FMCG Sector Report

FMCG l India Research l January 07, 2011
Rising costs and high valuations provide discomfort
 According to OECD-FAO, soft commodity prices are expected to increase

structurally and rise at c4% CAGR until 2019 driven by higher prices of
wheat (11%), vegetable oils (6%), whole milk powder (6%) and oil seeds
(4%).
 We expect higher input costs will result in c140bp contraction in gross

margins over FY10-13 for companies under our coverage. While GSK
Consumer and Colgate will be least affected, Marico is likely to be the
worst affected by rising input prices.
 Increasing competition should limit pricing power as well as result in

higher advertisement and promotion expenditure.
 Historically, FMCG index mirrors the movement in food inflation and

competitive intensity.
 Valuations are at an all-time high. We expect HUL and Marico to be worst

affected by high inflation and rising competition, and hence, initiate
coverage with a Sell rating and target price of INR234 and INR112,
respectively. Our earnings expectations are c10% lower than consensus.
We believe GSK Consumer is relatively better placed and hence, initiate
coverage with a Buy rating and target price of INR2,576.
 Higher agricultural production, drop in food prices and higher demand

remain the key risks to our call.
Analyst:
Sweta Jain
022- 42208915
s.jain@pugsec.com
FMCG Sector Report
Contents
Industry Section
Investment summary 3
Investment thesis 5
Input cost inflation a key challenge 6
Soft commodity prices to increase in long term… 6
Rising input costs to affect margins; HUL and Marico to be worst affected 10
Stock performance to mirror food inflation and competitive intensity 12
Competitive landscape is intensifying… 12
Stock performance affected by higher food inflation and intensive competition 14
Our assessment 15
Valuation and risks 16
Valuation snapshot 17
Risks 18
Company Section
Colgate-Palmolive (India) Ltd 21
Dabur India Ltd 26
Godrej Consumer Products Ltd. 34
GlaxoSmithKline Consumer Healthcare Ltd. 39
Hindustan Unilever Ltd. 47
Marico Ltd. 54
Nestle India Ltd. 62
January 07, 2011 2

FMCG Sector Report
Investment summary
 According to a joint assessment by OECD-FAO, prices of soft commodities will rise
structurally, with an estimated c4% CAGR increase until 2019. Rising input costs will
affect margins by c140bp for consumer companies over FY10-13E.
 Increasing competitive intensity will limit pricing power. Historically, stock prices
mirror the movement in food inflation and competitive intensity.
 We prefer companies with absolute market leadership like GSK Consumer, Nestle,
and Colgate and players that operate in niche categories with low MNC interests like
Dabur in ayurveda.
Input cost inflation is likely to keep margins under pressure. Managing higher raw material prices with
intensifying competitive landscape will remain a key challenge for consumer companies in future. We
believe absolute market leadership giving higher pricing power justifies premium valuations for
companies such as GSK Consumer.
Rising soft commodity prices to increase concerns on profitability…

While current food index as measured by FAO is up 22% YoY for November 2010 (driven by an increase
in edible oils and cereal prices), it is estimated that soft commodity prices will continue to remain firm with
c4% CAGR until 2019. Improving demand environment combined with rising supply concerns across
global markets will lead to a broader demand-supply mismatch; resulting in an upward price trend over a
long term. Moreover, crude oil prices are also on a rise, thereby increasing packaging costs for all FMCG
companies, which will adversely affect profitability going forward.
… which, along with higher competition will restrict margin expansion

Moreover, competitive landscape is intensifying, which will limit pricing power going ahead. Increasing
food inflation combined with higher competition will put pressure on companies’ profitability and thereby,
stock prices. Historically, it is seen that stock performance mirrors the movement in food inflation and
competitive landscape. We believe companies with absolute market leadership and strong brand equity
will be relatively better placed to maneuver brand innovations along with pricing interventions to maintain
their market position and financial profitability.
FMCG stocks trading at all-time high valuations, GSK Consumer is our top pick
Improving economic growth combined with rising consumerism has assisted strong double-digit volume
growth for the FMCG sector, which has re-rated the entire FMCG universe. We believe strong brand
equity, higher pricing power and low raw material cost sensitivity will help GSK Consumer and Nestle to
sustain the premium valuations. We believe, at the current price, GSK Consumer is the most attractive
play on the domestic F&B space and hence, initiate coverage with a Buy rating and target price of
INR2,576. We expect HUL and Marico to be worst affected by rising input costs and increasing
competition. Hence, we initiate coverage with a Sell rating and target prices of INR234 and INR112,
respectively.
January 07, 2011 3

FMCG Sector Report
GSK Consumer: Best play on domestic food and beverage space

Rating: Buy TP: INR2,576 Upside:12%
GSK Consumer, with a dominant position in the lesser-competitive and under-penetrated malted food
drink (MFD) category, is well placed to attain strong volume growth and pass on input cost inflation to
consumers with greater ease. Further, successful brand extensions to non-MFD categories and a healthy
balance sheet, supporting inorganic growth opportunities, would engender incremental growth triggers.
We expect earnings to grow at 22% CGAR during CY09-12, which is one of the highest in our coverage
universe. We value GSK Consumer on an average of DCF and PER basis to arrive at our target price of
INR2,579, which provides 12% potential upside from the current levels.
HUL: High costs to put pressure on margins

Rating: Sell TP: INR234 Downside: 28%
We expect HUL to face headwinds from increasing crude oil prices and rising competition. We expect
HUL will have difficulty in maintaining its operating margins due to higher dependence on the ageing
soaps and detergents category and increasing competition in personal care segment. We forecast a
contraction of 173bp in EBITDA margins over FY10-13.
Moreover current valuations at 31x our FY12E EPS, a 20% premium to its one-year forward mean PER,
appear rich. Hence, we initiate coverage with a Sell rating on the stock with our target price of INR234,
based on an average of DCF and PER methodologies.
Marico: High copra prices to result in consensus downgrade

Rating: Sell TP: INR112 Downside: 10%
We believe rising copra prices, which are up 67% YoY, will provide margin pressures and result in
consensus downgrade. While we expect the company to record earnings CAGR of 15% over FY10-13, it
will be lower than the company’s earning CAGR of 28% achieved over FY05-10. Hence, we believe the
premium of 37% to its historical one-year forward mean PER, which the stock is commanding currently,
should reduce and revert to its mean in future.
We value Marico at INR112 based on an average of DCF and PER methodologies. Our target price
provides 10% potential downside from the current levels and hence, we initiate coverage with a Sell
rating on the stock.
Key risks to our assumption

Substantial increase in agricultural crop production, thereby reducing prices of soft commodity, and
continuing higher consumer demand are the key risks to our assumptions.
January 07, 2011 4

FMCG Sector Report
Investment thesis
Share price
Target Upside
Company Rating Key catalyst Key risk Financial forecasts performance
price (INR) (%)
(3-month)
Earnings CAGR
Increase in
Strong volume to cap at 9% over
Upgrade competition to
Colgate 946 9.5 growth; lower input FY10-13E owing (2.5)
to Buy restrict pricing
cost inflation to higher tax
power
provisions
Inorganic growth
Higher input costs 18% earnings
opportunities to
Dabur Hold 102 (0.6) to restrict margin CAGR over (4.8)
maintain growth
expansion FY10-13E
momentum
Increasing visibility Increase in palm oil Consolidation to
of international prices to put aid 26% earnings
GCPL Hold 414 5.7 (1.9)
operations could re- pressure on CAGR over
rate the stock margins FY10-13E
Strong presence in One of the fastest
low-competitive Increasing growing
malted drink competition could companies with
GSK Consumer Buy 2,576 12.0 14.8
category to aid result in higher A&P earnings CAGR
robust earnings spends of 22% over
CAGR CY09-12E
Rising input costs, Increase in market
7% earnings
intensifying shares with
HUL Sell 234 (28.3) CAGR over 7.1
competition in its increasing focus on
FY10-13E
main categories competitive growth
Excise duty
Escalating copra settlement could Earnings CAGR
Marico Sell 112 (9.9) prices to curtail provide c10% of 15% over (7.1)
margin expansion upside to our FY10-13E
estimates
Continuing pricing
Intensifying
interventions and
competition could 17% earnings
new product
Nestle Sell 3,405 (12.6) challenge pricing CAGR over 19.3
launches without
power and result in CY09-12E
negative impact on
margin pressure
volume growth
Valuation matrix
EPS
Market Dividend yield
CMP CAGR PER (X) RoE (%) RoCE (%) Upside
Company cap (%) Rating
(INR) (%) (%)
(INRbn)
FY10-13E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Upgrade
Colgate 864 117 8.9 26.8 24.8 118.9 106.8 146.6 141.3 2.7 3.0 9.5
to Buy
Dabur 103 179 18.4 31.0 24.9 52.6 49.5 50.4 48.5 1.2 1.6 Hold (0.6)
GCPL 392 127 25.8 25.6 20.7 36.8 32.2 31.8 25.0 1.6 1.9 Hold 5.7
GSK
2,300 97 22.2 33.5 27.4 29.0 29.5 43.4 44.2 1.0 1.2 Buy 12.0
Consumer*
HUL 326 711 7.3 34.0 31.0 76.4 76.1 91.6 91.8 2.1 2.5 Sell (28.3)
Marico 124 76 15.0 26.1 23.7 37.3 31.5 30.8 30.0 0.6 0.8 Sell (9.9)
Nestle* 3,898 376 17.3 46.1 39.3 121.1 105.7 150.9 129.8 1.4 1.5 Sell (12.6)
Note: * Calendar year ending Source: PUG Research
January 07, 2011 5

FMCG Sector Report
Input cost inflation a key challenge

 FAO’s food price index is up 25% YoY for December 2010, driven by increase in soft
commodities. Oil price and cereals indices are up 55% and 39% YoY, respectively.
 OECD-FAO’s joint study estimates soft commodity prices to rise structurally and
increase at c4% CAGR until 2019.
 We expect increasing commodity prices will adversely affect operating margins of
FMCG companies, especially HUL and Marico, by 90-173bp. We believe consensus
numbers do not factor in higher commodity prices.
According to FAO-OECD, soft commodity prices are expected to structurally be on an uptrend and
increase c4% CAGR over the next decade amid increasing demand-supply mismatch. Recovery in
demand scenario and continuing supply concerns across the international markets will lend
support to firm prices in future. Companies such as HUL and Marico are likely to see their
operating margins contract by 90-173bp over the next two years.
Soft commodity prices to increase in long term…

Increasing uptick in demand led by economic recovery, combined with rising supply constraints due to
unfavourable weather conditions, has fuelled recent rise in soft commodities prices. Food and Agriculture
Organization of the United Nations’ (FAO) food price index has increased 22% and 25% YoY for
November and December, respectively. This increase is driven by worsening outlook for crops in key
producing countries, which will likely result in stock draw-downs and lead to demand-supply mismatch.
Chart 1: FAO’s food price index at all-time high

240
220
200
180
Indexed
160
140
120
100
80
Jul-02
Jul-07
Jan-00
Jun-00
Dec-02
Jan-05
Jun-05
Jan-10
Jun-10
Nov-00
Sep-01
Feb-02
Aug-04
Nov-05
Sep-06
Feb-07
Dec-07
Aug-09
Nov-10
Apr-01
Oct-03
Mar-04
Apr-06
Oct-08
Mar-09
May-03
May-08
Source: FAO
With demand growth expected to remain healthy and continuing uncertainty on supply conditions along
with weakening dollar, it is expected that prices will remain firm in future. The joint assessment of
Organization for Economic Co-operation and Development (OECD) and FAO in a recent report (OECD-
FAO Agricultural Outlook 2010-2019) indicates average 4% price CAGR until 2019, for major
commodities such as wheat, coarse grain, vegetable oils and dairy products in the domestic market. We
believe in this study and have factored a rising input cost scenario in our estimates.
January 07, 2011 6

FMCG Sector Report
OCED-FAO joint assessment and price forecasts

Chart2: Indexed prices Chart 3: Coasre grains to rise at 3% CAGR
300 12,000
250
11,000
200
10,000
150
9,000
100
INR/t
50 8,000
- 7,000
6,000
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
5,000
Wheat Oilseeds
4,000
Raw Sugar Coarse grains
Vegetable oils Whole milk powder
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Skimmed milk powder
Source: OECD-FAO, PUG Research Source: OECD-FAO
Chart4: Wheat price to rise highest; 11% CAGR Chart 5: However, sugar price to decline 2%
30,000 30,000
25,000 25,000
20,000 20,000
INR/t
15,000 INR/t 15,000
10,000 10,000
5,000 5,000
- 0
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Source: OECD-FAO Source: OECD-FAO
Chart6: Prices of vegetable oils to increase @6% Chart 7:Oilseed prices also likely to be firm with 4% rise
77,000 31,000
69,500 26,000
62,000
54,500 21,000
47,000
INR/t
INR/t
39,500 16,000
32,000
11,000
24,500
17,000 6,000
9,500
2,000 1,000
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Chart8: Skimmed milk powder prices to rise 4% Chart 9:Whole milk powder price to remain higher at 6%
200,000 300,000
160,000 250,000
200,000
120,000
INR/t
INR/t
150,000
80,000
100,000
40,000 50,000
- -
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
January 07, 2011 7

FMCG Sector Report
Untimely rains likely to impact production adversely

Monsoons in India have been 2% above the long-term average, according to the Indian Metrological
Department. Although the first advance estimates released by GoI indicate a YoY increase in production
of major crops, untimely rains are likely to affect crop production in this season and also are raising
concerns on the Rabi crop production. Hence, it is likely that prices will continue to remain firm in future
as well and managing higher input costs will be a key challenge for consumer companies in India.
Table 1: Estimates for major Kharif crops vs. historical production

Variance of 2010-11
Production (mn tonnes) 2006-07 2007-08 2008-09 2009-10 2010-11*
Vs. 2009-10 (%)
Rice 80.2 82.7 84.9 75.9 80.4 5.9
Food grains 110.6 121.0 118.1 103.8 114.6 10.4
Groundnut 3.3 7.4 5.6 3.7 5.6 51.4
Soya bean 8.9 11.0 9.9 10.1 9.8 (3.0)
Total Oilseeds 14.0 20.7 17.8 15.7 17.3 10.2
Sugarcane 355.5 348.2 285.0 277.8 324.9 17.0
Note: * First advance estimates Source: Ministry of Agriculture
Chart 10: Weekly food inflation in India (2010)

24
22
20
18
16
%
14
12
10
8
3-Jul-10
17-Jul-10
31-Jul-10
2-Jan-10
16-Jan-10
30-Jan-10
5-Jun-10
19-Jun-10
6-Nov-10
20-Nov-10
4-Dec-10
14-Aug-10
28-Aug-10
11-Sep-10
25-Sep-10
9-Oct-10
18-Dec-10
10-Apr-10
13-Feb-10
27-Feb-10
13-Mar-10
27-Mar-10
24-Apr-10
8-May-10
23-Oct-10
22-May-10
Source: Mospi
Industry interactions suggest that prices will be higher for certain commodities such as copra, liquid
paraffin, and palm oil. Although palm oil prices have reduced 11% from their peak levels, they are 48%
higher YoY. According to industry experts, it is expected that palm oil supply will remain tight until April
2011 and any possible recovery will not be as strong as earlier ones, resulting in high prices in coming
months. Similarly, copra prices are c67% higher YoY and are expected to remain firm in the near future.
Copra constitutes 40% of total raw material cost for Marico, whereas palm oil is a major raw material for
HUL and GCPL. We believe these companies would find it difficult to maintain their margins in future.
January 07, 2011 8

FMCG Sector Report
Chart 11: Milk price trend Chart 12: Barley price trend
200 1300
180 1200
160 1100
140 1000
120 900
100 800
80 700
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
3QFY11
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
3QFY11
Milk (Indexed base 2004-05) Barley (INR per quintal)
Source: Mospi Source: Bloomberg
Chart 13: Palm oil price trend Chart 14: Copra price trend
2900 6500
2750 5750
2600 5000
2450 4250
2300 3500
2150 2750
2000 2000
Aug-10
Sep-10
Jan-10
Jun-10
Feb-10
Mar-10
Oct-09
Nov-09
Dec-09
Apr-10
May-10
Oct-10
Nov-10
Dec-10
Jul-10
Aug-10
Sep-10
Jan-10
Feb-10
Mar-10
Jun-10
Oct-09
Apr-10
Oct-10
Nov-09
Dec-09
May-10
Jul-10
Nov-10
Dec-10
Palm Oil (MYR per metric tonne) Copra (INR per quintal)
Source: Bloomberg Source: Bloomberg
Increasing packaging costs could further impact margins

We expect costs of packaging material that forms less than 10% of total sales and 15-20% of total input
costs, to remain firm in future. High density polyethylene (HDPE), a crude derivative and a key ingredient
in packing material, is seeing an uptrend in prices since September 2010 and it was up 5% YoY for
December quarter. We expect crude prices to hover at USD85-95/bbl, with an upward bias, in future.
With increasing HDPE prices, packaging costs for consumer companies would increase, thus restricting
expansion of margins.
Chart 15: HDPE price trend Chart 16: Crude versus HDPE price movement
100 100 150
90
80 125
80
100
70 60
75
60
40
50 50
40 20 25
30 - -
Feb-09
Nov-07
Apr-08
Sep-08
Dec-09
May-10
Jan-07
Jun-07
Jul-09
Oct-10
Apr-08
Apr-09
Apr-10
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Oct-08
Oct-09
Oct-10
HDPE (INR per kg) HDPE (INR/kg) (LHS) Crude oil (USD/bbl) (RHS)
Source: RIL Source: RIL, Bloomberg
January 07, 2011 9

