India Consumer - Enjoying a Slice of Luxury.248.175.146

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.

8 October 2012 India Consumer – Enjoying a slice of luxury

Anand Rathi Research 2

India Consumer

Enjoying a slice of luxury

Investment Summary ........................................................................................3

Moving Up the Brand Curve..............................................................................4

Benefits of Investments Come to Fore..............................................................7

Rural Juggernaut to Continue .........................................................................10

Change in estimates and valuations ...............................................................13

Company Section............................................................................................21

ITC............................................................................................................22

Hindustan Unilever ...................................................................................24

Nestlé India ..............................................................................................26

Asian Paints .............................................................................................28

Dabur India...............................................................................................30

Colgate Palmolive India............................................................................32

Marico.......................................................................................................34

Glaxo Smithkline Consumer Healthcare...................................................36

Britannia Industries...................................................................................38

Emami ......................................................................................................40

Pidilite Industries ......................................................................................42

Agro Tech Foods......................................................................................44

Bajaj Corp.................................................................................................46

Jyothy Laboratories ..................................................................................48

Lovable Lingerie .......................................................................................50

VST Industries..........................................................................................52

Zydus Wellness ........................................................................................54

Radico Khaitan .........................................................................................56

Tilaknagar Industries. ...............................................................................58





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





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

Colgate Oral care Colgate dental cream Colgate Sensodyne, Total, Mouthwash, Floss Emami Cooling hair oil Navratna Navratna extra thanda, Navratna Lite, Navratna

cocout cool, Cool tac Source: Companies

Reduced sensitivity to input prices

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.





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

Market leader

Low price toothpastes Cibaca Babool, Amar Market leader

Toothpowder Colgate tooth powder Dabur Red toothpowder

Market leader

Toothbrush Colgate Oral B, Pepsodent Market leader

Source: Companies

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


(%)(`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


(%)(`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


(%)(`m)

Source: Companies





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

Healthy Food Health food drink, edible oil, biscuits Britannia, Agro Tech, Marico, GSK Consumer

Undergarments Lingerie Lovable Lingerie, Page Industries

Oral care All products Colgate, HUL

Source: Companies





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





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





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





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

FY08

FY09

FY10

FY11

FY12

FY13

e

(%)

CPI inflation Source: GoI





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)


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


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





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

Small SKUs Nestle, Marico, HUL, Dabur

Communication aimed at rural consumers

Nestle, HUL, Dabur

Expanded distribution networks

Project Shakti (HUL), Project Swadesh (Emami), Project Jagruti (Colgate)

Products for rural consumption

Emami, Nestle, Dabur

Source: Companies

Fig 27 – Rural sales as percent of net sales

0

15

30

45

60

HU

L

Nes

tle

Dab

ur

Col

gate

Mar

ico

Brita

nnia

GSK

Con

sum

er

Emam

i

(%)

Source: Companies





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

Company Rating Price (`) FY14e (%) FY14e (%) Revenues EPS FY14e (x)ITC Buy 278 33.9 43.6 15.1 15.1 26.2 HUL Sell 560 75.6 89.8 14.9 18.1 32.4 Nestle Buy 4,595 60.8 53.2 18.0 18.0 31.7 Asian Paints Buy 3,888 39.4 47.7 22.3 26.8 22.8 Dabur Hold 132 36.2 31.5 18.5 18.4 25.4 Colgate Buy 1,250 103.1 114.9 18.1 22.9 25.2 Marico Hold 202 23.9 26.3 21.7 27.0 24.2 GSKCH Buy 2,956 36.0 37.4 19.5 26.6 21.8 Britannia Sell 493 51.1 39.2 19.0 20.2 20.0 Emami Buy 503 36.5 33.3 17.8 17.8 19.8 Pidilite Buy 203 26.3 31.0 18.6 20.4 21.9 Agro Tech Buy 411 22.1 28.7 14.9 29.9 16.3 Bajaj Corp Buy 187 33.4 31.6 19.9 20.5 15.8 Jyothy Labs Sell 154 13.9 15.1 26.9 56.6 22.7 Lovable Lingerie Buy 382 16.0 17.0 28.8 20.4 20.4 VST Inds Buy 1,780 52.5 66.3 11.5 14.7 14.7 Zydus Wellness Buy 426 31.4 33.9 14.6 12.7 19.4 Radico Khaitan Buy 118 13.1 13.3 17.9 23.0 13.6 Tilaknagar Inds Buy 55 13.2 15.5 19.2 29.4 8.0

Source: Bloomberg, Anand Rathi Research

Fig 32 – ITC mean PE

Mean

+1SD

+2SD

-1SD

-2SD

5

10

15

20

25

30

Jan-

01Se

p-01

Jun-

02M

ar-0

3D

ec-0

3Au

g-04

May

-05

Feb-

06N

ov-0

6Au

g-07

Apr-0

8Ja

n-09

Oct

-09

Jul-1

0M

ar-1

1D

ec-1

1Se

p-12


Fig 30 – Change in estimates Revenues (`m) Net profit (`m)

Old estimates Revised estimates Change (%) Old estimates Revised estimates Change (%) Target price (`) Rating

FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e Old New Old New

ITC 300,293 339,631 297,919 346,743 (0.8) 2.1 74,622 85,744 71,036 82,927 (4.8) (3.3) 247 320 Buy BuyHUL 244,726 272,612 269,332 309,163 10.1 13.4 28,217 31,873 32,644 37,314 15.7 17.1 330 466 Sell SellNestle 86,266 104,251 86,266 104,251 - - 11,277 13,979 11,277 13,979 - - 5,220 5,220 Buy BuyAsian Paints 111,097 133,408 115,551 138,635 4.0 3.9 12,132 14,842 12,811 16,383 5.6 10.4 2,785 4,441 Sell BuyDabur 57,142 64,591 62,551 74,019 9.5 14.6 8,134 9,273 7,817 9,048 (3.9) (2.4) 120 130 Hold HoldColgate 31,002 36,246 32,193 37,575 3.8 3.7 6,221 7,133 5,775 6,741 (7.2) (5.5) 1,242 1,440 Buy BuyMarico 46,416 55,447 49,655 59,338 7.0 7.0 3,900 5,030 4,526 5,387 16.1 7.1 155 201 Hold HoldGSKCH 32,672 39,051 32,101 38,373 (1.7) (1.7) 5,014 5,788 4,761 5,692 (5.0) (1.7) 2,980 3,425 Buy Buy

Britannia 67,610 81,001 64,932 77,285 (4.0) (4.6) 2,269 2,829 2,360 2,945 4.0 4.1 420 493 Sell SellEmami 17,211 20,286 16,146 19,029 (6.2) (6.2) 3,040 3,748 3,156 3,843 3.8 2.5 500 635 Buy BuyPidilite 37,323 43,969 37,323 43,969 - - 4,167 4,823 4,167 4,823 - - 213 235 Buy BuyAgro Tech 9,265 10,667 9,265 10,667 - - 613 797 613 797 - - 576 576 Buy BuyBajaj Corp 6,790 8,111 6,790 8,111 - - 1,744 2,062 1,744 2,062 - - 189 210 Buy BuyJyothy Labs 11,997 14,666 11,997 14,666 - - 684 1,126 684 1,126 - - 130 130 Sell SellLovable Ling 1,811 2,332 1,712 2,204 (5.5) (5.5) 304 324 265 314 (12.8) (3.1) 555 490 Buy BuyVST Inds 7,520 7,954 7,693 8,452 2.3 6.3 1,272 1,368 1,641 1,876 29.0 37.1 1,236 2,260 Sell BuyZydus Wellness

3,731 4,335 3,731 4,335 - - 752 859 752 859 - - 536 536 Buy Buy

Radico Khaitan

13,137 15,512 13,484 15,899 2.6 2.5 1,086 1,411 916 1,152 (15.7) (18.4) 161 161 Buy Buy

Tilaknagar 6,288 7,343 6,531 7,787 3.9 6.0 645 877 616 822 (4.5) (6.3) 74 74 Buy Buy

