Things To Look in FMCG Sector

Household & personal products / India 6 June 2012
4Q FY12: good results, but high valuations cap upside

Growth of 19% YoY in top line and 23% YoY in net earnings in 4Q FY13 revenue growth to moderate given high base; modest gross margin expansion amid cost pressures We like ITC for its earnings visibility and Dabur as a potential turnaround story (both rated Outperform)
India Consumer Sector
How do we justify our view?
Percy Panthaki
(91) 22 6622 1063 percy.panthaki@in.daiwacm.com
Mihir Shah
While our FY13-14 earnings (91) 22 66221020 forecasts are slightly lower than United Sprits missed on its mihir.shah@in.daiwacm.com operating profit and heavily in terms those of the consensus, unlike the consensus, we believe margin of its net profit. Godrej Consumer What's new expansion across the sector will be Products (GCPL) reported revenue We analysed the 4Q FY12 results for and operating-profit that were in lower-than-expected over this the consumer staples companies and, line, but its net profit was higher, period. In spite of rolling over our as we expected, most were good. The while Colgate-Palmolive Indias valuations to March 2014 (which companies we cover saw strong (Colgate) revenue was in line, but its many analysts do not yet seem to weighted-average top-line growth of operating and net profit were higher. have done), we find it difficult to 19% YoY for the quarter, and 18.7% justify the significant upside to A&P spend across the sector was YoY growth for FY12. current share prices. higher, due notably to GCPL and Marico. In FY13, we expect gross The introduction of the new margin expansion to remain modest Key stock calls New Prev. schedule 6 accounting requirements (on cost pressures from Rupee ITC (ITC IN) resulted in most of the companies depreciation) and organic revenue Rating Outperform Outperform we cover restating last years growth to show a marginal Target price Rs251.00 Rs251.00 numbers, making comparisons with slowdown due to a high base effect Up/downside 11.1% our forecasts difficult. While the in FY12. Dabur India (DABUR IN) sectors gross margin expansion of Rating Outperform Outperform What we recommend 31bps seemed higher than our (flat) Target price Rs118.00 Rs118.00 expectations, adjusting for the We do not have any Buy calls in the Up/downside 15.5% restatement, it was in line with our consumer staples space, as we Nestle India (NEST IN) forecast. The adjusted net profit believe the upside for most of the Rating Outperform Outperform growth of 22.8% was higher than Target price Rs5,114.00 Rs5,114.00 stocks under coverage will be 12.8% that reported for 3Q FY12 and beat modest over our forecast period. We Up/downside Marico (MRCO IN) our forecast, although the sectors prefer ITC as it has provided clear Outperform Outperform reported operating profit was in line earnings visibility with all regulatory Rating Target price Rs187.00 Rs187.00 with our number. risks out in the open for this fiscal Up/downside 11.1% year, and consequently low risk for United Spirits (UNSP IN) What's the impact the next 2-3 quarters. Also, its Rating Sell Sell While the numbers for the sector valuation provides comfort on a Target price Rs463.00 Rs463.00 were in line, performances across relative basis. We also like Dabur as Up/downside (21.1)% the companies we cover were varied. a potential turnaround story, Source: Daiwa forecasts Note: Please refer to page 3 for details. The three large companies, namely, although earnings visibility is low Hindustan Unilever (HUL), ITC and and there are risks, such as a
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
Asian Paints, reported decent top line and bottom line numbers. However, some of the other companies, such Dabur India (Dabur), missed our operatingprofit forecasts, while Marico and Nestle India (Nestle) missed our top-line and profit forecasts.
contraction in operating margins. We advise investors to sell United Spirits as we expect Bloombergconsensus earnings downgrades for FY13 on the back of poor FY12 numbers.
How we differ

6 June 2012
How do we justify our view?

Growth outlook Valuation Earnings revisions
Growth outlook
We believe the India consumer staples space is poised for double-digit percentage revenue and earnings growth, not just for the next three years, but for several more years after that. We forecast a revenue CAGR of 17.3% for FY11-14 for the companies we cover, driven by a good combination of sales-volume growth and price increases. We forecast an EPS CAGR of 18.7% over the same period. While competition is intense, the effects are already in the basis of comparison and should not affect top-line or bottom-line growth adversely. Cost inflation, too, is an issue, but is likely to be dealt with by a combination of price increases and cuts in ad spend.
India Consumer Sector: net revenue growth and EPS growth

28%
23%
18%
13%
8% FY09 FY10 FY11 Net sales growth

Source: Companies, Daiwa forecasts
FY12E
FY13E EPS growth
FY14E
Valuation
Valuations are currently higher than their historical levels (see table on the right), and many of the stocks we cover have performed well over the past 3-6 months. We could see a moderation in PERs, thereby resulting in positive but unattractive returns over the medium term. Given our expectation of high-teens percentage EPS growth for most of the companies for FY13, negative share-price returns are unlikely, even on the back of a PER contraction. If PERs contract, this could present an opportunity to accumulate given that we believe the sectors overall growth story remains largely intact.
India Consumer Sector: average PERs over different periods

Average PER (x) 3 Years 2 Years 3 Months 22.2 23.3 24.9 26.5 26.4 29.3 32.5 34.4 35.4 23.7 25.8 24.8 26.0 26.8 23.9 21.3 23.0 24.9 25.8 27.6 29.8 46.9 51.3 24.2 25.4 25.8 25.7 24.9 25.9 26.7
Company ITC HUL Nestle Asian Paints Dabur Godrej Cons Colgate United Spirits Marico Coverage universe
5 Years 21.2 24.9 28.8 22.1 23.9 19.2 22.3 N.M 22.7 23.7
Current 24.7 29.1 34.3 26.7 22.8 26.7 30.4 20.5 24.8 26.6
Source: Companies, Bloomberg, Daiwa
Earnings revisions
The opposite chart shows the percentage difference between our EPS forecasts and those of the Bloomberg consensus (blue bars), and how the consensus forecasts have changed over the past 12 months (mustard squares). We are slightly below the consensus for the sector as a whole, because unlike the consensus, we believe margin expansion in FY13 will be less than expected. We believe significant upgrades are unlikely given sticky raw-material costs and A&P spend driven by competitive pressure.
Changes in consensus EPS, and Daiwa vs. consensus comparison (FY13)

15% 10% 5% 0% (5%) (10%) (15%) (20%) (25%) (30%) 20% 10% 0% (10%) (20%) (30%) (40%) (50%)
ITC
Asian Paints
Colgate
Daiwa vs consensus EPS (LHS)

Source: Bloomberg, Daiwa forecasts
% change in consensus EPS in last 12 months
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United Spirits
Godrej Con.
Marico
HUL
Nestle
Dabur

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Executive summary
4Q FY12: good results, but high valuations cap upside
Investment thesis
Despite competition and inflation pressure, we expect the India Consumer Sector to maintain its trajectory of top- and bottom-line growth in the short, medium and long run. While we cannot rule out a couple of weak quarters in terms of business performance, we believe any weakness in performance and share prices would be short lived. As we see it, the demographics in favour of India the changing income pyramid, falling dependency ratios and urbanisation will drive per capita consumption, which is at very low levels in several categories. We believe the risk profile is moderate intense competition seems to be the new normal, and cost pressures exist but could be mitigated by price increases. While an economic slowdown could be detrimental, we believe this sector would suffer the least relative to others.
We see steady double-digit percentage consumption growth over decades rather than years, driven by favourable macro factors, but valuations are currently a concern
Valuation
The sector has given a return of 21.1% over the past 12 months, versus the SENSEX return of -13.1%. But, EPS revisions (upward and downward) during the same timeframe have been of a low/mid-single-digit percentage, and are among the least-pronounced of any sector. Valuations are currently higher than their averages over the past 5 years (justified only in part by the increased investor confidence in their long-term revenue-growth prospects) and, in our view, are not sustainable. We think PER contractions are on the cards, which could result in lacklustre stock returns in the medium term, in spite of EPS growth in the high teens.
Profit outlook
We forecast a robust revenue CAGR of 17.3% for FY11-14, boosted by price increases in FY12 and by sales volume in FY13-14. While most analysts (including us) are building in gross-margin expansion in FY13, commodity prices up to now have been sticky and A&P spend could remain high due to competitive pressure. We forecast an EPS CAGR of 18.7% for the sector for FY11-14.
Key stock calls