FMCG Sector Report
Rising input costs to affect margins; HUL and Marico to be worst affected
Consumer companies that significantly depend on a single commodity are vulnerable to volatility in prices
of that commodity. Nestle, GCPL, Marico, and GSK Consumer are highly dependent on one commodity
— milk, palm oil, copra and malt and malt extracts, respectively. When input costs increased significantly,
these companies saw sharp reduction in margins. When palm oil prices increased sharply, GCPL’s
operating margins declined by 460bp in FY09. Similarly, when prices declined to low levels in FY10,
EBITDA margins expanded by 510bp.
Table 2: High dependence on one raw material
Company Raw materials % to total input cost
GCPL Oils and fats 55%
HUL Chemicals and perfumes 48%
Nestle Milk and skimmed milk 43%
Marico Copra 40%
GSK Consumer Malt and malt extract 30%
Dabur Herbs, etc. 28%
Source: Companies, PUG Research
Chart 17: GCPL margin vs palm oil price movement Chart 18: Marico margin vs copra price movement
4000 80 4500 60
MYR/tonne
3000 60 55
4000
INR/quintal
2000 40 50
%
%
1000 20 3500
45
0 0 3000 40
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
Palm Oil (LHS) Gross profit margin (RHS) Copra price (LHS) Gross profit margin (RHS)
Source: Company, Bloomberg, PUG Research Source: Company, Bloomberg, PUG Research
Chart 19: Nestle margin vs milk price movement Chart 20: GSK margin vs malt price movement
180 54 30000 68
160 66
52 20000
Indexed
64
INR/MT
140
%
%
50 62
120 10000
100 48 60
0 58
1QCY07
3QCY07
1QCY08
3QCY08
1QCY09
3QCY09
1QCY10
3QCY10
CY03
CY04
CY05
CY06
CY07
CY08
CY09
Milk price (indexed base 2004-05) (LHS) Malt and malt extract (LHS)
Gross profit margin (RHS) Gross profit margin (RHS)
Source: Company, Mospi, PUG Research Source: Company, Bloomberg, PUG Research
In rising input cost scenario, we prefer Colgate as it has low dependence on any single commodity and
GSK Consumer and Nestle as they have lower input cost sensitivity to earnings. We believe that HUL
and Marico will be worst affected due to rising cost pressures and estimate their operating margins to
decline 90-173bp until FY13. Moreover, crude oil prices are also on a rise, thereby increasing packaging
costs for all FMCG companies, which will adversely affect profitability going forward.
Table 3: Expected decline in operating margins
Company FY10 (%) FY13E (%) Change (bp)
Colgate 21.7 23.1 1.44
Dabur 18.4 18.4 0.00
GCPL 20.0 19.2 (0.76)
GSK Consumer 16.2 16.3 0.17
HUL 15.7 14.0 (1.73)
Marico 14.1 13.2 (0.90)
Nestle 20.2 20.2 0.06
January 07, 2011 10

FMCG Sector Report
Chart 21: Indexed prices

250
200
150
100
50
0
2QFY09
3QFY10
1QFY09
3QFY09
4QFY09
1QFY10
2QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Mentha Oil Kardi Oil Sunflower Oil Palm Oil
Source: Bloomberg, Mospi, PUG Research
250
200
150
100
50
-
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Wheat Sugar Milk Copra Barley
Source: Bloomberg, PUG Research

140
120
100
80
60
40
20
0
4QFY09
1QFY09
2QFY09
3QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
HDPE LAB Crude oil

Source: Bloomberg, RIL. PUG Research
January 07, 2011 11

FMCG Sector Report
Stock performance to mirror food inflation and competitive

intensity; Prefer GSK Consumer, Nestle, Colgate and Dabur
 Competitve intensity is increasing; we believe it will limit pricing power going ahead.
 As seen historically, stock prices react negatively to rising food inflation as well higher
competition.
 Market leadership, niche play and brand innovations would remain the key to pricing
power and sustaining higher profitability. We prefer absolute market leaders such as
GSK Consumer, Nestle and Colgate and niche category plays like Dabur.
Increasing food inflation combined with higher competition will put pressure on companies’
profitability and stock prices. We believe that in an escalating competitive environment, market
leadership and brand innovations would be instrumental in driving higher margins. In this
scenario, we prefer players such as GSK Consumer, Nestle and Colgate, which are relatively
better placed with absolute market leadership and strong brand equity, and Dabur with its niche
brand positioning.
Competitive landscape is intensifying…

Competition in the domestic consumer space, especially oral care, skin care and packaged foods, is
intensifying with many domestic and MNC players looking at increasing market share. Danone has
launched value-added milk and milk products in India and it has strong plans to tap baby foods and
packaged water markets in India. P&G recently entered the domestic hair colour market and is
contemplating an entry in toothpaste segment in the near term. We expect competitive activity to remain
high in sectors such as personal care and packaged food and beverages going ahead.
Table 4: Competitive activities increasing with new product launches

Company Category Remarks
Indian companies
Functional flavoured milk Actimind positioned as functional flavoured milk
Britannia
Baked snacks Time Pass
Chocolates Yorkie, Aero
Nestle
Prepared Dishes Maggie variant – Romantic Capsica
Instant noodles Sunfeast Yippee!
ITC
Fairness cream Vivel Active Fair launched in June 2010 in Kerala
Marico Hair oils Parachute Advanced in cooling hair oil segment
Zydus Wellness Health drinks Launched ActiLife, an adult health drink
MNC players
GSK Consumer Instant noodles Foodles as a brand extension of Horlicks
Danone Value added milk products Chocolate smoothies, Choco Plus, plain and flavoured yogurts, Danone Dahi.
Coco Cola Flavoured milk Mazaa Milky Delite
P&G Hair colours Wella, hair colour brand
Source: PUG Research
January 07, 2011 12

FMCG Sector Report
… leading to pricing pressure and higher A&P spends

We expect increasing competition will lead to undercutting by existing players in the future, limiting price
increases. Moreover, we expect with increasing competitive activities, players will have to spend higher
on their product’s advertising and promotions. Hence, we expect A&P spends to increase across the
companies going forward.
Chart 24: Higher competition to lead to increase in A&P spends

18
16
14
12
10
%
8
6
4
2
-
HUL Dabur GCPL Colgate Marico GSK Consumer
Average FY05-10 FY13E

We believe that those with presence in a low competitive category, or with absolute market leadership
and higher pricing power, would be relatively better placed to capitalize on the increasing consumerism in
the domestic markets. Moreover, with rising input costs, ability to increase product prices would remain
the key for better profitability. Hence, we prefer companies like Nestle, GSK Consumer and Colgate, as
we believe market dominance, in their respective categories, provides higher room for maneuvering
pricing to sustain profitability. Besides, we also like Dabur’s niche positioning in the herbal and ayurveda
space, which has low MNC interest.
Table 5: Absolute market leaders

Company Category Market share
Nestle Instant noodles 80%
GSK Consumer Malted health drink 60%
HUL Skin care 59%
Dabur Foods 52%
Colgate Toothpastes 51%
Marico Hair oils 31%
Notwithstanding the increasing competition, companies have raised product price in soaps, hair colours,
and detergents. While this indicates that some pricing power has returned, we believe it will only partially
offset higher increase in raw material prices. Although we have factored in a c5% price escalation in our
estimates, we do not anticipate such price hike to aid margin expansion, which is expected to remain
subdued owing to rising input costs and higher A&P expenditure.
January 07, 2011 13

FMCG Sector Report
Stocks performance affected by higher food inflation and intensive competition

We analyzed our FMCG index return sensitivity to food inflation data. We understand that the index
returns mirrors the movement in food inflation. When food inflation is low, index has given high returns
and vice- versa. Moreover, stock prices have been adversely affected by higher competitive activities and
eroding market shares. Going forward, we expect that as food inflation continues to remain firm and the
domestic market witnesses higher competition, our FMCG index will witness lower returns in future.
Chart 25: High food inflation .. restricting PAT growth… Chart 26: …. Further leading to lower stock returns
25.0 30.0 25.0 100.0
20.0 20.0 80.0
20.0
10.0 60.0
15.0 15.0 40.0
0.0
10.0 10.0 20.0
-10.0
-
5.0 -20.0 5.0
(20.0)
- -30.0 - (40.0)
Dec'06
Dec'07
Dec'08
Dec'09
Jun'06
Jun'07
Jun'08
Jun'09
Jun'10
Dec'06
Dec'07
Dec'08
Dec'09
Jun'06
Jun'07
Jun'08
Jun'09
Jun'10
Food inflation (YoY%) (LHS) Food inflation (YoY%) (LHS)

FMCG Index profit growth (YoY%)(RHS) FMCG Index return (YoY %) (RHS)
Note: Our FMCG index includes companies under our coverage. Note: Our FMCG index includes companies under our coverage.
Source: Bloomberg, PUG Research Source: Bloomberg, PUG Research
Chart 27: HUL’s stock price underperformance during Chart 28: Colgate’s stock price underperforming when
higher competition…. local regional players had become strong…
500 600
450
400 Increasing underperformance 500 Increased competiton
350 due to losing market shares from local players
400
300
250 300
200
150 200
100 100
50
0 0
Sep'02
Sep'05
Sep'08
Sep'02
Sep'05
Sep'08
Dec-01
Jun'03
Mar'04
Jun'06
Mar'07
Jun'09
Mar'10
Dec-10
Dec'04
Dec'07
Dec'04
Dec'07
Jun-00
Mar-01
Jun-00
Mar-01
Dec-01
Jun'03
Mar'04
Jun'06
Mar'07
Jun'09
Mar'10
Dec-10
HUL FMCG Index Colgate FMCG Index
Note: Our FMCG index includes companies under our coverage. Note: Our FMCG index includes companies under our coverage.
January 07, 2011 14

FMCG Sector Report
Our assessment
We believe GSK Consumer emerges as a clear winner, as it has the lowest earnings sensitivity to raw
material costs; and is well-placed, with its strong market leadership, to pass on rising cost pressure to
consumers with greater ease. Similarly, we prefer Nestle, which has a strong position in the market place
with its well-established brands like Maggi and Cerelac. Colgate, with a strong product portfolio straddling
different price points, also emerges as a strong player in India’s oral care segment. We expect HUL and
Marico to be the worst-hit companies in the scenario of rising competition and input costs as these will
erode their margins going forward.
Table 6: Assessment matrix

Competitive Pricing Input cost New product Winner /
Company Strong brands
intensity power scenario pipeline Runners-up
Colgate Dental Cream,
Colgate Medium High Neutral Low Winner
Cibaca
Dabur Dabur Amla, Babool Increasing Medium Rising Medium - Variants Winner
Godrej Powder Hair Dye, Low, Could increase
GCPL Godrej No. 1, Good High Low Rising from inorganic Runner-up
Knight synergies
High - Horlicks
GSK Consumer Horlicks, Boost Low High Rising Winner
variants
HUL Lifebouy, Lux, Wheel High Medium Rising Low Runner-up
High – brand
Marico Parachute, Saffola Medium Medium Rising Runner-up
extensions
Medium - Maggi
Nestle Cerelac, Maggi Increasing High Rising Winner
variants
January 07, 2011 15

FMCG Sector Report
Valuation and risks

 FMCG stocks have rallied recently and are trading at all-time high valuations. BSE
FMCG index has increased by 32% in 2010.
 We prefer GSK Consumer and initiate coverage with a Buy rating and target price of
INR2,576. We believe HUL and Marico will be worst performers during high inflation
and rising competition. Hence, we initiate coverage with a Sell rating on these stocks
with a target price of INR234 and INR112, respectively.
 Higher agricultural production and decline in soft commodity prices along with higher
consumer demand are main upside risks.
FMCG stock have rallied recently and are trading at all-time high valuations, driven by increasing
consumerism aiding strong volume growth in urban as well as rural India. While Nestle and GSK
Consumer are trading at c75-95% premium, other companies in FMCG universe are trading at 10-
35% premium to their historical one-year forward average PER. We expect strong leadership
position with lower competition supporting robust growth to justify higher premium for GSK
Consumer.
Improving economic growth combined with rising consumerism has assisted strong double-digit volume
growth for the FMCG sector, which has re-rated the entire FMCG universe. While Nestle and GSK
Consumer are trading at 75-95% premium to their historical one-year forward mean PER multiples, HUL
is trading at 20% premium to its historical average. We believe that, relatively, a higher premium for GSK
Consumer is sustainable because of its strong brand equity, higher pricing power and low raw material
cost sensitivity.
Table 7: Valuations at all-time high

Valuations (x)
Premium
Company one-year forward mean PER
PER (x) on FY12E EPS %
(Since 2002/03 - 2010)
Colgate 24.8 19.9 24.7
Dabur 24.9 23.1 7.6
GCPL 20.7 16.5 25.5
GSK Consumer 27.4 15.6 75.5
HUL 31.0 25.8 20.2
Marico 23.7 17.3 36.9
Nestle 39.3 20.2 94.7
Our valuation methodology

We value the consumer sector based on an average of DCF and PER methodologies. We analyze the
current scenario of rising input cost inflation and escalating competitive intensity and accordingly assign
premium and discount to the stocks’ historical PER average to arrive at fair price on PER basis. Similarly,
for DCF, we have assumed risk free rate of 7.5% with an equity premium of 5% for the CAPM model. For
terminal growth, we have factored in 3% rate and arrived at fair value of individual stocks forecasting the
future 10-year growth based on a GDP multiplier.
January 07, 2011 16

FMCG Sector Report
Valuation snapshot
Target Discounted
TP on PER TP on Average
Company CMP Rating FY12E cash flow Upside (%)
(INR) DCF (INR) TP (INR)
PER (x) (INR bn)
Colgate 864 Upgrade to Buy 22 766 95 1,127 946 9.5
Dabur 103 Hold 25 104 176 101 102 (0.6)
GCPL 392 Hold 21 397 140 431 414 5.7
GSK
2,300 Buy 25 2,100 128 3,052 2,576 12.0
Consumer*
HUL 326 Sell 23 246 483 221 234 (28.3)
Marico 124 Sell 21 110 70 114 112 (9.9)
Nestle* 3,898 Sell 32 3,171 351 3,639 3,405 (12.6)
Note:* Calendar year ending and TP stands for target price. Source: PUG Research
Colgate: We upgrade our rating on the stock to Buy from Hold earlier, as we believe the company is
relatively better placed with a normal input cost inflation and moderate to increasing competitive
environment. We raise our target price to INR946, which provides 10% upside from current levels.
Dabur: We like Dabur’s strategy and niche positioning of ayurveda and herbal products and believe it will
help the company to record robust growth ahead. However, the current valuations do not provide
significant upsides in the near term. Hence, we initiate with a Hold recommendation with our target price
of INR102.
GCPL: We expect GCPL to witness an 80bp contraction in operating margins owing to rising input costs
and increasing competition. We expect these concerns will continue to be an overhang in the near term.
Hence, we maintain our Hold rating on the stock with a revised target price of INR414, based on an
average of DCF and PER methodologies.
GSK Consumer: GSK Consumer, with a dominant position in the lesser-competitive and under-
penetrated MFD category, is well placed to attain strong volume growth and pass on input cost inflation
to consumers with greater ease. GSK Consumer is the best play on foods space in the domestic market,
available at attractive valuations. Hence, we initiate coverage with a Buy recommendation on the stock
with our target price of INR2,576.
HUL: Owing to increasing competition from players like ITC and P&G, we believe HUL will have to
increase its A&P budgets to protect its market shares. With increasing crude oil prices and rising
competition, especially in personal care segment, we expect HUL will have difficulty in maintaining its
operating margins; we expect a contraction of 173bp until FY13. We initiate coverage with a Sell rating
on the stock with our target price of INR234.
Marico: While we like Marico’s strong portfolio of brands including Parachute and Saffola, we believe
rising copra prices will provide margin pressures and result in consensus downgrade. The stock is
trading at rich valuations of 24x FY12E EPS. Hence, we initiate coverage on the stock with a Sell
recommendation with our target price of INR112.
Nestle: Nestle is one of the fastest-growing FMCG companies with a focus on food and beverage
segment. Its brands continue to grow robustly and the emerging packaged food industry offers healthy
long-term growth prospects. However, as current valuations of 39x CY11E EPS capture all the positives
and cap the upside, we initiate coverage on Nestle with a Sell rating.
Note: Refer to company section for a detailed discussion on valuations of individual companies
January 07, 2011 17

FMCG Sector Report
Peer valuation
Market EPS CAGR PER (X) RoE (%) RoCE (%)
Dividend yield
CMP (%) (%) Upside
Company cap Rating
(INR) (%)
(INRbn) FY10-13E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Upgrade
Colgate 864 117 8.9 26.8 24.8 118.9 106.8 146.6 141.3 2.7 3.0 9.5
to Buy
Dabur 103 179 18.4 31.0 24.9 52.6 49.5 50.4 48.5 1.2 1.6 Hold (0.6)
GCPL 392 127 25.8 25.6 20.7 36.8 32.2 31.8 25.0 1.6 1.9 Hold 5.7
GSK
2,300 97 22.2 33.5 27.4 29.0 29.5 43.4 44.2 1.0 1.2 Buy 12.0
Consumer*
HUL 326 711 7.3 34.0 31.0 76.4 76.1 91.6 91.8 2.1 2.5 Sell (28.3)
Marico 124 76 15.0 26.1 23.7 37.3 31.5 30.8 30.0 0.6 0.8 Sell (9.9)
Nestle* 3,898 376 17.3 46.1 39.3 121.1 105.7 150.9 129.8 1.4 1.5 Sell (12.6)
Note: * Calendar year ending.
Risks
Higher agricultural production and drop in prices of soft commodities
Higher than estimated production of agricultural crops which would reduce the prices of these soft
commodities will be a key upside risk to our assumptions. Moreover, drop in international prices of these
commodities will also lend upside risk.
Lower penetration and per capita consumption offers significant growth potential
A buoyant economy and rising disposable income are expected to aid robust growth momentum for
consumer products. Low penetration levels and low per capita consumption in moderately penetrated
categories provides immense growth opportunities for consumer companies in India. Continued strong
traction in consumer demand, despite high food inflation, would be a key upside risk.
Chart 29: Penetration level still low in many categories Chart 30: Opportunity to increase per capita
consumption
100
12
80
10
60
8
%
40
USD
6
20
4
0
2
Shampoo
Toothpaste
Health supplements
Toiletsoap
Mosquito repellants
Washing powders
Skin Cream
Tooth Powder
Packaged fruit beverage