Source: Anand Rathi Research





Fig 33 – Cons. sector - premium to 12M forward Nifty PE

Avg

+1 SD

-1 SD

Nifty90

120

150

180

210

240

270

300

Jul-9

7

Apr-9

9

Dec

-00

Aug-

02

Apr-0

4

Dec

-05

Aug-

07

Apr-0

9

Dec

-10

Aug-

12Source: Bloomberg, Anand Rathi Research

Fig 34 – Cons. 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






Fig 35 – PE trends: mean PE and standard deviation HUL

Mean

+1 SD

+2 SD

-1 SD

-2 SD15

20

25

30

35

40

45

50Ja

n-00

Nov

-00

Sep-

01Ju

l-02

May

-03

Mar

-04

Jan-

05D

ec-0

5O

ct-0

6Au

g-07

Jun-

08Ap

r-09

Feb-

10Ja

n-11

Nov

-11

Sep-

12

Nestlé India

Mean

+1 SD

+2 SD

-1 SD

-2 SD12

17

22

27

32

37

42

Jan-

00Se

p-00

May

-01

Jan-

02Se

p-02

May

-03

Jan-

04Se

p-04

May

-05

Jan-

06Se

p-06

May

-07

Jan-

08Se

p-08

May

-09

Jan-

10Se

p-10

May

-11

Jan-

12Se

p-12

Asian Paints

Mean

+1 SD

+2 SD

-1 SD

-2 SD8

12

16

20

24

28

32

Jan-

01N

ov-0

1Se

p-02

Jul-0

3M

ay-0

4M

ar-0

5Ja

n-06

Nov

-06

Sep-

07Ju

l-08

May

-09

Mar

-10

Jan-

11N

ov-1

1Se

p-12

Dabur

Mean

+1SD

+2SD

-1SD

-2SD

5

10

15

20

25

30

35

Jul-0

2Fe

b-03

Oct

-03

Jun-

04Ja

n-05

Sep-

05Ap

r-06

Dec

-06

Aug-

07M

ar-0

8N

ov-0

8Ju

l-09

Feb-

10O

ct-1

0M

ay-1

1Ja

n-12

Sep-

12

Colgate Palmolive

Mean

+1 SD

+2 SD

-1 SD

-2 SD5

101520253035404550

Jan-

00O

ct-0

0Au

g-01

May

-02

Mar

-03

Dec

-03

Oct

-04

Jul-0

5M

ay-0

6Fe

b-07

Dec

-07

Sep-

08Ju

l-09

Apr-1

0Fe

b-11

Nov

-11

Sep-

12

Marico

Mean

+1SD

+2SD

-1SD

-2SD 0

5

10

15

20

25

30

35

Jul-0

1M

ar-0

2O

ct-0

2Ju

n-03

Feb-

04O

ct-0

4Ju

n-05

Feb-

06O

ct-0

6Ju

n-07

Jan-

08Se

p-08

May

-09

Jan-

10Se

p-10

May

-11

Jan-

12Se

p-12

GSKCH

Mean

+1SD

+2 SD

-1 SD

-2 SD

5

10

15

20

25

30

Apr-0

1N

ov-0

1Ju

l-02

Mar

-03

Oct

-03

Jun-

04Ja

n-05

Sep-

05M

ay-0

6D

ec-0

6Au

g-07

Apr-0

8N

ov-0

8Ju

l-09

Feb-

10O

ct-1

0Ju

n-11

Jan-

12Se

p-12

Britannia

Mean

+1SD

+2SD

-1SD-2SD

05

1015202530354045

Apr-0

1N

ov-0

1Ju

l-02

Mar

-03

Oct

-03

Jun-

04Ja

n-05

Sep-

05M

ay-0

6D

ec-0

6Au

g-07

Apr-0

8N

ov-0

8Ju

l-09

Feb-

10O

ct-1

0Ju

n-11

Jan-

12Se

p-12

Emami

Mean

+1SD

+2SD

-1SD

-2SD

0

5

10

15

20

25

30

35

Apr-0

2N

ov-0

2Ju

l-03

Feb-

04Se

p-04

May

-05

Dec

-05

Jul-0

6M

ar-0

7O

ct-0

7M

ay-0

8Ja

n-09

Aug-

09Ap

r-10

Nov

-10

Jun-

11Fe

b-12

Sep-

12






Fig 35 (cont.) – PE trends: Mean PE and standard deviation Pidilite

Mean

+1SD

+2SD

-1SD

-2SD0

8

16

24

32

40Ja

n-00

Oct

-00

Jul-0

1M

ar-0

2D

ec-0

2Se

p-03

Jun-

04M

ar-0

5D

ec-0

5Se

p-06

Jun-

07M

ar-0

8D

ec-0

8Se

p-09

Jun-

10M

ar-1

1D

ec-1

1Se

p-12

Agro Tech

Mean+1SD

+2SD

-1SD-2SD

0

10

20

30

40

50

60

Mar

-02

Oct

-02

May

-03

Dec

-03

Jul-0

4Fe

b-05

Sep-

05Ap

r-06

Nov

-06

Jun-

07Ja

n-08

Aug-

08M

ar-0

9O

ct-0

9M

ay-1

0D

ec-1

0Ju

l-11

Feb-

12Se

p-12

Bajaj Corp.

Mean

+1SD

+2SD

-1SD

-2SD68

1012141618202224

Aug-

10

Oct

-10

Dec

-10

Feb-

11

Apr-1

1

Jun-

11

Aug-

11

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

VST

Mean

+1SD

+2SD

-1SD

-2SD02468

101214161820

Jan-

00Au

g-00

Mar

-01

Oct

-01

Jun-

02Ja

n-03

Aug-

03M

ar-0

4N

ov-0

4Ju

n-05

Jan-

06Au

g-06

Apr-0

7N

ov-0

7Ju

n-08

Jan-

09Se

p-09

Apr-1

0N

ov-1

0Ju

l-11

Feb-

12Se

p-12

Zydus Wellness

Mean

+1SD

+2SD

-1SD

-2SD05

1015202530354045

Mar

-05

Nov

-05

Jun-

06

Feb-

07

Sep-

07

May

-08

Dec

-08

Aug-

09

Mar

-10

Oct

-10

Jun-

11

Jan-

12

Sep-

12

Lovable

Mean

+1SD

+2SD

-1SD

-2SD10

15

20

25

30

35

40

45

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1D

ec-1

1Ja

n-12

Feb-

12M

ar-1

2Ap

r-12

May

-12

Jun-

12Ju

l-12

Aug-

12Se

p-12

Jyothy Labs

Mean

+1SD

+2SD

-1SD

-2SD

-10

0

10

20

30

40

50

Dec

-07

Apr-0

8Ju

l-08

Nov

-08

Feb-

09Ju

n-09

Sep-

09Ja

n-10

May

-10

Aug-

10D

ec-1

0M

ar-1

1Ju

l-11

Oct

-11

Feb-

12M

ay-1

2Se

p-12

Radico Khaitan

Mean

+1SD

+2SD

-1SD

0102030405060708090

100

Apr-0

6Se

p-06

Feb-

07Ju

l-07

Dec

-07

May

-08

Oct

-08

Apr-0

9Se

p-09

Feb-

10Ju

l-10

Dec

-10

May

-11

Oct

-11

Mar

-12

Sep-

12

Tilaknagar Industries

Mean

+1SD

+2SD

-1SD0

5

10

15

20

25

30

Apr-0

6

Oct

-06

Apr-0

7

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12






Fig 36 – India consumer sector: Financials and valuation matrix M.Cap RoE (%) RoCE (%) Revenue EPS CAGR PE (x) Div Yield

Company Price (`) (US$m) FY12 FY13e FY14e FY12 FY13e FY14e CAGR FY12-14(%) FY12-14 (%) FY12 FY13e FY14e FY14e (%)

ITC 278 40,823 33.3 32.9 33.9 42.3 41.9 43.6 15.1 15.1 34.7 30.6 26.2 2.1

HUL 560 23,262 89.6 82.3 75.6 92.7 86.4 89.8 14.9 18.1 45.2 37.1 32.4 2.0

Nestle* 4,595 8,518 91.0 70.5 60.8 88.1 58.1 53.2 18.0 18.0 44.1 39.3 31.7 1.1

Asian Paints 3,888 7,170 38.7 39.7 39.4 47.1 47.2 47.7 22.3 26.8 36.6 29.1 22.8 1.3

Dabur 132 4,419 42.2 39.4 36.2 26.2 26.9 31.5 18.5 18.4 35.7 29.4 25.4 1.3

Colgate 1,250 3,269 113.0 118.0 103.1 131.3 126.5 114.9 18.1 22.9 38.1 29.4 25.2 2.4

Marico 202 2,385 31.8 28.8 23.9 22.7 25.4 26.3 21.7 27.0 39.0 28.8 24.2 0.4

GSKCH* 2,956 2,393 34.9 37.9 36.0 37.2 38.8 37.4 19.5 26.6 35.0 26.1 21.8 1.7

Britannia 493 1,132 53.3 50.8 51.1 22.6 28.6 39.2 19.0 20.2 28.9 25.0 20.0 2.4

Emami 503 1,464 36.3 38.2 36.5 30.5 33.9 33.3 17.8 17.8 27.5 24.1 19.8 1.6

Pidilite 203 1,975 26.0 27.4 26.3 26.0 29.5 31.0 18.6 20.4 31.8 25.4 21.9 1.2

Agro Tech 411 193 19.0 21.2 22.1 23.6 27.0 28.7 14.9 29.9 27.6 20.7 16.3 0.5

Bajaj Corp 187 530 29.8 31.3 33.4 28.0 29.7 31.6 19.9 20.5 23.0 19.3 15.8 3.2

Jyothy Labs 154 492 7.0 10.5 13.9 6.1 11.3 15.1 26.9 56.6 55.7 37.4 22.7 1.0

Lovable Lingerie 382 123 14.3 15.5 16.0 14.1 15.3 17.0 28.8 20.4 29.6 24.1 20.4 0.8

VST Inds 1,780 527 53.9 54.3 52.5 68.2 70.0 66.3 11.5 14.7 19.3 16.7 14.7 4.5

Zydus Wellness 426 320 40.5 34.5 31.4 42.9 36.6 33.9 14.6 12.7 24.6 22.1 19.4 1.4

Radico Khaitan 118 301 8.8 11.6 13.1 10.9 11.7 13.3 17.9 23.0 20.5 17.1 13.6 0.7

Tilaknagar Inds 55 127 10.2 11.3 13.2 12.6 13.6 15.5 19.2 29.4 13.4 10.7 8.0 1.5

Source: Bloomberg, Companies, Anand Rathi Research *Year ending Dec





Fig 37 – Absolute and relative stock performances Absolute price performance (%) 1m 3m 6m 12m Relative price performance (%) 1m 3m 6m 12m

BSE FMCG 5.5 14.8 25.2 44.6 BSE FMCG (0.7) 8.1 18.6 28.4

ITC 5.5 9.9 22.1 39.5 ITC (0.8) 3.1 15.5 23.3

HUL 3.5 25.6 40.3 70.0 HUL (2.7) 18.8 33.7 53.9

Nestle (1.1) 3.7 (1.8) 9.2 Nestle (7.4) (3.0) (8.4) (6.9)

Asian Paints 3.5 4.7 17.0 24.3 Asian Paints (2.7) (2.0) 10.4 8.2

Dabur India 2.2 14.7 24.9 31.1 Dabur India (4.1) 8.0 18.2 15.0

Colgate Palmolive 1.8 7.4 10.2 26.8 Colgate Palmolive (4.5) 0.7 3.5 10.7

Marico (2.0) 9.9 18.9 40.4 Marico (8.3) 3.1 12.2 24.3

GSKCH 0.1 11.2 8.1 24.5 GSKCH (6.1) 4.5 1.5 8.3

Emami (1.4) 3.7 22.0 23.8 Emami (7.7) (3.1) 15.4 7.7

Britannia Industries (1.1) (7.8) (17.0) 9.2 Britannia Industries (7.4) (14.5) (23.7) (6.9)

Pidilite Industries 1.3 20.1 23.3 23.1 Pidilite Industries (5.0) 13.3 16.7 7.0

Agro Tech (5.4) (11.1) (6.9) 9.0 Agro Tech (11.7) (17.9) (13.6) (7.1)

