Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities Consumer Sector Report India I Equities Shirish Pardeshi +9122 6626 6730 [email protected]Aniruddha Joshi +9122 6626 6732 [email protected]Gautam Singh +9122 6626 6743 [email protected]8 October 2012 India Consumer Enjoying a slice of luxury Targeting the time-poor and cash-rich, consumer companies are making the most of ‘more pleasure at higher prices’ strategy. Most companies have raised distribution ~100% and capacities 50% in the past 2-3 years. Also, the rural story is plush with higher NREGA and MSP. Premiumisation is upon us and here to stay. Moving up the brand curve. We believe the launch of premium products (offering solution to specific problems) by companies and higher ad-spend on them has improved players’ realizations by at least 200-300bps. Notably, this growth is devoid of price hikes. Importantly, it has helped players raise gross margins and reduce susceptibility to volatile input prices, keeping them afloat amidst competition. Benefits of investments come to fore. Consumer companies have invested aggressively in more than doubling distribution network over past 2-3 years. They have also increased production capacities by more than half and introduced new products and variants, over the past 2-3 years. Yet, balance sheets (net cash) remain radiant. We believe the stage is set for Indian consumer companies to post 16% CAGR over the next three years. Rural juggernaut to continue. We expect the rural story to remain strong with income sources for the populace more diversified than ever, supplemented further by higher MSPs and NREGA allocations. We believe higher penetration into the rural belt will also allow the organised players to eat from the unorganised share of the pie. Top picks. Our large cap top picks are GSK Consumer, Colgate, Emami and Pidilite. Among the mid cap companies, our top picks are Agro Tech Foods, Bajaj Corp., and Zydus Wellness. Out top Sell ideas are Hindustan Unilever, Britannia Industries, and Jyothy Laboratories. Overweight Nifty / Sensex: 5676/18709 Key Data ITC HUL Nestle Asian paints Dabur Colgate Marico GSK CH Emami Britannia Pidilite Agro Tech Rating Buy Sell Buy Buy Hold Buy Hold Buy Buy Sell Buy Buy Current price (`) 278 560 4,595 3,888 132 1,250 202 2,956 503 493 203 411 Target price (`) 320 466 5,220 4,441 130 1,440 201 3,425 635 493 235 576 M.Cap (US$m) 40,823 23,262 8,518 7,170 4,419 3,269 2,385 2,393 1,464 1,132 1,975 193 Upside (%) 15 (17) 14 14 (2) 15 (0) 16 26 - 16 40 Target PE(x) FY14e 30.2 26.9 36.0 26.0 25.0 29.0 23.9 25.3 25.0 20.0 25.3 22.9 FY12-14e EPS CAGR (%) 15.1 18.1 18.0 26.8 18.4 22.9 27.0 26.6 17.8 20.2 20.4 29.9 FY14e RoE (%) 33.9 75.6 60.8 39.4 36.2 103.1 23.9 36.0 36.5 51.1 26.3 22.1 FY14e RoCE (%) 43.6 89.8 53.2 47.7 31.5 114.9 26.3 37.4 33.3 39.2 31.0 28.7 FY14e PE (x) 26.2 32.4 31.7 22.8 25.4 25.2 24.2 21.8 19.8 20.0 21.7 16.4 Source : Company, Anand Rathi Research ISIEmergingMarketsPDF in-avendusadv06 from 115.248.175.146 on 2013-04-16 04:54:40 EDT. DownloadPDF. Downloaded by in-avendusadv06 from 115.248.175.146 at 2013-04-16 04:54:40 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities
Targeting the time-poor and cash-rich, consumer companies are making the most of ‘more pleasure at higher prices’ strategy. Most companies have raised distribution ~100% and capacities 50% in the past 2-3 years. Also, the rural story is plush with higher NREGA and MSP. Premiumisation is upon us and here to stay.
Moving up the brand curve. We believe the launch of premium products (offering solution to specific problems) by companies and higher ad-spend on them has improved players’ realizations by at least 200-300bps. Notably, this growth is devoid of price hikes. Importantly, it has helped players raise gross margins and reduce susceptibility to volatile input prices, keeping them afloat amidst competition.
Benefits of investments come to fore. Consumer companies have invested aggressively in more than doubling distribution network over past 2-3 years. They have also increased production capacities by more than half and introduced new products and variants, over the past 2-3 years. Yet, balance sheets (net cash) remain radiant. We believe the stage is set for Indian consumer companies to post 16% CAGR over the next three years.
Rural juggernaut to continue. We expect the rural story to remain strong with income sources for the populace more diversified than ever, supplemented further by higher MSPs and NREGA allocations. We believe higher penetration into the rural belt will also allow the organised players to eat from the unorganised share of the pie.
Top picks. Our large cap top picks are GSK Consumer, Colgate, Emami and Pidilite. Among the mid cap companies, our top picks are Agro Tech Foods, Bajaj Corp., and Zydus Wellness. Out top Sell ideas are Hindustan Unilever, Britannia Industries, and Jyothy Laboratories.
Overweight
Nifty / Sensex: 5676/18709
Key Data ITC HUL Nestle Asian paints Dabur Colgate Marico GSK CH Emami Britannia Pidilite Agro Tech
Rating Buy Sell Buy Buy Hold Buy Hold Buy Buy Sell Buy Buy
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 3
Investment Summary Consumer companies are expected to continue to trade at premium valuations despite a staggering outperformance of more than 100% to Nifty over the past two years, on the back of:
The strategy of taking brands to premium levels, ensuring at least 10-20% higher realization and 100-200bps increase in profit margins; growth of modern trade platform (accounting for 8% consumption in India) in the past five years is likely to significantly aid premiumization.
Investments made in FY11 and FY12 to increase production capacities more than 50-100% and expand distribution network ~100% across companies.
Continued growth of the rural juggernaut of consumption on the back of ~30% increase in minimum support prices and linkage of wage rates under NREGA to inflation (~10%).
Though the sector is trading at premium of 100% premium to the Nifty PE against average premium of 75% over past 16 years, turbulent economic conditions are expected to retain defensive sectors such as consumer in focus. Free cash flows and earnings predictability are the key reasons for continued investor interest in the consumer sector.
Fig 1 – Gross margins of consumer companies
27
32
37
42
47
52
57
62
67
72
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Colgate Marico Nestle GSK CH
(%)
Source: Companies
Fig 2 – Distribution network
0
1
2
3
4
5
6
7
HU
L
Nes
tle
Col
gate
Dab
ur
GSK
CH
Emam
i
Brita
nnia
Mar
ico
(nos. m)
Source: Companies
Fig 3 – Sharp rise in MSP for FY13
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(Min
imum
Sup
port
Pric
e, R
s./Q
t)
Arhar Moong Urad
Last six years CAGR: 19%
Nine years CAGR: 6%
Source: GoI
Fig 4 – Consumer sector: Mean PE and standard deviation
Avg
+1SD
+2SD
-1SD
-2SD12
17
22
27
32
37
42
Jun-
97
Jul-9
8
Aug-
99
Sep-
00
Oct
-01
Nov
-02
Dec
-03
Jan-
05
Feb-
06
Mar
-07
Apr-0
8
May
-09
Jun-
10
Jul-1
1
Aug-
12
Source: Bloomberg, Companies, Anand Rathi Research
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 4
Moving Up the Brand Curve Growing realisation minus price hikes
Premiumization by way of launching products in ‘solution to specific problem’ to meet the consumer expectations has helped consumer companies to grow realizations 200-300bps without resorting to price hikes. We expect companies with strong premiumization strategy in place to do well, which include Colgate Palmolive India, GSK Consumer Healthcare, and Nestle India.
