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Consumer Monopolies
Standing tall
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel: +91 22 3982 5404
Contents
Page No.
Monopolies are best placed to capitalize emerging growth scenario ...... 16-17
Annexure I - Emerging income trends in urban and rural India .............. 21-23
4 December 2009 2
Thematic Report
SECTOR: FMCG
Consumer Monopolies
BSE Sensex: 17,102 S&P CNX: 5,109 4 December 2009
COMPANY NAME PG. India is on the threshold of a structural uplift in consumer demand. We are approaching
ITC 25
the inflexion point, at which the impact of rising per capita income, favorable demographics,
Hindustan Unilever 33 changing lifestyle and growing rural prosperity will combine to accelerate the FMCG
sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we
Nestle India 41
believe consumer monopolies can grow exponentially in the emerging scenario due to
Asian Paints 50 strong brands, captive consumers, high pricing power and better terms of trade. Consumer
United Spirits 58 monopolies could be one of the best themes to play the domestic consumption story.
Colgate 66
What are consumer monopolies?
Marico 73
Consumer monopolies are companies that occupy a dominant position in a product category
Titan Industries 79
or segment. We have identified companies in the consumer space that have emerged as
GSK Consumer 87 monopolies using criteria such as 1) market share at least 3x that of its nearest competitor
and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the
Gillette India 94
company.
Jyothy Laboratories 100
A monopoly is established over years and is aided by factors such as regulations, first-
mover advantage, technology breakthroughs, distribution, brands and industry consolidation.
Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of
trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative
working capital. All the companies covered in this report, except United Spirits and ITC,
have significantly increased their RoE over the past five years.
COMPANY CATEGORY MKT. NEAREST COMPETITOR *MKT. % SALES VOLUME SALES FY10
(%) NAME MKT SH. (%) X BUTION (%) CAGR (%) MARGIN (%)
4 December 2009 3
Consumer Monopolies
10.7 12.5
7.0 8.0
3.7
3.0
-1.0
-2.5
FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E
4 December 2009 4
Consumer Monopolies
We expect our We expect our consumer monopoly universe to report sales growth of 16.5% and PAT
consumer monopoly universe growth of 22% over FY10-12. Sales growth will be mainly volume led indicating strong
to report PAT growth of 22% demand for various monopolies. Besides, we expect most of the companies in our universe
over FY10-12 to report 200-500bp increase in RoCE over FY10-12.
Top picks
ITC: ITC has a strong monopoly in cigarettes, which contribute 40% to its net sales and
87% to PBIT. Cigarette volumes have grown 6.5% in 1HFY10 and a benign tax environment
will aid faster conversion from other forms of tobacco to cigarettes. We estimate 15%
EBIT CAGR in cigarettes and 19.3% PAT CAGR over FY10-12. Maintain Buy with
SOTP-based target price of Rs292.
Nestle India: We expect Nestle India to gain most from the likely growth in the processed
foods segment. We believe a monopoly in noodles and baby food will enable it to beat
average growth for the sector. We estimate 22% PAT CAGR over CY09-11. The stock
trades at 28x CY10E EPS of Rs93.5 and 22.9x CY11E EPS of Rs114.2. Maintain Buy.
Buy ITC, Nestle and United Spirits: United Spirits is a play on gains from a monopoly situation in the world’s
United Spirits fastest growing IMFL (spirits) market. We expect 14% volume CAGR which can further
increase from favorable regulatory changes for rationalization in excise or a gradual ban
on country liquor. We expect a 43.7% PAT CAGR over FY10-12. The stock trades at
26.4x FY11E EPS of Rs51.1 and 21.8x FY12E EPS of Rs61.9. Maintain Buy.
VALUATION COMPARISON
COMPANY SALES GR. (%) PAT GR. (%) EPS (RS) P/E (X) ROCE (%)
RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Asian Paints Neutral 16.4 16.7 12.0 21.5 80.0 97.1 20.9 17.2 57.4 57.3
Colgate Buy 16.4 17.0 14.3 17.8 31.0 36.5 22.1 18.8 145.1 143.2
Glaxo Smithkline* Buy 18.4 17.2 22.8 19.1 71.0 84.6 20.1 16.9 41.6 41.3
HUL Neutral 13.5 12.2 11.8 16.8 11.4 13.3 24.0 20.5 129.0 128.9
ITC Buy 16.6 12.8 21.6 17.0 12.3 14.4 20.8 17.8 35.1 35.5
Marico Buy 18.7 17.4 20.3 22.2 4.7 5.7 22.9 18.7 47.2 45.1
Nestle* Buy 20.3 19.7 22.2 22.2 93.5 114.2 28.0 22.9 164.0 158.5
Titan Industries Neutral 24.4 18.0 31.3 25.4 59.4 74.5 22.7 18.1 40.3 44.4
United Spirits Buy 14.6 14.7 66.3 21.1 51.1 61.9 26.4 21.8 14.4 15.6
*Year ending December; FY10 pertains to CY09 and FY11 to CY10 Source: MOSL
4 December 2009 5
Consumer Monopolies
Monopolies rule
Consumer monopolies India is on the threshold of a structural uplift in consumer demand. We are approaching
have strong brands that the inflexion point, at which the impact of rising per capita income, favorable demographics,
lead to high market shares changing lifestyle and growing rural prosperity will combine to increase the FMCG sector's
and a strong franchise of growth rate. Although the FMCG sector has a steady profit growth trajectory, we believe
captive customers consumer monopolies can grow exponentially in the emerging growth scenario. Consumer
monopolies have strong brands that lead to high market shares and a strong franchise of
captive customers. This ensures pricing power and better terms of trade. Consumer
monopolies could be one of the best themes to play the domestic consumption story.
We have identified companies in the consumer space that have emerged as monopolies
using criteria such as market share, sales mix and contribution to profits from a particular
category. Besides, we looked at qualitative factors such as recent trends in market share
and the emerging competitive landscape in that product category. We focused on the
Consumer monopolies following financial parameters:
could be one of the best
themes to play the domestic a) Market leadership with a share that is at least 3x that of the nearest competitor.
consumption story b) The brand or brand portfolio in the monopoly segment should contribute at least half
the sales or profits of the company.
Colgate Palmolive has market share 1.9x the nearest competitor but the gap is increasing.
Moreover it is global leader in oral care and this segment contributes more than 95% to its
sales and profit. So we believe that Colgate is an emerging monopoly.
COMPANY CATEGORY MKT. NEAREST COMPETITOR *MKT. % SALES VOLUME SALES FY10
(%) NAME MKT SH. (%) X BUTION (%) CAGR (%) MARGIN (%)
4 December 2009 6
Consumer Monopolies
1. Regulations
Regulations can create monopolies. Government policies, for instance, that erect barriers
to new entrants to a market can help existing players to emerge as monopolies. Some of
the regulations that have helped to create monopolies are
1) Banning FDI in an industry
HIGH DUTIES ARE ENTRY BARRIERS 2) Restricting advertising of a product or category of products
EXCISE (% IMPORT
3) Imposing high duties and taxes on new/imported brands
OF SALES) DUTY (%)
ITC Cigarettes Ban on FDI in tobacco and on tobacco advertising have kept
companies like Japan Tobacco, Philip Morris and RJR out of India
United Spirits IMFL High import duty and a ban on liquor advertising have prevented
companies like Diageo and Pernod Ricard from establishing a
strong presence
Nestle Baby foods Ban on advertising and solicitation has restricted the entry of players
like Danone and Bristol-Meyers-Squibb
Source: Company/MOSL
2. First-mover advantage
First-mover advantage has helped to create monopolies in certain product categories.
Such players have created the category and nurtured it over time to maintain their position.
Nestle created the instant noodles category, while GSK Consumer did the same in the
malted food drinks category and we believe it will continue to reap the benefit from its
first-mover advantage.
4 December 2009 7
Consumer Monopolies
Jyothy Fabric A new formulation in Ujala fabric whitener replaced Robin Blue
Laboratories whitener as the market leader in the category
Gillette India Shaving The launch of shaving systems transformed the shaving products
systems market, putting Gillette on its way to monopoly status
Source: Company/MOSL
SURF: GENERIC DETERGENT BRAND MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION
Asian Paints Decorative Strong brand and mascot of Gattu (a boy with a paint-can and
paints brush) led the brand drive and positioned the brand strongly
Marico Industries Parachute Blue-colored bottles became synonymous with coconut oil
coconut oil
GSK Consumer Malted food Horlicks has emerged as an iconic brand among malted drinks; was
drinks positioned as a drink fulfilling a family's daily body requirements
Nestle Instant noodles Maggi has emerged as a generic brand; was positioned as an "easy
to cook and good to eat" snack
Hindustan Unilever Detergents Surf has emerged as generic brand for detergents
Toilet soaps Lux has emerged as a soap focusing on beauty
Source: Company/MOSL
DEALER NETWORK TWICE AS LARGE MONOPOLY CATEGORY FACTOR CONTRIBUTING TO MONOPOLISTIC SITUATION
AS NEROLAC’S (NOS IN '000) Asian Paints Decorative Asian Paints started the concept of installing tinting machines with
22 paints distributors, which transformed the paint market and enabled the
company to gain a significant advantage over its competitors
11 United Spirits IMFL United Spirits belongs to the UB Group, which leads in the IMFL and
beer markets; this gives it an advantage in distribution, which in turn
gives it a sales push
Hindustan Unilever HUL has access to more than 8m retail outlets. The company has
Asian Paints Nerolac started project Shakti, which has provided deep rural reach.
Source: Company/MOSL
4 December 2009 8
Consumer Monopolies
Colgate Oral care Colgate draws its strength from Colgate Palmolive USA, which
Gillette has a 70% share has global leadership in oral care
in the global shaving Gillette India Shaving Gillette has a 70% share in the global shaving systems market due to
systems its cutting edge products. The Indian company draws strength from
systems market
the parent
Source: Company/MOSL
7. Acquisition of competitor
Acquisition of competitors can result in reduced competition and consolidation of market
share, creating a monopolistic structure. Marico and UNSP have been able to emerge as
UNITED SPIRITS: MARKET SHARE
monopolies due to the acquisition of competitors.
DOUBLED AFTER ACQUISITIONS (%)
4 December 2009 9
Consumer Monopolies
Strong pricing power, high innovation: Often market leaders are price leaders in
PARACHUTE: PRICING POWER
their respective categories: Asian Paints in decorative paints, GSK Consumer in malted
PUSHES UP GROSS MARGINS (%) food drinks or HUL in toilet soaps. This enables them to maintain margins despite
47.4 47.3 input cost pressure as their price movement is likely to be followed by the industry.
46.5
The companies often introduce innovations, which enable them to stay ahead. Innovations
45.1
35.6
ensure improvement in the sales mix through the introduction of value-added products.
37.6
Better terms of trade: Monopolies enjoy better terms of trade with suppliers and
FY04
FY05
FY06
FY07
FY08
FY09
distributors. Economies of scale coupled with a strong position in the market boost
their bargaining power with input suppliers, such as Colgate in the case of laminate
tubes suppliers, Marico in the case of copra suppliers, Nestle with milk suppliers, ITC
in tobacco and United Spirits in glass bottles suppliers. This ensures competitive prices
(higher gross margins) despite existence of price warriors in their categories.
The benefits might be The trade plays an important role in promoting under-penetrated categories, and strong
related to outpacing players, such as United Spirits and HUL, have exclusive arrangements with dealers/
category volume growth, or distributors due to their strong bargaining power. These arrangements act as entry
pricing power or improved barriers for competitors. The monopolies bundle sales, which ensures minimum sales
terms of trade for their weak brands. Sales are mostly based on advance payment/PDC, which enable
companies to operate with minimal working capital (negative in some cases).
BETTER TERMS OF TRADE HAVE REDUCED THE OPERATING CYCLE (DAYS OF SALES)
ITC 18
Nestle -63
Colgate -125
HUL -184
Source: Company/MOSL
4 December 2009 10
Consumer Monopolies
All the companies covered in High return ratios: Rising margins, low capex, high asset turns and low to negative
this report, except United working capital boost monopolies' returns ratios. All the companies covered in this
Spirits and ITC, have report, except United Spirits and ITC, have significantly increased their RoE over the
significantly increased their past five years. This enabled dividend payouts of more than 80% (Colgate, HUL
RoE over the past five years and Nestle).
Cash flows and high payouts: Steady profit growth and no significant capex help
monopolies to pile free cash flows. We believe successful companies maintain a balance
between payouts and re-investment, enabling shareholder value creation. Most of the
companies we cover in this report have a payout of 40-70%.
ASPECT REASON
Steady revenue growth visibility A monopoly position ensures a company grows at least in line with
the industry and consolidates its position
Superior EBITDA margins A monopoly ensures strong pricing power and the ability to
increase margins and pass on a cost push to consumers
Low working capital requirement Strong bargaining power with the trade and suppliers
High RoE High profit margins and low working capital investment
provide higher RoE
High dividend payout ratio Monopoly companies have a payout ratio of 40-70% due to high
growth visibility and low capital requirement
Source: Company/MOSL
4 December 2009 11
Consumer Monopolies
ITC’s cigarettes, HUL’s toilet Brands that are in a monopoly position enable their companies to achieve fast, sustained
soaps, Marico’s Parachute growth, healthy cash flows and good visibility. We have plotted various consumer monopolies
coconut oil, Nestlé’s infant on a BCG (Boston Consulting Group) matrix.
nutrition, and Titan’s watch
division are cash cows for We believe brands/brand portfolios like ITC's cigarette portfolio, HUL's toilet soaps,
their respective companies Marico's Parachute coconut oil, Nestlé's infant nutrition, Jyothy Labs' Ujala and Titan's
watch division are cash cows for their respective companies. The businesses are operating
in segments that have volume growth of 5-10%. Profit margins are high as the companies
have strong market shares, which ensure economies of scale. They generate free cash
flow, which is used to create new growth avenues, like functional foods in Marico, jewelry
and eyewear in Titan, New FMCG, hotels and paper in ITC, chilled dairy in Nestle, water
and foods in HUL and mosquito repellant and dish wash liquid in Jyothy Labs.