EPS (local curr.) Share Company Name ITC Dabur India Nestle India Marico United Spirits Hindustan Unilever Godrej Consumer Products Asian Paints Colgate-Palmolive India
Source: Daiwa forecasts
Rating New Outperform Outperform Outperform Outperform Sell Hold Hold Hold Prev. Outperform Outperform Outperform Outperform Sell Hold Hold Hold
Target price (local curr.) New 251.00 118.00 5,114.00 187.00 463.00 420.00 508.00 3,358.00 1,048.00 Prev. % chg 251.00 0.0 118.00 5,114.00 187.00 463.00 420.00 508.00 3,358.00 1,048.00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 New 7.830 3.653 123 5.327 12.543 12.096 17.278 98.851 32.557
FY1 Prev. % chg 7.830 0.0 3.653 123 5.327 12.543 12.096 17.278 98.851 32.557 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 New 9.145 4.395 147 6.615 25.556 13.994 20.029 123 37.771
FY2 Prev. % chg 9.145 0.0 4.395 147 6.615 25.556 13.994 20.029 123 37.771 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Stock code ITC IN DABUR IN NEST IN MRCO IN UNSP IN HUVR IN GCPL IN APNT IN CLGT IN
Price 225.90 102.15 4,535.25 168.35 586.50 407.30 574.70 3,718.95
1,142.95 Underperform Underperform
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Table of contents Results analysis for 4Q FY12 ........................................................................................................... 5 Top-line dynamics ........................................................................................................................ 7 Gross-profit growth and margins ................................................................................................. 9 Commodity cost trends ................................................................................................................ 11 Operating expenses..................................................................................................................... 13 Profit ........................................................................................................................................... 15
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6 June 2012
Results analysis for 4Q FY12

The companies under our coverage reported good 4Q FY12 results, with their top lines in step with forecasts and their bottom lines slightly ahead of forecasts.
4Q FY12 results: actual vs. estimates (coverage universe)
4Q FY12 Sales - growth YoY Gross-margin - change YoY Ad spend as a % of sales change YoY EBITDA margin - change YoY EBITDA - growth YoY Adjusted net profit - growth YoY Weighted average Daiwa forecast Actual 18.5% 19.0% -3bps 31bps -9bps 34bps 20.4% 17.9% 14bps 28bps 20.7% 22.8% Simple average Daiwa forecast Actual 20.9% 20.8% -17bps 69bps 57bps 19bps 24.0% 13.4% 90bps 6bps 21.5% 13.6%
While the sector results were in line with our forecasts, at the company level, they were varied. In terms of the top line, five of the companies we cover reported revenue that was higher than our forecast and four showed revenue that was lower. At the net profit level, six companies were higher than our forecasts and three were lower. The three large companies (ie, HUL, ITC and Asian Paints) reported both decent top line and bottom line numbers. However, some of the other companies, such as Dabur, missed our operating-profit forecasts, while Marico and Nestle missed on our top line and profit forecasts. United Spirits missed our operating-profit forecast and was well below our net-profit forecast. GCPLs reported revenue and operating profit were in line, but its net profit was higher than we forecast. Meanwhile, Colgates revenue was in line with our forecast, but its operating and net profit were higher. A&P spend across the sector was higher, due notably to GCPL and Marico. The FY12 net profit growth for the sector (weighted average) was 19.2% YoY, due to robust net profit growth for the large companies, such as ITC and HUL, which was above trend. We believe EPS growth for the sector in the future could cool off marginally as one-off factors, such as no tax hikes (for ITC) and heavy price increases (for HUL), are unlikely to be repeated in FY13. The sector is trading at an all-time high PER currently, and we believe EPS will have to surprise on the upside in order to provide meaningful share-price upside. However, we believe this would be difficult as the companies ability to raise prices aggressively appears to have been exhausted, and input costs and competitive intensity are not diminishing.
Source: Companies, Daiwa forecasts
Due to the restatement of figures on account of the introduction of new schedule 6 accounting requirements, comparisons between the actual numbers and our forecasts for certain P&L line items are not that accurate. However, ad spend for the sector was marginally higher than our forecast, and while the sectors gross-margin expansion beat our estimate for the quarter, much of it was due to the restatement of figures. There was no sign of the sector top line slowing down in 4Q, although there were some instances of it being lower than our forecasts. Sales-volume growth and price contributed equally to the top-line growth over the quarter. As we move into future quarters in FY13, price increases are likely to contribute less to revenue growth.
4Q FY12 results snapshot vs. Daiwa estimates and consensus
(Rs m) Companies ITC HUL Nestle Asian Paints Dabur Godrej Cons Colgate United Spirits Marico Actual 68,614 56,605 20,475 25,387 13,636 13,230 6,859 18,627 9,177 Net sales Daiwa Variance forecast Consensus (act/for) 67,432 65,307 1.8% 56,832 56,871 -0.4% 21,539 21,750 -4.9% 23,981 23,887 5.9% 13,299 13,445 2.5% 13,193 13,397 0.3% 6,894 6,959 -0.5% 19,163 18,502 -2.8% 9,342 9,493 -1.8% Variance (act/cons) 5.1% -0.5% -5.9% 6.3% 1.4% -1.2% -1.4% 0.7% -3.3%
Actual 22,634 8,334 4,657 3,827 2,244 2,493 1,699 1,951 1,137
EBITDA Daiwa Variance forecast Consensus (act/for) 22,388 23,067 1.1% 8,289 8,213 0.5% 4,841 4,672 -3.8% 3,415 3,446 12.0% 2,374 2,243 -5.5% 2,528 2,554 -1.4% 1,597 1,552 6.3% 2,621 2,303 -25.6% 1,242 1,188 -8.4%
Variance (act/cons) -1.9% 1.5% -0.3% 11.0% 0.0% -2.4% 9.5% -15.3% -4.2%
Actual 16,144 6,636 2,845 2,595 1,705 1,727 1,308 343 714
Adjusted PAT Daiwa Variance forecast Consensus (act/for) 15,151 15,236 6.6% 6,421 6,545 3.3% 3,055 2,970 -6.9% 2,179 2,199 19.1% 1,641 1,614 3.9% 1,619 1,731 6.6% 1,197 1,246 9.2% 694 595 -50.5% 803 765 -11.1%
Variance (act/cons) 6.0% 1.4% -4.2% 18.0% 5.7% -0.3% 5.0% -42.3% -6.6%
Source: Companies, Bloomberg, Daiwa
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ITCs results were marginally better than we expected: revenue growth, at 17.6% YoY, was higher than our forecast of 15.5%. Net profit growth of 26% YoY beat our forecast of 18.2% and the Bloombergs 18.9% YoY. While segmental profit was in line with our forecast, it was mainly other income which was higher than we expected; and this led to the betterthan-expected bottom line numbers. The performance of the cigarette division was in line with our expectations, with 4% YoY sales-volume growth and 19.5% YoY EBIT growth. However, the FMCG business, with a lower-than-expected loss, was the main positive surprise and the hotels business, with declining top line and EBIT, was the main negative surprise. HULs numbers were slightly above our forecasts. While revenue growth of 16% YoY was in line with our forecast, sales growth for the domestic consumer business, at 20.5% YoY, was higher than we expected. The adjusted net profit grew by 29% YoY, and was 3% above our forecast. Higher-than-expected revenue for the soap and detergent business drove the positive surprises in the top and bottom lines. The gross margin declined by 72bps YoY versus our flat forecast, and ad spend (as % of sales), at 12.2%, was in line with our forecast of 12%, resulting in adjusted EBITDA growth of 35% YoY versus our forecast of 28.5%. Reported net profit grew by 29% YoY, while the adjusted net profit (for the demerger of the exports business) was up 33% YoY. Nestles revenue, which rose by 13% YoY, was 4.9% lower than our forecast and 5.9% lower than that of the consensus. The net profit of Rs2,757m was 9.7% lower than our forecast and 7.1% lower than that of the consensus. The adjusted net profit grew by 9.2% YoY. The gross margin increased by 300bps versus our forecast of 129bps. While the EBITDA margin expanded by 121bps, which was higher than our estimate, EBITDA growth was 19.5% YoY, lower than our forecast of 24.2% YoY, mainly because of slow top-line growth. Asian Paints reported a good set of numbers that beat both our forecasts and those of the consensus in terms of both the top and bottom lines. Net revenue for the quarter grew by 29.5% YoY, above our and the consensus forecast of about 22% YoY growth. The gross margin contracted by 114bps, marginally below our forecast of 136bps YoY. However, gross profit grew by 25.9% YoY, above our forecast of 18% YoY growth, due to the higher revenue growth. The EBITDA margin expanded by 9bps versus our forecast of a 48bp contraction. The expansion was due to improved operating leverage. The EBITDA grew by 30.2% YoY, well above our forecast of 18% -6-
YoY growth. Other income increased by 148.8% YoY, resulting in profit before tax (PBT) rising by 37.1% YoY and PAT by 39.5% YoY, higher than our and the consensus forecast for PAT growth of about 17-18% YoY. Daburs revenue, up 23% YoY, beat our forecast by 2.5% and that of the consensus by 1.2%. Net profit, which rose by 16% YoY, was 3.9% higher than our forecast and 5.7% higher than that of the consensus. However, EBITDA, which increased by 3.3% YoY, was 5.5% below our forecast and only 0.1% above that of the consensus. The gross margin disappointed, down 319bps YoY, 90bps lower than our forecast. The gross-margin contraction and increased ad spend led to an overall decline in the EBITDA margin of 314bps (491bps for the standalone business) and resulted in the EBITDA growing by just 3.3% YoY (down 7.7% YoY for the standalone business). A reduction in interest costs (reversal of unrealised forex losses) and a lower effective tax rate resulted in the net profit growing by 16% YoY (standalone 2.7% YoY). Godrej Consumer reported consolidated net revenue growth for the quarter of 30.9% YoY, in line with our forecast of 32% YoY. The gross profit margin expanded by 250bps YoY, but this was due to the restatement of the previous years figure. The gross profit itself was in line with our forecast. The EBITDA margin grew by 119bps YoY, and EBITDA growth was 40% YoY. The EBITDA was in line with our estimate. PBT, before adjusting for exceptional items, grew by 28.4% YoY, and was about 3% higher than our forecast. The adjusted net profit, at Rs1.727bn, was up 21.9% YoY, and was 6.6% higher than our forecast but in line with that of the consensus. Colgates reported numbers were marginally better than we expected. Its top line rose by 17.9% YoY, in line with our expectation and slightly lower than that of the consensus. The gross profit for the quarter increased by 20% YoY, with the gross margin expanding by 107bps to 59.9% YoY this was marginally below our forecast of a 163bp expansion. However, the EBITDA increased by 20.6% YoY, with the EBITDA margin expanding by 56bps to 24.8%, better than our forecast of a 165bps contraction, as we had assumed higher advertising spend. PAT for the quarter rose by 14.7% YoY, due largely to an increase in the effective tax rate of 414bps, to 24.3%. However, this was better than our forecast of 5% YoY growth and that of the consensus (9.2% YoY growth). United Spirits reported disappointing results for the quarter. Net revenue was up 17% YoY, below our forecast of 20% YoY due largely to poor sales-volume