Colgate has launched a strong set of various premium products such as Colgate Sensitive, Colgate Total, Colgate Plax, and Colgate Floss. Also, GSK Consumer has launched products such Horlicks Gold, Horlicks Lite, Womens Horlicks, and Mother Horlicks. Nestle too has introduced various premium products such as Nescafe Gold, Cold coffee, Nestea, Milkmaid celebrations, Maggi Soupperoni, and Fruit Dahi.
Focus more on value than volume
The strategy helps companies to improve realizations by way of sale of premium products instead of only base products. For instance, base Horlicks 500grams costs `155, whereas Horlicks Gold 500grams costs `200 and Junior Horlicks 500grams `180. The average realization for Horlicks moves upward with increase in sale of Junior Horlicks or Horlicks Gold, helping the company to grow revenues although volume growth remains lower.
Colgate has hiked prices at a CAGR of just 3% over FY01-12. However, its average realization has moved up at above 5% during the period, driven by launch of Colgate Total, Sensitive, and Colgate Gel toothpastes.
Fig 5 – Examples of premiumization Company Segment Base product Premium variants introduced
GSK Consumer Health food drink Horlicks Horlicks Gold, Horlicks Lite, Junior Horlicks, Women Horlicks
Nestle Ready to cook Maggi noodles Maggi Dal Atta, Maggi multigrain, Soupperoni, Pasta
The strategy demands change in revenue mix, with more of high-value products. Since the target is achieving higher gross margin at a lower volume, the sensitivity to input prices automatically lessens.
Colgate’s gross margin has moved upwards from 35% in FY92 to 60% FY12. Volatility in prices of sodium carbonate or packaging material will not impact Colgate as much in FY13 or FY14 as they did in FY92 or FY93.
Marico’s gross margin has improved from 29% in FY97 to 48% in FY12. The impact of volatility in copra prices (Major raw material: 30% of net sales), has reduced.
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 5
Lower pressure from competition
As the new segments entered are distinct, there is little or no competition, enabling companies to enjoy strong pricing power. For instance, GSK Consumer (GSK) has launched Horlicks Lite (Sugarfree Horlicks) and Women Horlicks. There is no competing product in these segments by Bournvita (Cadbury) or Complan (Heinz), leaving GSK free to grow revenues from these segments.
Fig 7 – Colgate: Lesser competitive pressure
Segment Colgate's product Other competitive products Colgate's Status
Floss Colgate Floss Oral B Market leader
Mouthwash Colgate Plax Listerine Strong No. 2 player
Therapeutic toothpaste Colgate Sensitive, Total Pepsodent G, Sensitive
Market leader
Gel toothpastes Colgate Gel Close Up Strong No. 2 player
Family toothpastes Colgate dental cream, Herbal, Active Salt Pepsodent, Meswak, Anchor
Fig 6 – Improving gross margins of consumer companies despite strong revenue growth over past decade
Colgate
0
5,000
10,000
15,000
20,000
25,000
30,000
15M
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
30
36
42
48
54
60
66
Revenue Gross margins (RHS)
(%)(`m)
Marico
0
6,000
12,000
18,000
24,000
30,000
36,000
42,000
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
25
29
33
37
41
45
49
53
Revenue Gross margins (RHS)
(%)(`m)
Nestle
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
CY9
1C
Y92
CY9
3C
Y94
CY9
5C
Y96
CY9
7C
Y98
CY9
9C
Y00
CY0
1C
Y02
CY0
3C
Y04
CY0
5C
Y06
CY0
7C
Y08
CY0
9C
Y10
CY1
1
40
44
48
52
56
60
Revenue Gross margins (RHS)
(%)(`m)
GSK-CH
0
5,000
10,000
15,000
20,000
25,000
30,000
CY9
2C
Y93
CY9
4C
Y95
CY9
6C
Y97
CY9
8C
Y99
CY0
0C
Y01
CY0
2C
Y03
CY0
4C
Y05
CY0
6C
Y07
CY0
8C
Y09
CY1
0C
Y11
45
50
55
60
65
70
Revenue Gross margins (RHS)
(%)(`m)
Source: Companies
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 6
Modern trade a major platform
Modern trade forms 7-8% of consumption in India and, we believe, ~15% of urban area. Various segments such as juices, packaged tea, coffee, atta, premium shaving products, face wash sell largely through modern trade. The medium is bound to be explored even more with the recent allowance of multi-brand FDI.
Fig 8 – Usage of modern trade for launch of new products Company Product Usage of modern trade
Launched Uveda range in modern trade, then Dabur Uveda
rolled across genera trade
Saffola Oats Launched only in modern trade
Saffola Arise (Low GI Rice) Launched initially in modern trade, then rolled Marico
out in general trade
Rolled out pan India but post weaker response GSK Consumer Nutribar & Chill Dood
distribution restricted only to modern trade
Source: Companies
Key segments for premiumization
We believe there are various segments such as ready-to-eat, ready-to-cook, undergarments, premium personal care products, products focussed on health segments, amongst others which will see strong premiumization ahead. We believe changing lifestyles, rising number of working women, growing education levels and greater overall awareness due to media penetration will help driving growth of premium products.
Fig 9 – Key segments for premiumization Segment Products Companies
Ready to cook Noodles, popcorn, soups Nestle, Agro Tech, HUL
Ready to eat Biscuits, Chocolates Britannia, Nestle
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 7
Benefits of Investments Come to Fore Expanded distribution networks
In the past 2-3 years, most consumer companies expanded their distribution networks, in rural areas and smaller towns. Earlier, companies appointed distributors, who then appointed wholesalers. This restricted their reach and involved greater cost of operations. Now, with companies moving to distributor driven models, they are extending their reach catering to more touch points.
To expand their distribution networks, consumer companies initiated projects such as E-Choupal (ITC), Project Shakti (HUL) and Project Swadesh (Emami). Emami, GSK Consumer, Nestle, Bajaj Corp., Agro Tech, Jyothy Labs employed more feet on the ground to widen their distribution networks in rural areas as well as in tier II and III towns. They also launched products in formats suitable for rural areas (small SKUs) and crafted advertising aimed at rural consumers.
Earlier, products were advertised on national channels, but availability was an issue and ad-spends under-utilised. The expanded distribution networks would fuel sales without investing further in brand-building.
Launch of SKUs to drive growth
To drive growth, consumer companies invested in developing various stock-keeping units (SKUs). In the past 4-5 years, they came out with low unit packs to enhance trial generation for the product of `1 to `10 and promoted them aggressively. They also developed larger SKUs, which also drove growth.
GSK Consumer had no SKU below `60; so consumer trials were limited. It launched products at `20, which helped it grow its revenues since it could now tap new consumers. Similarly, small SKUS of Good Day and cream biscuits helped Britannia drive volumes in these segments. Horlicks in larger pouches and Bajaj Almond drops 500ml in PET bottles have also driven growth.
Fig 11 – SKUs to drive growth Company Product New SKUs
Bajaj Corp Bajaj Almond drops 500ml in PET bottles, `1 sachet GSK Consumer Horlicks, Boost `20 packs, pouches Britannia Good Day `5 packs Cadbury Chocolates `2 packs
Source: Companies, Anand Rathi Research
New products aiding growth
The consumer sector also grew through sub-segmentation and new products addressing specific consumer needs (Value-added products) such as Horlicks Gold, Junior Horlicks, Women’s Horlicks, drove growth in Horlicks. Colgate Sensitive, Colgate Max white and Colgate Total drove growth in Colgate’s oral care portfolio. Considerable investments in these new products have driven such growth. Apart from the regular segments (soaps and toothpastes), sub-segments were developed and now constitute 10-50% (by value) of the main segment. Shampoo, which gained through consumer up-trading from Shikakai soaps, is now larger than Shikakai soaps. Shower gels, face washes and hand washes are now ~5-10% of soaps.