HUL-Skin Care
Volume growth (%)
15 UNSP
APNT
Gillette Colgate
Source: Company/MOSL
Asian Paints’ On the other hand, brands/brand portfolios like Asian Paints' decorative range, Colgate's
decorative range, Colgate’s toothpaste range, United Spirits' IMFL, Nestlé's Maggi noodles and HUL's skin care
toothpaste, United Spirits’ products are rising stars for these companies. The businesses are poised for major growth
IMFL, Nestlé’s Maggi noodles in the coming years. As the companies consolidate their leadership position in the respective
and HUL’s skin care are categories over the coming years, they are likely to reap significant benefits in terms of
rising stars product mix (Asian Paints, United Spirits and Titan's jewelry), increased penetration (HUL's
skin care products, Colgate, Nestle's Maggi and United Spirits) and operating leverage in
advertising/distribution costs (Asian Paints, Colgate and Maggi).
We believe HUL's detergent division falls in the Dogs category. The business operates in
a category with mid to high single-digit volume growth but the pricing is constrained due to
stiff competition at the top end and in the mass market. This has reduced EBIT margins in
the business from 20-22% earlier to 12-13% currently. Besides, the company is gradually
losing market share in the segment.
4 December 2009 12
Consumer Monopolies
India's US$25b FMCG market is on the threshold of major growth acceleration. Rising
income levels in urban and rural India and benefits from increasing affordability, favorable
demographics, low penetration, increased availability and distribution expansion will increase
growth in the coming years.
PER CAPITA NOMINAL GDP IS EXPECTED TO INCREASE BY 12.2% CAGR TO US$1,666 IN 2014
200
2010E
2011E
2012E
2013E
2014E
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: MOSL
Households in the seekers This trend is expected to change the shape of India's income pyramid, which could have
and aspirers categories will far reaching implications on consumer demand as per MGI (McKinsey's Global Institute).
constitute two-thirds of The number of households in the deprived category is expected to fall to 74m in 2015 from
India’s households; this 101m in 2005. The number of households in this category has already declined by 24m in
section will fuel a major the past 10 years. Number of households in seekers category (income of Rs200,000-
increase in demand for Rs500,000/year) will increase five times over 2005-15 and seekers and aspirers will constitute
consumer goods two-thirds of India's households. We believe this section of the population will fuel a major
increase in demand for consumer goods.
4 December 2009 13
Consumer Monopolies
We believe categories like deodorant, instant coffee, skin creams, oral care, shampoo and
processed food offer strong growth potential through increased penetration.
Favorable demographics
Decline in dependecy Consumption of goods and services in India will increase significantly in the coming years.
ratio and higher proporation Some of the key likely contributors are 1) expected decline in dependency ratio from 60%
of population in high currently to less than 54% by 2015 and to 48% by 2025, 2) 62% of the population being in
consumption age group will the high consumption age group of 14-59 years, 3) the impact of media exposure and
boost demand communication due to the rising number of televisions and cell phones, and 4) lower savings
focus due to increased security and visibility of the future income.
DEPENDENCY RATIO DECLINING (%) 64% OF POPULATION IN THE AGE GROUP OF 14-59 (%)
35
32
29 27 25
23
12
9 11
7 8 8
1985 1995 2005 2015 2025 2001 2006 2011 2016 2021 2026
Source: Company/MOSL
4 December 2009 14
Consumer Monopolies
10.7 12.5
7.0 8.0
3.7
3.0
-1.0
-2.5
FY93 FY96 FY99 FY02 FY05 FY08 FY11E FY14E
4 December 2009 15
Consumer Monopolies
The emerging demand scenario will accelerate FMCG growth rate. But the terms of trade
and change in operating environment will require companies to innovate and evolve their
capability to cater to both, the mass and the class. Consumer monopolies we believe have
some in-built advantages that will enable them to stay ahead of the pack, despite increase
in competitive activity.
Technology will be a key Technology and innovation: We believe technology will be a key differentiator in growth
differentiator in growth rates rates. The emerging scenario will require companies to innovate on two fronts 1) launch
- the emerging scenario will premium products to cater to a fledging rich and upper income class and 2) initiate low
require companies to launch cost solutions to cater to a rising lower middle and middle class. Both the factors will play
premium products to cater to out differently and require significant investment in new product development, low cost
the rich and initiate low cost solutions and efficient production techniques. Monopolies can invest in technology and
solutions to cater to a rising development due to their strong cash flow, brands and pricing power.
lower middle and
middle class Distribution: Consumer companies will need to alter their distribution (8m outlets) to
cater to 1) organized retail in metros and tier-2 cities and 2) outlets in rural areas. Bargaining
power with organized retail (~15-20% of expected sales by 2020) will be a function of
category strength, market share and products relevant to their class of customers. Surging
rural demand will require significant investment to expand direct distribution to ensure
brand availability and visibility. We believe monopolies have sufficient clout with organized
retailers, on one hand, and an addressable market in rural areas, to expand distribution.
Monopolies have huge Economies of scale: The emerging demand scenario will require companies to cater to
economies of scale, which demand for value for money products in rural areas and small towns where the cost of
would enable them to distribution and logistics is higher than bigger cities. Monopolies have huge economies of
manufacture and distribute scale, which would enable them to manufacture and distribute goods in interiors at low
goods in the interiors at low costs and compete with the low price unorganized sector.
costs and compete with the
low price unorganized sector Brands: We expect brands to emerge as a key differentiating factor as many new players
will enter product segments to exploit the growth potential. Brand association will be key
to success in a scenario where there is increasing fragmentation in categories such as
household care, detergents, toilet soaps, noodles and skin creams. Monopolies usually
emerge as a generic name for a category, which enables them to maintain high recall and
triggers repeat purchases. Some brands that have achieved generic status are Maggi,
Surf, Vim, Chawyanprash, Parachute, Cerelac and Nescafe. Most of the owners of
such brands are consumer monopolies.
4 December 2009 16
Consumer Monopolies
Key takeaways
Detergents’ monopoly of HUL Skin care from HUL is the strongest monopoly due to huge market share gap over
is the weakest due to rising competitors and presence across price points.
competition across segments Detergents monopoly of HUL is weakest due to rising competition across segments
and declining market share and declining market share.
Nestlé’s Maggi noodles, United Spirits’ s IMFL, Marico's Parachute coconut oil and
ITC’s cigarettes are very strong monopolies.
4 December 2009 17
Consumer Monopolies
We expect our consumer We expect our consumer monopoly universe to report sales growth of 16.5% and PAT
monopoly universe to report growth of 22.4% over FY10-12. Sales growth will be mainly volume-led, indicating strong
sales growth of 16.5% and demand for various monopolies. Margins will expand for most of the companies, as lower
PAT growth of 22.4% raw material costs boost profitability. We expect ITC, Asian paints, Colgate and Nestle to
over FY10-12 report maximum expansion in profit margins.
VALUATION COMPARISON
COMPANY SALES GR. (%) PAT GR. (%) EPS (RS) P/E (X) ROCE (%)
RECO FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Asian Paints Neutral 16.4 16.7 12.0 21.5 80.0 97.1 20.9 17.2 57.4 57.3
Colgate Buy 16.4 17.0 14.3 17.8 31.0 36.5 22.1 18.8 145.1 143.2
Glaxo Smithkline* Buy 18.4 17.2 22.8 19.1 71.0 84.6 20.1 16.9 41.6 41.3
HUL Neutral 13.5 12.2 11.8 16.8 11.4 13.3 24.0 20.5 129.0 128.9
ITC Buy 16.6 12.8 21.6 17.0 12.3 14.4 20.8 17.8 35.1 35.5
Marico Buy 18.7 17.4 20.3 22.2 4.7 5.7 22.9 18.7 47.2 45.1
Nestle* Buy 20.3 19.7 22.2 22.2 93.5 114.2 28.0 22.9 164.0 158.5
Titan Industries Neutral 24.4 18.0 31.3 25.4 59.4 74.5 22.7 18.1 40.3 44.4
United Spirits Buy 14.6 14.7 66.3 21.1 51.1 61.9 26.4 21.8 14.4 15.6
*Year Ending December; FY10 pertains to CY09 and FY11 to CY10 Source: MOSL
4 December 2009 18
Consumer Monopolies
Top picks
4 December 2009 19
ITC
0
100
200
300
400
0
40
80
120
160
1,000
2,000
3,000
4,000
1,200
1,800
2,400
0
600
Apr-98 Apr-98
Apr-02 Jan-98
Feb-99 Feb-99
NESTLE INDIA
Oct-98
UNITED SPIRITS
Dec-99 Feb-03 Aug-99 Dec-99
4 December 2009
MARICO INDUSTRIES
Sep-00 May-00 Sep-00
Dec-03
Jul-01 Mar-01 Jul-01
May-02 Oct-04 Dec-01 May-02
Mar-03 Sep-02 Mar-03
Aug-05 Jul-03
Jan-04 Jan-04
Apr-04
Nov-04 Jun-06 Nov-04
Feb-05
Sep-05 Sep-05
May-07 Nov-05
Jul-06 Jul-06
Consumer Monopolies: PE Bands
Sep-06
May-07 Mar-08 Jun-07 May-07
Mar-08 Apr-08 Mar-08
Jan-09
Jan-09 Jan-09 Jan-09
Nov-09 Nov-09 Nov-09 Nov-09
8x
25x
9x
20x
15x
12x
26x
15x
30x
40x
28x
42x
10x
30x
35x
20x
18x
34x
20x
25x
16x
24x
50
170
290
410
530
0
300
600
900
1,200
0
800
1,600
2,400
3,200
50
500
950
1,400
1,850
Jan-98
COLGATE
Jan-98 Apr-98 Apr-98
Oct-98
Oct-98 Feb-99 Feb-99
ASIAN PAINTS
Aug-99
GSK CONSUMER
Aug-99 Nov-99 Nov-99
May-00 May-00
Sep-00 Sep-00
HINDUSTAN UNILEVER
Mar-01 Mar-01
Jul-01 Jul-01
Dec-01 Dec-01
May-02 May-02
Sep-02 Sep-02
Mar-03 Mar-03
Jul-03 Jul-03
Jan-04 Jan-04
Apr-04 Apr-04
Nov-04 Nov-04
Feb-05 Feb-05
Sep-05 Sep-05
Nov-05 Nov-05
Jul-06 Jul-06
Sep-06 Sep-06
Jun-07 May-07 May-07
Jun-07
Apr-08 Mar-08 Mar-08
Apr-08
Jan-09 Jan-09 Jan-09
Jan-09
Nov-09 Nov-09 Nov-09 Nov-09
8x
10x
12x
14x
16x
10x
18x
15x
20x
10x
15x
20x
25x
30x
18x
22x
26x
30x
34x
38x
25x
30x
35x
20
Consumer Monopolies
Consumer Monopolies
URBAN HOUSEHOLD CONSUMPTION (RS) TO INCREASE 2.5X BY 2025 THE MIDDLE CLASS WILL CONSTITUTE 85% OF URBAN INDIA BY 2015
R 81 51
2.9% CAG
66
86,351 115,620
53
65,416 49
26
18 10
4 2 4 6
1
0 1
0 1 3
1985 1995 2005 2015 2025
1985 1995 2005 2015 2025
Source: Industry/Bloomberg/MOSL
The middle class will emerge as a big growth driver in urban India. They are expected to
account for 85% of urban households and 70% of consumption by 2015 and the rich class
will account for 7% of households and 28% of consumption.
4 December 2009 21
Consumer Monopolies
73.8
66.2
58 51.4
42.1
96 90 Inflexion
point
65
47
48
32 46
29
20
8 6
4 3
1
Agricultural income The proportion of households in the deprived category (annual household income of
has increased 40-50% over <Rs90,000) is declining; MGI expects the proportion of deprived households in rural India
the past 2-3 years due to to fall to 46% by 2015. We believe the government's rural focus has begun to impact the
higher minimum support lives of the common people and actual change might be faster than anticipated due to:
prices of crops
1) NREGS (National Rural Employment Guarantee Scheme): The NREGS assures
100 days' work to the rural poor every year (wages are Rs100/day). Allocation under
NREGS has been increased from Rs42b in FY07 to Rs400b in FY10. This scheme will
thus cover 39% of rural households, which will include mainly marginal farmers and landless
laborers, thus increasing income and improving life of the bottom end of the rural population.
2) Bharat Nirman: This rural infrastructure development program had a spend of Rs1.76t
in FY09 in areas like infrastructure, sanitation, roads, electricity, irrigation and housing.
This will increase rural employment and ease infrastructure bottlenecks.
3) Changing face of agriculture: Agricultural income has increased 40-50% over the
past 2-3 years due to higher minimum support prices of crops. Besides agricultural income
will increase because of (1) rising income from segments like fruit, milk and livestock,
(2) food processing industries reducing wastage and provide employment, (3) contract
4 December 2009 22
Consumer Monopolies
farming reducing income uncertainties, (4) better price discovery through use of technology
under initiatives like E Choupal, and (5) productivity gains from improved irrigation and
farm practices.
