Research report::Indian FMCG Industry July 30, 2013 . OVERVIEW With a population of over one billion, India is one of the largest economies in the world in terms of purchasing power and increasing consumer spending, next to China. The Indian FMCG industry, with an estimated market size of ~`2 trillion, accounts for the fourth largest sector in India. In the last decade, the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated at compounded rate of ~17.3%. The sector is characterized by strong presence of global businesses, intense competition between organized and unorganized players, well established distribution network and low operational cost. Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. During 2012, the country witnessed high inflation, muted salary hikes and slowing economic growth, which affected the FMCG sector with companies posting deceleration in volume growth in their quarterly results. However, the trend seen in 2012 is likely to accelerate in 2013 as growth will come from rural dwellers that are expected to see a rise in their disposable incomes. Fast Facts: Indian FMCG Industry The Indian FMCG industry represents nearly 2.5% of the country’s GDP. The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the last 5 years driven by rising income levels, increasing urbanisation, strong rural demand and favourable demographic trends. The sector accounted for 1.9% of the nation’s total FDI inflows in April 2000- September 2012. Cumulative FDI inflows into India from April 2000 to April 2013 in the food processing sector stood at `9,000.3 crore, accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore. Food products and personal care together make up two-third of the sector’s revenues. Rural India accounts for more than 700 mn consumers or 70% of the Indian population and accounts for 50% of the total FMCG market. With changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 bn by 2026 in towns with population of up to 10 lakh. India's labor cost is amongst the lowest in the world, after China & Indonesia, giving it a competitive advantage over other countries. Unilever Plc's $5.4 billion bid for a 23% stake in Hindustan Unilever is the largest Asia Pacific cross border inbound merger and acquisition (M&A) deal so far in FY’14 and is the fifth largest India Inbound M&A transaction on record till date. Excise duty on cigarette has been increased in the Union Budget for 2013-14, which would hit major industrial conglomerates like ITC, VST Industries in the short term. Opportunities in FMCG Sector: Untapped rural market India is one of the world’s biggest producers of a number of FMCG products but the country’s exports account for a very small proportion of the overall output. Food-processing Industry: With 200 mn people expected to shift to processed and packaged food, India needs around USD 30 bn of investment in the food processing industry. Key Concerns for the sector: High inflation Rising cost of inputs Emergence of private labels Counterfeits and pass-offs Rupee depreciation may hit margins of companies Infrastructure bottlenecks
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Research report::Indian FMCG Industry
July 30, 2013
.
OVERVIEW
With a population of over one billion, India is one of the largest economies in the
world in terms of purchasing power and increasing consumer spending, next to
China. The Indian FMCG industry, with an estimated market size of ~`2 trillion,
accounts for the fourth largest sector in India. In the last decade, the FMCG sector
has grown at an average of 11% a year; in the last five years, annual growth
accelerated at compounded rate of ~17.3%. The sector is characterized by strong
presence of global businesses, intense competition between organized and
unorganized players, well established distribution network and low operational cost.
Availability of key raw materials, cheaper labor costs and presence across the entire
value chain gives India a competitive advantage. During 2012, the country witnessed
high inflation, muted salary hikes and slowing economic growth, which affected the
FMCG sector with companies posting deceleration in volume growth in their quarterly
results. However, the trend seen in 2012 is likely to accelerate in 2013 as growth will
come from rural dwellers that are expected to see a rise in their disposable incomes.
Fast Facts: Indian FMCG Industry
The Indian FMCG industry represents nearly 2.5% of the country’s GDP.
The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the last 5 years driven by rising income
levels, increasing urbanisation, strong rural demand and favourable demographic trends.
The sector accounted for 1.9% of the nation’s total FDI inflows in April 2000- September 2012. Cumulative FDI inflows into
India from April 2000 to April 2013 in the food processing sector stood at `9,000.3 crore, accounting for 0.96% of overall FDI
inflows while the soaps, cosmetics and toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore.
Food products and personal care together make up two-third of the sector’s revenues.
Rural India accounts for more than 700 mn consumers or 70% of the Indian population and accounts for 50% of the total
FMCG market.
With changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 bn by 2026 in
towns with population of up to 10 lakh.
India's labor cost is amongst the lowest in the world, after China & Indonesia, giving it a competitive advantage over other
countries.
