27 September 2012 Europe Equity Research Beverage (Food Producers & Processors/Personal Care & Household Products/Beer & Alcoholic Beverages) / UNDERWEIGHT/OVERWEIGHT Indian Spirits Market Research Analysts INDUSTRY PRIMER Alex Molloy 41 44 333 05 83 [email protected] Indian spirits: All aboard Charlie Mills 44 20 7888 0325 ■ The India spirits market is huge – number 3 globally by volumes, boasts [email protected] some of the largest brands in the world, growing mid-teens last 5 years and Nicolas Sochovsky showing healthy signs of premiumising. It has been largely inaccessible to 44 20 7883 8075 [email protected] foreign players due to punitively high import tariffs. The market is highly Sanjeet Aujla complex with local and national taxes and operates more like 28 separate 44 20 7888 0353 markets. However its potential seems clear, and any signs of deregulation [email protected] would represent a material opportunity to the global spirits players. Jimmie Bork ■ 44 20 7883 9941 Pernod: Though India only represents 6% of Pernod’s sales, it is probably [email protected] closer to 20% of the group’s organic growth. Pernod’s track record in the Michael Bleakley region has been very strong indeed and its business there is perhaps the 44 20 7888 0336 hidden jewel in the Pernod crown. [email protected] ■ Diageo: The news that Diageo is in discussions about taking a stake in the industry leader, United Spirits (44% market share), has understandably been well received. We await details of quite what shape this might take. If fully consolidated the potential impact on the shape of Diageo’s key financial metrics outweighs its near term financial impact - United Spirits has close to 120m cases sold (vs Diageo’s 157m), but an EBITA equal to just 4% of Diageo’s EBITA. We continue to rate Diageo and Pernod as Outperform, with 1,900p and EUR100 target prices, respectively. Figure 1: India is the 3rd largest market by volumes 40% 35% 30% 25% 20% 15% 10% 5% 0% China Rus India US S Korea Japan Brazil Thai Phil Germ Source: IWSR 2010 (size by volume) DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access 27 September 2012 The story in 6 charts.. Figure 2: India is the 3rd largest market by volume…. Figure 3: ….and one of the fastest growing major market 40% 20% 35% 15% 30% 10% 25% 20% 5% 15% 0% 10% -5% 5% 0% -10% China Rus India US S Korea Japan Brazil Thai Phil Germ China India US S Korea Brazil Russia Source: IWSR 2010 (size by volume) Source: IWSR 2005-2010 CAGR (growth by volume) Figure 4: It is principally made up of Whisky rum and Figure 5: The market has been premiumising, 2005-10 brandy, 2005-10 70% 30% 60% 25% 50% 20% 40% 15% 30% 10% 20% 10% 5% 0% 0% Whisky Rum Brandy Vodka Other Value Total Mk Low Price Standard + Source: IWSR, Credit Suisse research Source: IWSR, Credit Suisse estimates Figure 6: USL is the market leader in total spirits, 2010 Figure 7: ….and in whisky, 2010 Other Other John Distillers 14% 29% USL 7% USL 44% 44% John Distillers Jagatjit 5% 9% ABD Jagatjit 11% 6% ABD Pernod Pernod 7% 9% 15% Source: IWSR, Credit Suisse estimates Source: IWSR, Credit Suisse estimates Indian Spirits Market 2 27 September 2012 Diageo DGE.L Price (25 Sep 12): 1,754.00p, Rating: OUTPERFORM, Target Price: 1,900.00p Income statement (£ m) 06/12A 06/13E 06/14E 06/15E Per share data 06/12A 06/13E 06/14E 06/15E Sales revenue 10,762 11,470 12,174 12,938 No. of shares (wtd avg) 2,503 2,472 2,412 2,356 EBITDA 3,572 3,940 4,258 4,586 CS adj. EPS (p) 92.45 103.89 118.35 132.48 Depr. & amort. (411) (438) (465) (494) Prev. EPS (p) — — — — EBIT (CS) 3,161 3,502 3,793 4,092 Dividend (p) 43.50 46.98 50.74 54.80 Net interest exp. (397) (444) (396) (382) Dividend payout ratio 