Roads and power 50% rural population in connected Easy servicing, accessibility and consumer
districts; most others have basic roads, demand
power in all villages by 2012
Distribution Better connectivity to large centers More choice, better quality products at
nearby; organized sector setting up reasonable cost, easy availability
stores; innovations like Shakti and
E Choupal
Wide geography 78% of the rural population reside in Hub-and-spoke model with 20,000 non
200,000 villages out of a total of urban centers (population >5,000) acting
600,000 villages as hubs for small villages
Low cost Companies launching value for money Increase in volumes will lower overheads
unorganized products and expanding direct and distribution cost
competition distribution to reduce cost of
intermediation
Lack of Increased exposure to media Demand for high quality and branded
awareness (rising TV penetration), telecom (rural products, addition of new products to
mobile density), literacy (women consumption basket
and children)
Source: Industry/Bloomberg/MOSL
158
116
104
67
45 50
Source: MGI/MOSL
4 December 2009 23
Thematic Report
SECTOR: FMCG
Companies
BSE Sensex: 17,102 S&P CNX: 5,109 4 December 2009
ITC 25
Hindustan Unilever 33
Nestle India 41
Asian Paints 50
United Spirits 58
Colgate 66
Marico 73
Titan Industries 79
GSK Consumer 87
Gillette India 94
4 December 2009 24
Consumer Monopolies
SECTOR: FMCG
cigarette brands.
ITC Sensex - Rebased
ITC has taken lower price increases in low end brands 400
like Capstan and Scissors, which are key growth
drivers after the phase out of non-filter cigarettes. 325
ITC bolstered distribution at the grassroots level with
sharper sales focus and accountability in cities. 250
4 December 2009 25
ITC
Rs1.8/stick
VST ITC
ITC
8% 82%
71%
Source: Industry/MOSL
ITC dominates segments such as Regular and Kings. Its key brands are Wills Filter, Gold
Flake Filter, Classic, India Kings, Scissors, Capstan and Bristol.
23%
100% 21.0%
20.0%
85%
80% 17.0%
15.0%
60%
50%
15%
Source: Company/MOSL
4 December 2009 26
ITC
1,886
1,771
1,643
Sm oking tobacco m arket is
am ong the largest globally
Source: Company/MOSL
ITC – CIGARETTE EXCISE DUTY AND VOLUME GROWTH TRENDS (RS/'000 STICKS)
Filter
>85mm 1,780 1,960 2,058 2,181 2,181 2,181
75-85mm 1,450 1,595 1,675 1,775 1,775 1,775
Favorable tax
70-75mm 1,090 1,200 1,260 1,336 1,336 1,336
environment boosts
<70mm 670 740 777 824 824 824
cigarette volume growth
Non Filter
60-70mm 450 495 520 551 1,322 1,322
<60mm 135 150 158 167 820 820
Excise Increase (%) 0 10 5 5 390 (<60mm) 0.0
140 (60-70mm)
ITC’s Volume Growth (%) 7.1 8.4 7.1 -0.7 -2.9 6.5
Source: Company/MOSL
4 December 2009 27
ITC
Stable tax rates positively affect cigarette volume growth. Cigarette volumes have grown
by 6.5% in 1HFY10 (8% in 2QFY10) indicating positive volume impact due to stable
taxes this year. We believe rationalization of taxes on cigarettes versus other tobacco
products can help this market to grow rapidly.
5.5
4.5 5.0
ITC is expected to
continue to dominate the
2.1
Indian cigarette industry in
the coming years 1.2
Source: Company/MOSL
Source: Company/MOSL
4 December 2009 28
ITC
New
FMCG
New -10%
Hotels Cigare
5% FMCG ttes
17% 87%
Source: Company/MOSL
15
10 54.8 55.0
55.4
54.0
5 53.1
53.8 53.7
0
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
Dividend (Rs/share) Payout Ratio (%) EPS (Rs) FCF/ Share (Rs) 14.4
12.3
49.5 49.9
48.0 46.8 10.5
51.1 46.8
10.0
48.6 8.3 8.6
8.5
7.1 7.4
6.3
5.7 4.9
4.9
4.3 3.5
3.5 3.7
2.6 3.1
0.8 1.3
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
Source: Company/MOSL
4 December 2009 29
ITC
SEGMENTAL BREAK-UP
Cigarettes
Volume Growth (%) -0.7 -2.9 6.5 6.0 5.9
Net Sales (Rs m) 66,350 75,568 89,586 104,194 116,606
Growth (%) 12.6 13.9 18.5 16.3 11.9
EBIT (Rs m) 36,340 41,838 49,272 55,952 62,967
EBIT margin (%) 54.8 55.4 55.0 53.7 54.0
New FMCG
Net Sales (Rs m) 25,096 30,056 36,881 42,060 48,527
Growth (%) 48.5 19.8 22.7 14.0 15.4
EBIT (Rs m) -2,635 -4,835 -3,965 -3,785 -2,426
Paperboards
Net Sales (Rs m) 21,579 26,471 30,785 33,815 36,193
Growth (%) 12.9 22.7 16.3 9.8 7.0
EBIT (Rs m) 4,531 5,086 6,095 6,763 7,239
EBIT margin (%) 21.0 19.2 19.8 20.0 20.0
Hotel
Net Sales (Rs m) 10,121 9,355 9,258 10,413 11,971
Growth (%) 11.7 -7.6 -1.0 12.5 15.0
EBIT (Rs m) 4,108 3,162 2,963 3,436 4,310
EBIT margin (%) 40.6 33.8 32.0 33.0 36.0
Agri business
Net Sales (Rs m) 38,684 38,460 39,405 47,254 53,831
Growth (%) 10.5 -0.6 2.5 19.9 13.9
EBIT (Rs m) 1,292 2,562 4,729 4,962 5,652
EBIT margin (%) 3.3 6.7 12.0 10.5 10.5
Source: Company/MOSL
4 December 2009 30
ITC
Cigarette volume growth on uptrend (%) Cigarettes margin expansion spurs EBIT growth
-1.0
3,500 10
-2.0 -2.0
-3.0 -3.0
-4.0 -3.5 2
0
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Sales (Rs m)
Cigarettes 36,361 36,282 39,015 39,493 41,606 41,831
FMCG - Others 6,936 7,593 7,223 8,388 7,594 8,633
Hotels 2,390 2,283 2,471 2,210 1,728 1,740
Agri business 18,345 8,641 6,215 5,259 9,406 10,283
Paper and packaging 6,059 7,005 6,271 7,136 7,026 7,904
EBIT (Rs m)
Cigarettes 9,614 10,069 11,341 10,814 11,254 12,517
FMCG - Others -1,226 -1,166 -1,270 -1,173 -998 -850
Hotels 853 687 911 711 306 316
Agri business 765 764 502 531 999 1,741
Paper and packaging 1,234 1,222 1,111 1,519 1,278 1,862
Sales growth YoY (%)
Cigarettes 5.7 10.9 10.5 10.2 14.4 15.3
FMCG - Others 27.9 29.4 11.7 13.6 9.5 14.0
Hotels 17.3 10.1 -13.7 -28.9 -28.4 -25.2
Agri business 32.3 16.7 -6.2 -51.2 -48.7 19.0
Paper and packaging 23.9 22.6 10.9 20.6 12.1 9.1
EBIT growth YoY (%)
Cigarettes 2.4 16.6 18.0 24.3 17.1 24.3
FMCG - Others NA NA NA NA NA NA
Hotels 32.7 4.2 -33.9 -50.2 -64.1 -54.1
Agri business 40.5 667.8 80.8 43.4 30.5 127.9
Paper and packaging 42.6 -2.6 -6.1 23.8 3.5 52.3
EBIT Margin (%)
Cigarettes 55.3 55.6 56.9 53.8 52.4 56.9
FMCG - Others -17.7 -15.4 -17.6 -14.0 -13.2 -9.8
Hotels 35.7 30.1 36.9 32.2 17.7 18.1
Agri business 4.2 8.8 8.1 10.1 10.6 16.9
Paper and packaging 20.4 17.5 17.7 21.3 18.2 23.6
Source: Company/MOSL
4 December 2009 31
ITC
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
Net Sales 139,475 153,881 175,021 204,361 230,706 Basic (Rs)
Operational Income 2,345 1,946 1,790 1,886 1,990 EPS 8.3 8.6 10.5 12.3 14.4
Total Revenue 141,820 155,827 176,811 206,247 232,696 Cash EPS 9.4 10.1 12.1 14.1 16.3
Change (%) 15.6 9.9 13.5 16.6 12.8 BV/Share 32.0 36.4 41.9 48.4 56.0
Total Expenditure -95,231 -105,296 -114,518 -135,125 -151,104 DPS 3.5 3.7 4.3 4.9 5.7
Payout % 42.3 42.8 41.0 40.0 40.0
EBITDA 46,589 50,532 62,293 71,123 81,592
Change (%) 14.8 8.5 23.3 14.2 14.7 Valuation (x)
Margin (%) 33.4 32.8 35.6 34.8 35.4 P/E 31.0 29.7 24.5 20.9 17.9
Depreciation -4,385 -5,494 -6,184 -6,856 -7,486 Cash P/E 27.2 25.4 21.2 18.2 15.7
Int. and Fin. Charges -251 -183 -300 -258 -258 EV/Sales 6.7 6.1 5.2 4.4 3.8
Other Income - Recurring 3,764 3,403 3,225 4,767 6,467 EV/EBITDA 20.1 18.5 14.7 12.6 10.7
Profit before Taxes 45,718 48,257 59,035 68,775 80,316 P/BV 8.0 7.1 6.1 5.3 4.6
Change (%) 17.3 5.6 22.3 16.5 16.8 Dividend Yield (%) 1.4 1.4 1.7 1.9 2.2
Margin (%) 32.8 31.4 33.7 33.7 34.8
Return Ratios (%)
Tax -13,690 -15,622 -16,530 -20,976 -24,496
RoE 25.9 23.8 25.1 25.4 25.6
Deferred Tax -827 -2,834 -1,376 -1,606
RoCE 35.9 32.8 34.7 35.1 35.5
Tax Rate (%) -31.8 -32.4 -32.8 -32.5 -32.5
Profit after Taxes 31,201 32,636 39,671 46,423 54,213
Working Capital Ratios
Change (%) 16.8 4.6 21.6 17.0 16.8
Debtor (Days) 19 16 18 18 18
Margin (%) 22.4 21.2 22.7 22.7 23.5
Asset Turnover (x) 1.1 1.0 1.0 1.0 1.0
Reported PAT 31,201 32,636 39,671 46,423 54,213
Leverage Ratio
BALANCE SHEET (RS MILLION)
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Y/E MARCH 2008 2009 2010E 2011E 2012E
Share Capital 3,769 3,774 3,774 3,774 3,774 CASH FLOW STATEMENT (RS MILLION)
Reserves 116,808 133,576 154,217 178,915 207,756
Y/E MARCH 2008 2009 2010E 2011E 2012E
Net Worth 120,577 137,351 157,992 182,689 211,530
OP/(loss) before Tax 42,204 45,038 56,110 64,267 74,106
Loans 2,144 1,776 1,659 1,659 1,659
Int./Div. Received 3,764 3,403 3,225 4,767 6,467
Deferred Liability 5,451 8,672 11,300 12,456 13,826
Depreciation and Amort. 4,385 5,494 6,184 6,856 7,486
Capital Employed 128,172 147,798 170,952 196,804 227,015
Interest Paid -251 -183 -300 -258 -258
Direct Taxes Paid -14,517 -15,622 -19,363 -22,352 -26,103
Gross Block 89,597 105,587 115,587 130,587 142,587
(Incr)/Decr in WC -4,848 -4,070 -1,627 -3,973 -1,962
Less: Accum. Depn. -27,909 -32,867 -39,051 -45,907 -53,393
Deff Tax 722 3,221 2,629 1,155 1,370
Net Fixed Assets 61,688 72,719 76,535 84,679 89,194
CF from Operations 31,460 37,281 46,857 50,461 61,106
Capital WIP 11,268 12,141 15,000 10,000 10,000
Investments 29,346 28,378 44,810 62,081 84,491
Extraordinary Items 0 0 0 0 1
(Incr)/Decr in FA -21,232 -17,397 -12,859 -10,000 -12,000
Curr. Assets, L&A 70,193 81,611 87,429 102,028 113,909
(Pur)/Sale of Investments 1,332 968 -16,433 -17,271 -22,410
Inventory 40,505 45,997 49,853 59,281 66,470
CF from Invest. -19,900 -16,429 -29,292 -27,271 -34,409
Account Receivables 7,369 6,687 8,631 10,078 11,377
Cash and Bank Balance 5,703 10,324 8,742 10,206 11,530
Change in Networth 437 437 0 0 0
Others 16,616 18,603 20,203 22,463 24,532
(Incr)/Decr in Debt 136 -369 -116 0 0
Curr. Liab. and Prov. 44,323 47,050 52,823 61,984 70,579
Dividend Paid -15,432 -16,299 -19,030 -21,726 -25,372
Account Payables 27,397 29,141 32,064 38,353 43,111
CF from Fin. Activity -14,860 -16,231 -19,147 -21,726 -25,372
Other Liabilities 3,736 3,943 4,493 5,061 5,782
Provisions 13,190 13,966 16,266 18,570 21,686 Incr/Decr of Cash -3,300 4,621 -1,582 1,464 1,325
Net Current Assets 25,870 34,561 34,606 40,044 43,330 Add: Opening Balance 9,002 5,703 10,324 8,742 10,206
Application of Funds 128,172 147,798 170,952 196,804 227,015 Closing Balance 5,702 10,324 8,742 10,206 11,531
E: MOSL Estimates
4 December 2009 32
Consumer Monopolies
SECTOR: FMCG
4 December 2009 33
Hindustan Unilever
ITC
3% Fena
6.0%
Cavin
Reckitt P&G
Wipro GCPL Nirma Ghari care
4% Nirma 13.5% Amw ay L Oreal Emami
6% 9% 11% 8.5% 12.0% 3.5% 5.5%
4.0% 5.0%
Source: Company/MOSL
HUL’s market share in toilet soaps is 4x that of its nearest competitor, and its detergent
market share is 2.6x. Skin creams offer significant advantage to HUL as the second
competitor is just 10% of its size. HUL is present across price points in all these segments
while its competitors are not.