Unilever Plc's $5.4 billion bid for a 23% stake in Hindustan Unilever is the largest Asia Pacific cross border inbound merger
and acquisition (M&A) deal so far in FY’14 and is the fifth largest India Inbound M&A transaction on record till date.
Excise duty on cigarette has been increased in the Union Budget for 2013-14, which would hit major industrial conglomerates
like ITC, VST Industries in the short term.
Opportunities in FMCG Sector:
Untapped rural market
India is one of the world’s biggest producers of a
number of FMCG products but the country’s exports
account for a very small proportion of the overall
output.
Food-processing Industry: With 200 mn people
expected to shift to processed and packaged food,
India needs around USD 30 bn of investment in the
food processing industry.
Key Concerns for the sector:
High inflation
Rising cost of inputs
Emergence of private labels
Counterfeits and pass-offs
Rupee depreciation may hit margins of companies
Infrastructure bottlenecks
Research report::Indian FMCG Industry
July 30, 2013
FMCG sector – Overview
The fast-moving consumer goods (FMCG) sector is an important contributor to
India’s GDP and it is the fourth largest sector of the Indian economy. Items in this
category are meant for frequent consumption and they usually yield a high return.
The most common in the list are toilet soaps, detergents, shampoos, toothpaste,
shaving products, shoe polish, packaged foodstuff, and household accessories and
extends to certain electronic goods. The Indian FMCG sector, which is the fourth
biggest sector in the Indian economy, has a market size of `2 trillion with rural
India contributing to one third of the sector’s revenues.
The Indian FMCG sector is highly fragmented, volume driven and characterized by
low margins. The sector has a strong MNC presence, well established distribution
network and high competition between organized and unorganized players. FMCG
products are branded while players incur heavy advertising, marketing, packaging
and distribution costs. The pricing of the final product also depends on the costs of
raw material used. The growth of the sector has been driven by both the rural and
urban segments. India is becoming one of the most attractive markets for foreign
FMCG players due to easy availability of imported raw materials and cheaper labour
costs.
Household care
The fabric wash market size is estimated to be ~USD 1 billion, household cleaners to be USD 239 million, with the production of
synthetic detergents at 2.6 million tonnes. The demand for detergents has been growing at an annual growth rate of 10 to 11% during
the past five years. On account of convenience of usage, increased purchasing power, aggressive advertising and increased penetration
of washing machines, the urban market prefers washing powder and detergents to bars. The regional and small unorganized players
account for a major share of the total detergent market in volumes. Household Care category recorded robust volume and value growth
during the year through focused innovation in the portfolio to provide greater consumer value. Vim bar continues to delight consumers
by delivering superior performance and new offerings like the Anti-Germ Bar and the Monthly Tub Pack. Vim liquid continues to develop
the liquid dish wash category driven by superior product quality and strong advertising. It has effectively accomplished the dual job of
growing the liquids market by reaching out to more households, while increasing consumption in existing households. Domex continued
to provide clean and germ free toilets to the consumers.
HUL, a 52% subsidiary of Unilever, is India's largest Fast Moving
Consumer Goods Company. With over 35 brands spanning 20 distinct
categories, the Company is a part of the everyday life of millions of
consumers across India. HUL, with its iconic brands, has maintained its
growth which is impressive given the recent price hikes across product
categories and a strong competitive scenario, indicating a revival in
consumer demand and higher growth in the mid/premium market
segment. Besides, Unilever PLC’s voluntary offer to increase stake in
HUL to 75% at `600 per share is a fresh trigger for the stock.
The largest FMCG player in the country posted another year of
spectacular performance with 41% and 15% growth in bottom-line
growth and revenue at `37.97 billion and `270.03 billion, respectively
on the back of 16% growth in its domestic Consumer business, driven by
volume growth of 7%. Earnings before interest and tax (EBIT) grew by
23%, with EBIT margin improving 80 bps on account of double digit
growth across all segments.
During FY13, the company achieved the strong growth across all
segments as strong pipeline of innovations helped it to further
strengthen its portfolio and brands. The Soaps and Detergents segment,
contributing ~47% to the revenues, grew by 18.8% YoY, on the back of
strong underlying volume growth and pricing actions. The high margin
Personal Products segment, contributing ~28% to the revenues rose by
12.7% YoY, driven by robust double digit growth in Skin Care Hair & Oral
Care category while the Beverages and Packaged Foods segment grew
14.3%YoY and 11% YoY, respectively.