Fig 10 – Distribution network
0
1
2
3
4
5
6
7
HU
L
Nes
tle
Col
gate
Dab
ur
GSK
CH
Emam
i
Brita
nnia
Mar
ico
(nos. m)
Source: Companies
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 8
In the oral care category, new sub-segments (flosses and mouthwashes) are growing faster than toothpastes and toothpowders and, in the medium term, would comprise a large part of the oral-care range.
Fig 12 – Evolution of premium categories Segment Earlier products New products Hair washes Shikakai Shampoos Hair styling Shampoos Conditioners Oral care Toothpowders Toothpastes Oral care Toothpastes Flosses, Mouthwashes
Soaps Face washes
Soaps Hand washes, Hand sanitizers Body wash (bathing)
Soaps Shower gels
Source: Companies, Anand Rathi Research
Investment in manufacturing
In the past 2-3 years, consumer companies invested aggressively in manufacturing capacities. Nestle, GSK Consumer, Zydus Wellness, Agro Tech Foods, Asian Paints raised capacities by over 50%. As a large part of the capex has been completed, consumer companies would not need to incur capex for the next 3-4 years. Most of the capex has also been in tax-efficient zones. This would save excise and taxes.
We expect consumer companies to launch new products, variants and SKUs. We also expect significant savings in raw material sourcing and along the entire supply chain. Savings would also arise in distribution and in the lead time for products to reach consumers.
Fig 13 – Capex as % of net sales for major companies in FY11 and FY12
0
5
10
15
20
25
HU
L
Nes
tle
Asia
n Pa
ints
Col
gate
Mar
ico
GSK
Con
sum
er
Emam
i
Brita
nnia
Agro
Tec
hFo
ods
FY11 FY12
(%)
Source: Companies
Fig 14 – Consumer companies, capex location and brands Company Segment Capex locations Nestle Maggi, chocolates, milk products Baddi, Goa Agro Tech Foods Act II and peanut butter Gujarat Colgate Oral-care products Gujarat GSK Consumer Health-food drinks Rajamundry, AP Zydus Wellness Sugarfree, Ever Yuth Sikkim
Source: Companies
Ad-spend to generate consumer awareness
Consumer companies have invested substantially in generating consumer awareness regarding the various products. Nestle instructs consumers how to utilise the Maggi and Nescafe packs. Personal care players advertise in a manner designed to further explain to consumers the ingredients and their
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 9
use (SPF 15 for smoother skin, use of glycerine in winter, removal of trans-fats from wafers and low glycemic index rice).
In modern trade, substantial investment has been made in product promotions. Merchandisers help customers at or outside modern trade outlets, raising consumers’ awareness about newer products and their utility, and give them the opportunity to try them out. Such investment initiatives generate wider awareness of new products and their advantages.
Acquisition and integration
In the past 2-3 years, some consumer companies acquired brands and/or companies. Funds invested in such acquisitions as well as on streamlining them is likely to generate returns in coming years. Some benefits of such integration are synergies in merging distribution networks and in raw material sourcing as well as in media buying. Such synergies are likely to play out in the next 2-3 years.
Fig 15 – Acquisitions in the recent past by consumer companies Company Recent acquisitions
Jyothy Labs Henkel
Three brands of Reckitt (Paras) Marico
Code 10
Dabur Hoby Kozmetik, Namaste
Source: Companies
Balance sheets remain radiant
Despite the huge investments in expanding production capacities and enhancing distribution networks, consumer companies continue to have strong balance sheets. With their higher valuations, some (Marico, Jyothy Labs, Bajaj Corp.) raised money in equity markets and strengthened their balance sheets with free cash-flows. This would be a key growth driver in future.
Fig 16 – Return ratios of consumer companies (FY12)
0
35
70
105
140
ITC
HU
L
Nes
tle
Asia
n Pa
ints
Dab
ur
Col
gate
Mar
ico
GSK
Con
sum
er
Emam
i
Brita
nnia
Agro
tech
Foo
ds
Baja
j Cor
p
Zydu
s W
elln
ess
RoE RoCE
(%)
Source: Companies
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 10
Rural Juggernaut to Continue Sharp rise in wages would boost consumption
On the implementation of the government's flagship National Rural Employment Guarantee Act (NREGA), wage rates across India have risen sharply—by over 100%. Moreover, the wage rate under the NREGA has been linked to the consumer price index (CPI). In the past four years (FY09-FY12), CPI has risen by an average ~10%. We expect it to increase by 10% in FY13, leading to a further hike in the wage rate. The consumer sector is likely to be buoyed by the rise in wages in rural India.
Sharp rise in minimum support prices boost farm income
Government has raised the minimum support price (MSP) for FY13 kharif crops by an average 28%. The MSP of paddy for FY13 has been hiked more than 15% and that for oilseeds and pulses by 30-50%. In the past six years, the government has been prompt in sharply raising the MSP of most agricultural products. MSP of wheat registered an 11% CAGR between FY07 and FY12 versus 6% between FY98 and FY06. Similarly, MSPs of rice (up 11.2%) and pulses (up ~15%) have also risen considerably between FY06 and FY12. MSP generally sets the floor price of a crop; hence higher prices of farm produce raise incomes of rural consumers, especially of agricultural labour.
Fig 17 – Sharp rise in wages in major states of India
Biha
r
Biha
r
Biha
r
UP
UP U
P
Tam
il N
adu
Tam
il N
adu
Tam
il N
adu
Raj
asth
an
Raj
asth
an
Raj
asth
an
Wes
t Ben
gal
Wes
t Ben
gal
Wes
t Ben
gal
Andh
ra P
rade
sh Andh
ra P
rade
sh
Andh
ra P
rade
sh
Mah
aras
htra
Mah
aras
htra
Mah
aras
htra
Karn
atak
a
Karn
atak
a Karn
atak
a
Har
yana
Har
yana
Har
yana
50
80
110
140
170
200
FY06 FY11 Current wage rate
NREGA wage rate in major states (`/day) Source: GoI
Fig 18 – CPI remains high
0
2
4
6
8
10
12
14
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
e
(%)
CPI inflation Source: GoI
Fig 19 – Sharp rise in MSP for FY13
0
10
20
30
40
50
60
Jow
arR
agi
Gro
undn
utSo
yabe
anSu
nflo
wer
see
dJu
teU
rad
Cot
ton
Moo
ngSe
sam
umN
iger
seed
Arha
rBa
jraM
aize
Suga
rcan
ePa
ddy
Cop
ra
(Min
imum
Sup
port
Pric
e,%
, yoy
)
Rise in MSP in FY13
Average Hike:
Source: GoI
Fig 20 – CPI continues to be high
0
2
4
6
8
10
12
14
FY01
FY02
FY03
FY04
FY05
FY06
FY07
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FY09
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FY12
FY13
e
(%)
CPI inflation Source: GoI
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 11
Lower poverty levels to support consumption
Data from the World Bank show that the poverty headcount ratio at the rural poverty line has come down to 42% of the rural population in 2005 and to 34% in 2010, from a high of 50% in 1994. The lower poverty levels are likely to support higher rural consumption. Since 2005, the government policies have been pro rural development and employment generation leading to improvement in rural wealth.
Ahead, wealth to drive consumption
Lack of education and investment avenues lead to rural India largely buying gold, silver or land. Prices of gold, silver and land have sharply risen, automatically raising the wealth of rural consumers (believed to have almost doubled in the past 3-4 years). Ahead, this wealth would drive income and consumption. Also, higher gold prices have substantially enhanced the ability of rural consumers to raise debt.