Bajaj Corp 2.1 50.3 43.3 84.7 Bajaj Corp (4.1) 43.5 36.7 68.6

Jyothy Labs (1.2) 28.1 89.9 109.7 Jyothy Labs (7.5) 21.4 83.2 93.6

Lovable Lingerie 16.2 8.2 3.8 (11.6) Lovable Lingerie 10.0 1.4 (2.8) (27.7)

VST Inds 7.0 2.8 10.6 41.4 VST Inds 0.8 (3.9) 3.9 25.3

Zydus Wellness 7.4 3.5 9.7 (20.5) Zydus Wellness 1.2 (3.2) 3.0 (36.7)

Radico Khaitan 0.3 1.0 (7.2) (3.0) Radico Khaitan (6.0) (5.7) (13.9) (19.2)

Tilaknagar Inds 24.5 (4.6) (1.8) 69.4 Tilaknagar Inds 18.3 (11.4) (8.4) 53.3

Source: Bloomberg





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





Company Section



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


[email protected]


[email protected]

Consumer

UpdateIndia I Equities

Key financials (YE Mar) FY11 FY12 FY13e FY14e FY15e

Sales (`m) 222,737 261,795 297,919 346,743 403,725

Net profit (`m) 50,179 62,581 71,036 82,927 97,084

EPS (`) 6.5 8.0 9.1 10.6 12.4

Growth (%) 18.8 23.4 13.5 16.7 17.1

PE (x) 42.9 34.7 30.6 26.2 22.4

PBV (x) 12.5 10.7 9.5 8.4 7.3

RoE (%) 30.9 33.3 32.9 33.9 34.8

RoCE (%) 40.7 42.3 41.9 43.6 44.7

Dividend yield (%) 1.6 1.6 1.8 2.1 2.3

Net gearing (%) (40.7) (35.1) (38.0) (41.7) (45.9)

Source: Company, Anand Rathi Research

Rating: Buy Target Price: `320 Share Price: `278

Key data ITC IN / ITC.BO52-week high / low `280 / `189Sensex / Nifty 18709 / 56763-m average volume US$29.5mMarket cap `2259bn / US$42mShares outstanding 7,818m

Shareholding pattern (%) Jun’ 12 Mar ’12 Dec ’11

Promoters 0.0 0.0 0.0 - of which, Pledged 0.0 0.0 0.0Free Float 100.0 100.0 100.0 - Foreign Institutions 17.7 17.4 16.3 - Domestic Institutions 34.1 34.3 34.8 - Public 48.2 48.3 48.9

Estimates revision (%) FY13e FY14e

Sales (0.8) 2.1EBITDA (6.7) (2.4)EPS (4.8) (3.3)Target multiple (x) - -

Change in Estimates Target Reco

8 October 2012

ITC

Cigarette volumes high; Buy

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



8 October 2012 ITC – Cigarette volumes high; Buy


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues 222,737 261,795 297,919 346,743 403,725 Revenue growth (%) 16.4 17.5 13.8 16.4 16.4 - Op. expenses 148,660 173,420 196,552 227,353 265,118 EBIDTA 74,077 88,375 101,367 119,390 138,607 EBITDA margin (%) 33.3 33.8 34.0 34.4 34.3 - Interest expenses 502 805 336 336 336 - Depreciation 6,991 7,455 9,074 10,840 12,088 + Other income 7,765 11,566 11,863 12,839 15,388 - Tax 23,655 28,458 32,184 37,526 43,887 Effective tax rate (%) 31.8 31.0 31.0 31.0 31.0 Reported PAT 50,694 63,224 71,636 83,527 97,684 +/- Extraordinary items - - - - -+/- Minority interest 611 755 700 700 700 Adjusted PAT 50,179 62,581 71,036 82,927 97,084 Adj. FDEPS (`/share) 6.5 8.0 9.1 10.6 12.4 Adj. FDEPS growth (%) 18.8 23.4 13.5 16.7 17.1 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PAT 50,179 62,581 71,036 82,927 97,084 + Non-cash items 6,991 7,455 9,074 10,840 12,088 Cash profit 57,170 70,036 80,110 93,766 109,172 - Incr./(decr.) in WC 120 (7,983) 1,865 2,625 3,147 Operating cash-flow 57,627 65,004 81,975 96,391 112,318 - Capex (14,207) (24,090) (21,000) (23,000) (25,000)Free cash-flow 43,420 40,914 60,975 73,391 87,318 - Dividend (45,010) (40,618) (45,347) (52,149) (58,951)+ Equity raised 9,038 7,650 - - -+ Debt raised 341 (4) - - -- Investments 2,787 (887) (40,000) (25,000) (25,000)- Misc. items - - - - -Net cash-flow 10,577 6,832 (24,371) (3,757) 3,368 + Op. cash & bank bal. 13,050 23,623 31,301 6,930 3,172 Cl. cash & bank bal. 23,627 30,455 6,930 3,172 6,540 Source: Company, Anand Rathi Research

Fig 5 – PE band

ITC

9x

14x

19x

25x

30x

0

60

120

180

240

300

Jan-

01

Sep-

01

Jun-

02

Mar

-03

Dec

-03

Aug-

04

May

-05

Feb-

06

Nov

-06

Aug-

07

Apr-0

8

Jan-

09

Oct

-09

Jul-1

0

Mar

-11

Dec

-11

Sep-

12

(`)


Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital 7,738 7,818 7,818 7,818 7,818 Reserves & surplus 156,882 186,767 212,457 243,234 281,367 Net worth 164,621 194,586 220,275 251,053 289,186 Minority interest 1,408 1,571 1,571 1,571 1,571 Total debt 1,246 2,800 2,800 2,800 2,800 Def. tax liab. (net) 7,980 8,658 8,658 8,658 8,658 Capital employed 175,254 207,614 233,303 264,081 302,214 Net fixed assets 105,118 124,039 135,964 148,125 161,037 Investments 48,678 63,000 103,000 128,000 153,000 - of which, Liquid 48,678 63,000 103,000 128,000 153,000 Net working capital (2,811) (10,726) (12,591) (15,216) (18,363)Cash and bank balance 24,269 31,301 6,930 3,172 6,540 Capital deployed 175,254 207,614 233,303 264,081 302,214 Net debt (63,722) (82,844) (98,472) (119,715) (148,083)WC days (1.3) (4.1) (4.2) (4.4) (4.5)Book value (`/sh) 22.3 26.0 29.3 33.2 38.1 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `278 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

P/E (x) 42.9 34.7 30.6 26.2 22.4 P/B (x) 12.5 10.7 9.5 8.4 7.3 EV/sales (x) 9.3 8.0 7.1 6.1 5.2 EV/EBITDA (x) 28.1 23.8 20.7 17.6 15.2 RoAE (%) 30.9 33.3 32.9 33.9 34.8 RoACE (%) 40.7 42.3 41.9 43.6 44.7 Dividend yield (%) 1.6 1.6 1.8 2.1 2.3 Dividend payout (%) 68.6 56.2 55.0 54.2 52.3 RM to sales (%) 36.4 36.8 36.2 35.8 35.9 Ad-spend to sales (%) 2.9 2.7 3.0 3.0 3.0 EBITDA growth (%) 17.1 19.3 14.7 17.8 16.1 EPS growth (%) 18.8 23.4 13.5 16.7 17.1 PAT margin (%) 22.8 24.2 24.0 24.1 24.2 Volume growth (%) (2.8) 4.0 1.0 4.0 4.0 Realization growth (%) 18.0 7.9 11.0 5.0 5.0 Source: Company, Anand Rathi Research

Fig 6 – Indicative revenue break-up (FY12)

FMCG Cigarette64%

FMCG Others15%

Agri Business9%

Hotels3%

Paperboards, Paper &

Packaging7%

Others2%

Source: Company





[email protected]


[email protected]

Consumer



Sales (`m) 196,910 234,363 269,332 309,163 353,925

Net profit (`m) 21,336 26,770 32,644 37,314 41,315

EPS (`) 9.9 12.4 15.1 17.3 19.1

Growth (%) 2.8 25.3 21.9 14.3 10.7

PE (x) 56.7 45.2 37.1 32.4 29.3

PBV (x) 48.3 34.9 27.1 22.4 19.4

RoE (%) 86.7 89.6 82.3 75.6 70.9

RoCE (%) 86.6 92.7 86.4 89.8 85.9

Dividend yield (%) 1.2 1.3 1.6 2.0 2.3

Net gearing (%) (118.2) (92.9) (98.4) (102.8) (107.5)


Rating: Sell Target Price: `466 Share Price: `560

Key data HUVR IN / HLL.BO52-week high / low `554 / `319Sensex / Nifty 18709 / 56763-m average volume US$25.1mMarket cap `1,210bn / US$23bnShares outstanding 2162m




Sales 10.1 13.4EBITDA 28.8 31.1EPS 15.7 17.1Target multiple (x) - -


8 October 2012

Hindustan Unilever

Happiness short lived; Sell

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.