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growth. The gross margin contracted by 330bps, which was more severe than our estimate of a 283bps contraction due to the increase in Extra Neutral Alcohol (ENA) and glass costs. The gross profit grew by 8% YoY, below our forecast of 12% YoY growth. The EBITDA declined by 6.3% YoY versus our forecast of 12.4% YoY. The EBTIDA came in 25.6% below our forecast and 18.1% below that of the consensus, on account of lower revenue growth and gross margin compression. The net profit declined by 83.3% YoY to Rs100m, which was much lower than our forecast of Rs694m and that of the consensus (Rs595m), due largely to a substantial increase in interest costs. Even after adjusting for exceptional items, PBT of Rs260m was much lower than our forecast of Rs1,036m. Maricos results were lower than both our and the consensus forecasts. Net revenue growth of 22.9% YoY was marginally lower than our forecast of 25% YoY growth. The gross profit expanded by 656bps YoY, higher than our forecast of 376bps on account of weak copra prices. The gross profit grew by 40.1% YoY compared with our forecast of 35% YoY growth. However, most of these gains were offset by higher overhead costs, notably ad spend, which was up 393bps YoY versus our forecast of a 101bps rise. Consequently, the EBITDA margin grew by just 132bps versus our forecast of 275bps. The EBITDA rose by 37.5% YoY versus our forecast of a 57.6% YoY rise. The adjusted net profit (excluding the impact of exceptional items like revenue proceeds
from the divestment of the brand Sweekar, a writeback on excise provisions, the impairment of the brand Fiance, a change in revenue recognition for subsidiary Kaya and other non-comparable items) increased by 9.3% YoY, compared with our forecast of 20.5% YoY growth and the consensus forecast for 14.8% YoY growth.
Top-line dynamics
Overall, the consumer staples companies under our coverage continued to witness strong top-line growth for the quarter. Asian Paints, Dabur and ITC reported better-than-expected growth for the quarter, while Nestle, United Spirits and Marico reported lower-thanexpected growth, and other companies under our coverage reported results in line with our forecasts. The quarter saw an equal mix of price and sales-volume-led growth. The weighted-average revenue growth for the companies we cover was about 19% YoY for 4Q FY12, with the minimum growth rate being 13.1% YoY and the maximum 30.9% YoY. For the period from AprilMarch 2012, the companies we cover saw average revenue growth of 18.7% YoY, with a minimum of 12.1% YoY and a maximum rate of 32% YoY.
India Consumer Sector: revenue growth (Jan-March 2012 and April 2011-March 2012)
35% 30% 25% 20% 15% 10% 5% 0% Nestle HUL United Spirits ITC Colgate Sector Average Marico Dabur Asian Paints GCPL
Sales growth (Jan`12 - Mar`12)