Fig 21 – Near three-fold rise in the MSP of rice
300400500600700800900
1,0001,1001,2001,300
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(Min
imum
Sup
port
Pric
e, R
s./Q
t)
MSP for Rice (Rs./Quintal)
Last six years CAGR: 13%
Nine years CAGR: 5%
Source: GoI
Fig 22 – Minimum support prices of pulses
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(Min
imum
Sup
port
Pric
e, R
s./Q
t)
Arhar Moong Urad
Last six years CAGR: 19%
Nine years CAGR: 6%
Source: Goi
Fig 25 – Gold prices continue to rise
10,000
15,000
20,000
25,000
30,000
35,000
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10
Nov
-10
Feb-
11
May
-11
Aug-
11
Nov
-11
Feb-
12
May
-12
Aug-
12
Gold Price
(`/10 grams)
Source: Bloomberg
Fig 26 – Silver prices continue to rise
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
May
-08
Aug-
08
Nov
-08
Feb-
09
May
-09
Aug-
09
Nov
-09
Feb-
10
May
-10
Aug-
10
Nov
-10
Feb-
11
May
-11
Aug-
11
Nov
-11
Feb-
12
May
-12
Aug-
12
Silver Price
(`/kg)
Source: Bloomberg
Fig 23 – Rural poverty reducing 50.1
41.833.8
0
10
20
30
40
50
60
1994
2005
2010
(%)
Poverty headcount ratio at rural poverty line (% of ruralpopulation)
Source: World Bank
Fig 24 – House prices rising
141.7152.0
157.8164.1
176.9
100110120130140150160170180
Mar
-11
Apr-1
1
May
-11
Jun-
11
Jul-1
1
Aug-
11
Sep-
11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
( 200
8-09
Q4=
100,
All
Indi
a)
RBI's housing price Index Source: RBI
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 12
Rise in non-farm job opportunities
Rural household incomes have been rising due to the rise in non-farm job opportunities. Dependence on agriculture has slid in the past five years. The National Sample Survey Organization (NSSO) reports that jobs in rural construction rose 88% between FY05 and FY10, while the number of people employed in agriculture fell from 249m to 229m. Other allied businesses account for a larger share of incomes of rural consumers. We believe with rising rural income levels, consumption would trend higher.
Lower penetration in rural areas
Product offtake in rural areas is far lower than in urban areas. Most companies derive 75% or more of their revenues from urban areas though the urban population is half that of the rural population. In the medium-to-long term the low consumption base in rural areas and rising rural incomes would be the drivers for consumer companies to push their products there.
Also, the widening reach of the mass media (television, internet) would drive aspirations and growth.
Organised players in good stead
We believe a large portion of the market in rural areas is of the unorganised kind. Small and regional players dominate rural areas only on the basis of lower prices. We expect that, due to higher raw material prices, smaller players would lose their ability to hold selling prices. We also believe they lack brand-building abilities. Moreover, most do not enjoy economies of scale in manufacturing or distribution.
Ahead, with the growing reach of the media, consumer companies would gain market share from these unorganised operators. The growth of organised players is expected to come at more than total market growth.
Fig 28 – Advantages enjoyed by consumer companies over unorganised players Particulars Advantage for organised consumer companies
Brand-building activities Creation of brands through all-India ad-spend through regional media
Pricing power Ability to pass on prices or hold on to prices despite change in raw material prices
Use of promotions Use of brands/ products to promote other brands
Distribution network All-India distribution networks
Economies of scale Organised players benefit in manufacturing and raw material sourcing
Source: Anand Rathi Research
Increased focus on rural belt
To grow revenue from rural areas, consumer companies have invested aggressively, especially in widening their distribution networks. They have initiated projects such as Shakti (HUL), Swadesh (Emami), Double (Dabur) or Jagruti (Colgate).
Consumer companies have also launched products in keeping with the needs of rural consumers, introducing products at `10 and below. Further, they have structured their advertising to target rural consumers (Nestle’s advertising of Maggi noodles through brand ambassador Amitabh Bacchan focuses on the `5 price).
Fig 29 – Investment by consumer companies in rural areas Particulars Companies
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 13
Change in estimates and valuations
The consumer sector trades at a 100% premium to the Nifty PE’s 16-year average of 75%. It has been richly valued due to its 100% free cash-flows, earnings predictability and higher return ratios (over 25% for most). Considering the prevailing turbulent economic and political conditions as well as the strong growth drivers of consumer companies, we expect the premium valuations to continue.
Fig 31 – India consumer relative valuation matrix RoE RoCE CAGR FY12-14 (%) PE
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 19
Fig 38 – Price trends: Major raw materials
Sugar
1,000
1,500
2,000
2,500
3,000
3,500
4,000Au
g-07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/quintal)
Liquid Paraffin
28
38
48
58
68
78
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/kg)
Coffee
5,000
6,500
8,000
9,500
11,000
12,500
14,000
15,500
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/50kg)
Wheat
1,000
1,150
1,300
1,450
1,600
Aug-
07D
ec-0
7Ap
r-08
Aug-
08D
ec-0
8Ap
r-09
Aug-
09D
ec-0
9Ap
r-10
Aug-
10D
ec-1
0Ap
r-11
Aug-
11D
ec-1
1Ap
r-12
Aug-
12
(`/quintal)
Soda Ash
850
950
1,050
1,150
1,250
1,350
May
-08
Oct
-08
Apr-0
9
Oct
-09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Feb-
12
Aug-
12
(`/50kg)
Copra
2,500
3,400
4,300
5,200
6,100
7,000
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/100kg)
LAB
65
75
85
95
105
115
125
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/kg)
PE (packing material)
45
55
65
75
85
95
Aug-
07
Feb-
08
Aug-
08
Feb-
09
Aug-
09
Feb-
10
Aug-
10
Feb-
11
Aug-
11
Feb-
12
Aug-
12
(`/kg)
Palm Oil
200
250
300
350
400
450
500
550
600
650
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jul-1
0
Jan-
11
Jul-1
1
Feb-
12
Aug-
12
(`/10Kg)
Source: Bloomberg, CMIE, RIL, Companies
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 20
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8 October 2012 India Consumer – Enjoying a slice of luxury
Anand Rathi Research 21
Company Section
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Despite higher excise and sales tax (of 18%), we expect ITC to report positive cigarette volumes in FY13. Other FMCG is likely to be EBITDA-positive in FY14. With established distribution network in cigarettes and core brands in Other FMCG, we expect healthy earnings CAGR of 15% over FY12-14. We retain a Buy with target of `320.
Cigarettes volumes to turn robust. We expect cigarette volumes to be flat (1% upwards) in FY13 and 4% in FY14. The launch of 64mm cigarettes and little competition at the premium end is expected to help ITC maintain positive volume growth in FY13.
Other FMCG EBITDA positive in FY14. The Other FMCG segment is expected to turn EBITDA positive in FY14 from losses of `2bn in FY12. Segments such as biscuits and atta are already profitable with margin of 2-3%. The reduced need for investments to promote personal-care brands due to market share gain of 5% in three years of launch and sub-segmentation of the Sunfeast brand are helping drive revenues without resorting to aggressive ad-spend.
Launch of products not a difficult task. The company has already developed its all-India distribution network of more than 4m outlets and has created stronger brands such as Sunfeast, Fiama, Vivel, etc. Launch of variants on the base of these brands and the structured supply of raw materials from its agri division allows ITC to launch new brands/products at an easier pace than other competitors.
Other businesses on track. Other businesses (hotel, paper and agri) are expected to report upturn in margins by 200-300bps. We expect the agri business to benefit by the 10-12% rupee depreciation.
Valuation. We value the stock at `320 (earlier `247) at a target PE of 30x FY14e earnings. Positive cigarette volume growth would help drive valuations up. Risks: Rise in input prices and higher competition.
Relative price performance
ITC
Sensex180
200
220
240
260
280
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 ITC – Cigarette volumes high; Buy
Anand Rathi Research 23
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Hindustan Lever (HUL) is facing the threat of more competition across segments. As most of its categories have penetration levels of more than 80%, we believe the current phase of 7%+ volume growth would be short lived. We also expect the company's ad-spend to move up 100-200bps due to re-entry into all segments. Hence, we retain Sell with target price of `466.