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



8 October 2012 Hindustan Unilever – Happiness short lived; Sell




Net revenues 196,910 234,363 269,332 309,163 353,925 Revenue growth (%) 12.0 18.9 14.9 14.8 14.5 - Op. expenses 173,139 199,528 227,090 260,476 299,779 EBIDTA 23,771 34,836 42,241 48,687 54,146 EBITDA margin (%) 12.1 14.9 15.7 15.7 15.3 - Interest expenses 10 17 606 131 56 - Depreciation 2,293 2,335 2,566 2,923 3,213 + Other income 5,893 2,596 4,589 4,926 5,854 - Tax 5,919 8,215 10,915 13,145 15,318 Effective tax rate (%) 21.6 23.4 25.0 26.0 27.0 Reported PAT 21,442 26,865 32,744 37,414 41,415 +/- Extraordinary items 1,624 1,137 - - -+/- Minority interest 106 95 100 100 100 Adjusted PAT 22,961 27,907 32,644 37,314 41,315 Adj. FDEPS (`/share) 9.9 12.4 15.1 17.3 19.1 Adj. FDEPS growth (%) 2.8 25.3 21.9 14.3 10.7 Source: Company, Anand Rathi Research


PAT 22,961 27,907 32,644 37,314 41,315 + Non-cash items 2,293 2,335 2,566 2,923 3,213 Cash profit 25,253 30,242 35,210 40,237 44,527 - Incr./(decr.) in WC (1,521) (7,545) 4,190 4,297 4,977 Operating cash-flow 20,688 22,571 39,500 44,633 49,604 - Capex (3,106) (2,734) (5,000) (5,000) (5,000)Free cash-flow 17,582 19,837 34,500 39,633 44,604 - Dividend (16,619) (8,762) (22,761) (27,819) (32,876)+ Equity raised (6,219) 336 - - -+ Debt raised (82) - (8,000) (1,500) -- Investments 848 (5,794) (8,000) (8,000) (8,000)- Misc. items 2,239 1,307 - - -Net cash-flow (2,251) 6,925 (4,260) 2,315 3,728 + Op. cash & bank bal. 20,124 2,505 19,964 15,704 18,019 Cl. cash & bank bal. 17,873 9,430 15,704 18,019 21,747 Source: Company, Anand Rathi Research

Fig 5 – PE band

HUVR 17x

25x

33x

41x

50x

0

150

300

450

600

750

900

Jan-

00

Nov

-00

Sep-

01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Dec

-05

Oct

-06

Aug-

07

Jun-

08

Apr-0

9

Feb-

10

Jan-

11

Nov

-11

Sep-

12

(`)



Share capital 2,160 2,162 2,162 2,162 2,162 Reserves & surplus 24,934 34,649 44,533 54,028 62,466 Net worth 27,094 36,811 46,694 56,190 64,628 Minority interest 146 183 283 383 483 Total debt 27 10,060 2,060 560 560 Def. tax liab. (net) (2,070) (2,099) (2,099) (2,099) (2,099)Capital employed 25,196 44,954 46,938 55,033 63,571 Net fixed assets 25,231 24,905 27,339 29,416 31,204 Investments 11,885 27,030 35,030 43,030 51,030 - of which, Liquid 11,885 27,030 35,030 43,030 51,030 Net working capital (29,793) (26,945) (31,135) (35,431) (40,408)Cash and bank balance 17,873 19,964 15,704 18,019 21,747 Capital deployed 25,196 44,954 46,938 55,033 63,571 Net debt (31,801) (39,034) (50,773) (62,588) (74,316)WC days (15.1) (11.5) (11.6) (11.5) (11.4)Book value (`/sh) 11.6 16.1 20.6 25.0 28.9 Source: Company, Anand Rathi Research


P/E (x) 56.7 45.2 37.1 32.4 29.3 P/B (x) 48.3 34.9 27.1 22.4 19.4 EV/sales (x) 6.0 5.0 4.4 3.8 3.3 EV/EBITDA (x) 49.5 33.8 27.9 24.2 21.8 RoAE (%) 86.7 89.6 82.3 75.6 70.9 RoACE (%) 86.6 92.7 86.4 89.8 85.9 Dividend yield (%) 1.2 1.3 1.6 2.0 2.3 Dividend payout (%) 65.8 60.6 59.6 63.7 68.0 RM to sales (%) 51.3 53.3 52.0 52.0 52.4 Ad-spend to sales (%) 14.2 11.5 12.0 12.0 12.0 EBITDA growth (%) (7.7) 46.5 21.3 15.3 11.2 EPS growth (%) 2.8 25.3 21.9 14.3 10.7 PAT margin (%) 10.9 11.5 12.2 12.1 11.7 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research

Fig 6 – Indicative revenue breakdown (FY12)

Personal products

30%

Detergents21%

Soaps20%

Branded staple foods2%

Others12%

Canned & processed food

3%

Ice cream1%

Tea & garden tea

11%





India I Equities

Key financials (YE Dec) CY10 CY11 CY12e CY13e CY14e

Sales (`m) 62,547 74,908 86,266 104,251 126,229

Net profit (`m) 8,315 10,038 11,277 13,979 18,310

EPS (`) 86.2 104.1 117.0 145.0 189.9

Growth (%) 21.4 20.7 12.3 24.0 31.0

PE (x) 53.3 44.1 39.3 31.7 24.2

PBV (x) 49.9 33.6 23.6 16.3 11.1

RoE (%) 110.7 91.0 70.5 60.8 54.7

RoCE (%) 149.4 88.1 58.1 53.2 52.2

Dividend yield (%) 1.1 1.1 1.1 1.1 1.1

Net gearing (%) (45.7) 46.2 55.7 2.3 (36.6)


Consumer

Update


[email protected]


[email protected]

Rating: Buy Target Price: `5,220 Share Price: `4,595

Key data NEST IN / NEST.BO52-week high / low `5,024 / `3,930Sensex / Nifty 18709 / 56763-m average volume US$2.9m Market cap `443bn / US$8.5bnShares outstanding 96m



8 October 2012

Nestlé India

Leader of the pack; Buy

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.


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



Sales - -EBITDA - -EPS - -Target multiple (x) - -



8 October 2012 Nestlé India – Leader of the pack; Buy



Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Net revenues 62,547 74,908 86,266 104,251 126,229 Revenue growth (%) 21.9 19.8 15.2 20.8 21.1 - Op. expenses 50,051 59,381 67,775 81,288 97,842 EBIDTA 12,497 15,528 18,491 22,963 28,387 EBITDA margin (%) 20.0 20.7 21.4 22.0 22.5 - Interest expenses 11 51 468 548 548 - Depreciation 1,278 1,533 2,407 3,433 3,733 + Other income 427 509 494 988 2,051 - Tax 3,319 4,414 4,833 5,991 7,847 Effective tax rate (%) 28.5 30.5 30.0 30.0 30.0 Reported PAT 8,315 10,038 11,277 13,979 18,310 +/- Extraordinary items (129) (423) - - -+/- Minority interest - - - - -Adjusted PAT 8,187 9,615 11,277 13,979 18,310 Adj. FDEPS (`/share) 86.2 104.1 117.0 145.0 189.9 Adj. FDEPS growth (%) 21.4 20.7 12.3 24.0 31.0 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

PAT 8,315 10,038 11,277 13,979 18,310 + Non-cash items 1,278 1,533 2,407 3,433 3,733 Cash profit 9,593 11,572 13,684 17,411 22,043 - Incr./(decr.) in WC 756 (163) 2,572 3,092 3,801 Operating cash-flow 10,357 11,863 16,256 20,504 25,844 - Capex (4,456) (15,552) (15,000) (5,000) (5,000)Free cash-flow 5,902 (3,689) 1,256 15,504 20,844 - Dividend (5,430) (5,407) (5,640) (5,640) (5,640)+ Equity raised - - - - -+ Debt raised - 8,652 4,000 - -- Investments - - (1,000) (10,000) (8,000)- Misc. items - - - - -Net cash-flow 471 (444) (1,384) (137) 7,204 + Op. cash & bank bal. 3,588 4,060 2,272 888 751 Cl. cash & bank bal. 4,060 3,616 888 751 7,955 Source: Company, Anand Rathi Research

Fig 5 – PE band

Nestle12x

18x

24x

30x

36x

0

800

1,600

2,400

3,200

4,000

4,800

5,600

Jan-

00Au

g-00

Mar

-01

Oct

-01

May

-02

Jan-

03Au

g-03

Mar

-04

Oct

-04

Jun-

05Ja

n-06

Aug-

06M

ar-0

7N

ov-0

7Ju

n-08

Jan-

09Au

g-09

Mar

-10

Nov

-10

Jun-

11Ja

n-12

Aug-

12

(`)


Fig 2 – Balance sheet (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Share capital 964 964 964 964 964 Reserves & surplus 7,590 11,775 17,412 25,751 38,420 Net worth 8,554 12,740 18,376 26,715 39,385 Minority interest - - - - -Total debt - 9,709 13,709 13,709 13,709 Def. tax liab. (net) 333 435 435 435 435 Capital employed 8,887 22,883 32,520 40,858 53,528 Net fixed assets 13,616 29,944 42,537 44,104 45,372 Investments 1,507 1,344 2,344 12,344 20,344 - of which, Liquid 1,507 1,344 2,344 12,344 20,344 Net working capital (8,789) (10,676) (13,249) (16,341) (20,142)Cash and bank balance 2,553 2,272 888 751 7,955 Capital deployed 8,887 22,883 32,520 40,858 53,528 Net debt (3,727) 6,528 10,912 1,049 (14,155)WC days (14.1) (14.3) (15.4) (15.7) (16.0)Book value (`/sh) 92.2 136.6 195.1 281.6 413.0 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `4,595 Year-end: Dec CY10 CY11 CY12e CY13e CY14e

P/E (x) 53.3 44.1 39.3 31.7 24.2 P/B (x) 49.9 33.6 23.6 16.3 11.1 EV/sales (x) 7.2 6.0 5.2 4.3 3.6 EV/EBITDA (x) 35.9 28.9 24.3 19.6 15.8 RoAE (%) 110.7 91.0 70.5 60.8 54.7 RoACE (%) 149.4 88.1 58.1 53.2 52.2 Dividend yield (%) 1.1 1.1 1.1 1.1 1.1 Dividend payout (%) 56.2 46.6 42.7 34.5 26.3 RM to sales (%) 48.9 47.9 47.1 46.2 45.8 Ad-spend to sales (%) 4.8 4.4 4.5 4.8 4.8 EBITDA growth (%) 20.8 24.3 19.1 24.2 23.6 EPS growth (%) 21.4 20.7 12.3 24.0 31.0 PAT margin (%) 13.3 13.4 13.1 13.4 14.5 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


Beverages14%

Prepared dishes & Cooking aids

28%

Chocolate & confectionery

14%

Milk Production & Nutritional Products

44%






[email protected]


[email protected]

Consumer



Sales (`m) 77,062 96,322 117,835 144,157 174,961

Net profit (`m) 8,432 10,183 12,811 16,383 20,848

EPS (`) 87.9 106.2 133.6 170.8 217.4

Growth (%) 9.2 20.8 25.8 27.9 27.3

PE (x) 44.2 36.6 29.1 22.8 17.9

PBV (x) 16.4 13.1 10.3 7.9 6.1

RoE (%) 41.8 38.7 39.7 39.4 38.4

RoCE (%) 51.0 47.1 47.2 47.7 46.8

Dividend yield (%) 0.8 1.0 1.2 1.3 1.4

Net gearing (%) (31.3) (2.1) (21.2) (37.5) (51.4)



Key data APNT IN / APNT.BO52-week high / low `4,170 / `2,551Sensex / Nifty 18709 / 56763-m average volume US$6.3mMarket cap `373bn / US$7bnShares outstanding 96m






8 October 2012

Asian Paints

Long-term bet; Buy

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.