Source: Companies, Daiwa Note: sector average is on a weighted-average basis
Sales growth (Apr`11 - Mar`12)
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ITC
Net revenue growth for the quarter, at 17.6% YoY, was higher than our forecast of 15.5% YoY due to betterthan-expected sales of cigarettes and FMCG to some extent, but mainly due to higher revenue for the agri business. Cigarette net revenue increased by 17.4% YoY, slightly above our forecast of 16.5%. Volume growth was about 4% YoY, a little lower than what would be considered a good number (6% would have been desirable, in our view). However it did not come as a surprise, given that even 3Q FY12 saw a slowdown from 7% YoY for 1H FY12 to 5% YoY. This was probably on account of the fact that 1H FY11 saw volume declines on the back of tax increases, making 1H FY12 a favourable base. By 2H FY11, volume had recovered a little. However, there still seemed to be a marginal slowdown, but not enough to worry us too much or cause us to revise out forecasts. Revenue for the other FMCG business grew 23% YoY, almost in line with our forecast of 22% YoY. For the hotels business, industry growth was slow, which affected ITC: its revenue declined by 5% YoY compared with our forecast of flat revenue growth. While the average room rental rate was flat for the company, the occupancy rate declined. Revenue in the agri business did not increase as we expected, due to weak demand in the leaf-tobacco industry, while the proportion of revenue from other commodities in the agri business, such as soybean, increased. This led to a healthy 30% YoY rise in revenue, but due to an adverse product mix, the PBIT margin fell by 176bps YoY and EBIT increased by only 6% YoY. We had forecast 10% YoY rises in revenue and net-profit growth. The paperboard segment had weak revenue growth of 7% YoY. The increase was subdued due to the high base for 4Q FY11.
Revenue growth for beverages (up 7.6% YoY) and food (up 9.7% YoY) was lacklustre, but these segments were not large enough to pull down the overall performance. The EBIT margins for these segments fell by 124bps YoY and 253bps YoY respectively.
Nestle
The companys revenue for the quarter rose by 13.1% YoY, lower than our forecast of 19% YoY. Domestic revenue growth was slightly higher at 13.7% YoY and exports increased by 3.3% YoY. While part of the sluggishness in revenue could have been due to the product and channel-mix rationalisation that the company has undertaken, other reasons could include the weak economic conditions and large price hikes by Nestle, which could have dampened demand. Although the company does not report quarterly volume growth, we believe it was flat YoY or a low single-digit percentage. We believe the real internal growth (in other words, the volume including the mix effect) was higher, at a mid single-digit percentage. It seems that Nestles price increases have been a little more than what were necessary, a fact borne out by a 300bps YoY increase in the gross-profit margin.
Asian Paints
Consolidated net revenue for the quarter grew by 29.5% YoY, higher than our forecast of 22% YoY. This was probably on account of higher volume growth. While there may have been some impact from advance purchases before the budget, the demand environment was good, with growth in second- and third-tier towns and repainting demand driving revenue. While the company does not disclose volume growth on a quarterly basis, we estimate that it was about 15% YoY for the quarter. On a standalone basis, net revenue for the quarter rose by 29% YoY. This was driven primarily by interior and exterior emulsions in the decorative-coating business.
HUL
Revenue growth in 4Q FY12 for the domestic consumer business was robust at 20.5% YoY, compared with our forecast of 16% YoY. Volume growth was also higher, at 10% YoY compared with our forecast of 8% YoY. The revenue growth was mainly due to the 28% YoY rise for the soaps and detergents business (we forecast a rise of 18% YoY) on account of both volumes and price hikes being higher than our forecasts, and this segments operating margin expanding by 382bps YoY. Revenue from personal products increased by 17% YoY, with all of this coming from volume and mix improvements, and the operating margin expanded by 126bps YoY. Any price increases were passed back to consumers through promotions. The rate of increase in revenue from personal products was good, with that for the skin- and hair-care business growing well but that for the oral-care business lagging. -8-
Dabur
Revenue growth was robust, with the domestic business reporting a rise of nearly 20% YoY. This was driven equally by volume and price. Overall revenue growth, at 23% YoY, was driven by volume growth of 12.4% YoY. Domestic volume growth in 2Q FY12 fell to 4.5% YoY (revenue growth: 10% YoY), which improved to 7% YoY for 3Q FY12 (revenue growth: 16% YoY) and 10% YoY for 4Q FY12 (revenue growth: 19-20% YoY). The revenue growth was more broad based, with less variance in growth rates between different segments.

6 June 2012
Revenue for the shampoo business returned to growth in 4Q FY12 after several quarters of decline. Revenue growth for toothpaste, at 8.3% YoY, was muted due to competitive factors. Food was the star, with 30% YoY revenue growth for the quarter and 26% YoY for the year. The international business saw healthy revenue growth of 45.7% YoY. The Hobi and Namaste acquisitions were completed in FY11, and so the growth was organic in nature. Meanwhile, foreign-exchange movements benefitted revenue growth for the international business.
continued to do well: the company increased its market share in the category to 26.2%. On the innovation front, the company continued to focus on the emerging mouthwash category, with the new Colgate Plax Fresh Tea. The company also launched Colgate Super Shine Toothbrush to support revenue growth in this category.
United Spirits
Net revenue for the quarter rose by 17% YoY, below our forecast of 20% YoY, largely due to poor volume growth. Volume growth was 5.2% YoY (30.2m cases) compared with our forecast of a double-digit percentage rise. This was largely due to sales being affected in two key states; Tamil Nadu, due to the preference for local brands, and West Bengal, due to increased taxation. The company continues to focus on promoting its premium brands. Revenue in its premium and prestige segment grew by 18% YoY to 6.57m cases. For FY12, volume on a standalone basis rose by 7.1% to 120.2m cases and on consolidated basis by 7.4% to 122.7m cases.
Godrej Consumer
Consolidated net revenue for the quarter increased by 30.9% YoY, in line with our forecast of 32% YoY. Domestic business revenue grew by 21% YoY. The soaps division saw revenue rise by 30% YoY and volume by 17% YoY, both significantly higher than industry rates. Revenue from household insecticides also increased, at a robust 28% YoY, significantly above the industry rate. Revenue from hair colours rose by 13% YoY, and this was probably the only weak spot in the domestic business. Although the company did not say, we suspect this was below industry growth rate. Revenue for the international business rose by 49% YoY, driven by the inorganic growth of Darling Group. Megasari (the Indonesia subsidiary) registered 30% YoY revenue growth (in Rupiah terms, about 22% YoY) on the back of launches, such as HIT magic paper, HIT extra power electric, and the MITU range of baby products. The EBITDA margin was strong at 20.7%. Revenue for the Africa business grew by 185% YoY due to the acquisition of Darling Group. Organic revenue growth was not disclosed by the company, but we estimate it was a low double-digit percentage YoY. The EBITDA margin was 19.3%. Revenue for the Latin America business rose by 29% YoY (about 22% constant currency growth) with a strong EBITDA margin of 16.3%, ie, an expansion of 740bps QoQ and 300bps YoY. Revenue for the Europe business grew by 21% YoY (about 10% constant currency growth), with an EBITDA margin of 10.5%, ie a 470bps QoQ expansion.
Marico
Consolidated revenue for the quarter increased by 22.9% YoY, marginally lower than our forecast of 25% YoY. The difference was mainly due to Saffola edible oil, for which there was a reduction in stock in the canteen store department channel, which was a one-off. Other businesses revenue growth was satisfactory. This revenue growth was largely on the back of volume growth across all the companys business segments. Volume growth for the consumer products business in India was 10.3% YoY, with Parachute Coconut Oil in rigid packs recording volume growth of 11.1% YoY. Value-added hair oils saw volume growth of 17.5% YoY and Saffola saw volume growth of only 3.3% YoY for the quarter. On a standalone basis, net revenue increased by 9.3% YoY. For the quarter, Kayas revenue rose by 19% YoY. The international business division saw revenue growth of 37% YoY, with organic growth of 24% YoY for the quarter.
Colgate
Colgates revenue growth for the quarter (17.9% YoY) was in line with our forecast (18.5% YoY) and slightly below the Bloomberg-consensus forecast (19.6% YoY). The revenue growth was largely driven by volume growth of 13% YoY for the company and 11-12% YoY in the toothpaste category. The company increased its market share in the toothpaste category to 54%. The toothbrush category also continued to deliver strong revenue-growth momentum. Colgate Plax mouthwash -9-
Gross-profit growth and margins

Compared with previous quarters, the pressure on gross margins reduced slightly for 4Q FY12. The weighted-average gross profit of the companies we cover rose by 19.8% YoY for the quarter and 15.6% YoY for the period from April-March 2012.