HUL has been very actively re-launching products from its existing brands
and has increased the pace of new launches, targeting the mid/premium
market segment. This, in our view, is positive, considering that the
company will have a better control on pricing. Moreover, constant
innovations have helped HUL stabilize its market share loss. Some of the
key launches this year included, TRESemmé, a premium range of hair
care products, Dove Elixir hair oil, Lakmé’s advanced skincare range,
Perfect Radiance and Pepsodent Expert Care toothpaste.
Valuation
HUL has delivered broad based competitive growth and margin
improvement. Being the largest FMCG player in the country, HUL is well
positioned to take advantage of its strong brands by investing in brand
equity, finding and strengthening the connections between consumers and
the products through innovation and driven in-market execution and
operational efficiencies. Despite near term concern around slowing market
growth and inflationary pressures on consumers, the company remains
confident of the medium to long term growth prospects. Beside, with the
company’s business model to achieve sustained growth, lower
environmental impact and positive social impact, we believe the stock could
see meaningful upside. At the price of `625.8, the stock is trading at P/E
multiple of 35.4x of its FY13 EPS of `17.7.
Stock Data
Current Market Price (`) 625.8
Target Price (`) 730
Potential upside (%) 17
Reuters Code HLL.NS
Bloomberg Code HUVR:IN
Key Data
Market Cap (`bn ) 1,352.7
52-Week Range (`) 432-725
1-yr Avg. Daily Trading Value (`mn) 1,442.7
Promoters (%) 52.48
FII Holding (%) 20.23
DII Holding (%) 7.13
Public & Others Holding (%) 20.16
Fiscal Year Ended
Y/E March (`mn) FY12 FY13
EBIT Margin (%) 13.7 14.4
NPM (%) 11.8 13.9
EPS (`) 12.9 17.7
Book Value per share (`) 17.0 13.2
P/E (x) 48.5 35.4
P/BVPS (x) 36.7 47.2
EV/EBITDA 38.4 31.8
ROCE (%) 74.0 102.9
ROE (%) 75.8 133.7
One Year Relative Price Performance
Research report::Indian FMCG Industry
July 30, 2013
ITC LTD. Investment Rationale
ITC has posted 22% growth in consolidated net profit at `76.1 bn in
FY’13, mainly on account of strong performance across all financial
parameters, leveraging its corporate strategy of creating multiple
drivers of growth. Better revenue mix, higher operational efficiency and
significant rise in cigarette price enabled ITC to expand EBITDA margin
by 50 bps YoY to 35.7% in FY’13. Going forward, we expect margin to
grow at ~37% in FY14E.
ITC’s non-cigarette FMCG business, which contributes ~25% to the
revenues grew by 26% YoY in FY’13, surpassing the industry growth, a
sign that ITC is fast gaining market share in the Indian FMCG industry,
which is still dominated by HUL, with a 15% market share. In a short
span of time, ITC has penetrated successfully in segments like food &
confectionery and personal care products. The company plans to enter
into dairy products soon. Its foods division already has positive cash
flows; the personal care division would take at least another six
months to turn positive. Consequently we expect non-cigarette
businesses to add to the earnings in FY’15 in a better way.
ITC has gained competitive advantage in the packaged food business
with Sunfest now the market leader in the highly competitive premium
cream biscuits segment with a 27% market share and Aashirvaad’ atta
is the leader in the atta brand with a 70% market share. In the bakery,
the company augmented its product range with the launch of several
'first-to-market' variants including ‘Dark Fantasy Choco Fills – Coffee’,
‘Dark Fantasy Choco Meltz’, ‘Butterscotch Zing’, ‘Kaju Badam Cookies’.
In the staples, ready to eat and the snack food segment, Aashirvaad
‘Multi-grain’ atta and ‘Sunfeast Yippee!’ continues to hold its
leadership position in the market.
