Professional Documents
Culture Documents
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
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
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.
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.
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.
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.
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.
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
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.
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.
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
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
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.
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
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)
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
Source: Companies, PUG Research
200
150
100
50
0
2QFY09
3QFY10
1QFY09
3QFY09
4QFY09
1QFY10
2QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Mentha Oil Kardi Oil Sunflower Oil Palm Oil
250
200
150
100
50
-
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Wheat Sugar Milk Copra Barley
2QFY09
3QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
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.
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.
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.
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
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
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
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.
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.
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
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
0
Laundry
Shampoo
Deodrants
Toothpaste
Skin care
Source: Company presentation Note: Per capita consumption data is for 2006. Source: Company presentation
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
Toothpowder
Health supplements
100
50
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11BE
Company section
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.
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
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Dec-10
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
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100
0 10
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PER Mean + 1 stddev
Price 5x 10x 15x 20x 25x -1 std dev +2 std dev + 3 std dev
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.
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
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)
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)
Total assets 3,494 4,360 4,966 5,666 Dividend yield (%) 2.3 2.7 3.0 3.5
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
Market Cap (USD mn) 3,963
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%
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
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%
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.
800
600 30
400 20
200
0 10
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Revenue (LHS) YoY Growth (RHS)
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.
20
%
40
18
35
30 16
25 14
20 12
FY08 FY09 FY10 FY11E FY12E FY13E
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
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.
Chart 43: One-year forward PER bands Chart 44: One-year forward mean PER
130 45.0
110 40.0
35.0
90
30.0
70
25.0
50 20.0
30 15.0
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Table 10: Calculation based on DCF parameters Table 11: Sensitivity analysis
Risk free rate (%) 7.5
Terminal growth (%) 2.0 3.0 4.0
Beta 0.5
Equity risk premium (%) 5.0 WACC (%)
Cost of equity (%) 9.8
9.5 97 107 120
Terminal growth rate (%) 3.0
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
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.
Detailed financials
Dabur : Consolidated profit and loss statement
FY ending Mar, in INR mn FY10 FY11E FY12E FY13E
Net sales 33,914 42,071 52,698 59,960
Raw material consumed (15,507) (20,127) (25,354) (28,730)
Employee expenses (2,847) (3,408) (4,269) (4,857)
Selling, general & administrative exp (8,609) (10,170) (12,581) (14,376)
Other expenses (709) (749) (862) (964)
Total expenditure (27,673) (34,455) (43,066) (48,927)
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)
Profit before tax 6,009 7,213 9,007 10,386
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
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 33,914 42,071 52,698 59,960 Profit before tax 6,009 7,213 9,007 10,386
Total operating expenses (27,673) (34,455) (43,066) (48,927) Depreciation, Amortisation etc. 397 571 749 837
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)
EBIT 5,738 6,921 8,700 9,982 Net operating cash flow 5,219 6,289 6,938 8,275
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
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
Market Cap (USD mn) 2,800
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
Stock Performance (%)
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
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.
Chart 45: One-year forward PER bands Chart 46: One-year forward mean PER
500 35
450
30
400
25
350
300 20
250 15
200
10
150
100 5
50 0
0
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Dec-10
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.
Detailed financials
GCPL: Consolidated profit and loss statement
FY ending Mar, in INR mn FY10 FY11E FY12E FY13E
Net sales 20,412 36,683 45,274 51,520
Raw material Consumed (9,463) (17,627) (21,925) (25,007)
Employee expenses (1,518) (3,081) (3,758) (4,225)
Selling, general & administrative exp (3,524) (6,816) (8,416) (9,562)
Other expenses (1,829) (2,194) (2,508) (2,826)
Total expenditure (16,334) (29,719) (36,607) (41,620)
EBITDA 4,078 6,965 8,667 9,900
EBITDA margin (%) 20.0 19.0 19.1 19.2
Depreciation (236) (431) (633) (690)
Other income/extraordinary items 468 648 282 310
EBIT 4,310 7,181 8,316 9,520
Interest (111) (512) (575) (524)
Profit before tax 4,199 6,670 7,742 8,996
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
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 20,412 36,683 45,274 51,520 Profit before tax 4,199 6,670 7,742 8,996
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
Net block 5,736 29,950 30,287 30,449 Diluted EPS 64.0 38.7 23.7 16.2
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
Cash equivalents 3,722 1,709 2,452 5,052
Valuation ratios
Other current assets 2,247 3,224 3,733 4,068
Year ending 31 March FY10 FY11E FY12E FY13E
Total current assets 9,765 11,344 13,884 17,836
Diluted P/E (x) 35.5 25.6 20.7 17.8
Sundry creditors 1,455 2,546 3,069 3,462 Price/BV(x) 12.6 7.3 6.2 5.2
Other current liabilities 4,073 6,156 7,267 8,135 Market cap/sales (x) 5.6 3.1 2.5 2.2
Total current liabilities 5,528 8,702 10,336 11,598 EV/sales (x) 6.0 3.8 3.0 2.6
Net current assets 4,237 2,642 3,548 6,238 EV/EBITDA (x) 30.2 20.1 15.9 13.5
Total Assets 9,982 32,642 33,885 36,737 Dividend yield (%) 1.0 1.6 1.9 2.2
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
Market Cap (INR bn) 97
GlaxoSmithKline Consumer Healthcare (GSK Consumer) is an Indian group company of
Market Cap (USD mn) 2,135
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.