6 June 2012
While the weighted-average gross margin for the quarter for our covered companies expanded by 31bps YoY to 50.5%, compared with our forecast of a 3bps YoY contraction, adjusting for the restatement due to the new schedule VI format, they are almost in line with our numbers. The highest YoY contractions in gross margins in the quarter were recorded by United Spirits (down 330bps), Dabur (down 319bps), Asian Paints (down 114bps) and HUL (down 72bps).
Gross margins and gross-profit growth (4Q FY12)
45%
The companies that were able to expand their gross margins YoY were Marico (up 656bps), Nestle (up 301bps), GCPL (up 249bps), ITC (up 143bps) and Colgate (up 107bps). For the April-March 2012 period, all companies except Nestle witnessed gross margin compression. The sector average for the April-March 2012 period contracted by 133bps to 50.7%.
Gross profit growth YoY (Jan 2012 - Mar 2012)
40% 35% 30% 25% 20% 15% 10% 5% 0% 38% 39% 40% 41% 42% 43% 44% 45% 46% 47% 48% 49% 50% 51% 52% 53% United Spirits HUL Asian Paints Sector Average Dabur
Marico Godrej Consumer
Nestle ITC
Colgate
54%
55%
56%
57%
58%
59%
60%
61%
62%
Gross profit margin (Jan 2012 - Mar 2012)

Source: Company, Daiwa
- 10 -
125
150
175
200
225
250
275
300
105
115
125
100
125
150
65
25 50 75
75
85
95
Apr-08
Jul-08
Crude Brent
Oct-08
Titanium dioxide
Source: Bloomberg, Daiwa
Jan-09
Linear alkyl benzene
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Commodity cost trends
Crude - Brent (US$ / bbl)
LAB (Rs / kg.)
Oct-10
Titanium Dioxide (Rs / kg)
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
- 11 1,200
2,800 3,900 5,000 6,100 7,200 58 68 78
2,000
2,800
3,600
4,400
28
38
48
Copra
Apr-06
Palm oil
Aug-06
Dec-06
Liquid paraffin
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Copra (Rs / quintal)
Dec-09
Liquid Paraffin (Rs / Lt.)
Palm Oil (RM / tonne)
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
6 June 2012
Apr-12
270 250 230 210 190 170 150 130 110 90 105 90 125 145 165 185 205 110 130 150 170 190 210 230 85
Source: CEIC, Daiwa
Source: CEIC, Daiwa
Source: CEIC, Daiwa
India WPI: tea (indexed)
India WPI: sugar (indexed)
India WPI: tobacco (indexed)
India WPI : Tobacco India WPI : Tea India WPI : Sugar
Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
- 12 190 180 170 160 150 140 130 120 110 100
105
Source: CEIC, Daiwa Source: CEIC, Daiwa
340 320 300 280 260 240 220 200 180 160 140
100 95
60
75 70 65
90 85 80
High-density polyethylene
India WPI : Wheat
India WPI: wheat (indexed)
India WPI: coffee (indexed)
India WPI : Coffee
HDPE (Rs / kg)
6 June 2012

6 June 2012
Operating expenses
The companies continued with their cost-reduction efforts to cut other operating expenses and reduce the impact of high raw-material prices on EBIT margins.
India Consumer Sector: operating expenses as a % of sales (weighted average)
20%
As can be seen below, reduced spend in other expenditure, small increases in spend on employee costs and advertising helped mitigate the pressure from high input costs during the quarter.
India Consumer Sector: operating expenses, YoY change (weighted average)

25% 20% 15%
15%
10% 10% 5% 5% 0% Employee costs Advertising costs Other expenditure Employee costs Advertising costs Other expenditure Jan 2012 - Mar 2012)
Source: Companies, Daiwa
0% Apr 2011 - Mar 2012
Jan 2012 - Mar 2012

Apr 2011 - Mar 2012
Employee costs
Employee costs as a percentage of sales for the sector expanded by an average of 14bps YoY to 5.8% for the quarter, and contracted by 1bps YoY to 5.9% for the April-March 2012 period. The weighted average of employee costs for our covered stocks rose by 21.9% YoY for the quarter, above the weighted-average growth of 18.5% for the April-March 2012 period.
India Consumer Sector: employee costs (YoY change)
80% 70% 60% 50% 40% 30% 20% 10% 0% United Spirits Dabur HUL Asian Paints Colgate
The companies that managed to reduce cost were Dabur (down 86bps YoY), United Spirits (down 78bps YoY), and Asian Paints (down 53bps YoY). The companies that saw increases in employee costs were GCPL (up 197bps YoY), Nestle (up 90bps YoY), Marico (up 75bps YoY), ITC (up 15bps YoY), Colgate (up 14bps YoY), and HUL (up 7bps YoY).
ITC
Sector Average
Nestle
Marico
GCPL
Employee costs (Jan 2012 - Mar 2012)

Source: Companies, Daiwa Note: Sector average is on a weighted-average basis
Employee costs (Apr 2011 - Mar 2012)
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6 June 2012
Advertising
Ad spend for the sector as a whole was mixed in the quarter. There was no clear trend across the companies we cover. Of the six companies that report their ad spend, the split was half and half between increases and decreases, on a YoY basis. Ad spend for the sector average increased by 14bps to 11.5% (as % of sales) and by 20.4% YoY. The maximum YoY increases in ad spend for the quarter were seen at Marico (up 393bps), Dabur (up 185bps), and GCPL (up 86bps), while the reductions in ad spend were seen at HUL (down 77bps), Colgate (down 27bps), and United Spirits (down 20bps). Meanwhile, for the April-March 2012 period, five companies of the six reporting ad spend cut costs. Marico was the only company to increase ad spend YoY
India Consumer Sector: advertising spend (YoY change)
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% HUL Colgate United Spirits
over the period, and that by only 17bps. The sector average ad spend fell by 130bps YoY and advertising costs rose by only 6.33% YoY. The maximum YoY reduction in advertising spend for the period April-March 2012 was at HUL (down 214bps), and it was the only company that reduced ad spend by an amount greater than the sector average (down 130bps YoY). The other companies that saw YoY cuts were United Spirits (down 66bps), Dabur (down 63bps), GCPL (down 32bps), and Colgate (down 17bps). For HUL, the reduction in ad spend was largely due to cuts in spending in the soaps and detergent segments, the result of reduced competition. However, the company raised its spending in the personal-products segment and also increased promotional activity.
Sector Average
Dabur
GCPL
Marico
Advertising costs (Jan 2012 - Mar 2012)

Source: Company, Daiwa Note: sector average is on a weighted-average basis
Advertising costs (Apr 2011 - Mar 2012)
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6 June 2012
Profit
EBIT
As a result of the tightening of operating expenses, our covered stocks recorded weighted-average EBIT growth of 21.6% YoY for the quarter and 19.3% YoY for April-March 2012. The EBIT margin expanded by 41bps YoY to 19.2% for the quarter and by 10bps YoY to 20% for the period April-March 2012. However, individual company margins were very different from the weighted average. The companies that recorded EBIT-margin increases YoY for the
60% 40% 20% 0% (20%) (40%) (60%) (80%) United Spirits Dabur Nestle Colgate ITC
quarter were Marico (up 328bps), HUL (up 173bps), GCPL (up 133bps), Colgate (up 61bps), Nestle (up 44bps), ITC (up 41bps), and Asian Paints (up 34bps). Meanwhile, the only companies saw YoY margin contractions for the quarter were Dabur (down 267bps) and United Spirits (down 256bps).
Profit before tax (before exceptional items)

The weighted-average profit before tax for the companies we cover was better than for the previous quarter. The growth in profit before tax was 24.1% YoY for the quarter and 19.9% YoY for the period from April-March 2012.
India Consumer Sector: profit before tax (before exceptional items) YoY change
Sector Average
GCPL
HUL
Asian Paints
Marico
PBT (bei) growth YoY (Jan 2012 - Mar 2012)
PBT (bei) growth YoY (Apr 2011 - Mar 2012)
Source: Companies, Daiwa Note: Sector average is on a weighted-average basis; clean PBT growth for Marico in 4Q FY12 omitted due to the small base in 4Q FY11
Net profit
Prudent cost-control measures resulted in adjusted net-profit growth for the sector of 22.8% YoY for the quarter and 19.2% YoY for the period April-March 2012. The companies that saw the growth higher than the sector average were Asian Paints (39.5%), HUL (29%), and ITC (26%).
Meanwhile, the companies that saw lower growth than the sector average for the quarter were United Spirits (down 42.8% YoY), Nestle (up 9.2% YoY), Marico (up 9.3% YoY), Colgate (up 14.7% YoY), Dabur (up 16% YoY), and GCPL (up 21.9% YoY).
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6 June 2012
India Consumer Sector: weighted-average margins