Hair oil
Washing cakes/ bars
Branded baby oil
0
Laundry
Shampoo
Deodrants
Toothpaste
Skin care
India China Indonesia Thailand Malaysia South Afrcia
Source: Company presentation Note: Per capita consumption data is for 2006. Source: Company presentation
Government support to aid higher demand, especially in rural markets

Rural markets in India have been gaining significance with rising disposable income driven by better yield
crops, increasing MSPs (minimum supply price), and the government’s thrust on the rural economy
through NREGA and infrastructure developments. Unprecedented increase in rural income through
continued government support and stimulus packages would also lend further upsides to the demand.
January 07, 2011 18

FMCG Sector Report
Chart 31: NREGA allocation an uptrend Chart 32: Rural penetration – Sufficient headroom
450 100
400 80
350 60
(%)
300 40
250
20
INRbn
200
0
150
Toilet soap
Hair oil
Shampoo
Skin cream
Fairness creams
Toothpaste
Washing cakes/ bars
Packaged fruit beverage

Washing powders
Toothpowder
Health supplements
100
50
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11BE
Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS)
Source: GOI Source: Company presentation
Government intervention could restrict higher food inflation

With rising concerns on higher food inflation led by wheat, oil seeds, etc., any government intervention
through ban on exports or higher imports to control domestic prices would be an upside risks.
Changes in tax structure

Companies in the consumer sector have plants in tax-haven areas which exempt the production from
excise duties and income taxes for certain period. Any adverse changes in the current structure could
increase the tax-outflow restricting PAT growth.
January 07, 2011 19

FMCG Sector Report
Company section
January 07, 2011 20

FMCG l India Research FMCG Sector Report
Colgate-Palmolive (India) Ltd.
CMP: INR864 Reco: BUY
Target Price : INR946  Strong brand equity aiding pricing power will help to offset normal input
Upside : 10% cost inflation. We expect operating margin to expand by 144bp over FY10-
13.
Nifty 6,080  Lower tax benefits at the company’s Baddi unit will increase the tax rate to
Sensex 20,301 28% and restrict PAT growth to 9% over FY10-13E. However, we believe the
current stock price already factors this and hence, there is no further
downside from higher tax rates.
Stock Data
Sector FMCG  We upgrade the stock to Buy (Hold earlier), as we believe the company is
Reuters Code COLG.BO
relatively better placed with a normal input cost inflation and moderate to
Bloomberg Code CLGT IN
No. of shares (mn) 136 increasing competitive environment. We raise our target price to INR946,
Market Cap (INR bn) 117 based on an average of DCF and PER methods.
Market Cap (USD mn) 2,576
Avg 6m Vol. 132,686
Company background
Stock Performance (%) Colgate, with 53% share in toothpaste segment, is the leader in domestic oral care market.
Oral care contributes more than 90% of the company’s revenue; while the remaining comes
52-week high/low INR1,004/632
from personal care products like body wash, cold cream, etc. Increasing penetration and
1M 3M 12M
higher conversion from toothpowder is aiding healthy growth for the company. We believe
Absolute (%) (2) (3) 25 that Colgate is the best play on domestic oral care segment with its strong brand equity and
Relative (%) (4) (1) 9 increasing market dominance.
Shareholding Pattern Key positives

Public &
others Input cost pressure to be minimal
25%
DIIs Promoters Sorbitol prices, the major raw material requirement for Colgate, are likely to witness normal
8% 51%
FIIs
16% inflationary pressure, unlike other agri-commodities. Moreover, we expect Colgate’s strong
brand equity and a diversified portfolio will help the company to raise product prices to offset
higher input costs. We factor in marginal 40bp increase in gross margin over FY10-13E.
Presence in different price-points to insulate from competitive pressures

Nifty and Stock Movement Colgate’s flagship brands, Colgate Dental Cream, Cibaca, Max Fresh and Active Salt, have
950 6500 strong brand equity and collectively command 53% of the market. The company’s portfolio is
850
6000
diversified across different price points, unlike competition. Strong brand equity and presence
5500
across price points lend Colgate higher ability to maneuver pricing. While rising competition
(INR)
750
5000
650
4500
will entail higher A&P spends, we expect other cost efficiencies will aid 144bp expansion in
550 4000 operating margins till FY13.
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
Colgate Palmolive (LHS) Nifty (RHS)
January 07, 2011 21

FMCG Sector Report
Valuation
Colgate is relatively better placed with a normal input cost inflation and moderate to increasing
competitive environment. Moreover, it remains a preferred play on the domestic oral care space with
strong market leadership aiding healthy growth in future. Hence, we upgrade the stock to Buy (Hold
earlier) and raise our target price to INR946, based on an average of DCF and PER methods.
PER method
When the company witnessed high competion from local and regional players, the stock had traded in a
low PER band of 15-20x. As the company benefitted from higher penetration and increasing conversions,
with its increased brand investments, it had witnessed robust double-digit volume growth combined with
strengthening market leadership position. The stock is currently trading at 25% premium to its historical
one-year forward PER multiple of 20x. While we expect competition to increase, we believe that Colgate
is relatively better placed with its different product range. Hence, we believe 22x to our FY12E EPS is
justified and accordingly, arrive at a fair price of INR766.
Chart 33: One-year forward PER bands Chart 34: One-year forward mean PER
1,000 35
900
800 30
700
600 25
500
400 20
300
200 15
100
0 10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Aug-02
Dec-02
Aug-03
Dec-03
Aug-04
Dec-04
Aug-05
Dec-05
Aug-06
Dec-06
Aug-07
Dec-07
Aug-08
Dec-08
Aug-09
Dec-09
Aug-10
Dec-10
PER Mean + 1 stddev
Price 5x 10x 15x 20x 25x -1 std dev +2 std dev + 3 std dev
Source :Bloomberg, PUG Research Source :Bloomberg, PUG Research
Discounted cash flow method

For our DCF calculations, we have used a 9.3% cost of equity based on CAPM model. We arrive at the
terminal value using 3% terminal growth rate. Accordingly, we arrive at our fair price of INR1,127 per
share.
Table 8: Calculation based on DCF parameters Table 9: Sensitivity analysis
Risk free rate (%) 7.5 Terminal growth (%) 2.0 3.0 4.0
Beta 0.4
Equity risk premium (%) 5.0 WACC (%)
Cost of equity (%) 9.3 8.5 1,167 1,290 1,468
Terminal growth rate (%) 3.0
Terminal Value (INR mn) 51,693 9.3 1,038 1,127 1,250
Fair value (INR mn) 94,926 10.0 950 1,020 1,112
Outstanding shares (mn) 84
Value per share (INR) 1,127 11.0 846 896 960
Source: PUG Research Source: PUG Research
Key catalyst
Impressive volume growth in healthy doule-digits and continuing market dominance with more than 50%
market share would drive robust revenue CAGR of 13% over FY10-13E.
Risk
Higher tax rates to impact PAT growth
Lower tax benefits for the Baddi unit and increasing production at locations without tax benefits would
increase the tax rate, thus restricting PAT CAGR to 9% over FY10-13E.
January 07, 2011 22

FMCG Sector Report
Increase in competition could affect pricing power

Increasing competitive activity in the market — with existing players focusing more on oral care and new
entrants likely — could challenge the company’s pricing power and result in higher A&P spend, which would
impact its profitability.
Our view vs. consensus

Lower than consensus estimates
While our sales are 2-3% lower than consensus forecast, our earning expectations are 4-8% lower than
street forecasts as we have assumed a higher tax rate of 28% from FY12E.
FY11E FY12E FY13E
Variance Variance Variance
PUG Consensus PUG Consensus PUG Consensus
(%) (%) (%)
Sales (INR mn) 22,395 22,652 (1.1) 25,374 25,959 (2.3) 28,493 29,423 (3.2)
EPS (INR) 32.3 33.1 (2.3) 34.8 37.9 (8.2) 40.2 41.9 (4.2)
Detailed financials
Colgate: Profit and loss statement
FY ending Mar, in INR mn FY10 FY11E FY12E FY13E
Net sales 19,625 22,395 25,374 28,493
Raw material consumed (7,768) (8,739) (9,913) (11,166)
Employee expenses (1,591) (1,782) (1,995) (2,195)
Selling, general & administrative exp (4,146) (4,827) (5,482) (6,108)
Other expenses (1,866) (1,969) (2,201) (2,438)
Total expenditure (15,370) (17,317) (19,591) (21,906)
EBITDA 4,254 5,078 5,782 6,586
EBITDA margin (%) 21.7 22.7 22.8 23.1
Depreciation (376) (406) (434) (449)
Other income/extraordinary items 985 1,084 1,241 1,465
EBIT 4,863 5,755 6,589 7,603
Interest (15) (15) (15) (15)
Profit before tax 4,848 5,740 6,574 7,588
Tax (615) (1,349) (1,841) (2,125)
Tax rate (%) 12.7 23.5 28.0 28.0
Net profit 4,233 4,391 4,733 5,463
Adjusted profit 4,233 4,391 4,733 5,463
Colgate: Key ratios

Particulars FY10 FY11E FY12E FY13E
EPS (INR) 31.1 32.3 34.8 40.2
P/E (x) 27.8 26.8 24.8 21.5
RoE (%) 156.1 118.9 106.8 107.5
RoCE (%) 165.5 146.6 141.3 143.0
Dividend yield (%) 2.3 2.7 3.0 3.5
P/BV (x) 36.0 28.5 24.8 21.6
EV/Sales (x) 5.8 5.0 4.4 3.8
EV/ EBIDTA (x) 26.8 22.1 19.1 16.6
January 07, 2011 23

FMCG Sector Report
Colgate: Balance sheet

Sources of funds
Share capital 136 136 136 136
Reserves total 3,125 3,992 4,597 5,298
Total shareholders’ funds 3,261 4,128 4,733 5,433
Loans 46 46 46 46
Other non-current liabilities 187 187 187 187
Total 3,494 4,360 4,966 5,666
Application of funds
Net block 2,531 2,390 2,265 2,180
Investments 14 14 14 14
Inventories 1,106 1,201 1,360 1,521
Sundry debtors 98 104 118 132
Cash and bank 3,672 5,534 6,951 8,283
Loan and advances 1,167 1,215 1,273 1,329
Other current assets 55 - - -
Total current assets 6,097 8,055 9,701 11,265
Sundry creditors 3,708 4,214 4,811 5,402
Provisions 1,807 2,251 2,570 2,756
Total current liabilities 5,515 6,465 7,380 8,159
Other non-current assets 366 366 366 366
Total 3,494 4,360 4,966 5,666
Colgate: Cash flow statement

PBT 4,848 5,740 6,574 7,588
Depreciation 362 304 326 333
Change in working capital 754 509 481 474
Taxes paid (769) (1,162) (1,715) (2,052)
Operating cash flow 5,195 5,392 5,665 6,342
Capital expenditure (1,108) (163) (200) (248)

Change in investments 20 - - -
Other investing cash flow 153 - - -
Investing cash flow (934) (163) (200) (248)
Free cash flow to firm 4,261 5,229 5,465 6,094
Issue of equity - - - -
Change in borrowings (1) - - -
Dividend paid (3,336) (3,493) (4,048) (4,763)
Other 40 126 0 -
Financing cash flow (3,297) (3,366) (4,048) (4,763)
Net cash generated during year 964 1,863 1,417 1,332

Cash at beginning of year 2,511 3,476 5,338 6,756
Cash at the end of year 3,475 5,338 6,756 8,087
January 07, 2011 24

FMCG Sector Report
Financial summary
Profit and loss statement (INR mn) Cash flow statement (INR mn)
Year ending 31 March FY10 FY11E FY12E FY13E Year ending 31 March FY10 FY11E FY12E FY13E
Income from operations 19,625 22,395 25,374 28,493 Profit before tax 4,848 5,740 6,574 7,588
Total operating expenses (15,370) (17,317) (19,591) (21,906) Depreciation, Amortisation etc. 362 304 326 333
EBITDA 4,254 5,078 5,782 6,586 Less: Changes in W.C. 754 509 481 474
Depreciation (376) (406) (434) (449) Tax (769) (1,162) (1,715) (2,052)
EBIT 3,878 4,672 5,348 6,137 Net operating cash flow 5,195 5,392 5,665 6,342
Interest expenses (15) (15) (15) (15) Capex (1,108) (163) (200) (248)
Other income 985 1,084 1,241 1,465 Investments 173 - - -

Profit before tax and extraordinary Investing cash flow (934) (163) (200) (248)
4,848 5,740 6,574 7,588
items
Increase in equity - - - -
Extraordinary income - - - -
Debt raised/ (repaid) (1) - - -
Dividends (3,336) (3,493) (4,048) (4,763)
Provision for tax (615) (1,349) (1,841) (2,125)
Others 40 126 0 -
Net profit 4,233 4,391 4,733 5,463
Reported PAT 4,233 4,391 4,733 5,463
Net change in cash 964 1,863 1,417 1,332
Adjusted profit 4,233 4,391 4,733 5,463
Closing cash balance 3,475 5,338 6,756 8,087
Key ratios (%)

Balance sheet (INR mn)
Year ending 31 March FY10 FY11E FY12E FY13E
Diluted EPS (INR) 31.1 32.3 34.8 40.2
Liabilities
Dividend per share (INR) 20.0 23.0 26.0 30.0
Equity capital 136 136 136 136
Book value per share (INR) 24.0 30.4 34.8 40.0
Reserves and surplus 3,125 3,992 4,597 5,298
ROE 156.1 118.9 106.8 107.5
Shareholders’ funds 3,261 4,128 4,733 5,433
ROCE 165.5 146.6 141.3 143.0
Borrowings 46 46 46 46
Net debt/Equity (111.2) (133.0) (145.9) (151.6)
Others non-current liabilities 187 187 187 187
Dividend payout 75.0 83.1 87.2 87.2
Total liabilities 3,494 4,360 4,966 5,666
Growth
Assets
Revenues 15.8 14.1 13.3 12.3
Gross block 5,345 5,470 5,670 5,918
EBITDA 54.4 19.4 13.9 13.9
Depreciation (2,876) (3,180) (3,506) (3,838)
EBIT 38.4 18.4 14.5 15.4
Net block 2,469 2,290 2,165 2,080
Net profit 43.4 3.8 7.8 15.4
Capital WIP 62 100 100 100
Diluted EPS 43.4 3.8 7.8 15.4
Total fixed assets 2,531 2,390 2,265 2,180
Margins
Investments 14 14 14 14 EBITDA 21.7 22.7 22.8 23.1
Other non-current assets 366 366 366 366 EBIT 24.8 25.7 26.0 26.7
Inventories 1,106 1,201 1,360 1,521 Adjusted Profit 21.6 19.6 18.7 19.2
Cash equivalents 3,672 5,534 6,951 8,283
Valuation ratios
Other current assets 1,222 1,215 1,273 1,329 Year ending 31 March FY10 FY11E FY12E FY13E
Total current assets 6,097 8,055 9,701 11,265 Diluted P/E (x) 27.8 26.8 24.8 21.5
Sundry creditors 3,708 4,214 4,811 5,402 Price/BV(x) 36.0 28.5 24.8 21.6
Other current liabilities 1,807 2,251 2,570 2,756 Market cap/sales (x) 6.0 5.2 4.6 4.1
Total current liabilities 5,515 6,465 7,380 8,159 EV/sales (x) 5.8 5.0 4.4 3.8
Net current assets 582 1,590 2,321 3,107 EV/EBITDA (x) 26.8 22.1 19.1 16.6
Total assets 3,494 4,360 4,966 5,666 Dividend yield (%) 2.3 2.7 3.0 3.5
January 07, 2011 25

FMCG l India Research
FMCG Sector Report
Dabur India Ltd.
CMP: INR103 Reco: HOLD
Target Price : INR102  Dabur’s differential product postioning on herbal and ayurveda platform
Downside : 0.6% helps insulate the company, against intensive competition.
 Moreover, low dependence on any single input augurs well for the company
as it reduces cost sensitivity to earnings. We forecast EBITDA margins to
Nifty 6,080
Sensex 20,301
remain stable owing to operating cost effeciencies.
 At 25x FY12E EPS, the stock is trading at a 8% premium to its historical
Stock Data average and offers negligible upside in the near term, in our opinion. Hence
Sector FMCG
we initiate with a Hold recommendation.
Reuters Code DABU.BO
Bloomberg Code DABUR IN
No. of shares (mn) 1,743
Market Cap (INR bn) 179 Company background
Dabur is the fourth-largest FMCG company in India with strong presence in ayurveda and
Avg 6m Vol. 1,464,495
herbal-based products. It has a diversified product portfolio including hair oils, shampoos, oral
care, home care, skin care, foods, and healthcare. The company’s flagship brands, Dabur,
Vatika, Hajmola, Anmol and Real, command strong brand equity in the domestic FMCG
Stock Performance (%)
space.
52-week high/low INR118/90
1M 3M 12M
Absolute (%) 5 (5) 28
Key positives
Relative (%) 3 (4) 12
Niche category products to support robust growth
Dabur’s diversified portfolio, with presence in herbal and ayurveda category, will help it
Shareholding Pattern capitalise on increasing consumerism in the domestic market and in our opinion, will help
Public & insulate it from the rising competition. We expect the consumer care division (CCD) to record
others
DIIs
7% a 14% revenue CAGR, driven by healthy growth in skin care, oral care and health
10%
FIIs
14% Promoters
supplements.
69%
Fem Care to place skin care vertical on a strong footing

Fem Care, which leads in fairness bleaches and has a strong position in the hair removal
category, enabled Dabur to enter the high-growth mainstream skin care and fairness cream
market with an established brand, FEM. We expect Fem to further strengthen Dabur’s skin
care portfolio and add c3-4% to the company’s growth.
Nifty and Stock Movement
120 6500 International business to see healthy growth
110 6000
Dabur’s international business should growt at 42% CAGR, led by new acquisitions of Hobi
100 5500
Kosmetic and Namaste and continuing healthy growth momentum in the MENA region. Hobi
(INR)
90 5000
80 4500
Kosmetic and Namaste, together, are expected to contribute 40% to the international
70 4000 business and are expected to be earnings accretive from year one.
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
Dabur (LHS) Nifty (RHS)
January 07, 2011 26