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



8 October 2012 Asian Paints – Long-term bet; Buy




Net revenues 77,062 96,322 117,835 144,157 174,961 Revenue growth (%) 15.3 25.0 22.3 22.3 21.4 - Op. expenses 63,933 80,939 98,399 119,704 144,806 EBIDTA 13,130 15,384 19,436 24,453 30,155 EBITDA margin (%) 17.0 16.0 16.5 17.0 17.2 - Interest expenses 222 410 428 428 428 - Depreciation 1,131 1,211 1,545 1,925 2,120 + Other income 826 1,074 1,276 1,948 2,890 - Tax 3,789 4,335 5,528 7,214 9,149 Effective tax rate (%) 30.1 29.2 29.5 30.0 30.0 Reported PAT 8,814 10,502 13,211 16,833 21,348 +/- Extraordinary items - (296) - - -+/- Minority interest 381 319 400 450 500 Adjusted PAT 8,432 9,887 12,811 16,383 20,848 Adj. FDEPS (`/share) 87.9 106.2 133.6 170.8 217.4 Adj. FDEPS growth (%) 9.2 20.8 25.8 27.9 27.3 Source: Company, Anand Rathi Research


PAT 8,432 9,887 12,811 16,383 20,848 + Non-cash items 1,131 1,211 1,545 1,925 2,120 Cash profit 9,564 11,099 14,356 18,309 22,969 - Incr./(decr.) in WC (1,767) (2,795) 1,017 474 554 Operating cash-flow 7,855 8,346 15,374 18,782 23,523 - Capex (1,503) (6,675) (3,250) (3,250) (3,250)Free cash-flow 6,351 1,671 12,124 15,532 20,273 - Dividend (3,168) (3,831) (5,050) (5,611) (6,172)+ Equity raised - - - - -+ Debt raised 56 970 - - -- Investments (3,110) 1,067 (6,000) (6,000) (6,000)- Misc. items 12 103 - - -Net cash-flow 141 (19) 1,074 3,921 8,101 + Op. cash & bank bal. 6,375 6,262 6,243 7,317 11,238 Cl. cash & bank bal. 6,515 6,243 7,317 11,238 19,338 Source: Company, Anand Rathi Research

Fig 5 – PE band

APNT9x

15x

20x

25x

29x

0

900

1,800

2,700

3,600

4,500

Jan-

01

Nov

-01

Sep-

02

Jul-0

3

May

-04

Mar

-05

Jan-

06

Nov

-06

Sep-

07

Jul-0

8

May

-09

Mar

-10

Jan-

11

Nov

-11

Sep-

12

(`)



Share capital 959 959 959 959 959 Reserves & surplus 20,915 26,526 34,287 45,059 59,735 Net worth 21,874 27,485 35,246 46,018 60,694 Debt 2,347 4,277 4,277 4,277 4,277 Minority Interest 1,099 1,367 1,367 1,367 1,367 Def. tax liab. (net) 852 928 928 928 928 Capital employed 26,172 34,057 41,818 52,590 67,266 Net fixed assets 13,532 19,176 20,881 22,206 23,335 Investments 9,220 4,187 10,187 16,187 22,187 - of which, Liquid Net working capital 2,088 4,450 3,433 2,959 2,405 Cash and bank balance 1,332 6,243 7,317 11,238 19,338 Capital deployed 26,172 34,057 41,818 52,590 67,266 Net debt (9,453) (9,063) (16,137) (26,058) (40,159)WC days 2.7 4.6 2.9 2.1 1.4 Book value (`/sh) 237 296 377 489 642 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `3,888 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

P/E (x) 44.2 36.6 29.1 22.8 17.9 P/B (x) 16.4 13.1 10.3 7.9 6.1 EV/sales (x) 4.8 3.9 3.2 2.6 2.1 EV/EBITDA (x) 28.4 24.2 19.2 15.2 12.3 RoAE (%) 41.8 38.7 39.7 39.4 38.4 RoACE (%) 51.0 47.1 47.2 47.7 46.8 Dividend yield (%) 0.8 1.0 1.2 1.3 1.4 Dividend payout (%) 36.4 37.7 33.7 29.3 25.3 RM to sales (%) 58.1 60.0 59.4 59.1 58.9 Ad-spend to sales (%) 4.4 4.3 4.3 4.3 4.3 EBITDA growth (%) 7.0 17.2 26.3 25.8 23.3 EPS growth (%) 9.2 20.8 25.8 27.9 27.3 PAT margin (%) 11.4 10.9 11.2 11.7 12.2 Volume growth (%) 16.8 16.0 16.0 16.0 16.0 Realization growth (%) 7.9 6.3 6.0 6.0 5.0 Source: Company, Anand Rathi Research


Industrial paints6%

International17%

Chemicals2%

Distemper29%

Enamels23%

Emulsions23%






[email protected]


[email protected]

Consumer



Sales (`m) 40,691 52,721 62,551 74,019 87,816

Net profit (`m) 5,686 6,449 7,817 9,048 10,790

EPS (`) 3.3 3.7 4.5 5.2 6.2

Growth (%) 13.2 13.3 21.2 15.7 19.3

PE (x) 40.4 35.7 29.4 25.4 21.3

PBV (x) 17.6 13.2 10.3 8.3 6.7

RoE (%) 50.5 42.2 39.4 36.2 34.7

RoCE (%) 38.6 26.2 26.9 31.5 35.9

Dividend yield (%) 0.9 1.0 1.1 1.3 1.5

Net gearing (%) 27.1 51.2 28.2 9.4 (6.7)


Rating: Hold Target Price: `130 Share Price: `132

Key data DABUR IN / DABU.BO52-week high / low `135 / `92Sensex / Nifty 18709 / 56763-m average volume US$2.9mMarket cap `229bn / US$4.4mShares outstanding 1,742m




Sales 9.5 14.6EBITDA (6.3) 0.4EPS (3.9) (2.4)Target multiple (x) - -


8 October 2012

Dabur India

Facing headwinds; Hold

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.


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



8 October 2012 Dabur India – Facing headwinds; Hold




Net revenues 40,691 52,721 62,551 74,019 87,816 Revenue growth (%) 20.1 29.6 18.6 18.3 18.6 - Op. expenses 33,145 44,038 52,410 62,099 73,701 EBIDTA 7,547 8,683 10,141 11,920 14,115 EBITDA margin (%) 18.5 16.5 16.2 16.1 16.1 - Interest expenses 303 538 573 373 183 - Depreciation 816 1,032 945 1,119 1,300 + Other income 652 792 1,148 881 855 - Tax 1,390 1,464 1,954 2,262 2,697 Effective tax rate (%) 20 19 20 20 20 Reported PAT 5,689 6,441 7,817 9,048 10,790 +/- Extraordinary items - - - - -+/- Minority interest 3.2 (7.8) - - -Adjusted PAT 5,686 6,449 7,817 9,048 10,790 Adj. FDEPS (`/share) 3.3 3.7 4.5 5.2 6.2 Adj. FDEPS growth (%) 13.2 13.3 21.2 15.7 19.3 Source: Company, Anand Rathi Research


PAT 5,686 6,449 7,817 9,048 10,790 + Non-cash items 816 1,032 945 1,119 1,300 Cash profit 6,516 6,931 8,762 10,167 12,090 - Incr./(decr.) in WC (1,346) (761) (574) (201) (128)Operating cash-flow 5,170 6,170 8,189 9,966 11,962 - Capex (9,313) (2,327) (2,500) (2,750) (3,000)Free cash-flow (4,090) 3,928 5,689 7,216 8,962 - Dividend (2,277) (2,425) (3,031) (3,536) (4,042)+ Equity raised 1 1 - - -+ Debt raised 8,705 726 (6,000) (4,000) (5,500)- Investments (1,538) (550) - - -- Misc. items - - - - -Net cash-flow 801 1,680 (3,342) (321) (580)+ Op. cash & bank bal. 1,923 2,805 4,484 1,142 821 Cl. cash & bank bal. 2,724 4,484 1,142 821 241 Source: Company, Anand Rathi Research

Fig 5 – PE band

Dabur8x

16x

24x

32x

40x

0

50

100

150

200

Apr-0

2

Oct

-02

May

-03

Nov

-03

Jun-

04

Jan-

05

Jul-0

5

Feb-

06

Aug-

06

Mar

-07

Sep-

07

Apr-0

8

Nov

-08

May

-09

Dec

-09

Jun-

10

Jan-

11

Jul-1

1

Feb-

12

Sep-

12

(`)



Share capital 1,741 1,742 1,742 1,742 1,742 Reserves & surplus 12,170 15,427 20,213 25,724 32,472 Net worth 13,911 17,169 21,955 27,466 34,215 Minority interest 41 33 33 33 33 Total debt 10,510 17,319 11,319 7,319 1,819 Def. tax liab. (net) (821) 274 274 274 274 Capital employed 23,641 34,795 33,581 35,092 36,340 Net fixed assets 15,417 16,680 18,235 19,866 21,566 Investments 4,274 9,871 9,871 9,871 9,871 - of which, Liquid 4,274 9,871 9,871 9,871 9,871 Net working capital 1,225 3,760 4,333 4,534 4,663 Cash and bank balance 2,724 4,484 1,142 821 241 Capital deployed 23,641 34,795 33,581 35,092 36,340 Net debt 2,691 3,238 580 (3,099) (8,019)WC days 3.0 7.1 6.9 6.1 5.3 Book value (`/sh) 7.5 10.0 12.8 15.9 19.8 Source: Company, Anand Rathi Research




Health care33%

Personal care27%

IBD19%

OTC health4%

Ethical CHD3% Others

1%

Home care4%

Foods9%

Source: Company





[email protected]


[email protected]

Consumer



Sales (`m) 22,206 26,932 32,193 37,575 43,861

Net profit (`m) 4,026 4,465 5,775 6,741 7,850

EPS (`) 29.6 32.8 42.5 49.6 57.7

Growth (%) (7.3) 10.9 29.4 16.7 16.5

PE (x) 42.2 38.1 29.4 25.2 21.7

PBV (x) 46.3 40.2 30.6 22.6 16.3

RoE (%) 118.4 113.0 118.0 103.1 87.4

RoCE (%) 121.7 131.3 126.5 114.9 99.6

Dividend yield (%) 1.8 2.0 2.2 2.4 2.5

Net gearing (%) (120.3) (77.0) (110.1) (120.7) (124.6)



Key data ATFL IN / AGRO.BO52-week high / low `1264 / `932Sensex / Nifty 18709 / 56763-m average volume US$1.6mMarket cap `170bn / US$3.2bnShares outstanding 136m




Sales 3.8 3.7EBITDA (1.8) (1.0)EPS (7.2) (5.5)Target multiple (x) - -


8 October 2012

Colgate Palmolive India

Regaining lost glory; Buy

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.