60% 50% 40% 30% 20% 10% 0% Gross profit margin EBIT margin PBT (bei) margin
India Consumer Sector: weighted-average YoY change

30% 25% 20% 15% 10% 5% 0% Gross profit growth EBIT growth PBT (bei) growth Jan 2012 - Mar 2012
Jan 2012 - Mar 2012

Apr 2011 - Mar 2012
Apr 2011 - Mar 2012
India Consumer Sector: adjusted PAT YoY change

50% 40% 30% 20% 10% 0% (10%) (20%) (30%) (40%) (50%) United Spirits Nestle Marico Colgate Dabur GCPL Sector Average ITC HUL Asian Paints
Adjusted PAT growth YoY (Jan 2012 - Mar 2012)

Source: Companies, Daiwa Note: Sector average is on a weighted-average basis
Adjusted PAT growth YoY (Apr 2011 - Mar 2012)
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6 June 2012
Income statement snapshot: 4Q FY12 (Rs m)

Net Sales Other operational income Gross profit Gross-profit margin (%) Employee costs As a % of sales Advertising & publicity As a % of sales Other expenditure As a % of sales EBIT EBIT margin (%) Interest expenses Other income Clean PBT** Clean PBT margin (%) PBT PBT margin (%) Tax Effective tax rate (%) Reported net profit Net-profit margin (%) Adjusted net profit Net-profit margin (%) Reported basic EPS Reported diluted EPS ITC 68,614 933 40,573 59.1% 3,323 4.8% n.a. n.a. 15,549 22.7% 20,753 30.2% 148 2,079 22,684 33.1% 22,684 33.1% 6,540 28.8% 16,144 23.5% 16,144 23.5% 2.1 2.0 HUL 56,605 1,054 25,382 44.8% 2,751 4.9% 6,773 12.0% 8,578 15.2% 7,763 13.7% 2 700 8,461 14.9% 8,742 15.4% 1,876 21.5% 6,866 12.1% 6,636 11.7% 3.2 3.2 Nestle* 20,475 84 11,091 54.2% 1,547 7.6% n.a. n.a. 4,972 24.3% 4,129 20.2% 23 52 4,029 19.7% 4,029 19.7% 1,272 31.6% 2,757 13.5% 2,845 13.9% 28.6 28.6 Asian Paints 25,387 73 10,174 40.1% 1,354 5.3% n.a. n.a. 5,066 20.0% 3,513 13.8% 166 397 3,744 14.7% 3,744 14.7% 1,097 29.3% 2,595 10.2% 2,595 10.2% 27.1 27.1 Dabur 13,636 90 6,787 49.8% 956 7.0% 1,820 13.4% 1,857 13.6% 1,950 14.3% 57 190 2,083 15.3% 2,083 15.3% 377 18.1% 1,705 12.5% 1,705 12.5% 1.0 1.0 GCPL 13,230 19 7,087 53.6% 1,202 9.1% 1,096 8.3% 2,316 17.5% 2,337 17.7% 194 184 2,327 17.6% 2,577 19.5% 601 23.3% 1,927 14.6% 1,727 13.0% 5.8 5.8 Colgate 6,859 170 4,112 59.9% 518 7.6% 583 8.5% 1,481 21.6% 1,598 23.3% 2 131 1,728 25.2% 1,728 25.2% 420 24.3% 1,308 19.1% 1,308 19.1% 9.6 9.6 United Spirits 18,627 191 7,273 39.0% 1,007 5.4% 2,089 11.2% 2,417 13.0% 1,776 9.5% 1,663 147 260 1.4% 76 0.4% (24) -31.9% 100 0.5% 343 1.8% 0.8 0.8 Marico 9,177 38 4,913 53.5% 836 9.1% 1,186 12.9% 1,792 19.5% 947 10.3% 113 67 918 10.0% 901 9.8% 189 20.9% 697 7.6% 714 7.8% 1.1 1.1
Source: Companies, Daiwa *Note: 4Q FY12 is equivalent to 1Q12 for Nestle; **Clean PBT is before exceptional items
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6 June 2012
YoY change (%): 4Q FY12 vs. 4Q FY11

Net sales Other operational income Gross profit Gross profit margin Employee costs As a % of sales Advertising & publicity As a % of sales Other expenditure As a % of sales EBIT EBIT margin Interest expenses Other income Clean PBT** Clean PBT margin PBT PBT margin Tax Effective tax rate Reported net profit Net-profit margin Adjusted net profit Net-profit margin Reported basic EPS Reported diluted EPS ITC 17.6% -16.7% 20.5% 143bp 21.4% 15bp n.a. n.a. 19.6% 38bp 19.2% 41bp -25.2% 80.6% 23.5% 159bp 23.5% 159bp 17.8% -140bp 26.0% 157bp 26.0% 157bp 24.7% 23.6% HUL 15.7% 41.1% 13.8% -72bp 17.3% 7bp 8.7% -77bp 6.7% -128bp 32.4% 173bp 993.8% 16.0% 30.8% 173bp 19.7% 52bp 16.3% -62bp 20.6% 50bp 29.0% 121bp 21.7% 21.7% Nestle* Asian Paints 13.1% 29.5% 89.6% -19.0% 19.8% 301bp 28.4% 90bp n.a. n.a. 18.3% 107bp 15.6% 44bp 3142.9% -37.8% 12.4% -12bp 12.4% -12bp 23.9% 292bp 7.8% -66bp 9.2% -50bp 7.8% 7.8% 25.9% -114bp 17.8% -53bp n.a. n.a. 24.1% -87bp 32.7% 34bp 118.4% 148.8% 37.1% 82bp 37.1% 82bp 33.5% -80bp 39.5% 73bp 39.5% 73bp 39.5% 39.5% Dabur 23.0% 53.8% 15.6% -319bp 9.6% -86bp 42.9% 185bp 15.4% -90bp 3.7% -267bp -64.0% 16.6% 10.5% -173bp 10.5% -173bp -8.9% -386bp 16.0% -76bp 16.0% -76bp 16.7% 15.5% GCPL 30.9% -44.6% 37.2% 249bp 67.0% 197bp 46.1% 86bp 19.1% -173bp 41.5% 133bp 78.1% -32.1% 28.4% -34bp 42.1% 155bp 51.4% 143bp 36.0% 55bp 21.9% -96bp 33.1% 33.1% Colgate 17.9% 5.7% 20.0% 107bp 20.1% 14bp 14.3% -27bp 19.8% 35bp 21.1% 61bp -30.8% 17.8% 20.9% 63bp 20.9% 63bp 45.7% 414bp 14.7% -54bp 14.7% -54bp 14.7% 14.7% United Spirits 17.0% -8.9% 7.9% -330bp 2.2% -78bp 15.0% -20bp 17.0% 0bp -7.7% -256bp 43.9% 0.0% -71.5% -435bp -91.7% -532bp -107.7% -6618bp -83.3% -322bp -42.8% -193bp -83.2% -83.2% Marico 22.9% 8.1% 40.1% 656bp 33.9% 75bp 76.5% 393bp 26.2% 52bp 80.2% 328bp -39.9% 12.0% 1495.8% 923bp 126.7% 450bp -55.9% -8680bp -2.7% -200bp 9.3% -97bp -2.6% -2.6% Simple average 20.8% 12.1% 22.3% 69bp 24.2% 20bp 33.9% 90bp 18.5% -27bp 26.5% 32bp 468.6% 24.7% 176.4% 83bp 22.4% 27bp 1.8% -1680bp 8.3% -43bp 13.6% -24bp 8.0% 7.8% Weighted average 19.0% 6.1% 19.8% 31bp 21.9% 14bp 20.4% 14bp 17.1% -32bp 21.6% 41bp 25.3% 43.7% 24.1% 81bp 21.2% 35bp 13.8% -243bp 20.6% 19bp 22.8% 44bp
Source: Companies, Daiwa *Note: 4Q FY12 is equivalent to 1Q12 for Nestle; **Clean PBT is before exceptional items
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6 June 2012
Income statement snapshot: 1Q-4Q FY12 (Rs m)