Source: Company/MOSL
Per capita spends, potential for penetration to drive steady volume growth
Soaps and detergents have product penetration of 85-90%, which is among the highest in
FMCG categories. But the definition of penetration includes infrequent users, which is
reflected in lower per capita spends. India’s per capita spends are 30-35% lower than
those of its peers, like China and Indonesia. However, the spends are expected to converge
in the coming few years. Soap volumes are expected to grow 4% CAGR and detergent
4 December 2009 34
Hindustan Unilever
In the soaps and detergents volumes are expected to expand at 8% CAGR over coming 3-5 years. In the soaps and
categories, the mass market detergents categories, the mass market segment comprises 70-75% of volume, indicating
segment comprises 70-75% of a big opportunity to upgrade consumers to mid priced and premium products.
volume, indicating an
opportunity to upgrade COMPARISON OF PER-CAPITA SPENDS ACROSS CATEGORIES (US$)
Skin creams have a 22% penetration and rural penetration is only 17%. The per capita
spend is only 10% of China’s and 35% of Indonesia’s. Rising awareness of skin care and
aspirations to look good will drive demand for skin creams, which will grow by over 20%
CAGR in 3-5 years. Emami led the race, launching fairness creams for men, followed by
HUL and Nivea. This has resulted in 30-40% growth of this segment. Similarly, Oil of
Olay, Ponds and L’Oreal entered the premium anti-ageing and beauty creams segment,
which will increase demand at the premium end.
TOILET SOAPS - HUL OFFERS MORE THAN 30 VARIANTS ACROSS PRICE POINTS
10 GM
4 December 2009 35
Hindustan Unilever
BRANDS LOSING MARKET SHARE HUL losing market share due to competition in the mass segment
HUL has been losing market share in the toilet soaps, detergents and skin care segments
in the recent past. Market share declined by 980bp in the toilet soaps category, 280bp in
the detergents market and 600bp in the skin creams segment in the past 18 months. The
loss has been in the mass end of the market because national and regional players have
been aggressively expanding their distribution and product ranges. HUL increased prices
during the commodities boom and easier availability of competitive products dented HUL’s
market share. HUL initiated corrective action such as cutting prices across categories,
increasing adspends and revamping distribution, from which it will benefit after a lag.
However, since competitors’ direct distribution expansion is a key reason for HUL’s loss
of market share, recovering it would be a function of its own initiatives as well as competitive
intensity in the market. We believe HUL might not be able to regain market share without
denting margins.
HUL HAS LOST 980BP IN TOILET SOAPS HUL HAS LOST 280BP IN DETERGENTS HULHAS LOST 600BP IN SKIN CARE
39.1
54.3 38.2
37.9 54.0 54.6
52.1
37.4 52.7 53.1
50.3 37.8
49.6 51.4
48.2 36.2 50.2
46.3 49.4
35.0
44.5
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Sep-08
Sep-09
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Source: Company/MOSL
We believe growth in the mass market will be a key driver in the medium term. New
MNCs and Indian companies will enter the skin care market because of the growth
opportunities it offers. Even if HUL’s market share in some of these segments declines, it
would be able to retain its monopoly status in these categories because:
There is a huge gap between its own market share and that of its nearest competitor;
HUL’s share is 4x that of its nearest competitor in the toilet soaps market, its share is
2.6x that of its nearest rival in the detergents market and as much as 10x that of its
rival in the skin creams market.
Despite near term pressure, HUL will benefit, after a lag, from growth in the premium
segment.
HUL’s portfolio strategy enables it to cater to consumers at all price points.
4 December 2009 36
Hindustan Unilever
Source: Company/MOSL
Strong bargaining power Strong bargaining power with dealers and the trade has ensured HUL gets payment through
with dealers and the trade post-dated checks (PDCs). It also gets considerable credit from its suppliers. The net
has ensured HUL gets working capital has been a negative Rs19b-20b. This has ensured 110% ROCE, low capital
payment through post-dated requirement and a high payout ratio of 80-85%.
checks and considerable
credit from its suppliers
Valuation and view
HUL is losing market share in soaps, detergents and skin creams, however its monopoly in
these segments is not under threat. We expect heightened competition in core categories
of soaps, detergents and skin creams due to new launches and distribution expansion by
HUL is losing market the competition. We expect HUL to increase investment in advertising and trade push
share in soaps, detergents which can impact profit margins. We estimate HUL has 20% EBIT margins in toilet soap
and skin care, but its and detergent margins declined to 10-12% after the price war with P&G.. We estimate
monopoly in these segments 12.8% sales CAGR and 14.3% PAT CAGR over FY10-12. The stock trades at 24xFY11E
is not under threat EPS of Rs11.4 and 20.5xFY12E EPS of Rs13.3. Although HUL is trading at lowest P/E
premium to peers on a historical basis, loss of market share and increase in competitive
activity will continue to drag down stock performance. Maintain Neutral.
4 December 2009 37
Hindustan Unilever
SALES GROWTH REMAINS SLUGGISH (%) LOW INPUT COSTS BOOSTS MARGIN (%)
9.5
7.9 14.9
7.1 14.8 14.8
14.2
FY10E
FY11E
FY12E
FY10E
FY11E
FY12E
FY09*
FY09*
CY05
CY06
CY07
CY05
CY06
CY07
FOUR YEAR PAT CAGR AT 11.3% (CY06-FY10) MONOPOLY ENSURING NEGATIVE WORKING CAPITAL (RS B)
17.5 16.8
13.2 11.8
10.6
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
SHARE BUYBACK BOOSTS ROE (%) HEALTHY PAYOUT RATIO SUSTAINS (%)
113
121.1 121.3
92.0 84 86
93.5 92.5
74 75 72
65
56.8 56.5
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
FY10E
FY11E
FY12E
FY09*
CY05
CY06
CY07
4 December 2009 38
Hindustan Unilever
Volume growth (%) declines QoQ Lower volume growth impacts FMCG sales growth (%)
21.6 21.2
8.3
19.4
10.4 18.8
8.4 6.8 18.0
-4.2
7.0
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Palm oil prices: Up 50% from the bottom LAB prices (Rs/kg): Up 28% from the bottom
5,000 128
122.1
Malaysian Ringgit\Metric Tonnes
4,000 111
3,600
94.1
3,000 94
90.0
2,185
2,000 77
2,109
1,935 67.8 71.1
63.5
1,000 60
Jun-09
Jan-09
Mar-08
Dec-06
Nov-09
May-07
Oct-07
Jun-06
Jun-07
Jun-08
Jun-09
Feb-07
Feb-08
Feb-09
Aug-08
Oct-06
Oct-07
Oct-08
Oct-09
Gross margins: Boosted by low input cost Investment in A&P: At a new high (% of sales)
Gross Margins (%) - LHS
2006 2007 2008 2009
EBITDA Margins (%) - RHS
51 18
49.6 11.0 11.4 11.2 11.0
10.5 10.1
9.0
49 16 8.5
48.3
15.3
13.4
14.8 12.5
47 14 11.2 11.2
9.6 10.4 9.9
45 12
Jun-08
Jun-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Source: Company/MOSL
4 December 2009 39
Hindustan Unilever
Y/E MARCH CY07 FY09 FY10E FY11E FY12E Y/E MARCH CY07 FY09 FY10E FY11E FY12E
Net Worth 14,392 20,615 23,677 26,748 31,427 OP/(loss) before Tax 20,724 30,402 29,245 32,946 38,154
Loans 885 4,219 1,883 1,594 1,305 Int./Div. Received 2,379 2,056 1,721 1,597 1,916
Capital Employed 15,278 24,835 25,560 28,342 32,731 Interest Paid -255 -253 -217 -183 -150
Direct Taxes Paid -3,643 -5,244 -6,279 -7,021 -8,200
Gross Block 26,691 28,817 34,817 36,817 39,317 (Incr)/Decr in WC -2,641 742 -2,012 -1,677 -2,133
Less: Accum. Depn. -11,466 -12,750 -14,563 -16,569 -18,701 Change in Deff 122 -424 -172 -184 -196
Net Fixed Assets 15,225 16,068 20,254 20,248 20,617 CF from Operations 16,686 27,278 22,286 25,478 29,390
Capital WIP 1,856 4,721 1,500 1,500 1,500
Investments 14,408 19,194 19,480 22,764 27,473 Extraordinary Items 1,824 -43 65 0 0
Deferred Charges 2,124 2,548 2,720 2,904 3,100 (Incr)/Decr in FA 2,818 4,991 2,779 2,000 2,500
(Pur)/Sale of Investments 9,731 -4,786 -286 -3,285 -4,709
Curr. Assets, L&A 32,774 40,142 44,363 50,075 56,323 CF from Invest. 14,372 163 2,558 -1,285 -2,209
Inventory 19,536 25,289 27,320 30,859 34,611
Account Receivables 4,434 5,369 5,838 6,595 7,396 Change in Networth -8,782 381 -11 0 0
Cash and Bank Balance 2,009 1,906 3,220 4,217 5,466 (Incr)/Decr in Debt 159 3,334 -2,336 -289 -289
Others 6,796 7,579 7,984 8,405 8,849 Dividend Paid -23,316 -19,123 -19,128 -21,679 -24,229
Curr. Liab. and Prov. 51,110 57,838 62,757 69,150 76,282 Others -1,280 -12,136 -2,054 -1,228 -1,413
Account Payables 28,785 33,050 37,231 40,679 44,690 CF from Fin. Activity -33,219 -27,544 -23,530 -23,196 -25,932
Other Liabilities 15,610 16,068 16,535 18,294 20,171
Provisions 6,716 8,720 8,991 10,177 11,420 Incr/Decr of Cash -2,161 -103 1,314 997 1,250
Net Current Assets -18,336 -17,696 -18,395 -19,075 -19,958 Add: Opening Balance 4,169 2,009 1,906 3,220 4,217
Application of Funds 15,278 24,834 25,560 28,342 32,731 Closing Balance 2,009 1,906 3,220 4,217 5,467
E: MOSL Estimates; FY09 Fifteen month ending E: MOSL Estimates; FY09 Fifteen month ending
4 December 2009 40
Consumer Monopolies
SECTOR: FMCG
launched in India.
Nestle Sensex - Rebased
Nestle has repositioned Maggi Noodles with its 3,000
campaign Taste Bhi, Health Bhi. Maggi claims to
provide 20% of children's daily calcium and protein 2,500
needs.
Maggi noodles are available in 15 variants and two 2,000
cup packs. The product has undergone significant
change with variants like Vegetable Atta Noodles, 1,500
and Chinese variants.
Nestle has launched Maggi noodles in Rs5 packs to 1,000
increase the product penetration in small towns and Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
rural areas.
4 December 2009 41
Nestle India
Nestle
85%
Milk
10%
Milk Pow ders
34%
MULTIPLE BRANDS/VARIANTS IN
16.3
11.7
10.2 10.8
1.3 5.4
1.6 2.7 2.9
Source: Company/MOSL
4 December 2009 42
Nestle India
1 Complies with the IMS Act and WHO code of marketing of breast-milk substitutes.
2 Encourages continued breast feeding for up to two years.
3 Does not advertise or promote infant milk and substitutes and infant foods to public.
4 Warns users of consequences of incorrect use of infant-milk substitutes.
5 Does not use pictures of babies and women on its infant-milk substitute packaging.
6 Does not supply free samples and food packs to patients.
7 Does not distribute educational material for these products in hospitals.
8 Follows the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of
Production, Supply and Distribution) Act, 1992 (IMS Act).
Nestle poised for 10-12% sales growth in Infant Food and Nutrition
Infant food and nutrition Infant Food and Nutrition as a category will grow 10-12% as the use of these products is
as a category will grow by limited to children aged between three months and two years. Nestle is well placed to
10-12% and Nestle is well capture growth in this category because:
placed to capitalize
1 Nestle is at the forefront of infant-foods technology. It has introduced innovations like
on the growth
Nan2, 3 and variants of Lactogen and Nestogen.
2 Nestle has launched Nido, aimed at nutritional needs of children aged over two years.
3 Nestle has strong technological support from its parent company, which has brands
like Gerber, Mucilon and Naturnes that can be launched in India
Source: Company/MOSL
Maggi
80%
Source: Company/MOSL
4 December 2009 43
Nestle India
Source: Company/MOSL
Soups Others
Ketchup 5% 2%
13%
Instant
Noodles
80%
16.3 20.0
19.6
9.9
3.8
8.5 5.1
4.6 4.6
0.5 -1.0 -0.7
Source: Company/MOSL
4 December 2009 44
Nestle India
1. Nestle has strong brand equity in this market. Nestle has strong association of the
brand with children and adults
2. Nestle has repositioned Maggi noodles on the nutrition platform with the slogan Taste
Bhi Health Bhi. Maggi claims it provides children with 20% of their daily requirement
of calcium and protein
3. Maggi noodles are available in 15 variants and two cup-packs. The product has
undergone significant change with variants like vegetable atta noodles, dal atta noodles
and Chinese variants
4. Nestle launched Maggi noodles in five-rupee packs to increase product penetration
5. Nestle has been drawing on support of its parent to launch innovations. Rice Mania
was developed by the Singapore-based R&D centre of the parent company.