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



8 October 2012 Colgate Palmolive India – Regaining lost glory; Buy




Net revenues 22,206 26,932 32,193 37,575 43,861 Revenue growth (%) 13.2 21.3 19.5 16.7 16.7 - Op. expenses 17,699 21,147 25,216 29,269 34,147 EBIDTA 4,507 5,785 6,977 8,306 9,715 EBITDA margin (%) 20.3 21.5 21.7 22.1 22.1 - Interest expenses 33 15 10 11 12 - Depreciation 342 393 400 444 468 + Other income 1,068 507 1,238 1,511 1,822 - Tax 1,174 1,419 2,029 2,621 3,206 Effective tax rate (%) 22.6 24.1 26.0 28.0 29.0 Reported PAT 4,026 4,465 5,775 6,741 7,850 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted PAT 4,026 4,465 5,775 6,741 7,850 Adj. FDEPS (`/share) 29.6 32.8 42.5 49.6 57.7 Adj. FDEPS growth (%) (7.3) 10.9 29.4 16.7 16.5 Source: Company, Anand Rathi Research


PAT 4,026 4,465 5,775 6,741 7,850 + Non-cash items 342 393 400 444 468 Cash profit 4,442 5,382 6,175 7,185 8,318 - Incr./(decr.) in WC (322) (940) 1,506 956 945 Operating cash-flow 4,120 4,442 7,681 8,140 9,263 - Capex (411) (1,022) (375) (400) (400)Free cash-flow 3,711 3,426 7,306 7,740 8,863 - Dividend (3,168) (3,965) (4,455) (4,773) (4,932)+ Equity raised - - - - -+ Debt raised (45) - - - -- Investments (18) 485 (3,000) (2,500) (2,500)- Misc. items - - - - -Net cash-flow 479 (55) (149) 467 1,431 + Op. cash & bank bal. 3,477 1,611 3,098 2,949 3,416 Cl. cash & bank bal. 3,956 1,557 2,949 3,416 4,847 Source: Company, Anand Rathi Research

Fig 5 – PE band

Colgate

10x

20x

30x

40x

50x

0

400

800

1,200

1,600

2,000

2,400

Jan-

00

Oct

-00

Aug-

01

May

-02

Mar

-03

Dec

-03

Oct

-04

Jul-0

5

May

-06

Feb-

07

Dec

-07

Sep-

08

Jul-0

9

Apr-1

0

Feb-

11

Nov

-11

Sep-

12

(`)



Share capital 136 136 136 136 136 Reserves & surplus 3,705 4,218 5,538 7,505 10,423 Net worth 3,841 4,354 5,674 7,641 10,559 Minority interest - - - - -Total debt 1 308 308 308 308 Def. tax liab. (net) (168) (121) (121) (121) (121)Capital employed 3,673 4,541 5,861 7,829 10,746 Net fixed assets 2,673 3,238 3,213 3,169 3,101 Investments 387 471 3,471 5,971 8,471 - of which, Liquid 387 471 3,471 5,971 8,471 Net working capital (3,417) (2,266) (3,772) (4,728) (5,673)Cash and bank balance 4,029 3,098 2,949 3,416 4,847 Capital deployed 3,673 4,541 5,861 7,829 10,746 Net debt 136.0 136.0 136.0 136.0 136.0 WC days (15.4) (8.4) (11.7) (12.6) (12.9)Book value (`/sh) 27.0 31.1 40.8 55.3 76.8 Source: Company, Anand Rathi Research


P/E (x) 42.2 38.1 29.4 25.2 21.7 P/B (x) 46.3 40.2 30.6 22.6 16.3 EV/sales (x) 7.5 6.2 5.2 4.4 3.8 EV/EBITDA (x) 37.0 28.8 23.9 20.1 17.2 RoAE (%) 118.4 113.0 118.0 103.1 87.4 RoACE (%) 121.7 131.3 126.5 114.9 99.6 Dividend yield (%) 1.8 2.0 2.2 2.4 2.5 Dividend payout (%) 74.3 76.1 65.9 60.5 53.7 RM to sales (%) 39.3 39.0 38.7 38.2 38.3 Ad-spend to sales (%) 15.7 15.3 15.3 15.3 15.3 EBITDA growth (%) 3.2 28.4 20.6 19.1 17.0 EPS growth (%) (7.3) 10.9 29.4 16.7 16.5 PAT margin (%) 18.1 16.6 17.9 17.9 17.9 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


Toothpaste - Low End14%

Toothpowder 16%

Toothpaste- Family45%

Personal care Products

5%Toothbrush

10%

Toothpaste -Premium

10%






[email protected]


[email protected]

Consumer



Sales (`m) 31,167 40,083 49,655 59,338 70,959

Net profit (`m) 2,450 3,189 4,526 5,387 6,905

EPS (`) 4.0 5.2 7.0 8.4 10.7

Growth (%) (5.5) 30.0 35.5 19.0 28.2

PE (x) 50.7 39.0 28.8 24.2 18.8

PBV (x) 14.0 11.1 6.5 5.2 4.2

RoE (%) 33.2 31.8 28.8 23.9 24.7

RoCE (%) 25.4 22.7 25.4 26.3 29.0

Dividend yield (%) 0.3 0.3 0.4 0.4 0.5

Net gearing (%) 55.5 36.1 18.5 1.0 (15.0)


Rating: Hold Target Price: `201 Share Price: `202

Key data MRCO IN / MRCO.BO52-week high / low `209 / `134Sensex / Nifty 18709 / 56763-m average volume US$1.3mMarket cap `130bn / US$2.5bnShares outstanding 644m






8 October 2012

Marico

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.


MRCO

Sensex

130

150

170

190

210

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Jun-

12

Aug-

12

Oct

-12

Source: Bloomberg



8 October 2012 Marico – Lower raw material prices, expensive acquisitions; Hold




Net revenues 31,167 40,083 49,655 59,338 70,959 Revenue growth (%) 18.0 28.6 23.9 19.5 19.6 - Op. expenses 27,070 35,239 43,150 51,594 61,308 EBIDTA 4,098 4,844 6,505 7,744 9,652 EBITDA margin (%) 13.1 12.1 13.1 13.1 13.6 - Interest expenses 393 424 409 182 68 - Depreciation 633 725 859 1,012 1,156 + Other income 279 326 422 269 426 - Tax 850 783 1,132 1,432 1,948 Effective tax rate (%) 25.4 19.5 20.0 21.0 22.0 Reported PAT 2,500 3,238 4,526 5,387 6,905 +/- Extraordinary items 414 (18) - - -+/- Minority interest 50 50 - - -Adjusted PAT 2,864 3,171 4,526 5,387 6,905 Adj. FDEPS (`/share) 4.0 5.2 7.0 8.4 10.7 Adj. FDEPS growth (%) (5.5) 30.0 35.5 19.0 28.2 Source: Company, Anand Rathi Research


PAT 3,213 3,589 5,386 6,399 8,062 + Non-cash items 633 725 859 1,012 1,156 Cash profit 3,846 4,314 6,245 7,412 9,218 - Incr./(decr.) in WC (1,117) 262 (703) (679) (805)Operating cash-flow 2,729 4,576 5,542 6,732 8,413 - Capex (4,042) (1,441) (8,800) (1,600) (1,600)Free cash-flow (1,313) 3,135 (3,258) 5,132 6,813 - Dividend (475) (470) (561) (635) (747)+ Equity raised 286 31 5,000 - -+ Debt raised 3,281 (283) (3,500) (3,500) -- Investments (59) (2,157) 2,000 - (4,500)- Misc. items (90) - - - -Net cash-flow 997 (469) (1,178) (15) 409 + Op. cash & bank bal. 1,112 1,343 1,588 410 395 Cl. cash & bank bal. 2,109 875 410 395 804 Source: Company, Anand Rathi Research

Fig 5 – PE band

Marico

4x

10x

16x

23x

30x

0

50

100

150

200

250

Jul-0

1

Mar

-02

Oct

-02

Jun-

03

Feb-

04

Oct

-04

Jun-

05

Feb-

06

Oct

-06

Jun-

07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

May

-11

Jan-

12

Sep-

12

(`)



Share capital 614 615 644 644 644 Reserves & surplus 8,540 10,815 19,751 24,503 30,661 Net worth 9,155 11,430 20,396 25,147 31,305 Minority interest 219 249 249 249 249 Total debt 7,718 8,048 4,548 1,048 1,048 Def. tax liab. (net) (301) (223) (223) (223) (223)Capital employed 16,791 19,504 24,969 26,221 32,379 Net fixed assets 8,873 8,973 16,914 17,501 17,945 Investments 890 5,435 3,435 3,435 7,935 - of which, Liquid 890 5,435 3,435 3,435 7,935 Net working capital 4,897 3,508 4,211 4,890 5,695 Cash and bank balance 2,131 1,588 410 395 804 Capital deployed 16,791 19,504 24,969 26,221 32,379 Net debt 4,397 802 480 (3,005) (7,913)WC days 15.7 8.8 8.5 8.2 8.0 Book value (`/sh) 14.4 18.2 31.3 38.7 48.2 Source: Company, Anand Rathi Research


