Your success is our success

Ear to the ground

In order to delve into the reasons for the resilient growth witnessed by the highly penetrated laundry and soaps category and assess its future prospects, we conducted an extensive survey covering the entire supply chain. We did a 360 degree survey, wherein we met/spoke to sales managers and distributors of soaps and detergent companies across regions. This was also done with the intention of demystifying the inconsistency between research firms estimation for market growth and that reported by leading companies.
n

September 17, 2012 Pritesh Chheda pritesh.chheda@emkayglobal.com +91-22-66121273 Harsh Mehta harsh.mehta@emkayglobal.com +91 22 6624 2479

Volume growth remains resilient in branded S&D category but value growth to moderate owing to cap on further price hikes and base effect kicking in. Growth could normalize to 16-17% in laundry category and 10-12% in soaps category Branded players gained share at the expense of small/fringe regional players. Significant presence of regional players still exists (players with strong brand recall), but any incremental share gain would be at higher associated costs Southern and Eastern India have received sufficient rainfall, thereby dealers/sales managers from South and East were fairly confident of limited impact of deficient monsoon. Whereas, North and West were unable to guess the course of growth Laundry: New product launches will drive higher ad spends. Renewed vigor witnessed in Tide naturals. However, not much change witnessed in market share differential between HUL and P&G. Also, Ghadi detergents have deepened their penetration in Maharashtra Soaps: Lux and Rexona are witnessing de-growth and losing out to Santoor and Godrej No.1. HUL plans to refocus on Rexona and Lux - initiate trade promotions. Godrej Consumer reactivated Cinthol portfolio and also launched rosewater and almond variant in Godrej No. 1 soap On a positive note, soaps and laundry category is not witnessing downtrading like personal product category Positive in S&D category is offset by negatives brewing in PP category - earning upgrades for companies like HUL and GCPL unlikely We might have underestimated the consumer buoyancy (or bit early) as consumer demand continues to be robust until August 2012. We intend to repeat this exercise in October (around festive season) Until then, retain negative bias as valuations do not offer comfort and earnings upgrades unlikely. We maintain HOLD rating on HUL and GCPL with price targets of Rs415/Share and Rs580/Share respectively

Emkay Global Financial Services Ltd.

Sector Report

Emkay

Soaps and Detergents

Soaps and Detergents

Sector Report

Growth momentum to continue; However, incremental price hikes to become difficult

Branded S&D category is growing at a brisk pace with laundry segment witnessing robust value growth of 20-25% (double digit volume growth) and soaps segment growing at 15% (5% volume growth). National players are likely to sustain their volume growth momentum given the significant presence of regional players (market share gains). Also, new product pipeline could aid growth momentum. However, as base effect kicks in and further price hikes become difficult, value growth might subside to normalized levels of 16-17% in laundry business and 10-12% in soaps business.

Further share gain from regional players to be an expensive affair

Study revealed that unorganized small/fringe players (Nirma, Breeze, Dyna, etc) have lost market share. However, there are still several regional players having significant size (Venus, Champo), presence and brand recall. Hence, incremental market share gain at the expense of these regional players achievable only with higher associated costs.
Exhibit 1:

Source: Company, Emkay Research

Too soon to talk about deficient monsoon; confident of maintaining growth momentum
Deficient monsoon can have a significant impact on rural income (agri-related income). Rural India, in the past two years, has been in the forefront of FMCG growth story and hence, weak rain can put pressure on growth. The drought of 2002, when the monsoon deficiency was 19.2%, may be a precedent to assess the impact on growth. During that year, growth in private final consumption expenditure, in real terms, was just 2.9% yoy. Thats a far cry from consumption growth in recent years, which has been much higher. In 2010-11, despite high inflation, high interest rates and the slowdown in GDP growth, private consumption growth was 5.5%. Most of sales managers and distributors indicated that there has been no impact on the demand till date due to deficient monsoon. Also, Southern and Eastern India has witnessed sufficient rainfall, thereby rural demand is not expected to deteriorate in those regions. Also, with gradual pick-up in rainfall in Western and Northern India, the situation has improved drastically.

Volume growth the key; A&P spends to continue

On a broad brush basis, companies have maintained their A&P spends. However in certain regions, especially the Northern belt, where there is some impact on consumer demand, companies have intensified their A&P spends. Laundry category

In laundry, new product launches will drive higher ad spends. We are witnessing renewed vigor in Tide Natural (mass end detergent powder; INR 49/kg or INR10/190gm). Trade initiatives have led to stock outs for Tide sachet (INR. 1). Ghadi has deepened penetration in Maharashtra at price point INR 45/kg and is trying to gain market share by offering higher trade margins.