53.1
17.6 53.6 52.2 52.0
51.5
Source: Company/MOSL
4 December 2009 45
Nestle India
Oils, 88
60
CY07 3QCY09
Source: Company/MOSL
Nestlé’s PAT grew 20% over CY04-08, 30% in the past two years. Robust PAT growth
and increased asset turns enabled ROE to increase from 55% in CY04 increased to 120%
in CY08. FCF rose to Rs4.5b in CY08 from Rs2.5b in CY04 and DPS rose to Rs42.5/
share from Rs24.5 in CY04.
SUSTAINED PAT GROWTH (%) HIGH CASHFLOW GENERATION
2010E
2011E
2005
2006
2007
2008
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
Source: Company/MOSL
4 December 2009 46
Nestle India
RS5 SKU IS 53% OF SMALL PACK SALES PREPARED DISHES ACCOUNT FOR 66% OF SMALL PACK SALES
Milk
50 Paise - Products & Beverages -
Rs 10 - 4%
16% Choclate & 10%
Nutrition -
Confec-
7%
tionery -
Re 1 - 10%
17%
Prepared
Rs 2 - 17% Dishes &
Rs 5 - 53% Cooking
Aids - 66%
Source: Company/MOSL
4 December 2009 47
Nestle India
Choclate & Gross Margins (%) (LHS) EBIDTA Margin (%) (RHS)
Confec- Milk
Products & 54 25
tionery
53.3 52.8
14.1% Nutrition 52.4
46.3%
52 22
21.1
21.6
50 19
19.5
Prepared
Dishes & 48 16
3QCY07
4QCY07
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
cooking Aids Beverages
25.5% 14.1%
Milk products and nutrition: Volumes up 10.8% Prepared dishes and cooking aids: Volumes up 19.6%
Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b)
9.6
17.5
14.8
7.7
101.3 112.9
91.5 94.4
Sales Volume ('000 tons) Sales (Rs b) Sales Volume ('000 tons) Sales (Rs b)
5.3
5.3 5.3
4.6 32.8
18.1
31.2
16.4
9MCY08 9MCY09
9MCY08 9MCY09
Source: Company/MOSL
4 December 2009 48
Nestle India
Y/E DECEMBER 2008 2009 2010E 2011E 2012E Y/E DECEMBER 2008 2009 2010E 2011E 2012E
Leverage Ratio
BALANCE SHEET (RS MILLION)
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Y/E DECEMBER 2008 2009 2010E 2011E 2012E
Account Receivables 456 650 779 931 1,118 (Pur)/Sale of Investments 595 -1,443 -808 -1,340 -1,510
Cash and Bank Balance 1,937 236 249 411 417 CF from Invest. -2,010 -4,193 -4,058 -5,090 -6,010
4 December 2009 49
Consumer Monopolies
SECTOR: FMCG
4 December 2009 50
Asian Paints
BRANDS ACROSS PRICE POINTS Asian Paints holds 45% of the decorative paints market
Asian Paints has about 45% market share in the Rs120b decorative paints industry and
the second biggest player, Kansai Nerolac, has about 15% share. Berger and ICI have
12% and 9% market share respectively.
Others
20%
Rs9/sqft
Asian
Paints
ICI 45%
9%
Beger Nerolac
12% 14%
Asian Paints’ brand-building initiatives have boosted its growth and expanded the category.
It has played a significant role in de-commoditizing the product segment and consumer
involvement in making the buying decision has increased over the past decade. Thus a
market, which was painter/contractor-led has now become a virtual B-I-Y (Buy It Yourself)
segment. Asian Paints has led innovations in the category by launching Royale Play and
Apex Ultima, in sync with consumers’ changing aspirations. Consequently growth at the
premium end (emulsion/enamel) has outpaced that of the low-end category, signaling a
rising trend in consumer up-trading.
Rs15/sqft
RANGE OF DECORATIVE PAINTS PORTFOLIO
BRANDS POSITIONING *PRICE/SQFT
4 December 2009 51
Asian Paints
Source: Company/MOSL
The paints segment can benefit from a growing trend of construction of affordable homes.
Improving affordability can spur property demand and paints are likely to be a natural
beneficiary.
3,200
~20% CAGR in Hom e Loans
2,400
1,600
800
0
2005 2006 2007 2008 2009
Source: Company/MOSL
Over the past decade, paint Despite being a relatively price-elastic category major players have raised average prices
demand has averaged 1.5-2x without affecting volume growth. Over the past decade paint demand has averaged
GDP growth and the trend is 1.5-2x GDP growth and we expect the trend to strengthen in the next five years. Besides
expected to strengthen in the increasing demand at the bottom of the pyramid (distemper), we expect the paint category
next five years to also benefit from higher growth in the premium segment.
4 December 2009 52
Asian Paints
15.0 16.0
14.0 14.0 15.0
13.0 11.7
10.0
9.0 9.5 9.1
8.0 8.5 8.1
7.8 7.0 7.5 8.7
6.6 6.4 5.2 5.8
3.8
5.0
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Source: Company/MOSL
Asian Paints’ distribution Wide distribution with tinting machine: Asian Paints’ distribution network is more
network is more than twice than twice as large as its nearest competitor’s. It has more than 22,000 dealers and more
as large as its nearest than 12,400 Color World outlets with tinting machines.
competitor’s
DISTRIBUTION REACH/TECHNOLOGICAL INNOVATIONS DEALER NETWORK TWICE AS LARGE AS NEROLAC’S
Source: Company/MOSL
In the face of competition Product innovations built brand loyalty: Asian Paints has been at the forefront of new
from MNCs like Kansai and concepts and innovations in the decorative paints market. In the face of competition from
ICI, Asian Paints introduced MNCs like Kansai and ICI, Asian Paints introduced innovations such as:
path-breaking innovations Tinting machines offering consumers wide color options.
Asian Paints Home Solutions introduced the service concept with a complete solution
for painting.
Exterior paint (Apex) in a market dominated by cement paints for external use.
Concepts like Wall Fashion and Royale Play, which make painting a new experience
Samplers, which let consumers to feel a product before committing money for painting.
4 December 2009 53
Asian Paints
ASIAN PAINTS DESIGNER COLLECTION HAS KEPT PACE WITH CHANGING ASPIRATIONS OF CONSUMERS
Source: Company/MOSL
17.8 17.5
13.8 13.4 14.0 13.0 14 41.1
-4.0 38.9
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Source: Company/MOSL
Capacity ramp-up plans over Asian Paints’ stable gross-margin band of 40-42% enables it to offer competitive prices
the next few years indicate and keeps at bay competitors and new entrants. This strategy has enabled steady consumer
Asian Paints’ management’s upgrading and long-term production planning. Asian Paints is setting up a facility in Rohtak
confidence in sustaining and contemplating another plant in Maharashtra. Capacity ramp-up plans over the next
volume growth few years indicates the management’s confidence in sustaining volume growth.
HEALTHY ROE OF 35-40% (%)... ...BACKED BY ROBUST PAT GROWTH (%)
44.2 90
42.5 70.7
39.5 65
45.7
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
Source: Company/MOSL
4 December 2009 54
Asian Paints
56.3
2.9
2.3
2.1
43.6 42.7
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Source: Company/MOSL
Monopolistic business Tight control over overheads, high utilization of manufacturing facilities and steady growth
status, strong financials, ensured an increase in ROCE to 52% from 41% over the past five years. ROE increased
steady growth and investor to 41% from 31% and the dividend payout ratio has been steady at 40%. Monopolistic
friendly policies have business status, strong financials, steady growth and investor friendly policies have ensured
ensured premium valuations premium valuations for the stock relative to benchmark indices.
for Asian Paints relative to
benchmark indices
Valuation and view
Asian Paints continues to be a strong play on rising consumerism and housing demand in
India. We estimate 14% volume CAGR over FY10-12. Historically, paint sales volumes
increased by 1.6-1.8x GDP growth. Although EBIDTA margins seem to have structurally
moved up from 15-16% to 17-18%, we estimate 12.5% PAT growth in FY11 due to 70bp
margin decline (higher input costs and overheads on the Rohtak facility). Long term prospects
look encouraging; low PAT growth (estimates of 12%) in FY11 can result in near term
underperformance. We estimate 17% PAT CAGR over FY10-12. The stock trades at
20.9xFY11E EPS of Rs80 and 17.2xFY12E EPS of Rs97.1. Neutral.
4 December 2009 55
Asian Paints
Sales growth primarily volume led (%) ~12% price cut impacts sales growth
Volume Grow th Realization Grow th Sales (Rs m) - LHS Grow th (%) - RHS
20,000
14.5
12.1 29.3 30.2
13.2 15,000 25.9
23.4 25.4
1.1
20.0 19.0 5.5
10,000 17.5
13.0 18.2 16.8
11.5 17.5
9.8
5,000
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Jun-08
Dec-08
Mar-09
Jun-09
Sep-08
Sep-09
Low input costs boost margins All time high EBITDA and EBITDA margin
Raw Material Cost (%) EBITDA Margin (%) EBITDA (Rs m) - LHS EBITDA Margins (%) - RHS
3,700
63.9 18.7
18.9 18.7
18.9
16.0 15.8 61.3 2,900 16.0
61.1 14.4
14.1 60.5 14.2
13.7 12.6 13.9
12.6
2,100
13.9 14.2 12.6 8.3
58.5 58.7 58.7 58.2 56.8
1,300
56.1
8.3
500
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Turpentine oil prices rule easy (Rs/KL) Titanium dioxide prices sluggish (Index)
58,000 120
53,700
46,000 111
110
34,000
25,200 100
22,000 101
25,100 98
10,000 90
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Jan-06
Jul-06
Oct-06
Jan-07
Jul-07
Oct-07
Jan-08
Jul-08
Oct-08
Jan-09
Jul-09
Oct-09
Apr-06
Apr-07
Apr-08
Apr-09
Source: Company/MOSL
4 December 2009 56
Asian Paints
Y/E MARCH FY08 FY09 FY10E FY11E FY12E Y/E MARCH FY08 FY09 FY10E FY11E FY12E
Deferred Liability 391 533 760 959 1,245 OP/(loss) before Tax 6,606 6,694 10,900 12,222 14,631
Minority Interest 574 756 1,012 1,334 1,728 Int./Div. Received 596 517 654 768 939
Capital Employed 13,540 16,407 20,774 24,447 29,088 Interest Paid -212 -263 -329 -248 -185
Direct Taxes Paid -1,928 -1,811 -2,995 -3,511 -4,284
Gross Block 12,112 14,614 16,614 19,614 20,864
(Incr)/Decr in WC 1,021 -1,656 -1,195 -862 -1,017
Less: Accum. Depn. 6,337 6,484 7,381 8,421 9,526
CF from Operations 6,083 3,481 7,035 8,370 10,085
Net Fixed Assets 5,776 8,130 9,233 11,194 11,338
Capital WIP 1,142 921 2,500 500 2,250
Incr in FA -2,285 -2,281 -3,579 -1,000 -3,000
Investments 2,767 784 2,029 3,903 5,737
Pur of Investments -839 1,983 -1,245 -1,875 -1,834
Curr. Assets, L&A 14,936 17,987 21,299 25,341 29,022 CF from Invest. -3,124 -299 -4,824 -2,875 -4,834
Inventory 7,140 7,690 10,251 11,736 13,694
Account Receivables 4,603 5,719 6,834 7,957 9,284 Issue of Shares 0 0 0 0 0
Cash and Bank Balance 1,107 2,104 1,350 2,326 2,222 Incr in Debt 310 -334 -414 750 700
Others 2,086 2,475 2,865 3,323 3,821 Dividend Paid -1,908 -1,967 -3,366 -3,769 -4,655
Curr. Liab. and Prov. 11,523 11,921 14,793 16,997 19,764 Min Int/ Dt 96 324 483 522 679
Account Payables 5,720 5,542 6,859 8,026 9,346 Others -1,403 -208 332 -2,022 -2,079
Other Liabilities 4,140 4,570 5,124 5,799 6,568 CF from Fin. Activity -2,905 -2,185 -2,964 -4,519 -5,355
Provisions 1,664 1,810 2,810 3,171 3,851
Net Current Assets 3,413 6,066 6,507 8,345 9,258 Incr/Decr of Cash 53 997 -753 976 -104
Godwill on Cons. 444 506 506 506 506 Add: Opening Balance 1,054 1,107 2,104 1,350 2,326
Application of Funds 13,540 16,407 20,774 24,447 29,088 Closing Balance 1,107 2,104 1,350 2,326 2,222
E: MOSL Estimates
4 December 2009 57
Consumer Monopolies
SECTOR: FMCG
United Spirits is part of the UB Group, India's largest United Spirits Sensex - Rebased
alcoholic beverages group.This provides bargaining 2,000
power with distributors and bottlers.
United Spirits has launched tertapacks and blister 1,600
packs of whisky. Innovative products include Pinky
Vodka, Antiquity Blue and low-calorie vodka. 1,200
United Spirits gains from surrogate advertising
through its IPL team Royal Challengers and football 800
club (East Bengal).