FMCG Sector Report
Business analysis
Niche positioning to aid healthy 14% growth in CCD
Dabur has a diversified product portfolio with presence in the niche herbal and ayurveda category, which
will assist it in capitalising on increasing consumerism in the domestic market. With low MNC interest in
the herbal and ayurveda space and scattered domestic competition, we expect Dabur to record healthy
14% revenue CAGR, driven by robust growth in health supplements, skin care and foods.
Chart 35: Consumer care division forms c71% of total Chart 36: Revenue break-up – CCD (FY10 INR24bn)
revenue (FY10 – INR34bn)
3% 19%
30%
18%
8%
8% 6%
5%
71% 18%
14%
Hair care Oral care Foods

Consumer Care Division Consumer Health Division Home care Skin Digestives
International Business Division Others Health supplements
Source: Company, PUG Research Source: Company, PUG Research
Skin care, a key growth driver; FEM to further strengthen this category
Fem Care is expected to help Dabur report a 37% revenue CAGR in its skin care vertical (6% revenue
contribution) until FY13. This segment, growing at healthy double-digit levels, presents a cINR30-35bn+
market opportunity. We believe Fem, which leads in fairness bleaches and has a strong position in the
hair removal market, will drive strong growth in the skin care segment.
Acquisitions to aid international growth; earnings accretive

Dabur’s international business has been one of its key growth drivers with strong volumes supporting
19% revenue growth in FY10. This business should grow strongly by 42% until FY13E. This would be
driven by consolidation of Dabur’s new acquisition, Hobi Kosmetics and Namaste Laboratories, which
are growing at c15-20% and are expected to add revenue of cINR6bn in FY12. We expect these
acquisitions to EPS accretive from year one.
Chart 37: International business to register strong 42% revenue CAGR

2000 70
1800 High growth led by
1600 consolidation of acquired 60
businesses
1400 50
1200
1000 40
INR mn
800
600 30
400 20
200
0 10
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Revenue (LHS) YoY Growth (RHS)
Source: Company, PUG Research
January 07, 2011 27

FMCG Sector Report
Low dependence on single commodity augurs well

While Dabur saw sharp increases in prices of sugar (10% of total cost) and herbs in FY10, vegetable oils
and other chemicals (44% of total cost) witnessed some correction. Judicious price increases, a
favourable sales mix and an efficient cost management helped the company to expand margins by
180bp. We expect that, while higher vegetable oil prices and packaging cost will keep gross margins
under pressure, Dabur is relatively better placed with its diversified raw material requirement.
Chart 38: A diversified raw material mix Chart 39: Indexed price movement
10% 400
19%
19%
300
200
25% 100
28% 0
FY05 FY06 FY07 FY08 FY09 FY10
Sugar & Molasses
Vegetable Oils Sugar & Molasses
Herbs, Jari Booti & Raw Madhu Vegetable Oils
Chemicals & Perfumery Compounds Herbs, Jari Booti & Raw Madhu
Other Raw Materials Chemicals & Perfumery Compounds
Source: Company Source: Company, PUG Research
Financial outlook
Revenue to register 21% CAGR over FY10-13E
Dabur has consistently recorded robust volume growth across major categories, led by increasing
penetration and new product variants; this, along with judicious price increases, enabled the company to
record strong 20% revenue growth over the past five years. This robust growth momentum is expected to
continue with revenue CAGR of 21% over FY10-13E, driven by strong traction across its segments.
Chart 40: Revenue growth expected to remain robust

65 28
60 Higher growth due
26
to consolidation
55 24
50
22
45
INR bn
20
%
40
18
35
30 16
25 14
20 12
FY08 FY09 FY10 FY11E FY12E FY13E
Sales (LHS) YoY Growth (RHS)
Higher input costs to restrict margin expansion

Higher vegetable oil prices and packaging cost will keep gross margins under pressure; we expect gross
margins to contract c220bp until FY13. Nevertheless, we believe that increasing efficient cost
management and relatively stable A&P spend will help maintain operating margins at 18.4%. Although
increase in MAT rates in this fiscal will partially restrict PAT margin expansion, we expect PAT CAGR of
18% over FY10-13.
January 07, 2011 28

FMCG Sector Report
Chart 41: EBITDA margins to remain stable Chart 42: Profitability to increase 18%
12 9 15.0
8 14.8
10
7 14.6
8 6 14.4
14.2
5
INR bn
INR bn
6 14.0
%
4
13.8
4 3 13.6
2 13.4
2
1 13.2
0 0 13.0
FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E
EBITDA (LHS) PAT (LHS) PAT margin (RHS)
Valuation
We have used an average of DCF and PER valuation methodologies to value Dabur and arrive at our
target price of INR102, providing negligible upside from the current levels. Since the current price
captures near-term positives, we initiate coverage on Dabur with a Hold recommendation.
PER method
Dabur is the fourth-largest FMCG company in India with strong presence in ayurveda and herbal-based
products. Dabur achieved strong 22% earnings CAGR since FY06, driven by increasing consumerism,
healthy volume growth and efficacious price increases. While the stock traded at lower band during a
2002-05, improving performance from 2006 resulted in an healthy price appreciation. Currently, the stock
is trading at 7% premium to its historical one-year forward mean PER and 19% discount to HUL. While
we expect volume growth to remain steady, rising input costs and competition are expected to keep
margins under pressure. On a relative valuation matrix, we value the company at 25x its FY12E EPS to
arrive at a fair price of INR104.
130 45.0
110 40.0
35.0
90
30.0
70
25.0
50 20.0
30 15.0
10.0
10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Aug-02
Dec-02
Aug-03
Dec-03
Aug-04
Dec-04
Aug-05
Dec-05
Aug-06
Dec-06
Aug-07
Dec-07
Aug-08
Dec-08
Aug-09
Dec-09
Aug-10
Dec-10
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
PER Mean + 1 stddev

Price 15X 20X 25X 30X 35X -1 std dev +2 std dev + 3 std dev

We also calculate a fair price of INR101 based on our DCF calculations. We have asssumed 9.8% cost
of equity based on the CAPM model and a terminal growth of 3% to arrive at a fair value of INR176bn.
January 07, 2011 29

FMCG Sector Report
Risk free rate (%) 7.5
Terminal growth (%) 2.0 3.0 4.0
Beta 0.5
Cost of equity (%) 9.8
9.5 97 107 120
Terminal Value (INR mn) 114,177 9.8 92 101 113
Fair value (INR mn) 176,278
10.0 89 98 109
Outstanding shares (mn) 1,741
Value per share (INR) 101 10.5 83 90 99

Key catalyst
Inorganic growth opportunities, to support the healthy growth momentum, could provide surprise to our
estimates.
Risks
Increase in input costs to restrict margin expansion
Vegetable oils and chemical compounds, together, constitute c44% of total raw material cost and 9% of
standalone sales. While we estimate c200bp contraction in gross margins, higher-than-estimated
increase in input costs could provide downside to our estimates.
Retail business to be a drag on profitability

Dabur, with 21 newU stores, plans to scale up to 40-45 stores by FY11. This division recorded revenue
of INR92mn in FY10 with losses of INR86mn. While the management remains hopeful of an improved
performance, aggressive expansion can continue to be a drag on overall profitability.

Earnings in line with street
While our sales forecast is higher by 6-9%, our earning estimates are in line with consensus view.
FY11E FY12E FY13E

(%) (%) (%)
Sales (INR mn) 42,071 40,223 4.6 52,698 48,343 9.0 59,960 56,600 5.9
EPS (INR) 3.3 3.4 (3.5) 4.1 4.2 (1.1) 4.8 4.9 (2.2)
January 07, 2011 30

FMCG Sector Report
Detailed financials
Dabur : Consolidated profit and loss statement
Net sales 33,914 42,071 52,698 59,960
Other expenses (709) (749) (862) (964)
EBITDA 6,241 7,617 9,632 11,033
EBITDA margin (%) 18.4 18.1 18.3 18.4
Depreciation (503) (695) (933) (1,051)
Other income/extraordinary items 394 466 512 568
EBIT 6,133 7,387 9,211 10,550
Interest (123) (174) (205) (164)
Tax (1,005) (1,443) (1,801) (2,077)
Tax rate (%) 16.7 20.0 20.0 20.0
Net profit 5,005 5,770 7,205 8,309
Adjusted profit 5,013 5,780 7,217 8,323
Dabur : Key ratios

EPS (INR) 2.9 3.3 4.1 4.8
P/E (x) 35.8 31.0 24.9 21.6
RoE (%) 57.3 52.6 49.5 44.3
RoCE (%) 55.1 50.4 48.5 48.6
Dividend yield (%) 1.0 1.2 1.6 1.8
P/BV (x) 19.2 14.2 10.8 8.5
EV/Sales (x) 5.2 4.3 3.4 2.9
EV/ EBIDTA (x) 28.3 23.8 18.5 15.9
January 07, 2011 31

FMCG Sector Report
Dabur: Consolidated balance sheet

FY Ending Mar, in INR mn FY10 FY11E FY12E FY13E
Sources of funds
Share capital 869 1,741 1,741 1,741
Reserves total 8,458 10,817 14,775 19,229
Loans 1,793 4,793 3,293 1,793
Total 11,527 17,758 20,217 23,170
Net block 6,767 14,296 14,947 15,810
Inventories 4,262 5,471 6,869 7,795
Sundry debtors 1,198 1,510 1,891 2,152
Cash and bank 4,430 3,082 4,230 5,755
Provisions 4,582 5,107 5,915 6,598
Total 11,527 17,758 20,217 23,170
Dabur : Consolidated cash flow statement

Particulars (in INR mn) FY10 FY11E FY12E FY13E
PBT 6,009 7,213 9,007 10,386
Change in working capital (988) (490) (1,375) (1,147)
Taxes paid (199) (1,005) (1,443) (1,801)
Capital expenditure (1,573) (8,099) (1,400) (1,700)

Change in investments 2,100 0 - -
Other investing cash flow (1,271) - - -
Investing cash flow (744) (8,099) (1,400) (1,700)
Free cash flow to firm 4,494 (1,810) 5,538 6,575
Issue of equity (76) 881 12 14

Change in borrowings (507) 3,000 (1,500) (1,500)
Dividend paid (1,772) (2,544) (2,902) (3,564)
Other (1,700) (875) - -
Financing cash flow (4,056) 463 (4,390) (5,050)
Net cash generated during year 439 (1,348) 1,148 1,525

Cash at beginning of year 1,484 1,923 576 1,723
Cash at the end of year 1,923 576 1,723 3,249
January 07, 2011 32

FMCG Sector Report
Financial summary
EBITDA 6,241 7,617 9,632 11,033 Less: Changes in W.C. (988) (490) (1,375) (1,147)
Depreciation (503) (695) (933) (1,051) Tax (199) (1,005) (1,443) (1,801)
Interest expenses (123) (174) (205) (164) Capex (1,573) (8,099) (1,400) (1,700)
Other income 394 466 512 568 Investments 829 0 - -
Profit before tax and extraordinary 6,009 7,213 9,007 10,386 Investing cash flows (744) (8,099) (1,400) (1,700)
Extraordinary income - - - - Increase in equity (76) 881 12 14
Profit before tax 6,009 7,213 9,007 10,386 Debt raised/ (repaid) (507) 3,000 (1,500) (1,500)
Provision for tax (1,005) (1,443) (1,801) (2,077) Dividends (1,772) (2,544) (2,902) (3,564)
Net profit 5,005 5,770 7,205 8,309 Others (1,700) (875) - -
Minority Interest 8 10 12 14 Financing cash flow (4,056) 463 (4,390) (5,050)
Reported PAT 5,013 5,780 7,217 8,323 Net change in cash 439 (1,348) 1,148 1,525
Adjusted profit 5,013 5,780 7,217 8,323 Closing cash balance 1,923 576 1,723 3,249
Balance sheet (INR mn) Key ratios (%)

Liabilities Diluted EPS (INR) 2.9 3.3 4.1 4.8
Equity capital 869 1,741 1,741 1,741 Dividend per share (INR) 1.0 1.3 1.6 1.9
Reserves and surplus 8,458 10,817 14,775 19,229 Book value per share (INR) 5.4 7.2 9.5 12.1
Shareholders’ funds 9,327 12,558 16,516 20,970 ROE 57.3 52.6 49.5 44.3
Minorities 38 38 38 38 ROCE 55.1 50.4 48.5 48.6
Borrowings 1,793 4,793 3,293 1,793 Net debt/Equity (28.2) 13.6 (5.7) (18.9)
Others non-current liabilities 370 370 370 370 Dividend payout 40.5 44.0 45.2 46.5
Total liabilities 11,527 17,758 20,217 23,170 Growth
Assets Revenues 20.9 24.1 25.3 13.8
Gross block 9,857 17,957 19,357 21,057 EBITDA 33.9 22.0 26.5 14.5
Depreciation (3,391) (3,962) (4,710) (5,548) EBIT 31.0 20.5 24.7 14.5
Net block 6,466 13,996 14,647 15,510 Net profit 28.1 15.3 24.9 15.3
Capital WIP 301 300 300 300 Diluted EPS 28.1 15.3 24.9 15.3
Total fixed assets 6,767 14,296 14,947 15,810 Margins
Investments 135 135 135 135 EBITDA 18.4 18.1 18.3 18.4
Other non-current assets 263 263 263 263 EBIT 18.1 17.6 17.5 17.6
Inventories 4,262 5,471 6,869 7,795 Adjusted Profit 14.8 13.7 13.7 13.9
Sundry debtors 1,198 1,510 1,891 2,152
Cash equivalents 4,430 3,082 4,230 5,755 Valuation ratios
Net current assets 4,362 3,065 4,872 6,963 EV/EBITDA (x) 28.3 23.8 18.5 15.9
January 07, 2011 33

FMCG Sector Report
Godrej Consumer Products Ltd.
CMP: INR392 Reco: HOLD
Target Price : INR414  The international business would grow 37%, led by consolidation and
Upside : 6% healthy growth in Africa and Indonesia. Integration of recently-acquired
businesses remains GCPL’s focus.
Nifty 6,080
 Rising input cost is expected to put pressure on margins.We expect EBITDA
Sensex 20,301
margins to contract 80bp during FY10-13.
Stock Data  We continue to maintain our Hold rating with a revised target price of
Sector FMCG
INR414 (revised from INR402), based on an average of DCF and PER
Reuters Code GOCP.BO valuation methodologies.
Bloomberg Code GCPL IN
No. of shares (mn) 324
Market Cap (INR bn) 127
Avg 6m Vol. 198,395 Company background
Godrej Consumer (GCPL) is one of the fastest growing FMCG companies that has a strong
presence in personal care, hair care and home care products. It commands 10.4% market
share in the domestic soaps segment and is the leader in hair colours segment with a 34%
52-week high/low INR484/227 share. With 100% acquisition of Godrej Sara Lee (now GHPL), GCPL is the leader in
1M 3M 12M household insecticide business as well, with 33.1% share in the domestic market. With recent
Absolute (%) (3) (2) 45 acquisitions, GCPL has increased its footprint in the South African markets and has forayed
Relative (%) (5) (1) 28 in the fast growing South-East Asian and LatAm markets.
Shareholding Pattern
DIIs Public &
1% others
11%
Key positives
FIIs
Promoters
20%
68% HI segment to aid robust growth; dependence on soaps to reduce
Continued strong performance of the HI segment (c45% of consolidated sales) and effective
consolidation of the acquired businesses would result in 36% revenue growth and 28%
earnings growth over FY10-13E for GCPL. Moreover, increasing contribution from these
businesses will reduce the company’s dependence on soaps to 21%.
Nifty and Stock Movement Increasing visibility on international businesses seems a re-rating trigger
500 6500
Increasing visibility on performance of the international business along with successful
450
6000
400 integration of recent acquisitions should reinforce investor confidence on GCPL, engendering
5500
(NR)
350
5000 a re-rating.
300
4500
250
200 4000
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
Godrej Consumers (RHS) Nifty (RHS)
January 07, 2011 34

FMCG Sector Report
Valuation
We expect GCPL will witness rising concerns from increasing palm oil prices and increasing competition.
Hence, we continue to maintain our Hold rating on the stock with a revised target price of INR414 based
on an average of DCF and PER multiple.
PER method
Recent acquisitions has resulted in significant change in product profile of the company. We believe a
shift from soaps and hair colours to household insecticide segment augurs well for the company and
hence, the stock should command a premium to its historical one-year forward mean PER of 16.5x.
Strong revenue CAGR of 36% and earnings CAGR of 28% over FY10-13E, driven by consolidation of
recently acquired businesses, should support the premium valuations. Hence, we apply 21x to our
FY12E EPS and arrive at a fair value of INR397 per share.
500 35
450
30
400
25
350
300 20
250 15
200
10
150
100 5
50 0
0
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Aug-02
Dec-02
Aug-03
Dec-03
Aug-04
Dec-04
Aug-05
Dec-05
Aug-06
Dec-06
Aug-07
Dec-07
Aug-08
Dec-08
Aug-09
Dec-09
Aug-10
Dec-10
PER Mean + 1 stddev

Source :Bloomberg, PUG Research Source :Bloomberg, PUG Research

For our DCF calculations, we have assumed 10.5% cost of equity based on the CAPM model using 7.5%
Rfr and 3% terminal growth rate. We arrive at a fair price of INR431 per share.
Beta 0.6
Cost of equity (%) 10.5 9.0 463 513 580
11.0 367 397 435
Key catalyst
Increasing visibility on the international business and successful integration of these business could re-
rate the stock.
Risks
Rising input costs could adversely impact margins
GCPL has forward covers for its raw material requirements and has increased prices of select products.
Nevertheless, higher-than-anticipated increase in cost of inputs, primarily vegetable oils, could adversely
affect the company’s profitability snd provide downside risks to our estimates.
Increasing competition could result in higher ad spend
High competitive intensity in the soaps segment and hair colours remains a key challenge for GCPL. It
managed to grab additional 60bp of share from competition recently, taking the total to 10.4%;
nevertheless, increasing marketing activities from HUL, cash-rich ITC and P&G (via a new launch, Wella)
imply that GCPL would have to undertake higher A&P spend, which would adversely affect its profits.
January 07, 2011 35