Emkay Research

September 17, 2012

Soaps and Detergents

Exhibit 2:

Sector Report

Source: Companies, Emkay Research

Soaps category

In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor (in Southern India) and Godrej No.1 (in Western and Central India). HUL plans to refocus on Rexona and Lux - initiate trade promotions, which can revive their growth in soaps business especially in mass end. Godrej Consumer to continue its growth momentum in personal wash category. It has reactivated Cinthol portfolio and also launched rosewater and almond variant in Godrej No. 1 soap.

Exhibit 3:

Source: Companies, Emkay Research

Market share gain for national players is visible

National players are gaining share at the expense of smaller regional players. Laundry category

Not much change witnessed in market share differential between HUL and P&G. Entry of Ghadi in Maharashtra has created some ripples in the laundry market.

Soaps category In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor (in Southern India) and Godrej No.1 (in Western and Central India). Dove continues to enjoy strong brand loyalty and thereby, witness resilient growth and market share gain.

Brand loyalty a suspect in soaps; However, Dove glides through

Consumers remain brand agnostic to soaps business. Thereby persistent brand activation and competitive pricing is required. In the recent months, mass brands Lux and Rexona have seen significant exodus to other brands especially Santoor (southern India) and Godrej No.1 (Western and central India). This can be attributed to aggressive trade promotions. Moreover, Santoor and Godrej No.1 primarily sell in bundle packs which are Emkay Research
September 17, 2012

Soaps and Detergents

Sector Report

more economical to consumer. Thereby, HUL might have witnessed lower volume growth of ~5% in soaps category in Q1FY13 (as against ~10% in laundry business). However, Dove is one of the few brands which continues to enjoy strong brand loyalty and thereby will continue to see resilient growth.
Exhibit 4:

Source: Company, Emkay Research

Consumer trading down; more apparent in personal products

We witnessed certain pockets of downtrading. However, it was more pronounced in categories like toothbrush and shampoos.

Market research firms way off the mark in their findings

Leading market research firm and FMCG companies are in sharp disagreement over performance of the categories. In the April-June quarter of 2012, sales growth in value terms of some of India's biggest fast-moving consumer goods companies is higher than research firms growth estimate for the FMCG market and category growth. Such a difference can be attributed to ignoring / underestimating trade channels like Canteen Services Department (CSD), Modern Trades (MT) and institutional sales. CSD can easily qualify as India's largest retailer with some 3,500 outlets across the country.

Volume growth to continue; however, further earnings upgrades unlikely

The study revealed that volume growth in S&D continues to be resilient. However, as further price hikes become difficult, value growth might subside to normalized levels of 1617% in laundry business and 10-12% in soaps business. This is merely 1-2% higher than our assumption and inline with streets estimates. Further, downtrading was evinced in PP as against S&D category. Hence, further earning upgrades for companies like HUL and GCPL is unlikely - positive in S&D category is offset by negatives brewing in PP category.

Outlook - would wait till October to see if unfavorable macro condition and delayed monsoon impacts demand
We might have underestimated the consumer buoyancy (or bit early) as consumer demand continues to be robust. However, we would re-evaluate our negative stance on demand only post October (festive season begins) when we plan to repeat this exercise to evaluate impact of unfavorable macro condition and delayed monsoon on consumer demand if any. Until then, we retain earnings estimates and negative bias on HUL and GCPL . We have a HOLD rating on HUL and GCPL with price targets of Rs415/Share and Rs580/Share respectively.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Annexure
Given below are sample interviews from each category (supply chain as well as geographical) of our 360 degree survey, in order to provide a feel of the viewpoint of each region and intermediary. We have classified each of these sample interviews on a region and intermediary basis. For eg- Sales manager, AP would mean an interview with the sales manager of an FMCG company to assess the ground realities in AP region.

Sample Interview 1: Sales manager, Northern India

Q) With the Indian economy weakening, what is your view on overall consumer demand? Ans. The company continues to see resilient volume growth in the region and no evident sign of slowdown. There is no marked change in the pace of premiumization Q) Please throw light on the competitive landscape in the detergent (and S&D in general) business across other brands Ans. Competitive intensity is very high. However, the companys detergent brand is a leader in the region, unlike pan-India. The company plans to enhance profitability by managing costs and also taking one more price hike to offset new packaging norms. Also, the competitor (national leader) is aggressively trying to acquire clients with increased trade promotions, better display and not going for price hike in its midsegment detergent brand. Q) From where is volume growth coming? Ans. Smaller/unorganized players are losing market share on account of launch of lower priced SKU, thereby reducing the price differential. And with superior communication, visibility, promotions and value proposal, consumers switch to branded products. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think the situation will turn on its head? Any indication that market share gain momentum is reducing? Ans. As significant chunk of unbranded/unorganised players still exist, future volume growth is achievable (however, with higher associated costs). Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. However, the companys policy is to increase efficiency i.e. rather than increasing distribution and ad spends, the company would like to increase usage of the existing consumers rather than acquiring new ones. Q) Your region predominantly falls in the agricultural belt. Do you see deficient monsoon impacting volume growth going ahead. Ans. No impact witnessed till date. Impact on volume if any, only after February next year. Distributor inventory provides us with some level of confidence. Q) Any indications from the top management about the entry into much awaited consumer category? Ans. Globally, there has been a change in strategy with more focus on existing line of business and profitability. Thereby, entry into new category in such a tough macroenvironment looks unlikely. Also, very strong global player is present in the category and entering would involve large brand investment.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Sample Interview 2: Distributor, Tier 2 city Maharashtra