ITC has strengthened its market share in FMCG sector via the launch of
new products with innovative ideas, penetration into new segments
and enhancing distribution channels. ITC’s entry into the deodorant
market with the launch of ‘Aqua Pulse Deodorant Spray’ under the
‘Fiama Di Wills Men’ franchise and the launch of 'Vivel Cell Renew'
Body Lotion, Hand Crème/Moisturiser and ‘Vivel Perfect Glow’ Skin
Toner in target markets sets the tone for a pick-up in momentum in the
company’s personal care business.
Valuation
Over the years, ITC has utilized solid cash flows from the cigarette
business to expand its FMCG- other segment. Given the above industry
growth in the non-cigarette FMCG business, which turned profitable for the
first time in Q4’FY’13 and an aggressive investment in the new
businesses, ITC would demand premium valuations over its peers to
become a well-diversified growth company. At the price of `350.5, the
stock is trading at P/E multiple of 36.5x of its FY13 EPS of `9.6.
Stock Data
Current Market Price (`) 350.5
Target Price (`) 400
Potential upside (%) 14
Reuters Code ITC.NS
Bloomberg Code ITC:IN
Key Data
Market Cap (`bn ) 2,769.6
52-Week Range (`) 251-380
1-yr Avg. Daily Trading Value (`mn) 1,974.9
Promoters (%) -
FII Holding (%) 19.64
DII Holding (%) 33.79
Public & Others Holding (%) 46.57
Fiscal Year Ended
Y/E March (`mn) FY12 FY13
EBIT Margin (%) 35.2 35.7
NPM (%) 23.6 24.1
EPS (`) 8.0 9.6
Book Value per share (`) 24.9 29.3
P/E (x) 43.8 36.5
P/BVPS (x) 14.1 12.0
EV/EBITDA 29.4 24.2
ROCE (%) 44.5 45.1
ROE (%) 32.2 32.9
One Year Relative Price Performance
Research report::Indian FMCG Industry
July 30, 2013
DABUR INDIA LTD. (DIL)
Stock Data
Current Market Price (`) 165.1
Target Price (`) 187
Potential upside (%) 13
Reuters Code DABU.NS
Bloomberg Code DABUR:IN
Key Data
Market Cap (`bn ) 287.7
52-Week Range (`) 117.3-177.4
1-yr Avg. Daily Trading Value (`mn) 163.0
Promoters (%) 68.6
FII Holding (%) 20.4
DII Holding (%) 4.0
Public & Others Holding (%) 7.0
Fiscal Year Ended
Y/E March (`mn) FY12 FY13
EBIT Margin (%) 14.9 14.9
NPM (%) 12.2 12.5
EPS (`) 3.7 4.4
Book Value per share (`) 9.9 12.2
P/E (x) 44.59 37.68
P/BVPS (x) 16.74 13.54
EV/EBITDA 32.65 27.97
ROCE (%) 29.4 33.2
ROE (%) 37.6 35.9
One Year Relative Price Performance
Investment Rationale
DIL is one of India's leading FMCG companies having significant
presence in the global market through its products across 60
countries. The company's overseas revenue accounts for over 30% of
the total turnover. DIL is doing well on international front as the
acquisitions of Hobi Group and Namaste Laboratories, LLC by the
company, during FY’12, has given access to new and complimentary
products, thereby increasing the growth potential for the company.
DIL is expanding its rural distribution to grow ahead of the industry
rate. Rural India accounts for 45-50% of DIL’s domestic sales and is a
very strong driver for growth for the company. DIL has undertaken
Project Double aimed at doubling the direct distribution reach in rural
markets, customized trade promotions and has provided focused
servicing through a dedicated sales team in these markets. The efforts
in increasing rural reach have resulted in greater penetration in rural
availability across categories.
In a move to strengthen its footprints in the global market, the
company has expanded its portfolio in the Middle East region.
Currently, more than 65% of DIL’s revenue base comes from the Gulf
Cooperation Council (GCC), Egypt, Yemen, Jordan, Syria, Lebanon,
Morocco, Algeria, Libya, Sudan and Iraq. Further, DIL is looking forward
for setting up manufacturing facilities in North Africa for catering to
Maghreb countries. Its international's business division contributes to
around a third of its total turnover. Within the international business,
Middle East and North Africa (MENA) account for 40% of its business.
Therefore, the MENA region is a very important revenue generator for
the company.