P/E (x) 50.7 39.0 28.8 24.2 18.8 P/B (x) 14.0 11.1 6.5 5.2 4.2 EV/sales (x) 4.1 3.2 2.7 2.3 1.9 EV/EBITDA (x) 31.3 26.5 20.7 17.4 13.9 RoAE (%) 33.2 31.8 28.8 23.9 24.7 RoACE (%) 25.4 22.7 25.4 26.3 29.0 Dividend yield (%) 0.3 0.3 0.4 0.4 0.5 Dividend payout (%) 16.6 13.5 10.7 10.2 9.3 RM to sales (%) 53.5 52.4 51.3 51.3 50.8 Ad-spend to sales (%) 11.1 11.2 11.5 11.5 11.5 EBITDA growth (%) 9.2 18.2 34.3 19.0 24.6 EPS growth (%) (5.5) 30.0 35.5 19.0 28.2 PAT margin (%) 8.0 8.1 9.1 9.1 9.7 Volume growth (%) 9.7 4.1 14.3 14.3 14.3 Realization growth (%) 3.2 9.0 3.6 3.6 3.6 Source: Company, Anand Rathi Research


Parachute coconut35%

Saffola15%

Exports14%

Parachute Perfume

13%

Other 10%

Nihar coconut3%

Kaya skin7%

Nihar perfume3%






[email protected]


[email protected]

Consumer


Key financials (YE Dec) CY10 CY11 CY12e CY13e CY14e

Sales (`m) 23,061 26,855 32,101 38,373 45,870

Net profit (`m) 2,999 3,552 4,761 5,692 6,961

EPS (`) 71.3 84.5 113.2 135.4 165.5

Growth (%) 28.8 18.5 34.0 19.6 22.3

PE (x) 41.5 35.0 26.1 21.8 17.9

PBV (x) 13.3 11.3 8.8 7.1 5.6

RoE (%) 32.8 34.9 37.9 36.0 35.1

RoCE (%) 36.9 37.2 38.8 37.4 37.5

Dividend yield (%) 1.7 1.2 1.5 1.7 1.9

Net gearing (%) (104.6) (97.8) (85.9) (87.5) (89.5)



Key data SKB IN / GLXO.BO52-week high / low `3,114 / `2,179Sensex / Nifty 18709 / 56763-m average volume US$1.4mMarket cap `124bn / US$2.4bnShares outstanding 42m




Sales (1.7) (1.7)EBITDA (8.8) (7.2)EPS (5.0) (1.7)Target multiple (x) - -


8 October 2012

Glaxo Smithkline Consumer Healthcare

In the pink of health; Buy

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.


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



8 October 2012 Glaxo SmithKline Consumer Healthcare – In the pink of health; Buy



Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Net revenues 23,061 26,855 32,101 38,373 45,870 Revenue growth (%) 20.0 16.5 19.5 19.5 19.5 - Op. expenses 19,294 22,606 26,661 31,793 37,684 EBIDTA 3,767 4,250 5,440 6,580 8,186 EBITDA margin (%) 16.3 15.8 16.9 17.1 17.8 - Interest expenses 26 35 50 50 51- Depreciation 397 460 571 665 762 + Other income 1,174 1,648 2,183 2,506 2,865 - Tax 1,520 1,851 2,241 2,679 3,276 Effective tax rate (%) 33.6 34.3 32.0 32.0 32.0 Reported PAT 2,999 3,552 4,761 5,692 6,961 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted PAT 2,999 3,552 4,761 5,692 6,961 Adj. FDEPS (`/share) 71.3 84.5 113.2 135.4 165.5 Adj. FDEPS growth (%) 28.8 18.5 34.0 19.6 22.3 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

PAT 2,999 3,552 4,761 5,692 6,961 + Non-cash items 397 460 571 665 762 Cash profit 3,140 3,987 5,332 6,357 7,724 - Incr./(decr.) in WC 390 447 (903) 617 622 Operating cash-flow 3,530 4,434 4,429 6,974 8,346 - Capex (1,086) (952) (1,400) (1,500) (1,500)Free cash-flow 2,444 3,482 3,029 5,474 6,846 - Dividend (881) (2,446) (1,722) (2,214) (2,460)+ Equity raised - - - - -+ Debt raised - - - - -- Investments - - (9,000) (5,000) (5,000)- Misc. items - - - - -Net cash-flow 1,563 1,036 (7,693) (1,740) (614)+ Op. cash & bank bal. 8,198 9,761 10,797 3,103 1,363 Cl. cash & bank bal. 9,761 10,797 3,103 1,363 748 Source: Company, Anand Rathi Research

Fig 5 – PE band

GSK-CH

9x

14x

18x

22x

26x

0

600

1,200

1,800

2,400

3,000

3,600

Apr-0

1

Nov

-01

Jul-0

2

Mar

-03

Oct

-03

Jun-

04

Jan-

05

Sep-

05

May

-06

Dec

-06

Aug-

07

Apr-0

8

Nov

-08

Jul-0

9

Feb-

10

Oct

-10

Jun-

11

Jan-

12

Sep-

12

(`)


Fig 2 – Balance sheet (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Share capital 421 421 421 421 421 Reserves & surplus 9,180 11,021 14,060 17,539 22,040 Net worth 9,600 11,442 14,481 17,959 22,460 Minority interest - - - - -Total debt - - - - -Def. tax liab. (net) (267) (399) (399) (399) (399)Capital employed 9,333 11,043 14,082 17,560 22,061 Net fixed assets 3,106 3,718 4,547 5,382 6,120 Investments 0 - 9,000 14,000 19,000 - of which, Liquid Net working capital (3,534) (3,471) (2,568) (3,185) (3,807)Cash and bank balance 9,761 10,797 3,103 1,363 748 Capital deployed 9,333 11,043 14,082 17,560 22,061 Net debt (10,028) (11,195) (12,502) (15,762) (20,147)WC days (15.3) (12.9) (8.0) (8.3) (8.3)Book value (`/sh) 221.9 262.6 334.8 417.5 524.6 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `2,956 Year-end: Dec CY10 CY11 CY12e CY13e CY14e



Horlicks69%

Others1%

Maltova & Viva5%

Biscuits6%

Boost19%

Source: Company





[email protected]


[email protected]

Consumer



Sales (`m) 46,052 54,608 64,932 77,285 91,936

Net profit (`m) 1,379 2,039 2,360 2,945 3,671

EPS (`) 11.5 17.1 19.8 24.7 30.7

Growth (%) 3.7 47.9 15.7 24.8 24.7

PE (x) 42.7 28.9 25.0 20.0 16.0

PBV (x) 17.7 14.1 11.5 9.2 7.1

RoE (%) 44.2 53.3 50.8 51.1 50.1

RoCE (%) 18.4 22.6 28.6 39.2 47.3

Dividend yield (%) 1.3 1.7 2.0 2.4 2.6

Net gearing (%) 46.9 114.2 77.5 48.2 20.5



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




Sales (4.0) (4.6)EBITDA (1.0) (0.6)EPS 4.0 4.1Target multiple (x) - -


8 October 2012

Britannia Industries

Limited scope for differentiation; Sell

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.


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



8 October 2012 Britannia Industries – Limited scope for differentiation; Sell




Net revenues 46,052 54,608 64,932 77,285 91,936 Revenue growth (%) 22.1 18.6 18.9 19.0 19.0 - Op. expenses 43,689 51,593 61,155 72,630 86,249 EBIDTA 2,363 3,015 3,777 4,655 5,687 EBITDA margin (%) 5.1 5.5 5.8 6.0 6.2 - Interest expenses 478 416 505 333 227 - Depreciation 628 618 739 855 952 + Other income 649 779 700 623 662 - Tax 529 719 873 1,145 1,499 Effective tax rate (%) 27.7 26.0 27.0 28.0 29.0 Reported PAT 1,377 2,041 2,360 2,945 3,671 +/- Extraordinary items (35) (44) - - -+/- Minority interest (0.7) 1.0 - - -Adjusted PAT 1,343 1,996 2,360 2,945 3,671 Adj. FDEPS (`/share) 11.5 17.1 19.8 24.7 30.7 Adj. FDEPS growth (%) 3.7 47.9 15.7 24.8 24.7 Source: Company, Anand Rathi Research


PAT 1,343 1,996 2,360 2,945 3,671 + Non-cash items 628 618 739 855 952 Cash profit 1,941 2,519 3,099 3,800 4,623 - Incr./(decr.) in WC 594 (179) 332 271 331 Operating cash-flow 2,535 2,340 3,432 4,071 4,954 - Capex (720) (2,431) (1,250) (1,500) (1,750)Free cash-flow 1,815 (91) 2,182 2,571 3,204 - Dividend (696) (901) (1,398) (1,677) (1,817)+ Equity raised - - - - -+ Debt raised (384) (371) (3,061) (1,000) (1,500)- Investments (634) 1,492 2,000 - -- Misc. items - - - - -Net cash-flow 102 129 (277) (106) (113)+ Op. cash & bank bal. 373 391 613 336 230 Cl. cash & bank bal. 475 520 336 230 117 Source: Company, Anand Rathi Research

Fig 5 – PE band

Britannia 9x

17x

25x

33x

42x

0

150

300

450

600

750

900

1,050

Apr-0

1

Nov

-01

Jul-0

2

Mar

-03

Oct

-03

Jun-

04

Jan-

05

Sep-

05

May

-06

Dec

-06

Aug-

07

Apr-0

8

Nov

-08

Jul-0

9

Feb-

10

Oct

-10

Jun-

11

Jan-

12

Sep-

12

(`)