1900 5500 space and robust growth in its flagship brands, we expect this segment to contribute c8% to
(INR)
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.
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
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
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.
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)
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
%
%
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)
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.
Chart 53: One-year forward PER bands Chart 54: One-year forward mean PER
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
Table 15: Calculation based on DCF parameters Table 16: Sensitivity analysis
Risk free rate (%) 7.5 Terminal growth (%) 2.0 3.0 4.0
Beta 0.6
Equity risk premium (%) 5.0 WACC (%)
Cost of equity (%) 10.3 10.0 2,937 3,183 3,512
Terminal growth rate (%) 3.0
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
Outstanding shares (mn) 42
Value per share (INR) 3,052 11.5 2,436 2,587 2,779
Source: PUG Research Source: PUG Research
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.
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
Raw material Consumed (7,106) (8,770) (10,644) (12,652)
Employee expenses (2,007) (2,328) (2,747) (3,242)
Selling, general & administrative exp (5,865) (7,106) (8,525) (10,071)
Other expenses (1,129) (1,337) (1,618) (1,885)
Total expenditure (16,107) (19,541) (23,534) (27,849)
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)
Profit before tax 3,538 4,344 5,313 6,381
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
Issue of equity - - - -
Change in borrowings - - - -
Dividend paid (886) (1,082) (1,328) (1,574)
Financing cash flow (886) (1,082) (1,328) (1,574)
Financial summary
Profit and loss statement (INR mn) Cash flow statement (INR mn)
Year ending 31 December CY09 CY10E CY11E CY12E Year ending 31 December CY09 CY10E CY11E CY12E
Income from operations 19,215 23,201 28,074 33,290 Profit before tax 3,538 4,344 5,313 6,381
Total operating expenses (16,107) (19,541) (23,534) (27,849) Depreciation, Amortisation etc. 348 302 357 454
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)
Interest expenses (43) (30) (30) (30)
Investments - - - -
Other income 893 1,117 1,279 1,504
Investing cash flows (409) (1,322) (800) (650)
Profit before tax and extraordinary 3,538 4,344 5,313 6,381
Increase in equity - - - -
Extraordinary income - - - -
Debt raised/ (repaid) - - - -
Profit before tax 3,538 4,344 5,313 6,381
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
Closing cash balance 8,198 9,342 11,657 14,727
Total Liabilities 9,179 10,986 13,190 15,859 Dividend payout 38.0 37.5 37.6 37.1
Growth
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
No. of shares (mn) 2182 Company background
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.
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)
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
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
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
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
EBITDA (LHS) EBITDA margin (RHS) PAT (LHS) PAT margin (RHS)
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.
Chart 62: One-year forward PER bands Chart 63: One-year forward mean PER
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
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.
Detailed financials
HUL: Profit and loss statement
FY ending Mar, in INR mn FY10 FY11E FY12E FY13E
Net sales 175,238 190,767 214,196 239,438
Other operating income 2,421 2,735 3,064 3,370
Raw material Consumed (75,213) (82,471) (93,510) (104,366)
Employee expenses (9,363) (10,299) (11,329) (12,462)
Selling, general & administrative exp (39,722) (46,068) (51,743) (57,807)
Other expenses (25,456) (27,271) (30,705) (34,229)
Total expenditure (149,754) (166,109) (187,287) (208,864)
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)
Profit before tax 28,064 26,893 29,482 33,483
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
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 177,659 193,502 217,259 242,808 Profit before tax 28,064 26,893 29,482 33,483
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)
Interest expenses (70) (10) (10) (10)
Investments (9,315) - - -
Other income 1,076 1,629 1,792 1,971
Investing cash flows (14,336) (2,774) (2,709) (2,756)
Profit before tax and extraordinary 27,071 26,893 29,482 33,483
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
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
Dividend payout 78.8 85.5 89.2 88.3
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
Marico Ltd.
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.
Valuations at 24x FY12E EPS appear rich and hence we recommend Sell on
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
Stock Performance (%)
consumers.
52-week high/low INR145/92
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
Shareholding Pattern
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%
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
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)
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.