Cut-throat competition. Global players such as P&G and L’Oreal are getting aggressive in India and have indicated to target small towns, villages by launching price point products such as `5 or `10. Domestic player ITC is also aggressive and has gained market share of more than 5% in soaps, shampoos and skin care over the past two years.
Growth phase short lived. Owing to high penetration levels of most of its products (soaps, detergents, dish-washes, tea and coffee), we believe current volume growth phase of more than 7% may not last for more than 1-2 years.
Ad spending to rise. New product launches and aggression in smaller segments such as face washes, noodles, liquid blue, hair oil, spreads will drive ad-spend up 100-200bps. Another 5-10% rise is likely since the company is changing communication for a few brands.
Change in consumer perception. HUL continues to confuse consumers with communications regarding brands. It recently introduced Rin liquid blue, whereas other Rin detergent ads convey that liquid blue is not required if consumers use Rin powder. It has also launched Souppy Noodles, which failed to win any consumer traction. It previously created confusion with products such as Pepsodent toothpaste and Liril soap relaunching them on gel and family soap platform, respectively.
Valuation. Our DCF-based valuation puts HUL at `466 (earlier `330) at target PE of 27x FY14e earnings. Risks: Lower input prices, competition.
Relative price performance
HUVR
Sensex300
350
400
450
500
550
600
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Hindustan Unilever – Happiness short lived; Sell
Anand Rathi Research 25
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
In the past 2-3 years, Nestlé India (Nestlé) has invested aggressively in enhancing production 100% and doubling distribution. With most capex over and thinning competition in noodles, we expect EPS to post 23% CAGR over CY11-14. We retain a Buy, with a price target of `5,220.
Brand-building initiatives ready for take off. With a large part of Nestlé’s capex already over, its capacities across categories have grown more than 100%, except in beverages. It is, thus, set to regularly launch products and variants. Also, it is now free to resume ad-spend and brand building activities for most of its products.
Margins to improve backed by premiumisation. Nestlé has launched various products at 25-100% premium to the base product prices. This has helped it improve realizations and raise margins 70bps in FY12. We expect margin to move up a further 100bps by FY14.
Distribution capacities doubled. In the past 3-4 years, the number of company retail stores has doubled to ~4m. We also see strong growth in rural sales, 20% of net sales. This, together with higher production capacities, complete revival and new launches in chocolate and confectionery segment, and constant brand-building activity (4.5% of net sales), would aid stronger growth rates ahead.
Competition easing in noodles. Limited success of HUL’s Knorr, Capital Foods’ Smith & Jones and Pantaloon’s Tasty Treat has taken competitive pressure off Nestlé. Also, we expect GSK-CH to be focused on Foodles as healthy noodles and not compete head-on with Maggie; most competitors are not in the regular noodles segment such as Maggi Masala. Maggi is expected to retain market shares of 90%+.
Valuation. We value the stock at `5,220 at a target PE of 36x CY13e earnings. Our target PE is the mean PE plus two standard deviations. Risks: Higher raw material prices and delayed product launches.
Relative price performance
NEST
Sensex
3,900
4,200
4,500
4,800
5,100
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
Change in Estimates Target Reco
Estimates revision (%) FY13e FY14e
Sales - -EBITDA - -EPS - -Target multiple (x) - -
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8 October 2012 Nestlé India – Leader of the pack; Buy
Anand Rathi Research 27
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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With fall in crude oil prices and rupee appreciation, Asian Paints will be able to improve profitability margins (100bps over FY12-14) as well as drive volume growth (16% CAGR over FY12-14). This, coupled with the company’s strong distribution network, will continue to drive long-term growth for the company. We upgrade the stock to Buy from Sell with revised target price of `4,441.
Falling raw material prices. Asian Paints’ 80% of raw materials are crude-oil-linked. Recent fall in crude oil prices by more than 10% as well as rupee appreciation of 8% will help reduce costs. The company’s pricing power will allow to raise prices 5-6%, while maintaining volume growth. We expect EBITDA margin to rise 100bps over FY12-14e.
Fall in inflation to drive demand. As per our chief economist, inflation is expected to fall sharply from Jan’ 2013. We expect fall in inflationary pressure as well as positive economic outlook to drive growth for paints. We see healthy volume CAGR of 16% over FY12-14e.
Strong distribution network. The company has a strong all-India distribution network with coverage of 36,000 outlets out of 40,000 paint shops in India. Also, it has tinting machines in 30,000 outlets. We expect its vast range to help arrest down-trading and push products.
Long-term opportunity intact. The sector is growing a strong 15% since the past two decades. Lower per-capita consumption (1/10 of global consumption) and the large unorganised market (40% of total market) allow for the healthy growth of manufacturers such as Asian Paints. In the next decade, we expect healthy volume growth.
Valuation. We value the stock at `4,441 (earlier `2,785), at a target PE of 26x FY14e earnings. The stock quotes at the mean plus two standard deviations. Risks: Increase in crude oil prices.
Relative price performance
APNT
Sensex
2,500
3,100
3,700
4,300
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Asian Paints – Long-term bet; Buy
Anand Rathi Research 29
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Most of Dabur India’s (Dabur) brands are in the sunset stage. With the lack of a clear sub-segmentation strategy, we believe growth rates would be in low double digits. Weaker response to newer products and loss of market share in oral care and shampoos would hit growth ahead. We reiterate a Hold, with a price target of `130.
Weak response to launches hit growth. Most of the company’s launches have failed to take off. The launch of products in personal care, shampoos, Almond Drops hair oil, fruit drinks, health-food drinks have seen weaker consumer response. Successful new products account for 15-20% of revenue growth for consumer companies, but Dabur will see lower growth rates due to limited success of its new launches.
Market share loss in major segments. The company has lost market share by 100bps each over the past two years in two major segments, oral care and shampoo. Weaker response to variants and products of Dabur as well as aggressive pricing by competitors such as P&G and ITC (20% free grammage and price cuts of 5-10%) have led to market-share loss.
No strategy for sub-segmentation. Lack of clear sub-segmentation strategy is not allowing Dabur to retain consumers. Most of its brands are focused on the ayurved/ herbal concept. Though the company enjoys strong recall in this niche segment, it has not been able to create a platform of products for consumers to up- or down-trade.
Most segments sunset categories. Most of Dabur’s focus areas (toothpowders, Chyawanprash, Hajmola, Amla hair oil) are in the sunset stage with growth rates less than 10%. We believe that weaker growth prospects and the already deep penetration of more than 80% would result in lower growth ahead.
Valuation. Our valuation puts the stock at `130 (earlier `120) at a target PE of 25x FY14e earnings. Risks: Higher raw material prices.
Relative price performance
Dabur
Sensex
90
100
110
120
130
140
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Dabur India – Facing headwinds; Hold
Anand Rathi Research 31
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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We foresee strong earnings growth for Colgate Palmolive India (Colgate), driven by market-share gains of 100-300bps in various sub-segments, growing premiumisation and easing competition. We retain a Buy on the stock with a price target of `1,440 (earlier `1,242).
Gaining market share across segments. Over two years, Colgate has gained market share in toothpastes and toothbrushes by 100-300bps. It has also gained market share in mouthwashes by 200-300bps in FY12 and has maintained leadership in toothpowders with a market share of ~37%.
Growing premiumisation. Owing to the strong push for premium products such as those in the sensitive and mouthwash segments as well as in premium toothbrushes, realizations are improving 200-300bps. One consumer moving from Cibaca toothpaste to Colgate Total drives revenues 6x for same consumption in volumes.
Less competitive pressures. Competition in oral care has lessened. Launches of HUL and Dabur have not been so impactful to take away market share; P&G, too, has not yet launched oral care products in India. Colgate has, thus, been able to retain market leadership across segments and is a strong No. 2 in gel toothpastes and mouthwashes.