Q) With Indian economy weakening, what is your view on overall consumer demand? Ans. Region more impacted by deficient rainfall then economy at large, as the region is highly dependent on agriculture. There has been marginal decline in volume growth but still volume growth is resilient at 6% for laundry business. Most volume comes from mass market products viz. Wheel, Tide Naturals, Nirma (80%). Rin, Surf and Ariel contribute remaining. People are not moving to unbranded players or downtrading. Q) Competitive landscape in the detergent (and S&D in general) business across other brands Ans. P&G not very strong in the region. Ghadi has recently entered the market and has priced its product at a premium to Wheel with no special offer running for any of its laundry products. Q) From where is volume growth coming? Ans. Nirma and other unbranded players have lost market share to the tune of 20%. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think will the situation turn on its head? Any indication that market share gain momentum is reducing? Ans. As significant chunk of unbranded/unorganized players still exist (20-25%), future volume growth achievable. Q) Do you think deficient monsoon will impact volume growth going ahead. Ans. Yes. However, volume growth unlikely to fall below 3-4%. Q) Can you share the inventory level Ans. The inventory is at normal level.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Sample Interview 3: Sales Manager, Tamil Nadu

Q) With the Indian economy weakening, what is the sense of overall consumer demand? Ans. The company continues to see resilient volume growth (12%) in the region and no evident sign of slowdown. Smaller unorganized players are losing market share. However, further client acquisition will require incremental costs. Q) Competitive landscape in the detergent (and S&D in general) business across other brands Ans. We face competition from major national player and other large domestic players. However, our being the market leader in laundry in this region helps. It is unlikely that these large local players will succumb to national player and thereby gaining market share will become incrementally difficult. Q) From where is volume growth coming? Ans. Smaller/unorganized player are losing market share on account of launch of lower priced SKUs, thereby reducing the price differential and aiding consumer switch to branded products. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think will the situation turn on its head? Any indication that market share gain momentum is reducing? Ans. Market share gain to become incrementally difficult as large regional players are unlikely to relent easily as they have decent brand presence in the region. Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. Q) Do you see deficient monsoon impacting volume growth going ahead. Ans. Rainfall deficiency is not significant in the region. Also, no impact witnessed till date. However, going by past experience, there might some impact to the volume growth.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Sample Interview 4: Multi branded distributor, Rural Maharashtra

Q) With Indian economy weakening, what is the sense of overall consumer demand? Ans. Laundry business and soaps category is maintaining its growth trajectory. Laundry business is witnessing robust value growth of 20-25% and soaps business growth is pegged at 15%. Most of the growth is price led. The volume growth achieved is primarily at the expense of small local players. However, incrementally, it becomes difficult to take market share from local players having significant size. There has been some downtrading happening but not significant in laundry and soaps category. The companies might not be able to take price hikes in immediate future, thereby value growth might be impacted and it may come down to the range of 15-16% for laundry and 10-12% for Soaps. Q) Competitive landscape in the detergent (and S&D in general) business across other brands Ans. Competition is fierce with entry of Ghadi, which has been successful in taking market share from both P&G and HUL due to extensive trade promotions. HUL is the leader in this region and to maintain its dominance has initiated promotions in Rin detergents. However, HUL regularly comes up with such promotional activities. In soaps, ayurvedic soaps are losing out to perfumed soaps. Q) From where is volume growth coming? Ans. Bundle pack major volume driver. Santoor, Venus (Ghadis soap brand) and Godrej No. 1 have gained market share and witnessed good volume growth. In soaps, ayurvedic soaps are losing out to perfumed soaps. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think will the situation turn on its head? Any indication that market share gain momentum is reducing? Ans. Market share gain to slow down. Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. Q) Your region predominantly falls in agricultural belt. Do you see deficient monsoon impacting volume growth going ahead. Ans. The consumers still have spending power and in past few days, have witnessed some rains, which have given relief to the consumer. No impact witnessed till date. However, going by the past experience there might be some impact to the volume growth and also, we may witness downtrading.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Sample Interview 5: Sales manager, Metro