United Spirits owns Whyte and Mackay, which 400
ensures Scotch for IMFL blending. Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
4 December 2009 58
United Spirits
Others, 12
Diageo, 1
Mohan Meakin, 5
Jagatjit, 5
BDA, 5
USL, 55
Radico, 9
Seagrams, 8
Source: Company/MOSL
Whisky
Scotch/Super Premium Whisky Antiquity Blue and Rare, Whyte and Mackay
Premium Royal Challenge and Signature, DSP Black Label
Regular/Low End McDowell No1, Bagpiper, Green label, Director’s special
Rum McDowell No1 Celebration, Old Cask
Brandy McDowell No1, John Exshaw, Golconda, Honey Bee
Gin Blue Riband, Carew
Vodka White Mischeif, Alcazar, Romanov
Note: Brands in blue are millionaire brands Source: Company/MOSL
Besides, there are restrictions on distribution, inter-state movement of spirits and high
taxes. Strong entry barriers make the market more lucrative for existing players. Although
we do not expect big changes in distribution, we expect an increase in distribution outlets
and rationalization of taxes in the coming years. This would increase liquor demand.
4 December 2009 59
United Spirits
Spirits Industry
USL: PREMIUM WHISKY BRANDS 384m cases
Source: Company/MOSL
Per capita consumption is only 0.9 liter and the number of people in the legally permissible
age range will increase by 150m in current decade. The social stigma attached to drinking
is fading, leading to higher consumption among the educated. This is enhancing sales of
segments such as vodka, premium Scotches and whisky. IMFL volumes are expected to
grow 11-12% excluding the upside from favorable regulatory changes. State taxes account
for 70% of the MRP of liquor and a rationalization will increase demand significantly.
0.9
2001 70.8 485 455
UK
India
Thailand
Russia
Brazil
USA
World
Source: Company/MOSL
4 December 2009 60
United Spirits
McDowell & Co
Demerger of Investments
into McDowell Holdings
Merged Companies
2 United Spirits launched packaging innovations like small tetra-packs and blister packs
for whisky. The company’s innovative products include Pinky Vodka, Antiquity Blue
and low-calorie vodka. The company has launched Blue Riband Gin in flavors and a
diet version of McDowell No1.
3 United Spirits does surrogate advertising through its IPL team Royal Challengers and
football club, East Bengal. While the IPL team is named after one of its key brands,
the football team retains its original name.
4 United Spirits acquired Whyte and Mackay, which is among the top five Scotch whisky
companies in the world. This provides the company with a Scotch inventory of 108m
liters and brands like Isle of Jura, Dalmore and Whyte and Mackay.
ROYAL CHALLENGE BANGLORE IPL TEAM ENABLES SURROGATE ADVERTISING
Source: Company/MOSL
4 December 2009 61
United Spirits
UNITED SPIRITS: MARKET SHARE 1. Unwarranted promotional campaigns and undercutting has given way to more rational
DOUBLES AFTER ACQUISITION (%) pricing and a competitive environment.
55 2. A strong market position enables United Spirits to cut overhead costs like freight and
31
achieve economies of scale in production and distribution.
3. The monopolistic situation has increased EBIDTA margins to 18.8% in FY08 from
2004-Pre 2009-Post 5.5% in FY05.
Acquisition Acquisition 4. United Spirits has emerged as India’s largest consumer of glass bottles, cartons and
ENA, providing savings in procurement costs.
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
50
FY 08 FY 09 FY 10E FY11E FY 12E
FY11E
FY12E
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY06
FY07
FY08
FY09
Source: Company/MOSL
4 December 2009 62
United Spirits
USL Standalone
Sales 47,982 56,423 66,400
USL Standalone profits EBITDA 8,034 10,396 12,394
will increase by 32% CAGR EBITDA Margin (%) 16.7 18.4 18.7
over FY10-12 Interest 2,774 2,972 2,973
PAT 3,485 4,871 6,066
Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 29.7 41.6 51.7
Whyte & Mackay (inc USL Holdings)
Sales 13,772 13,870 13,955
EBITDA 4,312 4,247 4,246
EBITDA Margin (%) 31.3 30.6 30.4
Interest 2,432 2,355 2,278
Depreciation 367 355 344
Tax 530 538 601
Tax Rate (%) 35.0 35.0 37.0
PAT 984 999 1,023
Whyte & Mackay Int in USL Holding 532 0 0
will contribute Rs8.5 to Adj PAT 585 999 1,023
consolidated EPS by FY11 Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 5.0 8.5 8.7
GBP/Re 76.0 73.6 71.2
USL - Consolidated
Sales 63,869 73,203 83,933
EBITDA 11,974 14,670 16,699
EBITDA Margin (%) 18.7 20.0 19.9
PAT 3,603 5,990 7,257
Adj Share Capital 1,172 1,172 1,173
EPS (Rs) 30.7 51.1 61.9
Source: Company/MOSL
4 December 2009 63
United Spirits
Quarterly trend in domestic IMFL sales (m cases) High input costs impact margins
FY08 FY09 FY10 Gross Margin (%) EBITDA Margin (%)
25.2 54 25
24.0 52.0
22.9 51.0
21.5 22.1 21.2
20.6 20.0 48.5 19.6
18.1 49 20
17.9 17.8 21.3 17.9 16.9
19.2 48.6 46
17.8 46.7 45.4
44 42.2 15
16.0
38.9
39 10
10.3
34 5
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
1Q 2Q 3Q 4Q
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Whyte and Mckay Scotch inventory value rising Geographical sales mix (%)
300 3
East, 13.2
150 2
0 0
Mar-08
Dec-08
Mar-09
Sep-08
Sep-09
Acquisition
Rest of
On
Source: Company/MOSL
4 December 2009 64
United Spirits
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
BALANCE SHEET (CONSOLIDATED) (RS MILLION) Asset Turnover (x) 0.5 0.5 0.6 0.7 0.8
4 December 2009 65
Consumer Monopolies
SECTOR: FMCG
4 December 2009 66
Colgate
(RSB) SH (%)
TOOTHPASTE VOLUMES: IN A NEW GROWTH ORBIT (%) …REFLECTED IN MARKET-SHARE GAINS (%)
18 50.2
49.6
15
Premium - Rs65/150gm 49.2 49.1 49.2 49.6
13 11 14
14 49.2
10 9 11 48.4
10 10 10 48.2
8
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
2QFY09
3QFY09
4QFY09
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
35.1 35.2
5.9
2QFY08
3QFY08
4QFY08
2QFY09
3QFY09
4QFY09
1QFY10
Toothpaste Toothbrush
Source: Company/MOSL
4 December 2009 67
Colgate
Higher reach of media, rising awareness and increasing affordability (Rs.5/10 SKUs)
among rural Indians have pushed the younger generation to move directly towards
toothpaste. But the pace of upgrade of Datun and toothpowder users will be gradual.
in Malaysia (285gm) 30
0
2005 2008
Source: MOSL
51
44 44 50
44 46
45
36 35 36 35 35 35 35
34
31
Source: Company/MOSL
2005 2008
4 December 2009 68
Colgate
Source: Company/MOSL
Oral care focus and consumer activation: Colgate is an oral-care focused company,
with a wide reach (81% outlets in FY09 up from 49% in FY06). Consumer-activation
programs like Disha, partnerships with the IDA/dentist community, Oral Health Month
and awareness campaigns in schools will enable Colgate to maintain its lead in the market.
Colgate’s parental support Parent's technology: The company draws its strength from R&D and technology of its
will ensure steady gains parent, Colgate Palmolive USA, the world leader in oral care. This has enabled the launch
particularly as HUL’s parent, of innovative products such as Colgate Total, Active Salt, Herbal and Sensitive. Colgate
Unilever, quit the oral care also launched Colgate 360, Colgate Sensitive and ZigZag toothbrushes.
segment in some large,
developed markets We believe parental support will ensure steady gains for Colgate particularly as HUL’s
parent Unilever got out of the oral care segment in some large, developed markets. Dabur,
though an emerging player, has niche positioning. We believe Colgate has entered a phase
of high-volume growth on strong brand equity, consumer upgrades and a rational pricing
environment, which makes it a candidate for an emerging monopoly.
Colgate has entered a phase 32,000 Net Sales (Rs m) Grow th (%)
16.6 17.0
of high-volume growth on 15.5 13.9
24,000 15.2 15.0
strong brand equity, 13.8
consumer upgrades and a
16,000
rational pricing
environment, which makes it 8,000
a candidate for an emerging
monopoly 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Source: Company/MOSL
4 December 2009 69
Colgate
Colgate spends 15.5-17% Colgate spends 15.5-17% of sales on advertising and promotion (higher than the industry
of sales on advertising and average of 10-12%), which we expect will tend lower given Colgate’s strengthening position.
promotion (higher than We see the decline in adspend to be structural as Colgate has gained significant traction in
the industry average of sales due to attractive pricing and a wide distribution network. Besides, as a brand evolves
10-12%), which will tend and gains scale, the adspend required to maintain the equity would decline. This is expected
lower given Colgate’s to boost EBITDA margins. We have assumed 15.5% adspend in FY10 to be on the
strengthening position conservative side, but we don’t rule out upside on this front.
FY11E
FY12E
FY04
FY05
FY06
FY07
FY08
FY09
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Source: Company/MOSL
Colgate has ROE of
153% and dividend payout Colgate has ROE of 153% and dividend payout ratio of 80% (dividend yield of 2.5%).
ratio of 80%
REDUCTION OF SHARE CAPITAL HAS BOOSTED ROE (%) HIGH PAYOUT RATIO ENSURES HEALTHY YIELD
0
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Source: Company/MOSL
4 December 2009 70
Colgate
Toothpaste: Volume growth in new orbit Colgate gains share at the expense of HUL (%)
18.0
Colgate (LHS) HUL (RHS)
15.2
32.1 49.5
13.0 14.0
14.0
48.4
10.0 10.9 11.2 30.4 48.5
10.0
9.0
10.0 9.5 29.6
47.8 29.8
8.0
28.0
46.7
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
2QFY07
4QFY07
2QFY08
4QFY08
2QFY09
4QFY09
2QFY10
Mentha oil price trend (US$/ton) Calcium carbonate price trend (US$/ton)
850 160
748
144
750 140
650 120
567
550 100
96
482 89
450 80
Mar-07
Jun-07
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Source: Company/MOSL
4 December 2009 71
Colgate
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
Net Worth 1,622 2,163 2,614 3,130 3,737 Y/E MARCH 2008 2009 2010E 2011E 2012E
Loans 47 47 44 44 45 OP/(loss) before Tax 2,919 3,376 4,482 5,472 6,441
Deferred Liability -278 -177 -219 -287 -370 Int./Div. Received 214 318 303 376 454
Capital Employed 1,391 2,033 2,439 2,886 3,412 Interest Paid -14 -11 -20 -20 -20
Direct Taxes Paid -625 -448 -884 -1,434 -1,735
Gross Block 4,496 4,253 4,503 4,703 4,903
(Incr)/Decr in WC 988 -120 160 537 682
Less: Accum. Depn. -2,582 -2,513 -2,754 -3,007 -3,271
CF from Operations 3,483 3,115 4,041 4,931 5,821
Net Fixed Assets 1,914 1,739 1,749 1,695 1,631
Capital WIP 76 47 104 149 185
(Incr)/Decr in FA -214 273 -307 -245 -236
Investments 726 383 980 882 1,050
(Pur)/Sale of Investments 607 343 -597 98 -168
Curr. Assets, L&A 4,017 5,421 5,543 6,857 8,183 CF from Invest. 394 615 -904 -147 -404
Cash and Bank Balance 1,443 2,511 2,413 3,504 4,572 (Incr)/Decr in Debt 4 0 -3 0 1
Others 1,726 1,974 1,999 2,026 2,055 Dividend Paid -2,276 -2,381 -3,231 -3,693 -4,351
Curr. Liab. and Prov. 5,342 5,557 5,937 6,698 7,638 Others -54 -300 0 0 0
Account Payables 3,047 3,417 3,901 4,434 5,102 CF from Fin. Activity -3,551 -2,661 -3,235 -3,693 -4,350
Net Current Assets -1,325 -136 -394 160 545 Add: Opening Balance 1,117 1,443 2,511 2,413 3,504
Application of Funds 1,391 2,033 2,438 2,886 3,412 Closing Balance 1,443 2,511 2,413 3,504 4,572
E: MOSL Estimates
4 December 2009 72
Consumer Monopolies
SECTOR: FMCG
Marico has led innovation in the category through Marico Sensex - Rebased
packaging like blister packs and wide-neck packs. 120
Investment in brand building have enabled Marico to
de-commoditize the category. Resulting brand loyalty 100
4 December 2009 73
Marico
12.0
Others 11.0 11.0 11.0
32.0% 10.0
8.5 9.0
Dabur Marico
Shalimar
FY10E
FY11E
FY12E
5.0%
FY06
FY07
FY08
FY09
8.0% 55.0%
Source: Company/MOSL
Opportunity to uptrade
Increased use of coconut oil The branded coconut oil market presents high visibility of growth and profitability. The
and upgrades from loose oils coconut oil segment (both branded and loose) posted sales of 9% CAGR over FY04-09
to branded consumption and branded coconut oil posted sales of 15% CAGR. We believe increased use of coconut
helped branded coconut oil oil (penetration and frequency of use) and upgrades from loose oils to branded consumption
sales to grow 15% CAGR helped this growth. Unorganized/loose oils constitute about 40% of the coconut oil market
over FY04-09 (down from 53% in FY04) and we expect their share to fall to 25% in the next five years.