Net sales Other operational income Gross profit Gross-profit margin (%) Employee costs As a % of sales Advertising & publicity As a % of sales Other expenditure As a % of sales EBIT EBIT margin (%) Interest expenses Other income Clean PBT** Clean PBT margin (%) PBT PBT margin (%) Tax Effective tax rate (%) Reported net profit Net-profit margin (%) Adjusted net profit Net-profit margin (%) Reported basic EPS Reported diluted EPS ITC 247,984 3,754 151,659 61.2% 12,654 5.1% n.a. n.a. 54,273 21.9% 81,501 32.9% 779 8,253 88,975 35.9% 88,975 35.9% 27,352 30.7% 61,624 24.8% 61,624 24.8% 7.9 7.8 HUL 217,356 3,808 99,978 46.0% 11,073 5.1% 26,348 12.1% 33,452 15.4% 30,731 14.1% 12 2,796 33,501 15.4% 34,690 16.0% 7,776 22.4% 26,914 12.4% 25,992 12.0% 12.5 12.5 Nestle* 77,283 276 40,847 52.9% 5,807 7.5% n.a. n.a. 18,793 24.3% 14,525 18.8% 73 241 14,325 18.5% 14,325 18.5% 4,509 31.5% 9,816 12.7% 10,065 13.0% 101.8 101.8 Asian Paints 95,983 339 38,213 39.8% 5,260 5.5% n.a. n.a. 18,205 19.0% 13,876 14.5% 410 1,074 14,541 15.1% 14,541 15.1% 4,335 29.8% 9,887 10.3% 9,887 10.3% 103.1 103.1 Dabur 52,832 223 25,980 49.2% 3,874 7.3% 6,595 12.5% 6,831 12.9% 7,869 14.9% 538 574 7,905 15.0% 7,905 15.0% 1,464 18.5% 6,449 12.2% 6,449 12.2% 3.7 3.7 GCPL 48,509 152 25,324 52.2% 3,919 8.1% 4,499 9.3% 8,505 17.5% 7,910 16.3% 658 520 7,771 16.0% 9,773 20.1% 2,261 23.1% 7,267 15.0% 5,666 11.7% 22.3 22.3 Colgate 26,239 694 15,736 60.0% 2,156 8.2% 2,630 10.0% 5,859 22.3% 5,392 20.6% 15 507 5,884 22.4% 5,884 22.4% 1,419 24.1% 4,465 17.0% 4,465 17.0% 32.8 32.8 United Spirits 75,427 1,172 30,186 40.0% 4,210 5.6% 7,446 9.9% 9,038 12.0% 10,056 13.3% 5,944 604 4,716 6.3% 5,039 6.7% 1,611 32.0% 3,428 4.5% 3,208 4.3% 26.2 26.2 Marico 39,968 115 18,981 47.5% 3,073 7.7% 4,490 11.2% 6,677 16.7% 4,130 10.3% 424 314 4,168 10.4% 4,021 10.1% 782 19.5% 3,171 7.9% 3,262 8.2% 5.2 5.2
Source: Companies, Daiwa *Note: 1Q-4Q FY12 is equivalent to 2Q11-1Q12 for Nestle; **Clean PBT is before exceptional items
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6 June 2012
YoY change (%): 1Q-4Q FY12 vs. 1Q-4Q FY11

Net sales Other operational income Gross profit Gross-profit margin Employee costs As a % of sales Advertising & publicity As a % of sales Other expenditure As a % of sales EBIT EBIT margin Interest expenses Other income Clean PBT** Clean PBT margin PBT PBT margin Tax Effective tax rate Reported net profit Net profit margin Adjusted net profit Net-profit margin Reported basic EPS Reported diluted EPS ITC 17.2% 28.8% 16.6% -29bp 11.0% -28bp n.a. n.a. 14.4% -53bp 20.6% 95bp 14.0% 42.3% 22.4% 154bp 22.4% 154bp 19.9% -64bp 23.6% 129bp 23.6% 129bp 22.2% 22.3% HUL 12.1% 7.4% 7.5% -200bp 15.2% 13bp -4.7% -214bp 2.8% -140bp 25.0% 146bp 422.5% 2.4% 22.7% 133bp 18.1% 81bp 23.2% 93bp 16.7% 48bp 21.3% 90bp 17.9% 17.9% Nestle* Asian Paints 17.4% 24.8% 56.1% 8.4% 20.7% 148bp 27.9% 62bp n.a. n.a. 17.7% 6bp 19.2% 28bp 1139.0% -15.6% 17.7% 5bp 17.7% 5bp 30.8% 316bp 12.5% -55bp 12.6% -55bp 12.5% 12.5% 18.8% -201bp 15.9% -42bp n.a. n.a. 24.2% -9bp 14.2% -134bp 76.5% 58.0% 15.4% -123bp 15.4% -123bp 14.6% -22bp 17.3% -66bp 17.3% -66bp 17.3% 17.3% Dabur 29.6% -17.8% 21.4% -331bp 25.5% -24bp 23.4% -63bp 30.7% 12bp 11.5% -242bp 77.5% 78.6% 11.7% -240bp 11.7% -240bp 5.3% -111bp 13.4% -174bp 13.4% -174bp 13.1% 13.2% GCPL 32.0% -12.0% 28.6% -136bp 37.7% 34bp 27.5% -32bp 23.1% -126bp 30.0% -25bp 50.9% 10.7% 27.0% -62bp 49.7% 239bp 63.6% 196bp 41.2% 98bp 17.6% -143bp 38.7% 38.7% Colgate 18.2% 5.8% 16.7% -76bp 11.6% -48bp 16.1% -17bp 22.1% 72bp 12.3% -108bp -6.2% 22.9% 13.2% -99bp 13.2% -99bp 20.9% 155bp 10.9% -111bp 10.9% -111bp 10.9% 10.9% United Spirits 18.4% 138.3% 8.8% -354bp 15.4% -14bp 11.0% -66bp 16.5% -20bp 4.2% -182bp 33.6% 27.6% -16.9% -266bp -13.4% -245bp -17.9% -175bp -11.1% -151bp -14.7% -165bp -11.1% -11.1% Marico 27.9% 26.9% 25.8% -76bp 33.6% 33bp 29.8% 17bp 27.6% -4bp 18.9% -78bp 3.3% 48.0% 46.8% 134bp 22.8% -42bp -7.9% -649bp 10.7% -123bp 24.6% -21bp 10.8% 10.8% Simple average 21.9% 26.9% 18.3% -139bp 21.5% -2bp 17.2% -63bp 19.9% -29bp 17.3% -56bp 201.2% 30.5% 17.8% -40bp 17.5% -30bp 17.0% -29bp 15.0% -45bp 14.1% -57bp 14.7% 14.7% Weighted average 18.7% 22.0% 15.6% -133bp 18.5% -1bp 6.3% -130bp 15.0% -58bp 19.3% 10bp 35.4% 30.7% 19.9% 21bp 19.7% 18bp 19.5% -9bp 19.1% 6bp 19.2% 7bp
Source: Companies, Daiwa *Note: 1Q-4Q FY12 is equivalent to 2Q11-1Q12 for Nestle; **Clean PBT is before exceptional items
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6 June 2012
Daiwas Asia Pacific Research Directory