FMCG Sector Report

Higher than consensus estimates
Our expectation of INR18.9 EPS for FY12 and INR22 EPS for FY13 is higher by 4-7% than consensus
forecasts as we expect sales growth to be higher than consensus estimates.
FY11E FY12E FY13E

PUG Consensus Variance (%) PUG Consensus Variance (%) PUG Consensus Variance (%)
Sales (INR mn) 36,683 34,886 5.2 45,274 42,307 7.0 51,520 46,272 11.3
EPS (INR) 15.3 14.7 4.0 18.9 18.2 3.8 22.0 20.5 7.3
Detailed financials
GCPL: Consolidated profit and loss statement
Net sales 20,412 36,683 45,274 51,520
Raw material Consumed (9,463) (17,627) (21,925) (25,007)
Other expenses (1,829) (2,194) (2,508) (2,826)
EBITDA 4,078 6,965 8,667 9,900
EBITDA margin (%) 20.0 19.0 19.1 19.2
Depreciation (236) (431) (633) (690)
EBIT 4,310 7,181 8,316 9,520
Interest (111) (512) (575) (524)
Tax (803) (1,314) (1,626) (1,889)
Tax rate (%) 19.1 19.7 21.0 21.0
Net profit 3,396 5,355 6,116 7,107
Adjusted profit 3,396 4,944 6,116 7,107
GCPL: Key ratios

EPS (INR) 11.0 15.3 18.9 22.0
P/E (x) 35.5 25.6 20.7 17.8
RoE (%) 44.5 36.8 32.2 31.6
RoCE (%) 46.6 31.8 25.0 27.0
Dividend yield (%) 1.0 1.6 1.9 2.2
P/BV (x) 12.6 7.3 6.2 5.2
EV/Sales (x) 6.0 3.8 3.0 2.6
EV/ EBIDTA (x) 30.2 20.1 15.9 13.5
January 07, 2011 36

FMCG Sector Report
GCPL: Consolidated balance sheet

Sources of funds :
Reserves total 9,239 17,023 20,267 24,118
Total Shareholders’ funds 9,547 17,347 20,590 24,442
Loans 369 15,231 13,231 12,231
Total 9,982 32,642 33,885 36,737
Application of funds :
Net Block 5,744 30,000 30,337 30,499
Inventories 2,644 4,300 5,219 5,892
Sundry debtors 1,153 2,111 2,481 2,823
Cash and bank 3,722 1,709 2,452 5,052
Provisions 4,073 6,156 7,267 8,135
Total 9,982 32,642 33,885 36,737
GCPL: Consolidated cash flow statement

PBT 4,199 6,670 7,742 8,996
Change in working capital (260) (199) (184) (107)
Taxes paid (789) (1,283) (1,606) (1,872)
Capital expenditure (1,749) (24,687) (970) (851)

Change in investments 0 - - -
Other investing cash flow (595) - - -
Investing cash flow (2,344) (24,687) (970) (851)
Free cash flow to firm 1,240 (19,068) 5,615 6,856
Issue of equity 51 5,313 - -

Change in borrowings (2,407) 14,862 (2,000) (1,000)
Dividend paid (1,490) (2,644) (2,872) (3,255)
Other 1,874 (475) 0 -
Financing cash flow (1,971) 17,056 (4,872) (4,255)
Net cash generated during year (732) (2,012) 742 2,601

January 07, 2011 37

FMCG Sector Report
Financial summary
Total operating expenses (16,334) (29,719) (36,607) (41,620) Depreciation, amortisation etc. 434 431 633 690
Less: Changes in W.C. (260) (199) (184) (107)
EBITDA 4,078 6,965 8,667 9,900
Tax (789) (1,283) (1,606) (1,872)
Depreciation (236) (431) (633) (690)
Net operating cash flow 3,583 5,619 6,585 7,707
EBIT 3,842 6,533 8,034 9,210
Capex (1,749) (24,687) (970) (851)
Interest expenses (111) (512) (575) (524)
Investments (595) - - -
Other income 468 237 282 310
Investing cash flows (2,344) (24,687) (970) (851)
Profit before tax and extraordinary 4,199 6,258 7,742 8,996
Increase in equity 51 5,313 - -
Extraordinary income - 411 - - Debt raised/ (repaid) (2,407) 14,862 (2,000) (1,000)
Profit before tax 4,199 6,670 7,742 8,996 Dividends (1,490) (2,644) (2,872) (3,255)
Provision for tax (803) (1,314) (1,626) (1,889) Others 1,874 (475) - -
Net profit 3,396 5,355 6,116 7,107 Financing cash flow (1,971) 17,056 (4,872) (4,255)
Reported PAT 3,396 5,355 6,116 7,107 Net change in cash (732) (2,012) 742 2,601
Adjusted Profit 3,396 4,944 6,116 7,107 Closing cash balance 3,052 1,039 1,782 4,382

Diluted EPS (INR) 11.0 15.3 18.9 22.0
Liabilities
Equity Capital 308 324 324 324
ROE 44.5 36.8 32.2 31.6
ROCE 46.6 31.8 25.0 27.0
Borrowings 369 15,231 13,231 12,231
Net debt/Equity (35.1) 77.9 52.4 29.4
Total Liabilities 9,982 32,642 33,885 36,737 Growth
Revenues 46.5 79.7 23.4 13.8
Assets EBITDA 96.7 70.8 24.4 14.2
Gross block 7,267 31,913 32,883 33,734 EBIT 89.0 57.1 22.8 14.5
Depreciation (1,531) (1,963) (2,596) (3,286) Net profit 96.7 45.6 23.7 16.2
Net block 5,736 29,950 30,287 30,449 Diluted EPS 64.0 38.7 23.7 16.2
Capital WIP 8 50 50 50 Margins
Total fixed assets 5,744 30,000 30,337 30,499 EBITDA 20.0 19.0 19.1 19.2
EBIT 21.1 18.5 18.4 18.5
Investments - - - -
Adjusted Profit 16.6 13.5 13.5 13.8
Inventories 2,644 4,300 5,219 5,892
Sundry debtors 1,153 2,111 2,481 2,823
Valuation ratios
Other current assets 2,247 3,224 3,733 4,068
Diluted P/E (x) 35.5 25.6 20.7 17.8
Total Assets 9,982 32,642 33,885 36,737 Dividend yield (%) 1.0 1.6 1.9 2.2
January 07, 2011 38

FMCG Sector Report
GlaxoSmithKline Consumer Healthcare Ltd.

CMP: INR2,300 Reco: BUY
Target Price : INR2,576  Absolute market leadership and lower sensitivity of earnings to raw material
Upside : 12% costs will help GlaxoSmithKline Consumer (GSK Consumer) to maintain its
operating margins in future.
 Earnings CAGR of 22% is one of the highest in our coverage universe. We
Nifty 6,080 expect robust volumes, steady pace of new launches and low competition in
Sensex 20,301 the MFD category will help attain this strong earnings growth over CY09-
12E.
 Strong brand equity and lower sensitivity of earnings to commodity prices
Stock Data
justify GSK Consumer’s premium valuations. Hence, we initiate coverage
Sector FMCG
with a Buy and a target price of INR2,576, providing 12% upside from
Reuters Code GLSM.BO
current levels.
Bloomberg Code SKB IN
No. of shares (mn) 42 Company background
GlaxoSmithKline Consumer Healthcare (GSK Consumer) is an Indian group company of
GlaxoSmithKline plc UK, which holds 43% stake. GSK Consumer is the largest player in the
Avg 6m Vol. 16,307
malted food drink (MFD) category, with its flagship brand, Horlicks, commanding a leading
position in the white MFD category (predominantly in south and east). To cater to the north
Stock Performance (%) and east markets, the company introduced Boost in the brown MFD category. GSK
Consumer entered the non-MFD category with Foodles in instant noodles and Horlicks
52-week high/low INR2,524/1,252
Nutribar in multi-cereal bar categories.
1M 3M 12M
Absolute (%) 2 15 71 Key positives
Relative (%) 1 16 55 Strong brands and successful extensions provide healthy growth visibility
GSK Consumer continues to see robust double-digit volume growth, with its flagship brand,
Horlicks, recording c13% growth in 9MCY10. With low competitive intensity in the MFD
Shareholding Pattern category, the company’s strong brand equity, continued pace of new launches/extensions,
and increasing penetration through recruiter packs provide significant growth visibility.
Public &
others
25%
Promoters
43%
Low input cost sensitivity and higher pricing power to support healthy margins
DIIs Despite milk and barley prices being up 27% and 18% YoY respectively during M9CY10,
22% FIIs
10% GSK Consumer was able to restrict contraction of margins to a minimal 10bp due to
efficacious price increases and low input cost sensitivity. We believe that the company is
relatively better placed with significant pricing power to pass on increasing input costs easily,
owing to lower competition and absolute market leadership.
New launches provide incremental growth triggers

Nifty and Stock Movement GSK Consumer diversified into the non-MFD category recently and gained reasonable
2500 6500
success in instant noodles with Foodles commanding 5% market share in south and 3.5% in
2300
6000
east. Considering the company’s increasing focus on new food categories in the nutrition
2100
1900 5500 space and robust growth in its flagship brands, we expect this segment to contribute c8% to
(INR)
1700 5000 revenue by CY12.

1500
4500
1300
1100 4000
Cash of INR9bn provides opportunities for inorganic growth
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
A strong balance sheet with steady cash flows provides flexibility to GSK Consumer to pursue
GSK (LHS) Nifty (RHS)
inorganic growth strategies and strengthen its product portfolio.
January 07, 2011 39

FMCG Sector Report
Business analysis
Strong brands lead less-competitive domestic MFD; GSK Consumer our preferred pick
GSK Consumer commands more than 60% of the MFD market with strong brands such as Horlicks,
Boost, Viva and Maltova. Volume growth has been healthy at c10-12%, despite new launches from
competitors and increase in product prices by the company. Successful brand extension and increasing
distribution reach have helped GSK Consumer achieve higher penetration, aiding its strong growth
momentum. Low competition with higher pricing power places the company favourably to increase its
market dominance.
Chart 47: Volume growth trend Table 14: Competitive landscape remains low
25
Company Brand Remarks

20
15
GSK Consumer Horlicks No. 1 in white MFD category
(%)
10
Launched to cater to brown
GSK Consumer Boost
5 MFD category
0
Cadbury's Bournvita No. 1 in brown MFD category
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
Operates in white MFD

Heinz Complan
category
Horlicks Boost
New products likely to provide upside

GSK Consumer launched several new products recently, to leverage its strong brand equity in the MFD
category. It ventured into the non-MFD category with biscuits, cereal bars and instant noodles. The
company also launched Lucozade in the energy drinks space. While biscuits garner less than 1% market
share, instant noodles have attained initial success with 5% share in the southern market. These new
categories are expected to reduce the company’s dependence on its MFD portfolio and provide new
growth avenues. Increasing focus on food categories in the nutritional space, continued pace of new
launches, and robust growth in its flagship brands would drive GSK Consumer’s growth momentum in
future.
Strong pricing power would help absorb high input inflation

Despite milk and barley prices being up 27% and 18% YoY respectively, GSK Consumer was able to
restrict margin contraction to just 10bp for M9CY10, due to efficacious price increases and efficient
procurement. While input cost pressure is likely to remain firm in the long term, we believe that GSK
Consumer, with strong pricing power, will be able to pass on inflationary price movement with greater
ease. Hence, we believe that GSK Consumer is favourably placed to maintain healthy margins, despite
high commodity inflation.
January 07, 2011 40

FMCG Sector Report
Chart 48: Raw material composition Chart 49: Indexed price movement for GSK Consumer
150
20% 21%
140
130
8%
120
110
22% 100
90
29%
80
CY06 CY07 CY08 CY09
Milk Powder Liquid Milk Milk Powder Liquid Milk
Malt and Malt extract Flour (Wheat)
Others Malt and Malt extract Flour (Wheat)
Financial outlook
Expect revenue to grow 20% until CY12
Strong leadership position, with well-established brand equity and low competitive pressure, has helped
GSK Consumer achieve healthy 19% revenue CAGR over CY05-09. We expect this growth momentum
to continue, led by healthy volume growth of c12% and steady pace of successful launches/brand
extensions and judicious price increases by the company. This is expected to drive strong revenue
CAGR of 20% over CY09-12.
Chart 50: Revenue growth momentum to remain strong

35 26
30 24
22
25
20
20
INR bn
18
%
15
16
10
14
5 12
0 10
CY06 CY07 CY08 CY09 CY10E CY11E CY12E
Revenue (LHS) Growth (RHS)
Operating margins expected to remain stable

Input cost inflation should persist in the long term, but we expect GSK Consumer to pass it on to
customers with greater ease, considering its strong leadership position. Moreover, low competitive
intensity in the MFD category will not result in significant increase in A&P spend. Hence, we expect
operating margins to remain stable until CY12, thereby driving earnings CAGR of 22% over CY09-12E.
January 07, 2011 41

FMCG Sector Report
Chart 51: EBITDA margins to remain stable Chart 52: PAT margin trend
6.0 18.0 4.5 13.0
5.5 12.8
17.5 4.0
5.0 12.6
4.5 3.5 12.4
17.0
4.0 3.0 12.2
INR bn
INR bn
3.5 16.5 12.0
%
%
2.5 11.8
3.0
2.5 16.0 11.6
2.0
2.0 11.4
15.5 1.5
1.5 11.2
1.0 15.0 1.0 11.0
CY06 CY08 CY10E CY12E CY06 CY08 CY10E CY12E
EBITDA (LHS) EBITDA margin (RHS) PAT (LHS) PAT margin (RHS)
Increasing profitability to aid healthy return ratios

Considering PAT CAGR of 22% over CY09-12E, driven by strong volume growth and margin expansion,
we expect return ratios to remain healthy (RoE at 30% and RoCE at 44%) until CY12. GSK Consumer
has a strong balance sheet with INR9bn of cash; this translates into cash per share of INR222. However,
dividend payout is expected to remain low at c37%.
Valuation
We initiate coverage with a Buy rating on the stock, valuing the company based on an average of DCF
and PER methodolody; arriving at our target price of INR2,576.
PER method
GSK Consumer is a leading player in the domestic malted health drink space with its flagship brand
Horlicks commanding 50%+ market share. The stock has historically traded in a lower PER band due to
its portfolio skewed towards a single product. As the company introduced new product variants and
brand extensions, the stock has been re-rated and is currently trading at a 75% premium to its one-year
forward mean PER. We believe that GSK Consumer, with a dominant position in the lesser-competitive
and under-penetrated MFD category, is well placed to attain strong volume growth and pass on input
cost inflation to consumers with greater ease. Further, successful brand extensions to non-MFD
categories and a healthy balance sheet, supporting inorganic growth opportunities, would engender
incremental growth triggers. Hence we believe this premium is justified. We apply 25x to our CY11E EPS
and arrive at fair price of INR2,100.
3,500 35.0
3,000
30.0
2,500
25.0
2,000
20.0
1,500
15.0
1,000
500 10.0
0 5.0
Sep-04
Aug-07
Sep-09
Jan-03
Jun-03
Jan-08
Jun-08
Jul-05
Jul-10
May-06
Sep-04
Aug-07
Sep-09
Feb-05
Mar-07
Feb-10
Apr-04
Oct-06
Apr-09
Jan-03
Jun-03
Jan-08
Jun-08
Nov-03
Dec-05
Nov-08
Dec-10
Jul-05
May-06
Jul-10
Feb-05
Mar-07
Feb-10
Apr-04
Oct-06
Apr-09
Nov-03
Dec-05
Nov-08
Dec-10
PER Mean + 1 stddev

January 07, 2011 42

FMCG Sector Report

We also use DCF method to value the stock. For this, we assumed 10.3% cost of equity based on a
CAPM model. For terminal value of INR73bn, we have assumed a 3% terminal growth rate. Accordingly,
we arrive at a fair price of INR3,052.
Beta 0.6
Cost of equity (%) 10.3 10.0 2,937 3,183 3,512
Terminal Value (INR mn) 72,751 10.3 2,829 3,052 3,347
Fair value (INR mn) 128,371 11.0 2,583 2,760 2,987
Value per share (INR) 3,052 11.5 2,436 2,587 2,779
Key catalyst
Strong volume growth to aid robust revenue CAGR of 20% over CY09-12E, which will drive strong
earnings CAGR of 22%, one of the highest in our coverage universe.
Risks
Although the MFD category is characterized by low competitive intensity, increasing competition could
limit GSK Consumer’s ability to raise product prices with ease. It would also imply higher A&P spend,
which could put margins under pressure.