SHARE OF LOOSE OILS DECLINED FROM 53% IN FY04 TO 40% IN FY09: A RS25B OPPORTUNITY
Branded Unbranded/Loose
60
53
47
40
2004 2009
Source: Company/MOSL
4 December 2009 74
Marico
The branded coconut oil Rising incomes and aspiration levels have resulted in higher penetration. Branded coconut
market doubled to Rs15b in oil market doubled to Rs15b in 2009 from Rs7b in 2004. We expect the trend to continue
2009 from Rs7b in 2004 and in the medium term. Besides, new users enter the coconut oil market (about 10% growth)
this trend is expected to every year, adding Rs2b to the category. Growth of the branded coconut oil market is
continue in the medium term expected to accelerate (12-14%) led by category expansion and upgrades from loose oils.
We like the management’s strategy of not pursuing market share from regional brands in
price-led competition. The segment yields high margins for Marico and we see visibility of
growth and profitability from pure coconut oil for several years to come. We believe pure
coconut oil (Parachute) is a cash cow for Marico and the high returns thus generated are
invested in new growth engines like Saffola, Kaya and other recent prototypes.
Wide neck pack
9 9
Source: Company/MOSL
4 December 2009 75
Marico
Steady cashflow from the The company is still in a growth phase in other categories wherein investment in brands
Parachute stable is expected could help Marico to be a major player in hair oil and processed food. We believe the
to help Marico to develop existence of a steady cashflow from the Parachute stable will help to develop other
other segments segments.
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Source: Company/MOSL
India
80%
Source: Company/MOSL
4 December 2009 76
Marico
Sales growth impacted by price cuts/discounts Lower input costs boost gross margins (%)
Sales (Rsm) - LHS Sales Grow th (%) Gross Margins EBITDA Margins
7,800
50.7 52.9
48.4 47.2 49.2 49.7
30 47.9 46.3 45.7 45.0
6,300 28
23
4,800 24 23
Jun-07
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Parachute: Double digit volume growth in 1HFY10 (%) Copra price (Rs/Qtl): Hits a low
14 5,000
11 11 4,450
10 10 3,995
9 9
8
3,900
3,350
2,900
2,800
Dec-07
Feb-08
Jun-08
Oct-08
Dec-08
Feb-09
Jun-09
Oct-09
Apr-08
Aug-08
Apr-09
Aug-09
Dec-07
Jun-08
Dec-08
Jun-09
FY08
Sep-08
FY09
Sep-09
Saffola: Sales promotions/price cuts boost volumes (%) Safflower prices (Rs/ton): Benign
28 100,000
22 22 90,000
19
80,000
13
11 63,500
9 70,000
68,000
60,000
3
50,000
Feb-08
May-08
Nov-08
Feb-09
May-09
Nov-09
Aug-08
Aug-09
Dec-07
Jun-08
Dec-08
Jun-09
FY08
Sep-08
FY09
Sep-09
Source: Company/MOSL
4 December 2009 77
Marico
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
Leverage Ratio
BALANCE SHEET (RS MILLION)
Debt/Equity (x) 1.1 0.8 0.4 0.2 0.1
Y/E MARCH 2008 2009 2010E 2011E 2012E
Loans 3,579 3,750 2,638 1,750 1,300 OP/(loss) before Tax 2,463 3,040 3,724 4,303 5,027
Capital Employed 6,727 8,285 9,037 10,535 13,069 Int./Div. Received 96 122 152 189 318
Interest Paid -305 -357 -326 -261 -210
Gross Fixed Assets 2,934 3,885 4,385 4,885 5,885 Direct Taxes Paid -157 -70 -395 -525 -642
Intangibles 627 684 627 627 627 (Incr)/Decr in WC -827 -1,062 -478 -707 -526
Less: Accum. Depn. -1,635 -2,035 -2,549 -3,031 -3,583 CF from Operations 1,269 1,672 2,678 2,999 3,967
Net Fixed Assets 1,926 2,534 2,462 2,481 2,929
Capital WIP 647 577 250 200 200
Extraordinary Items 0 0 0 0 0
Goodwill 842 850 842 842 842
(Incr)/Decr in FA -1,159 -938 -116 -450 -1,000
Investments 0 121 800 1,600 3,800
(Pur)/Sale of Investments 0 -121 -679 -800 -2,200
Curr. Assets, L&A 5,281 6,719 7,254 8,787 9,749 CF from Invest. -1,159 -1,059 -795 -1,250 -3,200
4 December 2009 78
Consumer Monopolies
SECTOR: FMCG
4 December 2009 79
Titan Industries
Titan has, over the years, Titan has, over the years, identified and nurtured niche categories, offering branded products
identified and nurtured niche in an erstwhile unorganized segment. From a modest venture into quartz watches in 1984,
categories, offering branded to its entry into the organized jewelry segment (in 1996) and its latest foray into branded
products in an erstwhile eyewear, Titan has benefited from the first mover advantage in every segment of its
unorganized segment presence, thereby enjoying a near monopoly.
UNORGANIZED SEGMENT IS ~55% OF WATCH MARKET TITAN HAS ~60% SHARE IN ORGANIZED SEGMENT
Organized
Market, 45
Others, 31
Titan, 60
Timex, 9
Unorganized
Market, 55
Source: Company/MOSL
Luxury
Mid-Upper
Luxury Mass (> Rs5,000), 1%
(Rs1,000- Mass
(> Rs5000), 13% (< Rs400), 11% Rs5,000), 13% (< Rs400), 38%
Source: Company/MOSL
About 55% of the watch About 55% of the watch market is still unorganized and most of this is at the bottom end
market is still unorganized of the segment. About 38% of watch volumes are priced under Rs400 each and 86% are
and most of this is at the priced lower than Rs1,000 each. Premium watches (>Rs1,000) account for 13% of industry
bottom end of the segment volumes and luxury watches (>Rs5,000) account for 1% of the volumes.
4 December 2009 80
Titan Industries
TITAN'S WATCH PORTFOLIO Watch industry volumes to grow in high single digits
SONATA: VALUE FOR MONEY
Watch volumes are likely to grow in high single digits. Volume growth will be driven by low
penetration as only 27% of Indians own a watch, and the proportion is less than 15% in
rural India. However, subsequent growth would be more a function of rising aspirations
than functional use (time keeping) consequent to increasing penetration of mobile phones.
We believe watches have evolved from time keeping devices to fashion accessories. This
is resulting in dual ownership of watches (~5%) and those based on occasions, such as
formal, casual and sports watches. This trend is emerging among the upper middle class,
triggering 25-35% volume growth in the premium/luxury segment.
4 December 2009 81
Titan Industries
LICENSED AND OUTSOURCED WATCHES GROWING FASTER EBITDA MARGIN IMPACTED BY RETAIL EXPANSION
Titan & Fastrack Vol (m) Sonata Volume (m) Licensed Brands Sales Grow th (%) - LHS EBITDA Grow th % - LHS
Source: Company/MOSL
Branded, ~10 Competitors like Rajesh Exports, Gitanjali Gems, Reliance Retail and other mid sized players
have entered the branded jewelry segment. The entry of new players and their adspends
has increased awareness of branded jewelry and helped to boost its growth.
4 December 2009 82
Titan Industries
Margins at the jewelry division are a function of (1) sales proportion of GoldPlus (estimated
gross margin of 8%), studded jewelry (gross margin: 32%) and gold coins (gross margin:
3%) (2) stock turns, which should ideally be four, to enable lower holding costs 3) spends
on overheads and advertising. The jewelry business has increased EBIDTA margins by
40bp in the past few years due to operating leverage from existing stores.
OPERATIONAL LEVERAGE TO INCREASE MARGINS STUDDED JEWELRY AND GOLD COIN MIX KEY FACTOR (%)
Tanishq Plain 52
0 4.0 45
Gold 49
FY10E
FY11E
FY12E
FY06
FY07
FY08
FY09
Source: Company/MOSL
4 December 2009 83
Titan Industries
Although Titan’s margins eroded due to increasing contribution from jewelry, RoCE
increased from 12.6% in FY04 to 38.8% in FY09 due to higher asset turns.
Over FY04-09 Titan’s sales and adjusted PAT grew 4.3x and 5.6x respectively, and
increased capital employed was negligible at 23%.
INCREASING CONTRIBUTION OF JEWELRY AND LOSS MAKING BUSINESS DEPRESSES MARGINS (%)
600
FY10E
FY11E
FY12E
FY04
FY05
FY06
FY07
FY08
FY09
0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
4.2 39.6
38.8
3.5
36.1
2.8
31.0
29.7
25.6
FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Source: Company/MOSL
4 December 2009 84
Titan Industries
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
16,500
16
INR/10g
14,000
14,055
-3 11,500
-7.2 -7
-15
9,000
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Nov-09
Sep-09
FY09 sales mix: Jewelry is 72% of sales FY09 EBITDA mix: Watches are 50% of EBITDA
Precision PE &
Engg Eyew ear Eyew ear Watches
2% 2% Watches -6% 50%
24%
Jewelry
Jewelry
56%
72%
Source: Company/MOSL
4 December 2009 85
Titan Industries
Y/E MARCH 2008 2009 2010E 2011E 2012E Y/E MARCH 2008 2009 2010E 2011E 2012E
Share Capital 444 444 444 444 444 Debt/Equity (x) 0.6 0.3 0.2 0.1 0.0
Deferred Tax 247 182 235 317 431 OP/(loss) before Tax 2,249 2,838 2,980 4,041 5,109
Capital Employed 7,184 7,448 8,379 10,075 11,553 Int./Div. Received 18 53 60 19 22
Depreciation and Amort. 297 418 371 395 425
Gross Block 5,581 5,930 6,379 6,900 7,539 Interest Paid -201 -228 -361 -396 -406
Less: Accum. Depn. -2,856 -3,186 -3,493 -3,825 -4,186 Direct Taxes Paid -448 -672 -723 -1,108 -1,531
Net Fixed Assets 2,725 2,745 2,886 3,075 3,352 (Incr)/Decr in WC -938 -519 -365 -1,049 -851
Intangibles 525 461 398 335 271 CF from Operations 977 1,889 1,962 1,902 2,768
Capital WIP 100 195 100 100 100
Investments 474 77 77 77 77 Extraordinary Items -80 -466 0 0 0
(Incr)/Decr in FA -366 -445 -354 -521 -639
Curr. Assets, L&A 12,686 14,777 16,692 20,515 24,162 (Pur)/Sale of Investments -204 397 0 0 0
Inventory 10,211 12,027 13,494 16,290 18,939 CF from Invest. -650 -513 -354 -521 -639
Account Receivables 965 1,062 1,235 1,536 1,812
Cash and Bank Balance 519 547 669 1,190 1,604 Incr/(Decr) in Debt 105 -821 -426 -200 -728
Others 992 1,141 1,293 1,499 1,806 Dividend Paid -416 -672 -559 -660 -992
Curr. Liab. and Prov. 8,801 10,346 11,773 14,027 16,409 Others -4 145 -502 -1 6
Account Payables 6,538 6,967 8,029 9,985 11,779 CF from Fin. Activity -315 -1,347 -1,486 -861 -1,714
Other Liabilities 1,561 2,522 2,541 2,563 2,580
Provisions 702 857 1,203 1,479 2,050 Incr/Decr of Cash 12 28 122 521 416
Net Current Assets 3,885 4,432 4,918 6,488 7,753 Add: Opening Balance 507 519 547 669 1,190
Application of Funds 7,184 7,448 8,379 10,075 11,553 Closing Balance 519 547 669 1,190 1,604
E: MOSL Estimates
4 December 2009 86
Consumer Monopolies
SECTOR: FMCG
400
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
4 December 2009 87
GSK Consumer
KEY BRANDS IN MALTED FOOD GSK Consumer an undisputed leader in the Rs24b MFD category
GSK Consumer has a 70% share in the Rs24b malted food drinks (MFD) category. Cadbury
(Bournvita) and Complan from Heinz are the other prominent players with ~15% and
~13% market share respectively. Dabur recently entered this category with its Chawyan
Junior brand and HUL’s Kissan Amaze Brainfood is yet to be launched nationally. Milo,
the world’s leading brand from Nestle in this segment, quit the Indian market, which augurs
well for GSK.
GSK CONSUMER LEADS THE MFD CATEGORY... ...WITH FLAGSHIP BRAND HORLICKS
Others
Complan 2%
Others
13%
Cadbury Boost 3%
White Malted Food
15% 20%
Horlicks
77%
GSK
Consumer 70%
Source: Company/MOSL
The malted food drinks category can be sub-divided into white and brown segments based
on their flavor. In India the white segment comprises 70% of the MFD market and the
brown segment has a 30% share. GSK has 35% share in the brown segment and Bournvita
Brown Malted Food
leads this category with 45% market share. The market is skewed geographically too: the
South and East account for nearly 80% of the MFD market and in the North and the West,
where use is driven mainly by taste, the brown segment is popular.
Source: Industry/MOSL
4 December 2009 88
GSK Consumer
GSK has played a key role in We estimate the proportion of the Indian population consuming malted food drinks at less
consolidating the malted than 20%. South and East India are predominantly white malted drinks markets, as the
food drinks category and product has been traditionally used as a milk substitute. North and West India, on the other
Horlicks has been a key hand, are brown energy drinks markets as the product is used as a nutrient additive and
driver for GSK flavoring agent. We expect penetration to increase due to (1) launch of niche products
such as Women’s Horlicks and Mother Horlicks, (2) increased awareness and brand
building, (3) launch of Rs20 SKU, and (4) value-for-money variants aimed at the mass
market. We believe the category has evolved over years and is not price-led at the top
end. Each brand is focused on specific needs and priced accordingly (Complan is priced
about 32% higher than Horlicks). New entrant, Chyawan Junior has maintained pricing
at Rs138/500gm, at par with Horlicks.