Expect margins to improve. We expect Colgate’s profit margins to expand 60bps in FY14 over FY12 due to the growing premiumisation and lower ad-spending (less 100bps). We also expect higher realizations post price hike of 5% in FY12, after a long gap of five years, and stable raw material prices to also aid margin expansion.
Valuation. Our valuation puts the stock at `1,440 (earlier `1,242) at a target PE of 29x FY14e earnings. Lesser competition as well as Colgate’s market-share gains would hold valuations at premium levels, we believe. Risks: Higher raw material prices and keener competition.
Relative price performance
CLGT
Sensex
900
1,000
1,100
1,200
1,300
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Colgate Palmolive India – Regaining lost glory; Buy
Anand Rathi Research 33
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Lower raw material prices, expensive acquisitions; Hold
Though raw material prices are falling, more investments are likely in brand-building. Further, a weaker response to launches and expensive acquisition of the Paras brands would impact Marico’s earnings growth ahead. We retain a Hold at target of `201.
Lower raw material prices. The company’s major raw material, copra, has fallen ~40% from its peak in 3QFY12. The drop allows for margin expansion without Marico needing to resort to price hikes. It plans to cut prices selectively to further retain loyalty and attract new consumers in the coconut oil category.
Weaker response to launches. All Marico’s launches (Nihar cooling oil, Parachute cooling oil, Saffola Arise) have seen weaker consumer offtake. The company is now betting aggressively on growing its skin-care range under Parachute creating portfolio strategy.
Expensive acquisition of Paras products. Marico has acquired three major products from Reckitt at ~5x sales. As it had raised funds for the acquisition as well as debt, we see limited upside from these acquisitions. Assuming a 20% profit margin on sales of `1.5bn of these products, the return on the investment works out to less than 5%.
Strong investments behind brands in FY13. The company is investing strongly behind all its brands. As it has savings from lower raw material prices and wants to launch products, it is aggressively increasing ad-spend. We believe that in FY13 the savings in raw materials may not flow down to profitability.
Valuation. Our valuation puts the stock at `201 (earlier `155) at a target PE of 24x FY14e earnings. Risks: Sharp drop in copra prices and better-than-expected performance of the skin-care range of Parachute.
Relative price performance
MRCO
Sensex
130
150
170
190
210
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Marico – Lower raw material prices, expensive acquisitions; Hold
Anand Rathi Research 35
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
The health-food drinks category continues to grow robustly. This, together with lower ad-spends, will enable Glaxo Smithkline Consumer Healthcare (GSK-CH) to post healthy profit margins in coming quarters. The focus on differentiated launches as well as on small SKUs would drive penetration ahead. We retain a Buy with a target of `3,425.
HFD business to grow at a healthy rate. The company sees healthy growth in its health-food drinks (HFD) business. We believe it would maintain ~10% volume growth as well as price hikes of 7-8% in the next 2-3 years. Ahead, growth in value-added products (Junior Horlicks, Mothers Horlicks, Horlicks Gold) would also drive growth.
With lower ad-spend, margins to expand. GSK-CH had launched various products last year. As some of them have been withdrawn, we expect ad-spend-to-sales to come down 100-200bps in CY12 and CY13, causing margin expansion.
Focus on differentiated launches. The company continues to launch products such as oats and biscuit variants. We believe the steady flow of launches of scientific products with nutritional base would reduce dependence on the HFD category and leverage the Horlicks brand equity.
Small SKUs to drive penetration. At present, small SKUs make up only 2-3% of overall consumption. As the company is investing in expanding its rural distribution network and gaining more consumers, we expect small SKUs to be crucial to growth.
Valuation. Our valuation puts the stock at `3,425 (earlier `2,980), at a target PE of 25x CY13e earnings. The lower penetration of health-food-drink products offers sizeable growth opportunities for the medium to long term. Risks: Higher raw material prices and increase in competition.
Relative price performance
SKB
Sensex
2,200
2,400
2,600
2,800
3,000
3,200
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Glaxo SmithKline Consumer Healthcare – In the pink of health; Buy
Anand Rathi Research 37
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Key data BRIT IN / BRIT.BO52-week high / low `600 / `434Sensex / Nifty 18709 / 56763-m average volume US$0.9mMarket cap `59bn / US$1.1bnShares outstanding 119m
We expect Britannia Industries (Britannia) to undergo a slow growth phase over the next two years due to steep prices of food and rising competition. As MNCs are already actively launching products and variants, we do not see enough growth drivers for the company. We retain a Sell with target price of `493.
Higher food inflation. A weak monsoon and high global food inflation of 10%, we believe, would keep Britannia’s profitability under stress. We expect the higher food inflation to compel it to hike prices aggressively by more than 7%, impacting volume growth that is already at ~just 5-6%.
Keener competition. Competitive pressures in biscuits have built up to a very high level. Competition arises from Unbic, United Biscuits (Macvities), Cadbury (Oreo) and Pepsi (Aliva). Domestic manufacturers Parle, Surya Agro, and ITC are also aggressive in launches. All these are expected to erode Britannia’s profitability margins by 5.5%.
Brand building pressure. In the past 3-4 years, the company has reduced its brand-building activities 100bps. We believe, in a category where competition is intensifying rapidly, Britannia would be compelled to invest more 200-300bps in ad-spend to protect its brands. It also needs to invest in expanding staff cost, as its sales is the lowest in industry at 3.6% as at FY12. Britannia will also be paying the Wadia group 0.35% of net sales for services as well as the use of Wadia brand.
Sub-segmentation woes. The biscuit segment is awash with product launches and new variants/SKUs. We fear Britannia’s launches, innovations and renovations going unnoticed amidst this maze.
Valuation. Our valuation puts the stock at `493 (earlier `420), at a target PE of 20x FY14e earnings. We believe the potential to hike prices and expand margins is limited for Britannia. With lower margins and return ratios, we expect valuation multiples to be lower than past averages. Risks: Lower raw material prices and successful price hikes ahead.
Relative price performance
BRIT
Sensex
400
440
480
520
560
600
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Britannia Industries – Limited scope for differentiation; Sell
Anand Rathi Research 39
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
We retain our Buy on Emami as we see all its power brands doing well and holding on to their leading positions. Ahead, the healthy flow of launches and its stable Canteen Stores Department (CSD) and international businesses would drive growth. We retain our Buy, with a price target of `635 (earlier `500).
Power brands strong. All the company’s power brands (Navratna, Boroplus, Fair and Handsome, Zandu) continue to do well and are expected to report CAGR of more than 15% over FY12-15. Extensions of the power brands are also doing well and have established themselves, gaining separate identities.
Healthy flow of launches. The flow of launches and variants is healthy. The company sees strong growth for products such as its Zandu ethical ayurvedic range. It expects further launches in personal care and is focused mainly on hair care and baby care.
Temporary issues in CSD, international business. The CSD business, bogged down in FY12 and 1QFY13, is expected to be back on track from 2HFY13. As the inventory-correction phases would be over by Oct’12, we expect orders from CSD to resume. The international business also continues to suffer due to political instability in African countries. However, we expect these businesses to return to normal in 1-2 quarters.
Margins to improve. With fall in prices of mentha oil and an increase in sales of premium products, we expect margins to improve. Also, there has been no major hike in media rates, which will push margins higher despite slight increase in brand-building expense.
Valuation. We value the stock at `635 (earlier `500) at a target PE of 25x FY14e earnings. Owing to less competitive pressure as well as market-share gains, we expect valuations to continue at premium levels. Risks: Higher raw material prices and keener competition.