In line with consensus
While our sales forecast is c4% higher than street expectations, our earnings estimates are more or less
in line with consensus expecations.
CY10E CY11E CY12E

(%) (%) (%)
Sales (INR mn) 23,201 22,951 1.1 28,074 27121 3.5 33,290 32,157 3.5
EPS (INR) 68.7 70.9 (3.1) 84.0 84.1 (0.1) 100.9 99.5 1.4
January 07, 2011 43

FMCG Sector Report
Detailed financials
GSK Consumer: Profit and loss statement
FY ending Dec, in INR mn CY09 CY10E CY11E CY12E
Net sales 19,215 23,201 28,074 33,290
Other expenses (1,129) (1,337) (1,618) (1,885)
EBITDA 3,108 3,659 4,540 5,440
EBITDA Margin (%) 16.2 15.8 16.2 16.3
Depreciation (420) (402) (476) (534)
Other income/extraordinary items 893 1,117 1,279 1,504
EBIT 3,581 4,374 5,343 6,411
Interest (43) (30) (30) (30)
Tax (1,211) (1,455) (1,780) (2,138)
Tax rate (%) 34.2 33.5 33.5 33.5
Net profit 2,328 2,889 3,533 4,243
Adjusted profit 2,328 2,889 3,533 4,243
GSK Consumer : Key ratios

Particulars CY09 CY10E CY11E CY12E
EPS (INR) 55.3 68.7 84.0 100.9
P/E (x) 41.6 33.5 27.4 22.8
RoE (%) 27.9 29.0 29.5 29.5
RoCE (%) 42.2 43.4 44.2 44.1
Dividend yield (%) 0.8 1.0 1.2 1.4
P/BV (x) 10.7 8.9 7.4 6.1
EV/Sales (x) 4.6 3.8 3.0 2.5
EV/ EBIDTA (x) 28.6 23.9 18.8 15.1
January 07, 2011 44

FMCG Sector Report
GSK Consumer : Balance sheet

Sources of funds
Reserves total 8,630 10,437 12,641 15,310
Total Shareholders’ funds 9,051 10,857 13,062 15,731
Loans - - - -
Total 9,179 10,986 13,190 15,859
Net block 2,323 3,343 3,786 3,983
Investments 0 0 0 0
Inventories 2,660 3,135 3,649 4,151
Sundry Debtors 314 380 459 545
Cash and Bank 8,198 9,342 11,657 14,727
Loan and Advances 338 399 476 559
Other current assets 220 235 251 269
Provisions 1,957 2,360 2,817 3,287
Total 9,179 10,986 13,190 15,859
GSK Consumer : Cash flow statement

PBT 3,538 4,344 5,313 6,381
Change in working capital 2,284 358 553 598
Other non-cash adjustments - - - -
Taxes paid (1,387) (1,455) (1,780) (2,138)
Capital expenditure (409) (1,322) (800) (650)

Change in investments - - - -
Investing cash flow (409) (1,322) (800) (650)
Change in borrowings - - - -
Dividend paid (886) (1,082) (1,328) (1,574)
Financing cash flow (886) (1,082) (1,328) (1,574)
Net cash generated during year 3,488 1,144 2,315 3,070

January 07, 2011 45

FMCG Sector Report
Financial summary
Year ending 31 December CY09 CY10E CY11E CY12E Year ending 31 December CY09 CY10E CY11E CY12E
EBITDA 3,108 3,659 4,540 5,440 Less: Changes in W.C. 2,284 358 553 598
Depreciation (420) (402) (476) (534) Tax (1,387) (1,455) (1,780) (2,138)
Net Operating Cash Flow 4,783 3,549 4,443 5,295
EBIT 2,688 3,257 4,064 4,907
Capex (409) (1,322) (800) (650)
Investments - - - -
Other income 893 1,117 1,279 1,504
Investing cash flows (409) (1,322) (800) (650)
Increase in equity - - - -
Extraordinary income - - - -
Debt raised/ (repaid) - - - -
Dividends (886) (1,082) (1,328) (1,574)
Provision for tax (1,211) (1,455) (1,780) (2,138)
Others - - - -
Net profit 2,328 2,889 3,533 4,243
Financing cash flow (886) (1,082) (1,328) (1,574)
Reported PAT 2,328 2,889 3,533 4,243
Net change in cash 3,488 1,144 2,315 3,070
Adjusted profit 2,328 2,889 3,533 4,243

Liabilities Diluted EPS (INR) 55.3 68.7 84.0 100.9
Equity capital 421 421 421 421 Dividend per share (INR) 18.0 22.0 27.0 32.0
Reserves and surplus 8,630 10,437 12,641 15,310 Book value per share (INR) 215.2 258.2 310.6 374.1
Shareholders’ funds 9,051 10,857 13,062 15,731 ROE 27.9 29.0 29.5 29.5
Borrowings - - - - ROCE 42.2 43.4 44.2 44.1
Others non-current liabilities 128 128 128 128 Net debt/Equity (90.6) (86.0) (89.2) (93.6)
Total Liabilities 9,179 10,986 13,190 15,859 Dividend payout 38.0 37.5 37.6 37.1
Growth
Assets Revenues 24.6 20.7 21.0 18.6

EBITDA 30.9 17.7 24.1 19.8
Gross block 5,585 6,985 7,885 8,535
EBIT 23.0 22.1 22.1 20.0
Depreciation (3,640) (3,942) (4,299) (4,752)
Net profit 23.6 24.1 22.3 20.1
Net block 1,945 3,043 3,586 3,783
Diluted EPS 23.6 24.1 22.3 20.1
Capital WIP 378 300 200 200
Margins
EBITDA 16.2 15.8 16.2 16.3
Investments 0 0 0 0
EBIT 18.6 18.9 19.0 19.3
Adjusted Profit 12.1 12.5 12.6 12.7
Inventories 2,660 3,135 3,649 4,151
Valuation ratios
Other current assets 557 634 727 828 Year ending 31 December CY09 CY10E CY11E CY12E
January 07, 2011 46

FMCG Sector Report
Hindustan Unilever Ltd.
CMP: 326 Reco: SELL
Target Price : INR234  Increasing raw material prices, especially crude-linked products, and
Downside : 28% rising competition resulting in higher A&P spends will lead to 173bp
contraction in operating margins over FY10-13E.
 Our FY12E EPS is 11% lower than consensus as we believe consensus is
Nifty 6,080
underestimating margin pressure in future.
Sensex 20,301
 At 31x FY12E EPS, the stock is trading at 20% premium to its historical
average of 26x. We expect rising concern on commodity inflation will put
Stock Data
pressure on valuations and hence, we recommend Sell.
Sector FMCG
Reuters Code HLL.BO
Bloomberg Code HUVR IN
Market Cap (INR bn) 711 Hindustan Unilever (HUL) is a 52% subsidiary of Anglo Dutch Unilever Group. It is the
Market Cap (USD mn) 15,692 largest consumer company in India growing at 10-12%, with an annual turnover of
Avg 6m Vol. 2,006,276 INR175bn. With a diversified portfolio, the company’s products are present across price
points and reach more than 6mn retail outlets directly.

Key negatives
1M 3M 12M
Absolute (%) 8 7 23 Rising crude oil prices; high input cost inflation to result in margin contraction
Relative (%) 7 8 7
Increasing crude oil prices, which are up 12% YoY, are increasing concern on input cost
inflation and its impact on operating margins. We estimate that higher commodity costs will
result in 173bp contraction in operating margins. Continuing uptrend in commodity prices
remains a key risk for the stock and we expect this will lead to an overhang on the stock
price in near term.
Headwinds expected from increasing competition in personal care

Although the HUL management is adopting various strategies including competitive pricing
and higher brand investments, increasing competition in the fast-growing personal care
segment should result in margin pressure. Moreover, the low-margin soaps and detergents
category would not provide enough cushion to the company’s profitability.
Nifty and Stock Movement Ageing category still dominates revenue; unlikely to change in near future
400 6500
6000
The soaps and detergents category forms c43% of total revenue. With high penetration
350
5500 levels, this segment is highly fragmented comprising a large number of regional and local
(INR)
300
5000
250
players. Although a rebound in volumes is a good sign, industry growth is at single digit
4500
200 4000
levels vis-à-vis other categories growing at a healthier pace. We believe that change in
Aug-10
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
product mix, with reducing dependence on soaps and detergents, will take time.
HUL (LHS) Nifty (RHS)
January 07, 2011 47

FMCG Sector Report
Business analysis
High dependence on mature categories and intensifying competition in personal care; difficult
to sustain robust growth
The soaps and detergents category, c43% of total revenue, is a highly penetrated category with industry
growth in single digits. While focus on higher growth categories like personal care and foods is
increasing, we believe that change in product mix will take time. Moreover, increasing input costs and
intensifying competition from P&G, L’Oreal and ITC in personal care combined with higher brand
investments for new launches and maintaining market share will likely put pressure on operating
margins, adversely affecting profitability.
Chart 55: High dependence on soaps and detergents to remain a drag on margins
12%
1% 21%
3%
11%
22%
29%
Soaps detergents Personal Products Tea Coffee Frozen Desserts and Ice-creams Others
Input cost pressure and increasing competition to restrict margin expansion

Crude-related inputs and vegetable oils form majority of raw materials for HUL. Increasing crude oil
prices, up 12% YoY, are raising concern on input cost inflation and its impact on operating margins.
Moreover, increasing competition would restrict HUL’s ability to undertake frequent price increases,
which would further stress margins.
Chart 56: High dependence on crude based inputs to Chart 57: Indexed raw material prices per tonne –
affect margins structurally up
13% 16% 350
3% 300
250
200
150
20% 100
50
48% 0
CY04 CY05 CY06 CY07 FY09 FY10
Oils, fats and rasins Chemicals and Perfumes Oils, fats and rasins Chemicals and Perfumes
Tea and Green Leaf Coffee
Others Tea and Green Leaf Coffee
January 07, 2011 48

FMCG Sector Report
Financial outlook
Revenue to increase at 11% CAGR over FY10-13E
Modest volume growth, judicous price increases and new variants would drive revenue growth of 11%
over FY10-13E. While soaps and detergents should see a rebound on a low base, we expect HUL will
able to sustain c15% growth in personal care space backed by healthy offtake in the new launches,
product variants, etc. However, increasing competitive activiites in this segment could restrict future
growth.
Chart 58: Volume growth expected to remain modest Chart 59: Sales to increase at 11% CAGR
16 260 19
14
240
12 17
220
10
15
8 200
INR bn
6 180 13
%
%
4
160
2 11
0 140
9
-2 120
-4 100 7
-6 CY05 CY07 FY10 FY12E
Q1CY08
Q2CY08
Q3CY08
Q4CY08
Q5CY08
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Net sales (LHS) YoY Growth (RHS)
Rising input costs and A&P spend to restrict margin growth

Increased input costs and competitive activities would put pressure on HUL’s margins. While we factor in
marginal price hikes, we expect it will only partially offset the rise in its costs and would result in 173bp
contraction in operating margins to 14%, resulting in modest 7% PAT CAGR until FY13E.
Chart 60: Higher costs to lead to EBITDA margin Chart 61: …Will also result in PAT margin contraction
contraction… 28 13.5
35 16.0 26 13.0
33 24
15.5
31 12.5
22
29 15.0
20 12.0
INR bn
27 14.5
%
INR bn
25 18 11.5
%
23 14.0 16
11.0
21 13.5 14
19 10.5
13.0 12
17
10 10.0
15 12.5
CY05 CY07 FY10 FY12E
CY05 CY07 FY10 FY12E
Return ratios and dividend payout to remain healthy

With PAT CAGR estimated to be 7% over FY10-13, ROE and ROCE should decline to 79% and 96%,
respectively in FY13E. Further, healthy cash flows will help the company maintain dividend payout of
88% until FY13E.
January 07, 2011 49

FMCG Sector Report
Valuation
We value HUL based on an average of DCF and PER methodologies to arrive at our target price of
INR234, which implies 28% potential downside from the current level. Hence, we initiate coverage on the
stock with a Sell recommendation.
PER method
HUL is the largest FMCG company in the domestic market. When the company had witnessed lower
demand growth along with increased competition and higher cost pressures, the stock appears to have
traded at a high PER of 40x. As demand scenario witnessed an uptick along with an improvement in
profitability, it commanded 15% premium to its one-year forward PER multiple of 26x. However, going
forward we expect HUL to face headwinds from rising input cost, maturing soaps and detergent category
and increasing competition in personal care segment. These would put pressure on margins and
profitability. Hence we believe a 10% discount to its mean PER multiple is justified. On a PER basis, we
apply 23x to our FY12E EPS and arrive at a fair price of INR246.
450 45.0
400 40.0
350 35.0
300
30.0
250
25.0
200
20.0
150
15.0
100
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Price 20x 25x 30x 35x Mean + 1 stddev -1 std dev +2 std dev

For DCF calculations, we have considered cost of equity at 10.2% based on the CAPM model. We
forecast the terminal value of INR253bn using a terminal growth rate of 3%. Accordingly, we arrive a fair
price of INR221 per share.
Beta 0.5
Cost of equity (%) 10.2
9.5 225 244 270
11.0 186 198 213
Outstanding shares (mn) 2,182
Key catalyst
Rising crude prices could adversely affect the operating margins of the company, thereby restricing
earnings growth.
Risks
Increasing focus of the management on aggressive and competitive growth, resulting in market share gains
will be a key risk to our call.
January 07, 2011 50

FMCG Sector Report

Lower than consensus
Our sales estimates are 1-3% lower while profit expectations are 11% lower than consensus, as we have
factored in higher cost pressures.
FY11E FY12E FY13E

(%) (%) (%)
Sales (INR mn) 190,767 193,831 (1.6) 214,196 216,782 (1.2) 239,438 245,515 (2.5)
EPS (INR) 9.6 10.3 (6.6) 10.5 11.8 (10.7) 11.9 13.5 (11.4)
Detailed financials
HUL: Profit and loss statement
Net sales 175,238 190,767 214,196 239,438
Other operating income 2,421 2,735 3,064 3,370
Other expenses (25,456) (27,271) (30,705) (34,229)
EBITDA 27,905 27,393 29,972 33,944
EBITDA margin (%) 15.7 14.2 13.8 14.0
Depreciation (1,840) (2,119) (2,272) (2,422)
Other income/extraordinary items 2,069 1,629 1,792 1,971
EBIT 28,134 26,903 29,492 33,493
Interest (70) (10) (10) (10)
Tax (6,044) (5,997) (6,574) (7,467)
Tax rate (%) 21.5 22.3 22.3 22.3
Net profit 22,020 20,896 22,907 26,017
Adjusted profit 21,027 20,896 22,907 26,017
HUL: Key ratios

EPS (INR) 9.6 9.6 10.5 11.9
P/E (x) 33.8 34.0 31.0 27.3
RoE (%) 90.5 76.4 76.1 79.2
RoCE (%) 99.5 91.6 91.8 96.0
Dividend yield (%) 2.0 2.1 2.5 2.8
P/BV (x) 27.5 24.6 22.7 20.7
EV/Sales (x) 3.9 3.6 3.1 2.8
EV/ EBIDTA (x) 24.5 24.8 22.5 19.6
January 07, 2011 51

FMCG Sector Report
HUL: Balance sheet

Sources of funds
Share capital 2,182 2,182 2,182 2,182
Reserves total 23,653 26,678 29,161 32,200
Loans - - - -
Other non-current liabilities 2,023 2,023 2,023 2,023
Total 27,858 30,883 33,366 36,405
Net block 24,361 25,016 25,453 25,787
Investments 4,913 4,913 4,913 4,913
Inventories 21,799 24,221 27,274 30,062
Sundry Debtors 6,784 6,677 7,497 8,380
Cash and bank 26,650 30,478 36,456 43,759
Other current assets 166 572 643 718
Provisions 14,934 16,165 17,455 18,780
Other non-current assets 4,511 4,511 4,511 4,511
Total 27,858 30,883 33,366 36,405
HUL: Cash flow statement

PBT 28,064 26,893 29,482 33,483
Depreciation 1,449 2,119 2,272 2,422
Change in working capital 13,443 277 2,699 3,333
Taxes paid (5,984) (5,997) (6,574) (7,467)

Change in investments (3,825) - - -
Other investing cash flow (5,499) - - -
Investing cash flow (14,345) (2,774) (2,709) (2,756)
Issue of equity 322 0 - -

Change in borrowings (4,219) - - -
Dividend paid (17,028) (16,691) (19,190) (21,713)
Other (553) 0 (0) -
Net cash generated during year 1,149 3,828 5,978 7,303

January 07, 2011 52

FMCG Sector Report
Financial summary
Total operating expenses (149,754) (166,109) (187,287) (208,864) Depreciation, Amortisation etc. 1,449 2,119 2,272 2,422
Less: Changes in W.C. 13,443 277 2,699 3,333
EBITDA 27,905 27,393 29,972 33,944
Tax (5,984) (5,997) (6,574) (7,467)
Depreciation (1,840) (2,119) (2,272) (2,422)
Net Operating Cash Flow 36,972 23,292 27,878 31,772
EBIT 26,065 25,274 27,700 31,522
Capex (5,021) (2,774) (2,709) (2,756)
Investments (9,315) - - -
Other income 1,076 1,629 1,792 1,971
Investing cash flows (14,336) (2,774) (2,709) (2,756)
Increase in equity 322 0 - -
Extraordinary income 994 - - - Debt raised/ (repaid) (4,219) - - -
Profit before tax 28,064 26,893 29,482 33,483 Dividends (17,028) (16,691) (19,190) (21,713)
Provision for tax (6,044) (5,997) (6,574) (7,467) Others (553) 0 (0) -
Net profit 22,020 20,896 22,907 26,017 Financing cash flow (21,479) (16,690) (19,190) (21,713)
Reported PAT 22,020 20,896 22,907 26,017 Net change in cash 1,149 3,828 5,978 7,303
Adjusted profit 21,027 20,896 22,907 26,017 Closing cash balance 18,922 22,750 28,729 36,031

Key ratios (%)
Equity capital 2,182 2,182 2,182 2,182 Diluted EPS (INR) 9.6 9.6 10.5 11.9
Reserves and surplus 23,653 26,678 29,161 32,200 Dividend per share (INR) 6.5 7.0 8.0 9.0
Shareholders’ funds 25,835 28,860 31,343 34,382 Book value per share (INR) 11.8 13.2 14.4 15.8
Borrowings - - - - ROE 91.5 76.4 76.1 79.2
Others non-current liabilities 2,023 2,023 2,023 2,023 ROCE 99.5 91.6 91.8 96.0
Net debt/Equity (103.2) (105.6) (116.3) (127.3)
Total Liabilities 27,858 30,883 33,366 36,405
Assets
Growth
Gross block 35,820 38,533 41,193 43,799
Revenues 8.2 8.9 12.3 11.8
Depreciation (14,199) (16,318) (18,590) (21,012)
EBITDA 18.0 (1.8) 9.4 13.3
Net block 21,621 22,216 22,603 22,787
EBIT 11.2 (0.9) 9.6 13.6
Capital WIP 2,740 2,800 2,850 3,000
Net profit 5.1 (0.6) 9.6 13.6
Total fixed assets 24,361 25,016 25,453 25,787 Diluted EPS 5.0 (0.6) 9.6 13.6
Investments 4,913 4,913 4,913 4,913 Margins
Other non-current assets 4,511 4,511 4,511 4,511 EBITDA 15.7 14.2 13.8 14.0
Inventories 21,799 24,221 27,274 30,062 EBIT 15.3 13.9 13.6 13.8
Sundry debtors 6,784 6,677 7,497 8,380 Adjusted Profit 12.0 11.0 10.7 10.9

Valuation ratios
Other current assets 6,172 7,938 8,744 9,614
Diluted P/E (x) 33.8 34.0 31.0 27.3
Net current assets (5,927) (3,557) (1,511) 1,194 EV/EBITDA (x) 24.5 24.8 22.5 19.6
January 07, 2011 53

FMCG l India Research FMCG Sector Report
Marico Ltd.
CMP: INR124 Reco: SELL
Target Price : INR112  Rising raw material prices, especially copra, is a key concern and could
Downside : 10% limit margin growth; we forecast c90bp margin contraction over FY10-13.
 Our earning expectations are 10-11% lower than consensus as we expect

Nifty 6,080
higher input costs will lead to sharp margin contraction in future.
Sensex 20,301
 Valuations at 24x FY12E EPS appear rich and hence we recommend Sell on
Stock Data the stock with our target price of INR112.