The company has invested $16 mn on a manufacturing facility for
packaged fruit-based beverage in Sri Lanka recently. The opening of
this new facility would mark a new mile stone as this would be the
company’s largest overseas venture to date. The new facility, located in
Mirigama, Gampaha, has a total capacity to produce 280,000 cases of
fruit-based beverages every month.
Valuation
DIL has a unique mix of seven diverse growth engines in the FMCG space,
which have a potential of delivering strong revenue growth. Its
international business is expected to record 15% YoY growth in FY’14 led
by Hobi and Namaste business. With business restructuring at Namaste
now complete, the management expects it to record ~15% (YoY) growth in
FY’14 against 10% decline in FY’13. DIL is also likely to benefit from stable
input prices and lower advertisement spending in FY’14. The management
expects ~100-150bps expansion in gross margins in the next fiscal. At the
price of `165.1, the stock is trading at P/E multiple of 37.68x of its FY13
EPS of `4.4.
Research report::Indian FMCG Industry
July 30, 2013
GODREJ CONSUMER PRODUCTS LTD. (GCPL)
Stock Data
Current Market Price (`) 822.5
Target Price (`) 980
Potential upside (%) 19
Reuters Code GOCP.NS
Bloomberg Code GCPL:IN
Key Data
Market Cap (`bn ) 279.9
52-Week Range (`) 599.7-978.0
1-yr Avg. Daily Trading Value (`mn) 151.2
Promoters (%) 63.3
FII Holding (%) 28.3
DII Holding (%) 1.2
Public & Others Holding (%) 7.2
Fiscal Year Ended
Y/E March (`mn) FY12 FY13
EBIT Margin (%) 17.3 15.2
NPM (%) 14.8 12.3
EPS (`) 16.2 19.6
Book Value per share (`) 89.2 103.5
P/E (x) 50.8 42.0
P/BVPS (x) 0.03 0.02
EV/EBITDA 33.8 28.6
ROCE (%) 18.7 17.7
ROE (%) 18.1 18.9
One Year Relative Price Performance
Investment Rationale
GCPL’s management is confident of achieving ~26% revenue CAGR
over the next 10 years. Around 10% growth is envisaged through the
inorganic route, which translates into a 10x jump in revenues by 2021.
GCPL’s successful acquisition integration in the past makes it
confident of its ability to derive synergy benefits. GCPL expects revenue
and earnings CAGR of ~27 and 35% respectively over FY’12-14.
GCPL’s 3x3 strategy that focuses on international markets through its
three core categories is delivering desired results. The company aims
to penetrate deeper into Asia, Africa and South America, with three
product segments - personal wash, hair care and insecticides. Its focus
has always been on developing countries as these places have higher
population and consumption of its products is high consequently. GCPL
has acquired market-leading brands in emerging-markets, most of
which operate in categories that do not face tough competition from
global players. We expect GCPL to use its expanded distribution
footprint to introduce other key products in its portfolio in these
geographies.
The company aims to grow 10 fold over the next 10 years and for that
it requires a compounded annual growth rate (CAGR) of about 26%.
The company believes that it can achieve it, as it already has achieved
26% growth rate over the past three years, when India was facing a
slowdown. The company is expecting about 15-20% of that growth of
26% CAGR, to come from organic growth and the balance from
inorganic growth.
GCPL has continued to leverage innovation as a differentiator and has
strong pipeline in place to introduce exciting and disruptive new
products in the near future. It has launched a number of products
during FY’13 like HIT Anti-Roach gel. Moreover, it has successfully
launched other products like latest soap variants Godrej no. 1 Aloe
Vera and white lily and Rosewater and almond soaps, Godrej Expert
rich crème hair colour, range of Cinthol shower gels etc. With wider
distribution network of over 4.1 mn outlets, the company is well
positioned to lead market penetration efforts in a country.
Valuation
Being a market leader in hair colour, home insecticides and liquid
detergent and the number two player in toilet soaps in the Indian market,
GCPL will continue to leverage innovation as a differentiator. The company
has launched several products in FY’13 and has a strong innovation
pipeline in place to introduce exciting and disruptive new products.
Traction in Asian, African and Latin American business will further enhance
the profitability. At the price of `822.5, the stock is trading at P/E multiple
of 42.0x of its FY13 EPS of `19.6.
Research report::Indian FMCG Industry
July 30, 2013
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