Relative price performance
HMN
Sensex
300
350
400
450
500
550
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Emami – All-round growth; Buy
Anand Rathi Research 41
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities
Key data PIDI IN / PIDI.BO52-week high / low `212 / `134Sensex / Nifty 18709 / 56763-m average volume US$1.1mMarket cap `102bn / US$1.9bnShares outstanding 508m
Considering Pidilite Industries’ (Pidilite) strategy of entering less competitive segments and creating brands in commodity segments, we believe it has strong growth potential (15% p.a.). Further, owing to its strong sub-segmentation strategy, we expect smoother price hikes (5-7% each year) and lesser competitive pressure. We also expect the issue regarding its synthetic elastomer project (Capex of `3bn) to be resolved in FY13 and retain our Buy, with a price target of `235 (earlier `213).
Strategy of entering less competitive segments. Pidilite enters segments growing in excess of 15% per annum and therefore faces lesser competition. It has been able to retain market shares in excess of 80% in most of categories. It has launched successful products and brands in segments such as adhesives, sealants and construction chemicals.
Ability to create brands in commodity segments. Adhesives and sealants are commodities globally. Due to strategic advertising and training to intermidateries such as carpenters, plumbers, Pidilite has created brands in such commodity segments which allows Pidilite to enjoy pricing premium of ~10-15% over competing products such as Camlin, Joker glu.
Sub-segmentation strategy in place. The company has a sub-segmentation strategy for its Fevicol and Dr. Fixit brands with products ranging from `5-500. It has launched Fevistik, Fevibond, Fevikwik and Fevicryl under the Fevicol brand and products and SKUs of Dr. Fixit.
Synthetic elastomer project issue to get clean chit. This project, wherein the company has spent `3.5bn as capex deadlock, is expected to get a clean chit in FY13. We believe management would clarify the position regarding it after the recommendation of the internal committee.
Valuation. Our valuation puts the stock at `235 (earlier `213) at a target PE of 25x FY14e earnings. Risks: Higher raw material prices and delay in resolving the synthetic elastomer project issue.
Relative price performance
PIDI
Sensex
130
150
170
190
210
230
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Pidilite Industries – Taking the road less travelled; Buy
Anand Rathi Research 43
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Agro Tech Foods’ (Agro Tech) Act II popcorn continues to grow healthily at ~20% and its peanut butter factory is slated to start production from 3QFY13. With this, the share of high-margin branded products in overall revenues is bound to rise, pushing margins to 10% in FY14 from 7.4% in FY12. We retain our Buy rating and target of `576.
Act II volumes strong. Contrary to the market view of Act II slowdown, the product is growing a strong 15-20%. SKU launches and entry into the ready-to-eat sub-segment fuelled the growth. The company said it has sufficient corn inventory for FY13 and is in advanced discussions with government for approval to import corn.
Sundrop range steady. Sundrop Heart continues to grow in low teens. However, the launch of Sundrop peanut butter as well as cooking-oil sprays point to increased investment in the brand. This will aid growth in the edible oil category that accounts for 63% of the company’s revenues.
Crystal dilutes growth. Crystal, a low-value-added edible oil (15% of net sales), has weaker pricing power. Its volumes and revenues were down 10% and 6%, respectively, in 1QFY13. The company has, hence, decided to protect its profitability rather than volumes.
Profitability to expand. With the rising proportion of brand-named food products, we expect profit margin to improve. The greater proportions of Act II peanut butter and Sundrop edible oil are expected to drive the margin to 11.1% by FY15 (from 7.4% in FY12).
Peanut-butter on track. The peanut butter factory, expected to commence production from 3QFY12, will roll out new SKUs and variants. The company’s venture into this sub segment, where there is little competition, is likely to aid margin expansion.
Valuation. Our DCF-based valuation puts the stock at `576, at a target PE of 24x FY14e earnings. Risk: Higher raw material prices.
Relative price performance
ATFL
Sensex
300
350
400
450
500
550
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Agro Tech Foods – Brand power; Buy
Anand Rathi Research 45
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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New SKUs and an expanded distribution network have created a stronger platform for launches. Bajaj Almond Drops and Kailash Parbat hair oil gained market share of 100bps in FY12. Management is confident of maintaining margins as it had hiked prices 8.5% to pass on raw material costs. We retain a Buy, with a target of `235.
Market-share gains in Almond Drops. Bajaj Corp.’s Almond Drops has continued to gain. For the seventh year running, it upped its market share, gaining 100bps in FY12 (over FY11), taking its share to 54%. It aims to hit a 65% market share by end-FY16.
Kailash Parbat also doing well. The Kailash Parbat brand also continued to gain, and now commands a 2.1% market share since its Mar’11 launch. The company plans to focus on its sandalwood USP and to rope in celebrities to fortify the brand equity.
Price hikes to pass on higher raw material prices. Though crude oil prices have recently fallen 7-8%, the steep (10-12%) rupee depreciation has held liquid paraffin (a crude-oil derivative) prices high. To pass on rising raw-material prices, the company had hiked prices 8.5%. With this, management is confident of maintaining margins at 25%.
Expansion of distribution network. The company is aggressively looking at expanding its distribution network. In the past three years, it has already doubled it. We believe launch of new SKUs (such as `1 sachets) and 500ml PET bottles would attract consumers as well as premium sales outlets. The expanded distribution network would be a platform for the launch of such products.
Valuation. We value the stock at `235 (earlier `189), at a target PE of 20x FY14e earnings. Our target PE is at the mean PE of 13x since listing plus two standard deviation. Risks: Keener competition and weaker response to launches.
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8 October 2012 Bajaj Corp – Market-share gains continue; Buy
Anand Rathi Research 47
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Though we are enthusiastic about Jyothy Laboratories’ (Jyothy) strategy of creating a long-term business model, its FY13 earnings are likely to be volatile. This is because three key events scheduled for FY13 have now been postponed to FY14: 1) land sale; 2) benefits from the distribution restructuring in FY12; and 3) turnaround in the mosquito-repellent business. Hence, we retain Sell, with a price target of `130.
FY13 to be the year of consolidation. The company plans to change its entire distribution structure and categorise all its brands. It plans to launch variants and re-launch most brands. It has also divided brands into those focused on and those less-focused-on. We expect the changes in its entire business structure to lead to volatile results in FY13.
Change in distribution structure. In line with other FMCG companies, Jyothy now plans to redesign its sales structure and drive sales through zonal sales managers. It will service its distributors using 28 C&F agents’ network and dismantle its own 67 depots. It will also start selling products on cash and will do away with the two-week-credit system. It has cut distributor margins (from 8% to 6%) and reduced retailer margins by 200bps.
Land sale unlikely in near term. The company was looking to sell its Karaikal and Ambatur and its vacant office at MIDC (Andheri, Mumbai) for ~`2bn total and repay part of its debt. However, it has now decided to wait until its merger with Henkel, likely in FY14.
Mosquito-repellent business in investment mode. The company plans to re-launch its Maxo brand and subsequently introduce variants and products under it. More investment in mosquito repellents would result in lower profitability in FY13.
Valuation. We value the stock at `130 at a target PE of 22x FY14e earnings. Risk: Lower raw material prices.
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Lovable Lingerie (Lovable) is focused on driving volumes. It has benefited from the 30% fall in cotton prices, which it is using to lower selling prices by 10% for some styles and increase brand-building. We expect the benefit of its ad-campaigns and distribution restructuring to be seen from FY13. We retain a Buy, with price target of `490.
Volume growth strong. Lovable has been proactive in creating a new range of innerwear at lower prices (10% lower than regular range). This has helped arrest down-trading in lingerie after the slowdown in the economy. We expect volumes to grow at CAGR of 25% over FY12-14e.
Lower raw material prices allow for price drops. Prices of the major raw material (cotton) are down ~30% yoy. This allows Lovable to maintain its profit margin of 17% despite lower realizations. With these savings, it has increased brand-building measures by 300bps in FY12.
Benefits of ad-campaign to be seen ahead. We believe the benefits of ad-campaigns conducted for the Lovable and Daisy Dee brands would be seen in coming quarters. Lower prices, new ranges, national rollout of Daisy Dee and higher ad-spend would help expand market shares from the current level of 28%.