Sector FMCG
Reuters Code MRCO.BO
Bloomberg Code MRCO IN
Business analysis
No. of shares (mn) 614
Marico, incorporated in 1988, is one of the fastest-growing FMCG companies in our
Market Cap (USD mn) 1,679 coverage universe, with presence in the beauty and wellness space. It has strong and
Avg 6m Vol. 414,769 established brands in hair care, healthcare and skin care segments. Parachute, which
contributes 33% to revenue, is a market leader in hair care and enjoys strong brand equity.
Saffola leads in edible oils (53% market share), which are aimed at health-conscious
consumers.
1M 3M 12M
Absolute (%) (3) (7) 22
Relative (%) (5) (6) 5
Key negatives
Increasing copra prices could limit margins
Copra prices, which forms 40% of total raw material cost, is up 67% YoY and would remain
a key concern for the company’s profitbaility. While the company has undertaken price hikes
DIIs
7% Public &
others of c12% since August, we believe it would only partially offset input costs pressure and
8%
FIIs result in 240bp decline in gross margins during FY10-13.
22% Promoters
63%
Rising cost pressure could lead to consensus downgrade

Increasing input costs are posing rising concerns on company’s profitability. We have built in
higher than consensus cost pressure and consequently our earning estimates are 10-11%
lower than street expecations. Continuing input cost pressure will lead to consensuss
Nifty and Stock Movement downgrade in future.
150 6500
140
130
6000 Lower SSS growth in Kaya Skin Care business to remain downside risk
5500
I(NR)
120
5000
Although the management has redesigned the strategy for Kaya Skin Care and remains
110
100
4500
hopeful about a pick-up, continuing decline in domestic same-store-sales growth (SSG)
90 4000
entails downside risks for the business, which would be a drag on overall profit.
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
Marico (LHS) Nifty (RHS)
January 07, 2011 54

FMCG Sector Report
Business analysis
Rising input costs to lend margin pressure
Copra constitutes c40% of cost of raw material, which also includes kardi oil, ricebran oil, and liquid
paraffin. Raw material prices continue to remain on an uptrend with copra prices increasing 67% YoY.
While the company has undertaken c12% price increase, we expect this will only partially offset the input
cost pressure, thus resulting in margin contraction in future.
Chart 64: Gross margins versus copra prices Chart 65: Increase in copra prices
4600 60 6000
5500
56
4200 5000
52 4500
INR/quintal
3800
%
4000
48
3500
3400
44 3000
2500
3000 40
2000
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
Feb-10
May-10
Aug-10
Sep-10
Dec-09
Apr-10
Nov-10
Jan-10
Mar-10
Jun-10
Jul-10
Oct-10
Copra price (LHS) Gross profit margin (RHS) Copra (INR per quintal)
Source: Company, Bloomberg Source: Company, Bloomberg
Redesigning business model for Kaya; expected turnaround still away

The company is revamping its business strategy for Kaya Skin Care (97 clinics- 81 in India, 14 in Middle
East and 2 in Bangladesh) and remains hopeful about improvement in SSS growth. It acquired Derma
Rx, (revenue of INR500mn) a Singapore-based skin care company, with an aim to ramp-up Kaya’s
product revenue contribution from 13%; Derma Rx has 55% revenue contribution from products. We
believe the new strategies will take time to turnaround this model, which posted loss of INR123mn in
FY10 and expect this business to remain a drag on company’s profitability over the next 2 years.
Rising food inflation could reduce demand

Continued high food inflation could adversely affect demand for company’s products, especially Saffola,
and could see down-trading to other loose packs of oils. This could provide downside to company’s
sales, which are estimated to increase at a modest 14%CAGR until FY13.
January 07, 2011 55

FMCG Sector Report
Financial outlook
Revenue to increase at 14 % CAGR until FY13E
Revenue grew at 21% CAGR over FY05-10, driven by strong volume growth, judicious price increases,
new product launches and acquisitions. We expect this growth momentum to sustain in the domestic
market, on the back of healthy volume growth in key brands, Parachute and Saffola. Moreover, the
international business is expected to grow c21%, supporting overall revenue CAGR of 14% over FY10-
13E.
Chart 66: Revenue growth to remain healthy

50 30
40 25
20
30
INR bn
15
%
20
10
10 5
0 -
FY08 FY09 FY10 FY11E FY12E FY13E
Sales (LHS) YoY Growth (RHS)
However, higher input costs will restrict margin expansion

We expect sharp increase in raw material prices, especially copra and liquid paraffin, to result in 90bp
contraction in operating margins until FY13. Moreover, increase in tax provisions to c20% (from c16% in
FY11E) would restrict PAT growth to 15% over FY10-13E.
Chart 67: EBITDA margins to contract 90bp Chart 68: Profitability to increase 15%
6,000 14.5 4,000 10.0
3,500
5,000 14.0 9.5
3,000
4,000 13.5 9.0
2,500
INR mn
INR mn
3,000 13.0 2,000 8.5

%
1,500
2,000 12.5 8.0
1,000
1,000 12.0 7.5
500
0 11.5 0 7.0
FY11E
FY12E
FY13E
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY08
FY09
FY10
Return ratios to decline

We expect return ratios to decline due to lower growth in profits going ahead. We forecast RoE to decline
to 29% in FY13 from 44% in FY10 and RoCE to decline to 30% till FY13 from 34% in FY10.
January 07, 2011 56

FMCG Sector Report
Valuation
We value the stock based on an average of DCF and PER methodology, arriving at our target price of
INR112. Our target price provides a downside of 8% from the current levels and hence, we recommend a
Sell on the stock.
PER method
Marico is the leader in the hair oils segment with Parachute commanding 31% market share and edible
oil segment with Saffola commanding a leadership position. High dependence on two brands in the
domestic market led the stock to trade in lower band till 2005. As the company adopted an inorganic
growth path, the stock has seen a re-rating. While the stock is currently trading at c33% premium to its
historical one-year forward PER multiple, we believe this premium is not justified due to rising concerns
on increasing copra prices. While we expect the company to record earnings CAGR of 15% over FY10-
13, it will be lower than the company’s earning CAGR of 28% achieved over FY05-10. Moreover, rising
input costs will continue to put pressure on its profitability. Hence, we believe the premium shoud reduce
and the valuation should revert to its mean in future. We apply 21x to its FY12E EPS and arrive a fair
price of INR110 per share.
160 40.0
140 35.0
120 30.0
100 25.0
80 20.0
60 15.0
40 10.0
20 5.0
0 -
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Price 13x 16x 20x 23x 27x PER Mean + 1 stddev -1 std dev +2 std dev

Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
For our DCF calculations, we have factored in a cost of equity of 9.6% based on the CAPM model. For
terminal value, we assume a 3% terminal growth rate and arrive at a fair price of INR114.
Price 13x 16x 20x 23x 27x
Beta 0.4
Cost of equity (%) 9.6 9.0 114 126 144
Fair value (INR mn) 69,731 10.5 97 106 117
January 07, 2011 57

FMCG Sector Report
Key catalyst
Continuing rise in copra prices will result in margin pressure and consensus downgrade. We estimate
every 10% increase in copra prices could result in 160bp decline in operating margins.
Risks
Higher international growth could provide upside risk
Marico’s international business is expected to register robust 20% growth, driven by broad-based traction
across Bangladesh, MENA, and South Africa. Higher than anticipated growth (estimated at 21% revenue
CAGR over FY10-13) in these regions will provide upsides to our estimates. Moreover, the company’s
strong cash flows provide sufficient room for inorganic growth opportunities, which could provide upside
surprise to our forecasts.
Excise duty dispute settlement could provide upside

In FY10, Marico provided INR294mn for excise duty on Parachute packs of less than 200 ml, as per the
CBEC circular on excise on hair oils packs up to 200 ml. Settlement of this dispute in Marico’s favour
could provide c10% upside to our earnings estimates.Our view vs. consensus
Our View versus cosnensus

Lower than consensus estimates
Our earnings estimates are 10-11% lower than consensus, as we expect sharp increase in input costs to
restrict margin expansion in future.
FY11E FY12E FY13E

(%) (%) (%)
Sales (INR mn) 31,361 30,934 1.4 35,554 35,809 (0.7) 39,860 40,875 (2.5)
EPS (INR) 4.7 4.8 (1.8) 5.2 5.8 (10.1) 6.1 6.8 (10.6)
January 07, 2011 58

FMCG Sector Report
Detailed financials
Marico: Consolidated profit and loss statement
Net sales 26,608 31,361 35,554 39,860
Other expenses (1,876) (2,113) (2,355) (2,606)
EBITDA 3,752 4,073 4,625 5,260
EBITDA margin (%) 14.1 13.0 13.0 13.2
Depreciation (601) (554) (638) (704)
EBIT 3,236 3,771 4,300 4,945
Interest (257) (357) (349) (332)
Tax (643) (540) (781) (911)
Tax rate (%) 21.6 15.8 19.8 19.8
Net profit 2,335 2,875 3,170 3,702
Adjusted profit 2,452 2,914 3,217 3,759
Marico: Key ratios

EPS (INR) 4.0 4.7 5.2 6.1
P/E (x) 30.8 26.1 23.7 20.3
RoE (%) 43.8 37.3 31.5 29.2
RoCE (%) 34.4 30.8 30.0 30.0
Dividend yield (%) 0.5 0.6 0.8 1.0
P/BV (x) 11.3 8.5 6.7 5.3
EV/Sales (x) 3.0 2.5 2.2 1.9
EV/ EBIDTA (x) 21.0 19.2 16.6 14.2
January 07, 2011 59

FMCG Sector Report
Marico: Consolidated balance sheet

Sources of Funds :
Reserves total 5,930 8,195 10,605 13,396
Loans 4,459 4,359 3,859 3,359
Total 11,124 13,333 15,291 17,638
Net block 4,847 5,809 5,919 6,205
Inventories 4,448 5,411 6,113 6,837
Sundry debtors 1,507 1,725 1,955 2,192
Cash and bank 1,831 2,196 3,317 4,633
Other current assets - - - -
Provisions 1,041 1,228 1,320 1,412
Total 11,124 13,333 15,291 17,638
Marico: Consolidated cash flow statement

PBT 2,979 3,415 3,951 4,613
Change in working capital (1,070) (911) (727) (744)
Taxes paid (619) (540) (781) (911)
Capital expenditure (1,275) (1,456) (728) (971)

Change in investments (110) - - -
Other investing cash flow (596) - - -
Investing cash flow (1,981) (1,456) (728) (971)
Free cash flow to firm (301) 1,002 2,333 2,671
Issue of equity 322 84 95 114

Change in borrowings 716 (100) (500) (500)
Dividend paid (467) (542) (712) (855)
Other (58) (79) (95) (114)
Financing cash flow 514 (637) (1,212) (1,355)
Net cash generated during year 213 365 1,121 1,316

Cash at beginning of year 902 1,115 1,479 2,600
January 07, 2011 60

FMCG Sector Report
Financial summary
EBITDA 3,752 4,073 4,625 5,260 Less: Changes in W.C. (1,070) (911) (727) (744)
Depreciation (601) (554) (638) (704) Tax (619) (540) (781) (911)
Interest expenses (257) (357) (349) (332) Capex (1,275) (1,456) (728) (971)
Other income 183 252 313 389 Investments (706) - - -
Profit before tax and extraordinary 3,077 3,415 3,951 4,613 Investing cash flows (1,981) (1,456) (728) (971)
Extraordinary income (98) - - - Increase in equity 322 84 95 114
Profit before tax 2,979 3,415 3,951 4,613 Debt raised/ (repaid) 716 (100) (500) (500)
Provision for tax (643) (540) (781) (911) Dividends (467) (542) (712) (855)
Net profit 2,335 2,875 3,170 3,702 Others (58) (79) (95) (114)
Financing cash flow 514 (637) (1,212) (1,355)
Minority Interest 19 39 47 57
Net change in cash 213 365 1,121 1,316
Reported PAT 2,354 2,914 3,217 3,759
Adjusted profit 2,452 2,914 3,217 3,759
Key ratios (%)

Diluted EPS (INR) 4.0 4.7 5.2 6.1
Liabilities
Equity Capital 609 614 614 614
ROE 43.8 37.3 31.5 29.2
ROCE 34.4 30.8 30.0 30.0
Minorities 125 165 212 269
Net debt/Equity 39.4 24.1 4.7 (8.9)
Borrowings 4,459 4,359 3,859 3,359
Total Liabilities 11,124 13,333 15,291 17,638
Growth
Revenues 11.4 17.9 13.4 12.1
Assets
EBITDA 23.4 8.6 13.6 13.7
Gross block 6,142 7,342 7,942 8,742
EBIT 18.9 13.1 14.0 15.0
Depreciation (2,424) (2,918) (3,537) (4,221)
Net profit 20.4 18.9 10.4 16.8
Net block 3,718 4,424 4,406 4,521
Diluted EPS 20.4 17.9 10.4 16.8
Capital WIP 1,129 1,385 1,513 1,684
Margins
EBITDA 14.1 13.0 13.0 13.2
EBIT 12.5 12.0 12.1 12.4
Other non-current assets 616 616 616 616 Adjusted Profit 9.2 9.3 9.0 9.4
Inventories 4,448 5,411 6,113 6,837
Sundry debtors 1,507 1,725 1,955 2,192
Cash equivalents 1,831 2,196 3,317 4,633 Valuation ratios
January 07, 2011 61

FMCG Sector Report
Nestle India Ltd.
CMP: INR3,898 Reco: SELL
Target Price : INR3,405  Volume growth expected to be healthy; increase in planned capex by 1.8x
Downside : 13% its combined capex of INR9.2bn in last 5 years indicates management’s
focus and optimism about strong growth potential in future.
Nifty 6,080  Strong brand equity and leading market position will help Nestle to sustain
Sensex 20,301 its profitability; we expect PAT to grow at 17% CAGR over CY09-12E.
 However, at the current price, valuations at 39x CY11E EPS capture all the
Stock Data aforementioned positives and doesnot offer potential upside. Hence, we
Sector FMCG recommend Sell on the stock.
Reuters Code NEST.BO
Bloomberg Code NEST IN
Market Cap (INR bn) 376 Nestle India (Nestle), incorporated in 1959, is a 61.8% subsidiary of Switzerland-based
Market Cap (USD mn) 8,301 Nestle S.A. With strong brands and a dominant position in the domestic F&B category, the
Avg 6m Vol. 34,145 company is one of the fastest-growing in the Indian consumer space.
Stock Performance (%) Key positives

52-week high/low INR4,224/2,295 Increase in production capacities indicate positive volume outlook
1M 3M 12M
Nestle has increased its planned capex to fund its future growth in the domestic markets. It
Absolute (%) 4 19 53 will spend cINR17bn for increasing its production capacities across 4 plants, besides
Relative (%) 3 20 37 undertaking greenfield expansions. This increase in capex (1.8x its combined capex of
INR9.2bn in last 5 years) indicates management’s confidence and optimism about the strong
growth potential in India. We expect volume growth to remain in robust double-digits in
Shareholding Pattern future.
Public &
DIIs
others
18%
Strong and leading brands to entail higher pricing power
10%
FIIs Promoters Nestle enjoys a dominant position across various categories such as dairy whiteners, infant
10% 62%
nutrition and instant noodles. Despite steep price increases implemented to offset increasing
raw material prices, Nestlé’s products continued to witness robust volume growth across
categories. We believe that Nestle, with its strong brand equity, will be able to increase
product prices, despite increasing competition, to offset increasing input costs pressure.
Hence, we expect operating margins to remain stable at c20% until CY12.
Nifty and Stock Movement
4100 6500 Sustained strong growth on innovative launches
6000
3650
5500
Nestle has consistently focused on achieving strong growth through innovative product
(INR)
3200
5000 launches such as Maggi Cuppa Mania and multigrain noodles and new affordable SKUs
such as Nescafe Mild Sachet at INR1 and Munch Chocolate at INR2. Nestle’s initiatives to
2750
4500
2300 4000
reach customers and provide differentiated products would strengthen its positioning and
Aug-10
Sep-10
Jan-10
Jun-10
May-10
Jul-10
Jul-10
Feb-10
Mar-10
Apr-10
Oct-10
Nov-10
Dec-10
Nestle (LHS) Nifty (RHS) enable it to sustain the strong growth momentum.
January 07, 2011 62

FMCG Sector Report
Business analysis
Enjoys dominant position in many categories with higher pricing power
Milk products and nutrition (43% of revenue)
Nestle commands a leadership position in dairy whitener and condensed milk products and has various
strong brands across packaged milk, curd, and ghee. It is also the top player in infant foods with well-
established brands such as Lactogen and Cerelac. Increased focus on exports, innovative launches, and
new variants should drive strong growth of c19% for this segment.
Prepared dishes and cooking aids (28% of revenue)