Q) With Indian economy weakening, what is the sense of overall consumer demand? Ans. The company continues to see resilient volume growth in soaps (18-20%)in the region and no evident sign of slowdown. Smaller unorganized players (Dyna, Breeze) are losing market share in urban area. Also, high growth in rural India continues to remain growth driver. Brand loyalty is a suspect in soaps business, thereby constant focus and competitive pricing is required. Dove is one of the few brands which continues to enjoy strong brand loyalty and thereby, will continue to see resilient growth. There is no marked change in the pace of premiumization Q) Competitive landscape in the Soaps (and S&D in general) business across other brands Ans. Brand loyalty is a suspect in soaps business, thereby constant focus and competitive pricing is required. Dove is one of the few brands, which continues to enjoy strong brand loyalty. Q) From where is volume growth coming? Ans. Smaller unorganized players (Dyna, Breeze) are losing market share in urban area. Also, high growth in rural India continues to remain growth driver. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think will the situation turn on its head? Any indication that market share gain momentum is reducing? Ans. In urban region, growth is expected to normalize. However, rural regions will continue to witness robust growth. Bundle packs in soaps are major volume driver. Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. Q) Can you share about the inventory level Ans. Inventory is below the normalized level.

Emkay Research

September 17, 2012

Soaps and Detergents

Sector Report

Sample Interview 6: Distributor, Gujarat

Q) With Indian economy weakening, what is the sense of overall consumer demand? Ans. Laundry business is maintaining its growth trajectory. witnessing robust value growth of 22%. Laundry business is

The volume growth achieved is primarily at the expense of Henko, Mr. White loosing share. Also, Tide Natural (mass brand which competes with Wheel of HUL) has aided growth. Local players are strong in this territory and also of late, there has been some downtrading happening but not significant in laundry and soaps category. Q) Competitive landscape in the detergent (and S&D in general) business across other brands Ans. Competition is fierce with HUL and P&G having almost equal market share. Local players like Nirma are strong and continue to dominate mass category. Due to distribution glitch in Henko and Mr. White, there has been gain by P&G and HUL. Q) From where is volume growth coming? Ans. The volume growth achieved is primarily at the expense of Henko, Mr. White loosing share. Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. Q) Do you deficient monsoon impacting volume growth going ahead? Ans. No impact witnessed till date. However, going by the past experience,there might some impact on volume growth and also, we may witness downtrading. Villages to be more impacted. Other categories like shampoo, toothbrush are largely feeling the brunt of downtrading. Q) Can you share about the inventory level Ans. Inventory level is normal at retail level. However, a bit above normal at distributor level.

Emkay Research

September 17, 2012

10

Soaps and Detergents

Sector Report

Sample Interview 7: Sales manager, AP

Q) With Indian economy weakening, what is the sense of overall consumer demand? Ans. Laundry business and soaps category is maintaining its growth trajectory. Laundry business is witnessing robust value growth of 20-25% (double digit volume growth) and soaps business growth is pegged at 15% (5% volume growth). In laundry business, the volume growth is primarily achieved at the expense of small local players and new launches. In soaps category, Santoor is gaining share from HULs Lux and Rexona. No downtrading happening in laundry and soaps category. Q) Competitive landscape in the detergent (and S&D in general) business across other brands Ans. Laundry: HUL is market leader with Surf and Rin dominating the laundry business. HUL has been successful in taking market share from local players. P&G is also witnessing robust growth in the region. However, we not deterred and are confident of sustaining market share. In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor. Santoors market share gain is attributed to significant trade promotions. HUL plans to refocus on Rexona and initiate trade promotions, which can revive their fortunes and be growth driver in soaps business especially in mass end. Dove is doing exceedingly well. Q) From where is volume growth coming? Ans. Laundry: Smaller/unorganized players are losing market share. In soaps, bundle packs in soaps are major volume driver. Santoor in South and Godrej No. 1 in West and central India have gained market share and witnessed good volume growth. Q) If the entire volume growth is coming at the cost of fringe players, then when do you think will the situation turn on its head? Any indication that market share gain momentum is reducing? Ans. Laundry: New product pipeline to drive growth in future. Also, do not expect volume growth to decline below 10%. Soaps: Plan to refocus on Rexona and initiate trade promotions which can revive their fortunes and be growth driver in soaps business especially in mass end. Q) Do you think FMCG companies have to spend incrementally more on ad and promotions to sustain volumes? Ans. Yes. Increase in trade promotion in Rexona is on the cards. Q) Will deficient monsoon impact volume growth going ahead? Ans. Our region has received normal rainfall. So, no impact. Q) Can you share the inventory level Ans. Inventory level is below normal at distributor level i.e. no inventory pile up.

Emkay Research

September 17, 2012

11

Soaps and Detergents

Sector Report

Emkay Global Financial Services Ltd. 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates
are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of Emkay or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Research

September 17, 2012

12 www.emkayglobal.com