Distribution re-structuring to be complete in FY13. The company has changed the entire distribution network of the Lovable brand from direct retail to distributor-based model. This has increased oulets from 2,000 to 2,500. The Daisy Dee brand has been nationally launched (earlier it was only in South India) with distribution network moving from 7,500 outlets to 9,000 outlets.
Valuation. We value the stock at `490 (earlier `555) at a target PE of 26x FY14e earnings. Risks: Higher raw material prices and increase in competitive pressures.
Relative price performance
LLL
Sensex
270
315
360
405
450
495
540
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Lovable Lingerie – Strong volumes; Buy
Anand Rathi Research 51
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities
We believe VST Industries (VST) would report ~1% volume growth in FY13 contrary to market expectations of a drop in volumes. We expect-less competition at the entry level of `2 cigarette and launch of 64mm cigarettes at `1.5 - to arrest any drop in volumes and down-trading. We upgrade VST from a Sell to a Buy with target price of `2,260.
Steady volumes in FY13 despite higher taxes. On the ~18% increase in excise duty as well as 100-200bps rise in VAT rates, VST hiked prices ~15% to pass on the higher costs. However, as there are hardly any brands available at its price points of `2.0 and `2.5, we expect no loss of market share. We expect 1-2% volume growth in FY13. We expect VST to benefit from beedi uptrading to entry point cigarette.
Launch of new cigarettes at `1.5 to drive volumes. VST has introduced a cigarette at `1.5, taking advantage of the new cigarette slab of 64mm. The cigarette attracts far lower excise duty and enjoys similar profit as those of 69mm. We expect the entry price point to help arrest any down-trading in cigarettes.
Raw material and other costs lower. Though excise and VAT rates have risen 18%, most other costs are still low. Tobacco prices are trending stable , and it helps the company not to resort to price hikes in order to maintain profitability.
Strong dividend play. The company’s business model does not require huge capital expenditure and current capacity utilization of ~55% requires little capex ahead. As the working capital cycle is negative, the company pays a ~75% of its free cash as dividend.
Valuation. We value the stock at `2,260 (earlier `1,236) at a target PE of 19x FY14e earnings. The present dividend yield of 5% and cash per share of `110 on the FY12 balance sheet also supports the valuations. Risks: Weaker growth in cigarettes.
Relative price performance
VST
Sensex
1,000
1,200
1,400
1,600
1,800
2,000
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 VST Industries – Cigarette well-lit; Buy
Anand Rathi Research 53
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Zydus Wellness’ (Zydus) revenue growth rates, we believe, would be on track in FY13 due to rising general health awareness in society, its differentiated product launches and lower competition. Concerted brand-building measures would drive growth rates. We retain our Buy rating and price target of `536.
Upswing in net sales. The company’s aggressive brand-building has finally borne fruits. The company is now enjoying strong consumer offtake in Sugarfree, Nutralite and EverYuth. Gross revenues are up 13.4% in the past two quarters.
Sugarfree going steady. Sugarfree, which accounts for ~40% of revenues and 50% of EBITDA, has consolidated its market leadership by upping its market share from 89% to 91%. Its sub-segmentation strategy and strong brand building has helped it maintain market leadership.
Strategy of differentiated launches. The company is launching differentiated products such Men’s face wash, herbal hand sanitizers and a health-food drink for consumers above the age of 30. The launch of niche products in less competitive markets would drive profitable growth.
Strong investments in brands. Zydus is investing strongly across brands. It has a gross margin of over 65%, which allows brand-building expenditure of more than 20%. We believe its ad-spend is under-utilized as distribution network is restricted to ~1m outlets.
Valuation.We value the stock at `536, at a target PE of 24x FY14e earnings. Products such as Sugarfree and Nutralite have strong growth potential due to rising health awareness in the society, in general. Risks: Higher raw material prices and increase in competition.
Relative price performance
ZYWL
Sensex
300350400450500550600650
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
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8 October 2012 Zydus Wellness – Out of the woods; Buy
Anand Rathi Research 55
Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities
Radico Khaitan (Radico) has the second-largest distribution network in India and has made inroads into the military’s Canteen Stores Department (CSD) to create and support its products. Its earnings have been driven by its ability to launch products/brands with a strong premiumisation strategy. We estimate EPS CAGR of 23% over FY12-14. We retain our Buy rating and price target of `161.
Effective branding capability. Innovative packaging, celebrity endorsements and an effective communication strategy have helped Radico launch and build premium brands in the liquor industry (growing at 15% since past decade). However, despite these spends, it maintains margin of ~14% which is comparable to other liquor players in India. The erstwhile country liquor company has launched successful brands such as 8PM, Old Admiral, and Contessa.
Strong distribution network. After United Spirits, Radico has the second-largest distribution network in India. It sells through ~35,000 retail outlets that cater to ~80% of India’s liquor-consuming areas. It has also made inroads into CSD which accounts for 15% of liquor consumption. This poses a strong entry barrier to potential competition.
Impressive brandwagon. Strong range of brands taps consumers across income levels which is not the case with peers such as Globus Spirits or Tilaknager Industries. Presence in country liquor (25% of sales) and all types of liquor, except for beer and wine, provides growth platform.
Valuation. We value the stock at a price target of `161, a target PE of 19x FY14e earnings. Our target PE is at a 40% discount to the past average PE of 33x. In the past three years, the stock has traded at an average PE of 20x. Risk. Higher prices of molasses.
Rating: Buy Target Price: `161 Share Price: `118
Relative price performance
RDCK
Sensex
100
110
120
130
140
150
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
Key data RDCK IN / RADC.BO52-week high / low `135 / `92Sensex / Nifty 18709 / 56763-m average volume US$0.9m Market cap `16bn / US$298mShares outstanding 133m
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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research India Equities
Well-established in the military’s Canteen Stores Department (CSD) and in the southern states where distribution is government-controlled, Tilaknagar Industries (Tilaknagar) has strong profit margins. It plans to leverage its strong position in the South to expand nationwide. We expect 29% earnings CAGR over FY12-14 and retain our Buy, and a price target of `74.
The brandy focus. Tilaknagar is focused on growing brandy in South India, and currently holds market shares between 40% and 97% across southern states. It has a strong sub-segmenting strategy in its major brand, Mansion House, which pulls in consumers across price points.
Nationwide expansion. ~80% of the company’s revenues are currently concentrated in South. It is, however, now trying to expand pan India by way of aggressive brand launches, leased unit set up and tie-ups. Further, its acquisition of infrastructure-consulting firms is expected to drive internal expansion capabilities.
Cost cutting in process. The company has initiated cost-cutting steps such as recycling 40% of bottles (to rise to 60% in three years). Also, distribution costs and media spend are lower in the South since a large part of distribution is state-government-controlled and Tilaknagar’s brands are well entrenched.
Valuation. Our price target of `74 is based on a target PE of 13x FY14e earnings. Our target PE is at +1 standard deviation to the mean PE. Due to Tilaknagar’s aggressive investment in products and newer areas and improved outlook for the medium term, we assign a higher target multiple to the stock. Risk. Higher molasses prices.
Rating: Buy Target Price: `74 Share Price: `55
Relative price performance
TLNGR
Sensex25
35
45
55
65
Oct
-11
Dec
-11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Oct
-12
Source: Bloomberg
Key data TLNGR IN / TILK.BO52-week high / low `64 / `28Sensex / Nifty 18709 / 56763-m average volume US$0.4m Market cap `6bn / US$115mShares outstanding 120m
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Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Anand Rathi Research Ratings Distribution (as of 15 Sep 2012) Buy Hold Sell Anand Rathi Research stock coverage (128) 74% 13% 13% % who are investment banking clients 5% 6% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.
Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.
Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.