HONG KONG Nagahisa MIYABE Regional Research Head (852) 2848 4971 nagahisa.miyabe@hk.daiwacm.com christopher.lobello@hk.daiwacm.com john.hetherington@hk.daiwacm.com SOUTH KOREA Chang H LEE (82) 2 787 9177 chlee@kr.daiwacm.com Head of Korea Research; Strategy; Banking/Finance Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Anderson CHA Banking/Finance (82) 2 787 9185 anderson.cha@kr.daiwacm.com mike.oh@kr.daiwacm.com sanghee.park@kr.daiwacm.com
Christopher LOBELLO (852) 2848 4916 Regional Research Co-head John HETHERINGTON (852) 2773 8787 Head of Product Management
Tathagata Guha ROY (852) 2773 8731 tathagata.guharoy@hk.daiwacm.com Head of Thematic Research; Product Management Mingchun SUN (852) 2773 8751 mingchun.sun@hk.daiwacm.com Head of China Research; Chief Economist (Regional) Dave DAI (852) 2848 4068 dave.dai@hk.daiwacm.com Deputy Head of Hong Kong and China Research; Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com Deputy Head of Regional Economics; Macro Economics (Regional) Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com Head of Hong Kong Research; Regional Property Coordinator; Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Jeff CHUNG (852) 2773 8783 Automobiles and Components (China) jeff.chung@hk.daiwacm.com
Mike OH (82) 2 787 9179 Capital Goods (Construction and Machinery) Sang Hee PARK Consumer/Retail (82) 2 787 9165
Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com IT/Electronics (Tech Hardware and Memory Chips) Jihye CHOI (82) 2 787 9121 Materials (Chemicals); Oil and Gas jihye.choi@kr.daiwacm.com
Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com Telecommunications; Software (Internet/Online Games) Shannen PARK Custom Products Group TAIWAN Yoshihiko KAWASHIMA Consumer/Retail (886) 2 8758 6247 y.kawashima@daiwacm-cathay.com.tw (82) 2 787 9184 shannen.park@kr.daiwacm.com
Grace WU (852) 2532 4383 grace.wu@hk.daiwacm.com Head of Greater China FIG; Banking (Hong Kong, China) Jerry YANG (852) 2773 8842 Banking/Diversified Financials (Taiwan) Queenie POON (852) 2532 4381 Banking (Hong Kong, China) jerry.yang@hk.daiwacm.com queenie.poon@hk.daiwacm.com
Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Alex CHANG (886) 2 8758 6248 alex.chang@daiwacm-cathay.com.tw IT/Technology Hardware (Handsets and Components) Chris LIN (886) 2 8758 6251 IT/Technology Hardware (PC Hardware - Panels) INDIA Kartik A. MEHTA (91) 22 6622 1012 kartik.mehta@in.daiwacm.com Head of India Research; Regional Head of Pharmaceuticals and Healthcare Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com Deputy Head of Research; Strategy; Banking/Finance Saurabh MEHTA Capital Goods/Utilities Percy PANTHAKI FMCG; Consumer SINGAPORE Tony DARWELL Head of Singapore Research Josh CHERIAN Quantitative Research Suzanne HO Quantitative Research Srikanth VADLAMANI Banking (ASEAN) (65) 6321 3050 (65) 6499 6549 (65) 6499 6545 (65) 6499 6570 tony.darwell@sg.daiwacm.com josh.cherian@sg.daiwacm.com suzanne.ho@sg.daiwacm.com srikanth.vadlamani@sg.daiwacm.com (91) 22 6622 1009 (91) 22 6622 1063 saurabh.mehta@in.daiwacm.com percy.panthaki@in.daiwacm.com chris.lin@daiwacm-cathay.com.tw
Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com Capital Goods Electronics Equipments and Machinery (Hong Kong, China) Bing Zhou (852) 2773 8782 Consumer/Retail (Hong Kong, China) bing.zhou@hk.daiwacm.com
Hongxia ZHU (852) 2848 4460 hongxia.zhu@hk.daiwacm.com Consumer, Pharmaceuticals and Healthcare (China) Alicia HU (852) 2532 4180 Internet (Hong Kong, China) alicia.hu@hk.daiwacm.com
Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Alexander LATZER (852) 2848 4463 alexander.latzer@hk.daiwacm.com Regional Head of Materials; Materials/Energy (Regional) Felix LAM Materials (China) (852) 2532 4341 felix.lam@hk.daiwacm.com
Mark CHANG (852) 2773 8729 mark.chang@hk.daiwacm.com Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) John CHOI (852) 2773 8730 Small/Medium Cap (Regional) Pranab Kumar SARMAH Head of Solar (852) 2848 4441 john.choi@hk.daiwacm.com pranab.sarmah@hk.daiwacm.com
Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Transportation Aviation, Land and Transportation Infrastructure (Regional) Justin LAU (852) 2773 8741 justin.lau@hk.daiwacm.com Head of Custom Products Group; Custom Products Group Philip LO Custom Products Group Jibo MA Custom Products Group PHILIPPINES Rommel RODRIGO (63) 2 813 7344 ext 302 rommel.rodrigo@dbpdaiwacm.com.ph (852) 2773 8714 (852) 2848 4489 philip.lo@hk.daiwacm.com jibo.ma@hk.daiwacm.com
Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) David LUM Property and REITs (65) 6329 2102 david.lum@sg.daiwacm.com
Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Amy CHEW Thematic Research (65) 6321 3085 amy.chew@sg.daiwacm.com
Head of Philippines Research; Strategy; Capital Goods; Materials (63) 2 813 7344 alvin.arogo@dbpdaiwacm.com.ph ext 301 Economy; Consumer; Power and Utilities; Transportation Aviation Alvin AROGO (63) 2 813 7344 ext 293 Property; Banking; Transportation Port Danielo PICACHE danielo.picache@dbpdaiwacm.com.ph
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6 June 2012
Daiwas Office
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6 June 2012
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6 June 2012
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"3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. 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Things To Look in FMCG Sector

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Things To Look in FMCG Sector

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Household & personal products / India 6 June 2012

4Q FY12: good results, but high valuations cap upside

India Consumer Sector

How do we justify our view?

(91) 22 6622 1063 percy.panthaki@in.daiwacm.com

India Consumer Sector

How do we justify our view?

India Consumer Sector: net revenue growth and EPS growth

8% FY09 FY10 FY11 Net sales growth

FY13E EPS growth

India Consumer Sector: average PERs over different periods

Source: Companies, Bloomberg, Daiwa

Changes in consensus EPS, and Daiwa vs. consensus comparison (FY13)

Daiwa vs consensus EPS (LHS)

% change in consensus EPS in last 12 months

India Consumer Sector

4Q FY12: good results, but high valuations cap upside

Key stock calls

Price 225.90 102.15 4,535.25 168.35 586.50 407.30 574.70 3,718.95

1,142.95 Underperform Underperform

India Consumer Sector

India Consumer Sector

Results analysis for 4Q FY12

Source: Companies, Daiwa forecasts

Source: Companies, Bloomberg, Daiwa

India Consumer Sector

India Consumer Sector

Sales growth (Jan`12 - Mar`12)

Sales growth (Apr`11 - Mar`12)

India Consumer Sector

India Consumer Sector

Gross-profit growth and margins

India Consumer Sector

Gross profit growth YoY (Jan 2012 - Mar 2012)

Marico Godrej Consumer

Gross profit margin (Jan 2012 - Mar 2012)

Source: Company, Daiwa

Source: Bloomberg, Daiwa

Source: Bloomberg, Daiwa

Linear alkyl benzene

Commodity cost trends

Crude - Brent (US$ / bbl)

LAB (Rs / kg.)

Titanium Dioxide (Rs / kg)

Source: Company, Daiwa

Source: Bloomberg, Daiwa

Source: Bloomberg, Daiwa

Copra (Rs / quintal)

India Consumer Sector

Liquid Paraffin (Rs / Lt.)

Palm Oil (RM / tonne)

Source: CEIC, Daiwa

Source: CEIC, Daiwa

Source: CEIC, Daiwa

India WPI: tea (indexed)

India WPI: sugar (indexed)

India WPI: tobacco (indexed)

India WPI : Tobacco India WPI : Tea India WPI : Sugar

Source: Company, Daiwa

India WPI: wheat (indexed)

India WPI: coffee (indexed)

India WPI : Coffee

India Consumer Sector