Maggi, (Nestle’s flagship brand) with presence in instant noodles, soups, ketchups and pasta, commands
more than 80% share in the cINR12bn instant noodles market. Competition is increasing in instant
noodles with new players looking at increasing market share. Nevertheless, Maggi, with strong brand
equity and innovative launches, should continue to dominate this category with strong revenue CAGR of
24% over CY09-12E.
Beverages (14% of revenue)

Nestle leads the domestic instant coffee market with Nescafe Classic and Nescafe Sunrise. Growth in
this category has been disappointing (8% CAGR over CY05-09) due to low volume growth in the
domestic coffee market and c5% decline in the export market, especially Russia (44% contribution to
export revenue). With increasing focus on low-priced SKUs and rising presence in Asia and Europe, we
expect the performance of this division to improve.
Chocolate and confectionary (15% of revenue)

With strong brands such as Milky Bar, KitKat, and Munch, Nestle leads in the milk chocolates and wafers
segment. Increasing presence in low-priced SKUs and recent launches like Nestle BarOne and dark
premium chocolates will aid robust c17% revenue growth until CY12E.
Chart 21: Strong product profile with leading brands
Categories Brands Relative market position Competitor brands
EveryDay, Milkmaid, No. 1 in diary whitener and

Milk products Amulya, Amul Light, etc.
Nesvita sweetened condensed milk
Lactogen, Cerelac, No. 1 in baby foods and infant

Nutrition Farex, Amulspray
Nido, Nan formula
Prepared dishes and Maggi noodles, sauces

No. 1 in instant noodles and sauces Knorr, Kissan, Foodles
cooking aids and soups
Tata Coffee, Tata Tea, Bru, Brooke

Beverages Nescafe, Nestea No. 1 in instant coffee
Bond, Amul Kool Café
Kitkat, Milkybar, Bar

Chocolates No. 1 in Wafers and Whites Perk, 5 Star, Amul Milk Chocolate
One, Munch
Confectionary Polo, Eclairs Leading presence in Eclairs Mint-o , Cadbury's Eclairs
High dependence on milk; likely price increases to offset impact on operating margin
Fresh and skimmed milk comprise c45% of total raw material cost for Nestle. Although the company has
established a strong model for sourcing milk directly from farmers, to ensure regular supply economically,
continuing increase in milk prices could put pressure on the company’s operating margins. Nevertheless,
despite increasing competition, we believe that Nestle, with strong and well-established brands, has
strong pricing power and will be able to partially offset any adverse movement in input prices. The
January 07, 2011 63

FMCG Sector Report
company appears well-placed to maintain margins and profitability with sustained brand innovations and
higher pricing interventions.
Chart 71: Milk forms c45% of total input costs Chart 72: Green coffee has witnessed highest inflation
21% 250
35%
200
10%
150
Indexed
100
8%
50
11%
8% -
7%
CY06 CY07 CY08 CY09
Fresh milk and milk concentrate Fresh milk and milk concentrate
Green coffee Green coffee
Sugar Sugar
Vegetable oil Vegetable oil
Skimmed milk powder Skimmed milk powder
Wheat flour
Source: Company Source: Company, PUG Research
Management confident of future growth; Increasing production capacities

Nestle’s manufacturing plants are operating at optimum capacities and it has stepped up its planned
capex to fund its future growth. It will spend cINR17bn for increasing its production capacities across its
existing plants at Samalkha (INR6.5bn), Ponda (INR5bn), Bicholim (INR1.5bn) and Nanjangud (INR4bn),
besides undertaking greenfield unit establishments. This increase in capex (1.8x its combined capex of
INR9.2bn in last 5 years) indicates management’s confidence and optimism about the strong growth
potential in the domestic market.
Low price point strategy driving robust growth at bottom of the pyramid
Nestle’s low price point (LPP) strategy is aimed at making products affordable, drawing new users, and
increasing reach for bottom of the pyramid (BoP) consumers. While LPP products up to INR10 form 40%
of the total domestic consumer market, Nestle earns c27% of revenue (CY07) from products priced at
INR0.5 to INR10. Increasing presence at these price points will enable the company to grab more market
share, which would sustain its strong growth momentum.
Chart 73: INR10 SKU forms the majority of LPPs Chart 74: Strong presence of LPPs across segments
4% 66%
16%
10%
7%
53%
17%
10% 17%
Milk products and nutrition Prepared dishes and cooking aids

INR0.5 1INR INR2 INR5 INR10 Beverages Chocolate and Confectionary
Source: Company Source: Company
January 07, 2011 64

FMCG Sector Report
Financial outlook
Healthy volume growth to drive revenue CAGR of 19%
Low penetration and per-capita consumption, combined with increasing young population and rising
urbanisation, are expected to engender healthy growth in the processed food and beverages industry.
Nestle, the largest company in this space, would achieve a robust revenue CAGR of 19% during CY09-
12E, driven by strong growth in its leading brands and innovative product launches across its portfolio.
Chart 75: Revenue growth to remain healthy Chart 76: Prepared dishes and cooking aid to lead the
95 26 growth…
85 24 15%
75 22
44%
65 20 15%
INR bn
%
55 18
45 16
35 14
25 12
26%
CY06
CY07
CY08
CY09
CY10E
CY11E
CY12E
Milk Products and Nutrition Prepared Dishes and cooking aids

Sales (LHS) YoY Growth (RHS) Beverages Chocolate and confectionery
Source: Company, PUG Research Source: Company
Healthy sales to underpin earnings CAGR of 17%

Food inflation was the key reason for 200bp fall in operating margins over M9CY10. However, strong
brand equity engendering price increases and efficient cost management would help Nestle maintain its
operating margin. But, increase in debt to fund higher capex and higher depreciation would result in
c50bp decline in PAT margins. Nevertheless, we believe robust volume growth will drive 17% earnings
CAGR over CY09-12E.
Chart 77: EBITDA margins to remain stable Chart 78: Higher capex to contract PAT margins by 50bp
20 20.4 12 14
18
10 14
16 20.0
14 13
8
12 19.6 13
INR mn
INR bn
6
%
10
%
12
8 19.2
4
6 12
4 18.8 2 11
2
0 11
0 18.4
CY06 CY08 CY10E CY12E
CY06 CY08 CY10E CY12E
Higher capex to lower return ratios

With increasing capex plans and possible debt-funding, return ratios are expected to decline; we expect
ROE and ROCE at 93% and 112%, respectively, in CY12. Moreover, management has indicated that
increase in capex will also result in lower dividend payout. We expect dividend payout to reduce to 70%
(from c80% in CY09) until CY12. While increase in capex planned over the next 3-4 years will restrict
healthy expansion in return ratios, we expect strong volume growth will offset this impact over a long
term.
January 07, 2011 65

FMCG Sector Report
Valuation
We value the company based on an average of DCF and PER multiple arriving at our target price of
INR3,405, which imples 13% potential downside from the current level. As current valuations of 39x
CY11E EPS capture all the aforementioned positives and do not offer any upside, we initiate coverage
on Nestle with a Sell rating.
PER method
Nestle is one of the fastest-growing FMCG companies with a focus on food and beverage segment.
During low growth period during 2004-06, the stock has traded at the lower end of PER band. However,
as the growth momentum picked up, post the management’s increased focus on bottom of pyramid, the
stock price increased, taking valuations at c50% premium to its one-year forward mean PER. Nestle’s
brands continue to grow robustly and the emerging packaged food industry offers healthy long-term
growth prospects. Hence, we believe 32x PER multiple, a 60% premium ot its historical average, is
justified. We arrive at a fair price of INR3,171 per share implying 32x CY11E EPS.
4,500 35.0
4,000
3,500 30.0
3,000
2,500 25.0
2,000
20.0
1,500
1,000
15.0
500
0 10.0
Aug-02
Aug-04
Aug-06
Aug-08
Aug-10
Jan-03
Jun-03
Jan-05
Jun-05
Jan-07
Jun-07
Jan-09
Jun-09
Mar-04
Mar-06
Mar-08
Apr-02
Oct-03
Oct-05
Oct-07
Apr-10
Nov-09
Dec-10
Apr-02
Oct-05
Oct-07
Apr-10
Aug-02
Nov-03
Aug-04
Aug-06
Aug-08
Nov-09
Aug-10
Dec-10
Jan-03
Jun-03
Jan-05
Jun-05
Jan-07
Jun-07
Jan-09
Jun-09
Mar-04
Mar-06
Mar-08
Price 16x 20x 24x 28x 32x PER Mean + 1 stddev
-1 std dev +2 std dev + 3 std dev

For our DCF valuations, we have factored in a 9.3% cost of equity based on the CAPM model and
assumed a terminal growth rate of 3% to arrive at a terminal value of INR238bn. Accordingly, we arrive at
a fair price of INR3,639 per share.
Beta 0.4
WACC (%)
Equity risk premium (%) 5.0
Cost of equity (%) 9.3 9.0 3,439 3,841 4,405
9.3 3,278 3,639 4,137
Terminal value (INR mn) 238,984
Fair value (INR mn) 350,896 10.0 2,919 3,197 3,568
11.0 2,520 2,719 2,975
Value per share (INR) 3,639
January 07, 2011 66

FMCG Sector Report
Key catalyst
Intensifying competition could hamper pricing power; New players, especially in instant noodles category
(c20% of sales), including Horlicks’ Foodles and ITC’s Sunfeast Yippee!, could restrict Nestle’s ability to
increase prices.
Risks
While we have built-in rising input cost scenario, unprecendented increase in milk and skimmed milk,
which constitute c45% of total raw material cost, could provide downside risk to our estimates.

In line with consensus
Our earnings estimates are more or less in line with consensus expectations.
Difference from consensus

CY10E CY11E CY12E
(%) (%) (%)
Sales (INR mn) 62,127 61,417 1.2 73,391 73,050 0.5 85,899 85,885 0.0
EPS (INR) 84.6 84.0 0.7 99.1 100.4 (1.3) 116.8 115.9 0.8
January 07, 2011 67

FMCG Sector Report
Detailed financials
Nestle: Profit and loss statement
Net sales 51,294 62,127 73,391 85,899
Other expenses (2,455) (2,926) (3,346) (3,889)
EBITDA 10,345 12,239 14,629 17,376
EBITDA Margin (%) 20.2 19.7 19.9 20.2
Depreciation (1,113) (1,299) (1,664) (2,009)
Other income/extraordinary items (48) 406 439 476
EBIT 9,184 11,346 13,405 15,843
Interest (14) (12) (18) (44)
Tax (2,620) (3,181) (3,834) (4,533)
Tax rate (%) 28.6 28.1 28.6 28.7
Net profit 6,550 8,153 9,554 11,266
Adjusted profit 6,976 8,154 9,554 11,266
Nestle: Key ratios

EPS (INR) 72.4 84.6 99.1 116.8
P/E (x) 53.9 46.1 39.3 33.4
RoE (%) 132.3 121.1 105.7 93.0
RoCE (%) 159.0 150.9 129.8 111.9
Dividend yield (%) 1.2 1.4 1.5 1.8
P/BV (x) 64.6 49.1 36.0 27.2
EV/Sales (x) 7.3 6.0 5.1 4.4
EV/ EBIDTA (x) 36.2 30.7 25.7 21.6
January 07, 2011 68

FMCG Sector Report
Nestle: Balance sheet

Sources of funds
Reserves total 4,849 6,684 9,470 12,840
Loans - - 1,000 1,500
Total 6,601 8,436 12,222 16,092
Net block 9,758 12,963 16,599 20,390
Investments 2,033 2,033 2,033 2,033
Inventories 4,987 6,132 7,127 8,297
Sundry debtors 642 808 954 1,117
Cash and bank 1,556 496 1,122 1,433
Provisions 8,423 8,955 9,568 10,149
Total 6,601 8,436 12,222 16,092
Nestle: Cash flow statement

PBT 9,170 11,334 13,387 15,799
Depreciation 927 1,299 1,664 2,009
Change in working capital 1,409 309 476 231
Other non-cash adjustments 7 - - -
Taxes paid (2,676) (3,181) (3,834) (4,533)

Change in investments (1,684) - - -
Other investing cash flow - - - -
Investing cash flow (3,748) (4,504) (5,300) (5,800)
Change in borrowings - - 1,000 500
Dividend paid (5,471) (6,317) (6,768) (7,896)
Net cash generated during year (381) (1,060) 626 311

Cash at beginning of year 1,936 1,556 496 1,122
Cash at the end of year 1,555 496 1,122 1,433
January 07, 2011 69

FMCG Sector Report
Financial summary
Total operating expenses (40,949) (49,888) (58,762) (68,523) Depreciation, Amortisation etc. 927 1,299 1,664 2,009
EBITDA 10,345 12,239 14,629 17,376 Less: Changes in W.C. 1,416 309 476 231
Depreciation (1,113) (1,299) (1,664) (2,009) Tax (2,676) (3,181) (3,834) (4,533)
Interest expenses (14) (12) (18) (44) Capex (2,064) (4,504) (5,300) (5,800)
Other income 378 407 439 476 Investments (1,684) - - -
Profit before tax and extraordinary 9,596 11,335 13,387 15,799 Investing cash flow (3,748) (4,504) (5,300) (5,800)
Extraordinary income (426) (1) 0 0 Increase in equity - - - -

Debt raised/ (repaid) - - 1,000 500
Dividends (5,471) (6,317) (6,768) (7,896)
Provision for tax (2,620) (3,181) (3,834) (4,533)
Net profit 6,550 8,153 9,554 11,266
Net change in cash (381) (1,060) 626 311
Reported PAT 6,550 8,153 9,554 11,266
Closing cash balance 1,555 496 1,122 1,433
Adjusted profit 6,976 8,154 9,554 11,266
Key ratios (%)

Year ending 31 December CY09 CY10E CY11E CY12E
Year ending 31 December CY09 CY10E CY11E CY12E
Diluted EPS (INR) 72.4 84.6 99.1 116.8
Liabilities
Equity capital 964 964 964 964
ROE 132.3 121.1 105.7 93.0
ROCE 159.0 150.9 129.8 111.9
Borrowings 0 0 1,000 1,500
Net debt/Equity (26.8) (6.5) (1.2) 0.5
Total liabilities 6,601 8,436 12,222 16,092
Growth
Revenues 18.6 21.1 18.1 17.0
Assets
EBITDA 19.8 18.3 19.5 18.8
Gross block 16,408 20,708 25,508 30,308
EBIT 19.3 18.1 18.1 18.2
Depreciation (7,446) (8,745) (10,409) (12,418)
Net profit 23.5 16.9 17.2 17.9
Net block 8,962 11,963 15,099 17,890
Diluted EPS 23.5 16.9 17.2 17.9
Capital WIP 796 1,000 1,500 2,500 Margins
Total fixed assets 9,758 12,963 16,599 20,390 EBITDA 20.2 19.7 19.9 20.2
Investments 2,033 2,033 2,033 2,033 EBIT 18.7 18.3 18.3 18.4
Other non-current assets 468 468 468 468 Adjusted Profit 13.6 13.1 13.0 13.1
Inventories 4,987 6,132 7,127 8,297
Sundry debtors 642 808 954 1,117
Cash equivalents 1,556 496 1,122 1,433 Valuation ratios
Other current assets 1,380 1,656 1,957 2,378 Year ending 31 December CY09 CY10E CY11E CY12E
Net current assets (5,658) (7,027) (6,878) (6,798) EV/EBITDA (x) 36.2 30.7 25.7 21.6
January 07, 2011 70

FMCG Sector Report
Rating System (In Absolute Terms)

BUY = Expected to give a return of 10% or more over a 12 months' time frame.
HOLD = Expected to give a return of -10% to +10% over a 12 months' time frame.
SELL = Expected to give a return of -10% or lower over a 12 months' time frame
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FMCG l India Research l January 07, 2011

Rising costs and high valuations provide discomfort

 According to OECD-FAO, soft commodity prices are expected to increase

 We expect higher input costs will result in c140bp contraction in gross

 Increasing competition should limit pricing power as well as result in

 Historically, FMCG index mirrors the movement in food inflation and

 Valuations are at an all-time high. We expect HUL and Marico to be worst

 Higher agricultural production, drop in food prices and higher demand

Competitive landscape is intensifying… 12

Stock performance affected by higher food inflation and intensive competition 14

January 07, 2011 2

Rising soft commodity prices to increase concerns on profitability…

… which, along with higher competition will restrict margin expansion

January 07, 2011 3

GSK Consumer: Best play on domestic food and beverage space

HUL: High costs to put pressure on margins

Marico: High copra prices to result in consensus downgrade

Key risks to our assumption

January 07, 2011 4

January 07, 2011 5

Input cost inflation a key challenge

Soft commodity prices to increase in long term…

Chart 1: FAO’s food price index at all-time high

January 07, 2011 6

OCED-FAO joint assessment and price forecasts

15,000 INR/t 15,000

Source: OECD-FAO Source: OECD-FAO

Source: OECD-FAO Source: OECD-FAO

January 07, 2011 7

Untimely rains likely to impact production adversely

Table 1: Estimates for major Kharif crops vs. historical production

Chart 10: Weekly food inflation in India (2010)

January 07, 2011 8

Increasing packaging costs could further impact margins

Source: RIL Source: RIL, Bloomberg

January 07, 2011 9

January 07, 2011 10

Chart 21: Indexed prices

Source: Bloomberg, Mospi, PUG Research

Chart 22: Indexed prices

Source: Bloomberg, PUG Research

Chart 23: Indexed prices

HDPE LAB Crude oil

January 07, 2011 11

Stock performance to mirror food inflation and competitive

Competitive landscape is intensifying…

Table 4: Competitive activities increasing with new product launches

January 07, 2011 12

… leading to pricing pressure and higher A&P spends

Chart 24: Higher competition to lead to increase in A&P spends

Average FY05-10 FY13E

Table 5: Absolute market leaders

January 07, 2011 13

Stocks performance affected by higher food inflation and intensive competition

Food inflation (YoY%) (LHS) Food inflation (YoY%) (LHS)

HUL FMCG Index Colgate FMCG Index

January 07, 2011 14

Table 6: Assessment matrix

January 07, 2011 15

Valuation and risks

Table 7: Valuations at all-time high

Our valuation methodology