15.8%
12.0%
CY08 volume growth 11.0%
10.3%
was boosted by 98%
9.1% 9.1%
increase in exports
7.1%
Source: Company/MOSL
We believe GSK is well placed to maintain its dominance in this product category because:
GSK’s flagship brand, Horlicks, is positioned on the nutrition platform in the white
drinks segment and Boost is positioned on the energy platform in the brown drinks
segment.
Horlicks has launched flavors such as vanilla, toffee, elaichi and chocolate, which has
created excitement in the white category and increased the brand’s relevance to young
consumers.
4 December 2009 89
GSK Consumer
GSK is targeting various GSK is targeting various consumers such as women, mothers and children aged between
consumers such as women, two and 10 years with products like Women’s Horlicks, Mother Horlicks, Acti Base
mothers and children aged and Acti Grow.
between two and 10 years
through variants of Horlicks NEW LAUNCHES HAVE CATERED TO A VARIED CONSUMER BASE
Source: Company/MOSL
GSK is test marketing a value for money variant, Horlicks Asha (Rs80/500gm) in
Andhra Pradesh to tap opportunity at the bottom of the pyramid.
The company has tested the waters with LUP (low unit packs) of Rs20/90gm SKUs
to stimulate trials by non-users, and the response has been encouraging.
CY10E
CY11E
CY05
CY06
CY07
CY08
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
Source: Company/MOSL
4 December 2009 90
GSK Consumer
The company posted ROE of ~25%, even as more than 50% of its capital employed is in
cash/cash equivalent. Historically, the company has retained profits (payout ~30%) despite
a low capex requirement.
ROE IS IMPACTED BY RS4.5B CASH (%) GSK HAS LOWEST PAYOUT RATIO AMONG MNCS (%)
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
CY09E
CY10E
CY11E
CY05
CY06
CY07
CY08
Source: Company/MOSL
4 December 2009 91
GSK Consumer
Decline in exports impact 3QCY09 sales 3QCY09 volume growth at a 10-quarter low (%)
Net Sales (Rs m) - LHS Grow th (% YoY) - RHS 20
6,000 17
31.4
16
25.8 16
4,500 24.5 13.5
13 13
19.3 20.2 12
12
3,000 16.6 17.3
17.2
8
1,500 8 7
6
7.3
0 4
Mar-08
Mar-09
Dec-07
Jun-08
Dec-08
Jun-09
Sep-07
Sep-08
Sep-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Increased adspend impact margins Low volume growth, adspend impact profit growth
Gross Margin (%) - LHS EBITDA Margin (%) - RHS PAT (Rs m) - LHS PAT Grow th (% YoY) - RHS
1,000
66 22.0 48.3
19.3 19.4 65
800 39.4
65 15.9 33.8
14.5 15.9
14.9 63
600
62 62
18.5 19.6
61 400 9.1
12.6 12.1 60 9.1 13.2
60 5.0
200
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Dec-07
Mar-08
Jun-08
Dec-08
Mar-09
Jun-09
Sep-07
Sep-08
Sep-09
Sep-07
Sep-08
Sep-09
Milk price index rising steadily Barley prices firm (Rs/qtl)
270 1,120
1,069
249.4
245 1,040
1,007
220 960
216.1
195 880
881
182.3
170 800
Jan-06
May-06
Jan-07
May-07
Jan-08
May-08
Jan-09
May-09
Sep-06
Sep-07
Sep-08
Sep-09
Jul-09
Jul-09
Jul-09
Jun-09
Oct-09
Oct-09
Nov-09
Sep-09
Sep-09
Aug-09
Aug-09
Source: Company/MOSL
4 December 2009 92
GSK Consumer
Y/E DECEMBER 2008 2009E 2010E 2011E 2012E Y/E DECEMBER 2008 2009E 2010E 2011E 2012E
Int. and Fin. Charges -82 -65 -65 -60 -60 P/E 31.9 24.7 20.1 16.9 13.8
Other Income - Recurring 955 890 995 1,135 1,371 Cash P/E 26.1 21.0 17.3 14.6 12.2
Profit before Taxes 2,841 3,694 4,447 5,260 6,422 EV/Sales 3.6 2.9 2.4 2.0 1.6
Change (%) 16.2 30.1 20.4 18.3 22.1 EV/EBITDA 23.3 16.6 13.8 11.2 8.9
Margin (%) 18.4 19.3 19.6 19.8 20.6 P/BV 7.9 6.6 5.5 4.7 3.9
Tax -1,064 -1,404 -1,623 -1,894 -2,312 Dividend Yield (%) 1.1 1.4 1.7 2.1 2.7
4 December 2009 93
Consumer Monopolies
SECTOR: FMCG
M.Cap. (US$ b) 2.2 12/08 6,247 1,174 36.0 -17.5 37.1 10.2 27.6 42.4 6.8 21.8
4 December 2009 94
Gillette India
Others Gillette
36% 30%
HUL Malhotra
10% Vidyut Mettalics Shaving
10% 14%
Source: Company/MOSL
In the male grooming market, shaving blades and systems comprise 75% (Rs13b) and
deodorant, hair care, skin care and others account for about 6% each. Gillette has 40%
share in the shaving blades and systems market while House of Malhotra has 14% share.
INDIAN MALE GROOMING MARKET BLADES AND RAZORS: A RS13B OPPORTUNITY
Pre
Razor
Shave
and
14%
Skin Blades Others
60% Gillette
Care 37%
40%
5%
Hair
Care
7%
Vidyut Malhotra
Deo 8% Men's Razor and Mettalics Shaving
Show er Blades 60% 9% 14%
6%
Source: Company/MOSL
GILLETTE HAS THE MOST COMPREHENSIVE OFFERING IN MALE GROOMING PRODUCTS SEGMENT
Source: Company/MOSL
4 December 2009 95
Gillette India
Gillette is present in major categories in the male grooming market: shaving blades and
systems, deodorants, shaving gels and foams. HUL is present in the shaving creams, face
creams and deodorants segments and Emami and Nivea are fast emerging as key players
in the male skin care segment.
4 December 2009 96
Gillette India
Steady sales CAGR of 10% Steady sales CAGR of 10% over FY03-09 and robust margins (27%) have enabled the
over FY03-09 and robust company to report high ROE of 23%. With a payout of 36%, the stock offers yield
EBIT margins of 27% have of ~1%.
enabled the company to
SALES MIX (CATEGORY WISE) FY09 VOLUMES IMPACTED BY DISTRIBUTION HICCUPS
report high ROE of 23%
Others 27.6 Shaving Systems
Toiletries Shaving Systems
2% Volume grow th
9% and Catridges, 36%
Batteries
5%
13.3
Tooth
2.8
brush
20% Safety Razor
Blades FY07 FY08 FY09
28%
SEGMENTAL REVENUE BREAK-UP SEGMENTAL PBIT MIX
Grooming Grooming
74% 83%
Source: Company/MOSL
Source: Company/MOSL
4 December 2009 97
Gillette India
42 40.1
40 34.7
21.1
17.5 36.0
35 36 15.8
28 12.5 12.5
23
20
Source: Company/MOSL
4 December 2009 98
Gillette India
Y/E DECEMBER 2006 2007 2008 2009E Y/E DECEMBER 2006 2007 2008 2009E
Reserves 3,156 3,270 3,928 4,583 Debt/Equity (x) 0.0 0.0 0.0 0.0
Capital Employed 3,599 3,668 4,301 4,957 OP/(loss) before Tax 1,094 2,160 1,822 1,770
Int./Div. Received 179 0 0 0
Gross Block 2,726 2,580 2,538 2,468 Depreciation and Amort. 156 223 140 114
Less: Accum. Depn. -1,399 -1,515 -1,621 -1,577 Interest Paid 0 0 0 0
Net Fixed Assets 1,327 1,065 918 891 Direct Taxes Paid 430 781 673 628
Capital WIP 37 6 30 24 (Incr)/Decr in WC -71 -301 -381 -172
Investments 0 0 0 0 CF from Operations 1,788 2,863 2,254 2,341
Curr. Assets, L&A 4,443 5,933 5,152 5,548 (Incr)/Decr in FA -71 372 -1,089 -830
Inventory 499 827 1,032 1,010 CF from Invest. -71 372 -1,089 -830
Account Receivables 344 640 644 606
Cash and Bank Balance 2,297 1,728 764 926 Dividend Paid -3259 -5703 -4073 -4073
Loans & Adv. 1,304 2,739 2,712 3,007 Others 1,899 1,900 1,945 2,724
Curr. Liab. and Prov. 2,208 3,336 1,798 1,506 CF from Fin. Activity -1,360 -3,803 -2,128 -1,349
Account Payables 671 1,043 1,260 980
Provisions 1,537 2,294 539 527 Incr/Decr of Cash 357 -568 -963 162
Net Current Assets 2,235 2,597 3,354 4,042 Add: Opening Balance 1,939 2,297 1,728 764
Application of Funds 3,599 3,668 4,301 4,958 Closing Balance 2,297 1,728 765 926
E: MOSL Estimates
4 December 2009 99
Consumer Monopolies
SECTOR: FMCG
80
40
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Others, 20
Ujala pushed Robin Blue to a
small market share despite
Reckitt Benckiser launching
Robin Blue in liquid form Reckitt Benckiser, 5
Jyothy Labs, 75
Source: Company/MOSL
30,000 3,600
20,000 2,400
10,000 1,200
0 0
Total Urban Rural Total Urban Rural
Source: Company/MOSL
It is a low involvement It is a low involvement category that is growing volumes in low to mid single digits (5-6%).
category but increasing The low category growth despite 35% penetration is due to:
spends on consumer Lack of awareness rather than lack of affordability.
awareness are likely to Rising use of washing machines and high end detergents impacting.
result in steady volume Rising incomes leading to lower use of white clothes except as uniforms.
growth for Ujala
We believe increasing spends on consumer awareness are likely to result in steady volume
growth for Ujala. The use of the product does not change with rising affordability, which
will keep the category as a slow but steady growth segment.
We believe Ujala has become a generic brand for fabric whitener and is best placed to
ride the increasing penetration in the segment as:
The company has proprietary technology and product which is only manufactured in-
house. There is no outsourcing of the product.
Jyothy Laboratories has a reach of 2.9m outlets (direct reach of 1m outlets) and a
dedicated sales force that caters to the unique requirements of the category with small
sized and low value SKUs. The company has developed the distribution with a
partnership approach with its distributors, which has enabled the company to enter
new categories.
Fabric whitener has not Jyothy's sales force is on its rolls and not on contract or on the rolls of dealers. This
attracted large players as the has enabled improved production planning, high level of commitment and better results.
small size of the category Fabric whitener has not attracted large players as the small size of the category (Rs4b),
(Rs4b), low consumer low consumer involvement and small unit price make it unattractive for them. Besides,
involvement and low unit the company is evolving the category; it has extended the product to include Ujala
price make it unattractive Stiff and Shine, which offers consumers dual benefits.
India. Strong performance from Ujala fabric whitener has enabled Jyothy to report 43%
ROE and dividend payout of 38%.
Soaps &
Home
Detergents, 94
Care, 44
Home
Care, 6
Soaps &
Detergents, 56
18.3
17.6 36.2
15.9 30.6
19.3
18.5
11.4
Y/E MARCH 2006 2007 2008 2009 Y/E MARCH 2006 2007 2008 2009
Share Capital 73 73 73 73
Reserves 2,475 2,865 3,219 3,451
CASH FLOW STATEMENT (RS MILLION)
Net Worth 2,548 2,938 3,292 3,523
Loans 1 2 2 2 Y/E MARCH 2006 2007 2008 2009
Capital Employed 2,549 2,939 3,294 3,525 PBT before EO items 468 516 524 401
Add : Depreciation 52 62 74 68
Gross Block 1,074 1,353 2,179 2,283 Interest 1 2 7 4
Less: Accum. Depn. 240 297 365 432 Less : Direct taxes paid 90 73 166 105
Net Fixed Assets 834 1,056 1,814 1,851 (Inc)/Dec in WC -394 -324 106 93
Capital WIP 84 573 91 61 CF from Operations 216 329 878 671
Investments 17 17 23 173
Curr. Assets, L&A 1,970 1,767 2,016 2,186 (Incr)/Decr in FA -122 -398 -968 -238
Inventory 236 397 425 429 (Pur)/Sale of Investments -17 0 -6 -150
Account Receivables 322 407 253 424 CF from Invest. -139 -398 -974 -388
Cash and Bank Balance 1,277 768 955 1,002
Loans and Advances 134 195 383 331 Inc/(Dec) in networth 1,924 -217 -315 -315
Inc/(Dec) in debt 1 1 0 0
Curr. Liab. and Prov. 298 419 562 638 Less : Interest paid -1 -2 -7 -4
Account Payables 226 369 341 388 Dividend paid 91 91 145 145
Other Liabilities 0 0 0 0 Others -1,706 -313 460 -62
Provisions 72 50 221 250 CF from fin. activity 309 -441 283 -236
Net Curr. Assets 1,672 1,348 1,454 1,547 Incr/Decr of Cash 386 -510 187 48
Def. Tax Liability -57 -55 -88 -107 Add: Opening Balance 892 1,277 768 955
Appl. of Funds 2,549 2,939 3,294 3,525 Closing Balance 1,277 768 955 1,002
Source: Company
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any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information
contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter
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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement ITC HUL Nestle Asian Paints United Spirits GSK Cons. Titan Ind Colgate Marico
1. Analyst ownership of the stock No No No No Yes No No No No
2. Group/Directors ownership of the stock Yes Yes No No No No No No Yes
3. Broking relationship with company covered No No No No No No No No No
4. Investment Banking relationship with company covered No No No No No No No No No
This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required
from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide
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