40 25
20
30
INR bn
15
%
20
10
10 5
0 -
FY08 FY09 FY10 FY11E FY12E FY13E
Sales (LHS) YoY Growth (RHS)
Source: Company, PUG Research
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
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
EBITDA (LHS) EBITDA margin (RHS) PAT (LHS) PAT margin (RHS)
Source: Company, PUG Research Source: Company, PUG Research
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.
Chart 69: One-year forward PER bands Chart 70: One-year forward mean PER
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
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
Table 19: Calculation based on DCF parameters Table 20: 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 (%) 9.6 9.0 114 126 144
Terminal growth rate (%) 3.0
Terminal Value (INR mn) 45,054 9.6 103 114 128
Fair value (INR mn) 69,731 10.5 97 106 117
Outstanding shares (mn) 614
Value per share (INR) 114 11.5 90 97 107
Source: PUG Research Source: PUG Research
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.
Detailed financials
Marico: Consolidated profit and loss statement
FY ending Mar, in INR mn FY10 FY11E FY12E FY13E
Net sales 26,608 31,361 35,554 39,860
Raw material consumed (13,021) (16,087) (18,270) (20,470)
Employee expenses (1,901) (2,186) (2,449) (2,694)
Selling, general & administrative exp (6,058) (6,900) (7,855) (8,830)
Other expenses (1,876) (2,113) (2,355) (2,606)
Total expenditure (22,856) (27,288) (30,929) (34,600)
EBITDA 3,752 4,073 4,625 5,260
EBITDA margin (%) 14.1 13.0 13.0 13.2
Depreciation (601) (554) (638) (704)
Other income/extraordinary items 85 252 313 389
EBIT 3,236 3,771 4,300 4,945
Interest (257) (357) (349) (332)
Profit before tax 2,979 3,415 3,951 4,613
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
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 26,608 31,361 35,554 39,860 Profit before tax 2,979 3,415 3,951 4,613
Total operating expenses (22,856) (27,288) (30,929) (34,600) Depreciation, Amortisation etc. 390 494 618 684
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)
EBIT 3,151 3,520 3,987 4,556 Net operating cash flow 1,680 2,458 3,061 3,642
Interest expenses (257) (357) (349) (332) Capex (1,275) (1,456) (728) (971)
Profit before tax and extraordinary 3,077 3,415 3,951 4,613 Investing cash flows (1,981) (1,456) (728) (971)
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
Closing cash balance 1,115 1,479 2,600 3,916
Adjusted profit 2,452 2,914 3,217 3,759
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
No. of shares (mn) 96 Company background
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.
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.
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.
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
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
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%
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
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
EBITDA (LHS) EBITDA margin (RHS) PAT (LHS) PAT margin (RHS)
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.
Chart 79: One-year forward PER bands Chart 80: One-year forward mean PER
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
Table 22: Calculation based on DCF parameters Table 23: Sensitivity analysis
Risk free rate (%) 7.5 Terminal growth (%) 2.0 3.0 4.0
Beta 0.4
WACC (%)
Equity risk premium (%) 5.0
Cost of equity (%) 9.3 9.0 3,439 3,841 4,405
Terminal growth rate (%) 3.0
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
Outstanding shares (mn) 96
11.0 2,520 2,719 2,975
Value per share (INR) 3,639
Source: PUG Research Source: PUG Research
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.
Detailed financials
Nestle: Profit and loss statement
FY ending Dec, in INR mn CY09 CY10E CY11E CY12E
Net sales 51,294 62,127 73,391 85,899
Raw material consumed (24,484) (30,614) (36,257) (42,301)
Employee expenses (4,324) (4,583) (5,317) (6,167)
Selling, general & administrative exp (9,686) (11,765) (13,842) (16,166)
Other expenses (2,455) (2,926) (3,346) (3,889)
Total expenditure (40,949) (49,888) (58,762) (68,523)
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)
Profit before tax 9,170 11,334 13,387 15,799
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
Issue of equity - - - -
Change in borrowings - - 1,000 500
Dividend paid (5,471) (6,317) (6,768) (7,896)
Financing cash flow (5,471) (6,317) (5,768) (7,396)
Financial summary
Profit and loss statement (INR mn) Cash flow statement (INR mn)
Year ending 31 December CY09 CY10E CY11E CY12E Year ending 31 December CY09 CY10E CY11E CY12E
Income from operations 51,294 62,127 73,391 85,899 Profit before tax 9,170 11,334 13,387 15,799
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)
EBIT 9,232 10,940 12,966 15,367 Net operating cash flow 8,837 9,761 11,694 13,507
Interest expenses (14) (12) (18) (44) Capex (2,064) (4,504) (5,300) (5,800)
Profit before tax and extraordinary 9,596 11,335 13,387 15,799 Investing cash flow (3,748) (4,504) (5,300) (5,800)
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