47.05 45.22 42.87 41.36 Associates 213 245 269 296 Free cash flow per share 59.65 90.21 109.19 122.26 Other adj, — — — — PBT (CS) 2,977 3,303 3,667 4,007 Key ratios and 06/12A 06/13E 06/14E 06/15E Income taxes (1,038) (595) (660) (721) valuation Profit after tax 1,939 2,708 3,007 3,285 Growth(%) Minorities (130) (140) (152) (164) Sales 8.3 6.6 6.1 6.3 Preferred dividends — — — — EBIT 9.6 10.8 8.3 7.9 Associates & other 505 — — — Net profit 11.1 11.0 11.2 9.3 Net profit (CS) 2,314 2,568 2,855 3,122 EPS 11.0 12.4 13.9 11.9 Other NPAT adjustments (409) — — — Margins (%) Reported net income 1,905 2,568 2,855 3,122 EBITDA margin 33.2 34.4 35.0 35.4 EBIT margin 29.4 30.5 31.2 31.6 Cash flow (£) 06/12A 06/13E 06/14E 06/15E Pretax margin 27.7 28.8 30.1 31.0 EBIT 3,161 3,502 3,793 4,092 Net margin 21.5 22.4 23.5 24.1 Net interest (391) (444) (396) (382) Valuation metrics (x) Cash taxes paid (521) (514) (595) (660) EV/sales 4.7 4.4 4.1 3.9 Change in working capital (529) (135) (150) (165) EV/EBITDA 14.2 12.9 11.8 10.9 Other cash & non-cash items 218 376 562 613 EV/EBIT 16.0 14.5 13.3 12.3 Cash flow from operations 1,938 2,785 3,215 3,498 P/E 19.0 16.9 14.8 13.2 CAPEX (445) (555) (581) (618) P/B 6.4 5.9 5.2 4.6 Free cash flow to the firm 1,493 2,230 2,634 2,881 Asset turnover 0.48 0.50 0.51 0.52 Acquisitions (1,420) — — — ROE analysis (%) Divestments 51 — — — ROE stated-return on 29.8 36.3 37.0 36.6 Other investment/(outflows) — — — — ROIC 14.6 19.2 20.1 20.9 Cash flow from investments (1,814) (555) (581) (618) Interest burden 0.94 0.94 0.97 0.98 Net share issue/(repurchase) 1 (1,150) (1,150) (1,250) Tax rate 33.7 18.0 18.0 18.0 Dividends paid (1,036) (1,172) (1,250) (1,318) Financial leverage 1.3 1.2 1.1 1.0 Issuance (retirement) of debt — — — — Credit ratios (%) Other (4) — — — Net debt/equity 110.9 104.2 91.5 79.1 Cash flow from financing (1,039) (2,322) (2,400) (2,568) Net debt/EBITDA 2.1 1.9 1.7 1.5 Effect of exchange rates (27) — — — Interest coverage ratio 8.0 7.9 9.6 10.7 Changes in Net Cash/Debt (942) (92) 234 313 . Net debt at start 6,611 7,553 7,645 7,411 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 942 92 (234) (313) (EUROPE) LTD. Estimates. Net debt at end 7,553 7,645 7,411 7,098 Balance sheet (£ m) 06/12A 06/13E 06/14E 06/15E Assets Cash and cash equivalents 1,076 984 1,218 1,531 1694 Accounts receivable 2,103 2,241 2,379 2,528 Inventory 3,955 4,215 4,474 4,754 1494 Other current assets 119 119 119 119 Total current assets 7,253 7,559 8,190 8,933 1294 Total fixed assets 2,972 3,089 3,205 3,329 1094 Intangible assets and goodwill 8,821 8,821 8,821 8,821 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Investment securities — — — — Other assets 3,304 3,524 3,766 4,032 Price Price relative Total assets 22,350 22,993 23,982 25,114 Liabilities The price relative chart measures performance against the FTSE ALL SHARE Accounts payable 2,997 3,194 3,390 3,603 INDEX which closed at 3022.74 on 25/09/12 Short-term debt 1,230 1,230 1,230 1,230 On 25/09/12 the spot exchange rate was £.8/Eu 1. - Eu .78/US$1 Other short term liabilities 557 619 684 752 Total current liabilities 4,784 5,043 5,304 5,585 Long-term debt 7,399 7,399 7,399 7,399 Other liabilities 3,356 3,214 3,183 3,153 Total liabilities 15,539 15,655 15,886 16,136 Shareholders' equity 6,811 7,338 8,096 8,978 Minority interest — — — — Total equity & liabilities 22,350 22,993 23,982 25,114 Net debt (£ m) 7,553 7,645 7,411 7,098 Indian Spirits Market 3 27 September 2012 Pernod-Ricard PERP.PA Price (25 Sep 12): Eu88.45, Rating: OUTPERFORM, Target Price: Eu100.00 Income statement (Eu m) 06/12A 06/13E 06/14E 06/15E Per share data 06/12A 06/13E 06/14E 06/15E Sales revenue 8,215 9,035 9,682 10,391 No.