Share capital 239 239 239 239 239 Reserves & surplus 3,021 3,853 4,815 6,083 7,937 Net worth 3,260 4,092 5,054 6,322 8,176 Minority interest 21 22 22 22 22 Total debt 6,188 7,477 4,416 3,416 1,916 Def. tax liab. (net) 57 76 76 76 76 Capital employed 9,527 11,667 9,568 9,836 10,190 Net fixed assets 5,183 6,412 6,923 7,568 8,366 Investments 3,885 2,126 126 126 126 - of which, Liquid 3,885 2,126 126 126 126 Net working capital (310) 307 (26) (297) (628)Cash and bank balance 769 613 336 230 117Capital deployed 9,527 11,667 9,568 9,836 10,190 Net debt 1,592 4,815 4,031 3,137 1,749 WC days (0.7) 0.6 (0.0) (0.4) (0.7)Book value (`/sh) 27.8 34.9 43.0 53.6 69.1 Source: Company, Anand Rathi Research




Good Day25%

Tiger30%

Nutrichoice3%

Others18%

Marie11%

Bread9%

Cake4%






[email protected]


[email protected]

Consumer



Sales (`m) 12,024 13,704 16,146 19,029 22,241

Net profit (`m) 2,169 2,768 3,156 3,843 4,645

EPS (`) 14.3 18.3 20.9 25.4 30.7

Growth (%) 19.3 27.6 14.0 21.8 20.9

PE (x) 35.1 27.5 24.1 19.8 16.4

PBV (x) 10.8 10.6 8.2 6.5 5.2

RoE (%) 34.2 36.3 38.2 36.5 35.3

RoCE (%) 26.2 30.5 33.9 33.3 32.7

Dividend yield (%) 0.7 1.6 1.2 1.6 2.0

Net gearing (%) 1.8 (25.3) (37.9) (46.7) (53.2)



Key data HMN IN / EMAM.BO52-week high / low `558 / `321Sensex / Nifty 18709 / 56763-m average volume US$0.6mMarket cap `76bn / US$1.5bnShares outstanding 151m




Sales (6.2) (6.2)EBITDA 2.0 2.0EPS 3.8 2.5Target multiple (x) - -


8 October 2012

Emami

All-round growth; Buy

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.


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



8 October 2012 Emami – All-round growth; Buy




Net revenues 12,024 13,704 16,146 19,029 22,241 Revenue growth (%) 15.8 14.0 17.8 17.9 16.9 - Op. expenses 9,490 10,737 12,590 14,759 17,168 EBIDTA 2,534 2,968 3,556 4,270 5,073 EBITDA margin (%) 21.1 21.7 22.0 22.4 22.8 - Interest expenses 152 152 134 134 134 - Depreciation 140 188 190 206 225 + Other income 331 541 524 645 816 - Tax 404 401 601 732 885 Effective tax rate (%) 15.7 12.7 16.0 16.0 16.0 Reported PAT 2,169 2,768 3,156 3,843 4,645 +/- Extraordinary items 118 (179) - - -+/- Minority interest (0) (0) - - -Adjusted PAT 2,287 2,588 3,156 3,843 4,645 Adj. FDEPS (`/share) 14.3 18.3 20.9 25.4 30.7 Adj. FDEPS growth (%) 19.3 27.6 14.0 21.8 20.9 Source: Company, Anand Rathi Research


PAT 2,169 2,768 3,156 3,843 4,645 + Non-cash items 140 188 190 206 225 Cash profit 2,427 2,776 3,346 4,050 4,870 - Incr./(decr.) in WC (1,236) 700 176 167 186 Operating cash-flow 1,301 3,957 3,522 4,217 5,056 - Capex (493) (1,156) (750) (850) (1,000)Free cash-flow 809 2,801 2,772 3,367 4,056 - Dividend (531) (615) (1,062) (1,416) (1,770)+ Equity raised - - - - -+ Debt raised (311) (683) - - -- Investments 572 (699) (3,500) (2,500) (2,000)- Misc. items (122) (174) - - -Net cash-flow 491 654 (1,790) (549) 286 + Op. cash & bank bal. 1,614 2,105 2,759 969 420 Cl. cash & bank bal. 2,105 2,759 969 420 706 Source: Company, Anand Rathi Research

Fig 5 – PE band

Emami

3x

10x

17x

24x

30x

0

100

200

300

400

500

600

700

Apr-0

2

Nov

-02

Jul-0

3

Feb-

04

Sep-

04

May

-05

Dec

-05

Jul-0

6

Mar

-07

Oct

-07

May

-08

Jan-

09

Aug-

09

Apr-1

0

Nov

-10

Jun-

11

Feb-

12

Sep-

12

(`)



Share capital 151 151 151 151 151 Reserves & surplus 6,747 6,915 9,008 11,436 14,310 Net worth 6,899 7,066 9,160 11,587 14,462 Minority interest 1 1 1 1 1 Total debt 2,294 1,673 1,673 1,673 1,673 Def. tax liab. (net) 137 145 145 145 145 Capital employed 9,330 8,885 10,979 13,406 16,281 Net fixed assets 4,909 4,803 5,363 6,007 6,782 Investments 74 1,125 4,625 7,125 9,125 - of which, Liquid 74 1,125 4,625 7,125 9,125 Net working capital 2,242 197 21 (146) (332)Cash and bank balance 2,105 2,759 969 420 706 Capital deployed 9,330 8,885 10,979 13,406 16,281 Net debt 252 (2,067) (3,777) (5,727) (8,013)WC days 18.6 1.4 0.1 (0.8) (1.5)Book value (`/sh) 46.5 47.7 61.5 77.5 96.5 Source: Company, Anand Rathi Research




Navratna oil25%

Zandu 18%

Boroplus antiseptic cream

14%

Prickly heat powder

2%

Fast Relief2%

Other products12%

Exports13%

Mentho plus balm5%

Chyawanprash1%

Fair & Handsome8%

Source: Company




Aniruddha Joshi+9122 6626 6732

[email protected]

Shirish Pardeshi +9122 6626 6730

[email protected]

Consumer



Sales (`m) 26,439 31,266 37,323 43,969 51,799

Net profit (`m) 3,100 3,244 4,167 4,823 5,786

EPS (`) 6.1 6.4 8.0 9.3 11.1

Growth (%) 13.7 4.3 25.3 15.8 19.9

PE (x) 32.8 31.5 25.1 21.7 18.1

PBV (x) 9.0 7.4 6.3 5.2 4.3

RoE (%) 30.4 26.0 27.4 26.3 26.2

RoCE (%) 27.5 26.0 29.5 31.0 31.6

Dividend yield (%) 0.9 0.9 1.0 1.2 1.4

Net gearing (%) 5.5 2.2 (13.5) (23.3) (31.2)



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






8 October 2012

Pidilite Industries

Taking the road less travelled; Buy

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.


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



8 October 2012 Pidilite Industries – Taking the road less travelled; Buy




Net revenues 26,439 31,266 37,323 43,969 51,799Revenue growth (%) 20.6 17.9 16.4 17.8 17.8 - Op. expenses 21,931 26,429 31,146 36,613 43,043 EBIDTA 4,508 4,836 6,177 7,355 8,756 EBITDA margin (%) 17.0 15.5 16.5 16.7 16.9 - Interest expenses 314 307 152 201 201 - Depreciation 595 637 790 972 1,063 + Other income 432 435 397 425 543 - Tax 947 1,100 1,464 1,784 2,250 Effective tax rate (%) 23.5 25.4 26.0 27.0 28.0 Reported PAT 3,084 3,226 4,167 4,823 5,786 +/- Extraordinary items - - - - -+/- Minority interest (0) 3 - - -Adjusted PAT 3,100 3,244 4,167 4,823 5,786 Adj. FDEPS (`/share) 6.1 6.4 8.0 9.3 11.1 Adj. FDEPS growth (%) 13.7 4.3 25.3 15.8 19.9 Source: Company, Anand Rathi Research


PAT 3,100 3,244 4,167 4,823 5,786 + Non-cash items 595 637 790 972 1,063 Cash profit 3,986 4,304 4,957 5,796 6,849 - Incr./(decr.) in WC (1,011) 716 39 (432) (509)Operating cash-flow 2,975 5,019 4,996 5,364 6,340 - Capex (1,287) (1,554) (1,200) (1,500) (1,800)Free cash-flow 1,688 3,466 3,796 3,864 4,540 - Dividend (885) (1,030) (1,268) (1,449) (1,661)+ Equity raised - - 13 - -+ Debt raised (1,321) (1,626) (1,706) - -- Investments 904 (875) (3,000) (2,600) (3,000)- Misc. items - - - - -Net cash-flow 386 (66) (2,164) (185) (121)+ Op. cash & bank bal. 444 834 2,732 568 382 Cl. cash & bank bal. 830 769 568 382 261 Source: Company, Anand Rathi Research

Fig 5 – PE band

ZYWL

4x

14x

23x

33x

42x

0

200

400

600

800

1,000

Mar

-05

Nov

-05

Jun-

06

Feb-

07

Sep-

07

May

-08

Dec

-08

Aug-

09

Mar

-10

Oct

-10

Jun-

11

Jan-

12

Sep-

12

(`)



Share capital 506 508 521 521 521 Reserves & surplus 10,341 12,754 15,653 19,027 23,152 Net worth 10,847 13,261 16,173 19,547 23,672 Minority interest 2 5 5 5 5 Total debt 3,356 3,936 2,231 2,231 2,231 Def. tax liab. (net) 420 468 468 468 468 Capital employed 14,625 17,671 18,877 22,251 26,376 Net fixed assets 9,138 10,115 10,525 11,053 11,789 Investments 1,705 1,251 4,251 6,851 9,851 - of which, Liquid 1,705 1,251 4,251 6,851 9,851 Net working capital 2,743 3,573 3,534 3,966 4,475 Cash and bank balance 1,039 2,732 568 382 261 Capital deployed 14,625 17,671 18,877 22,251 26,376 Net debt 1,032 422 (2,120) (4,534) (7,413)WC days 10.4 11.4 9.5 9.0 8.6 Book value (`/sh) 22.3 27.0 32.0 38.4 46.4 Source: Company, Anand Rathi Research




EverYuth25%

Nutralite35%

Sugar Free40%

Source: Company





[email protected]


[email protected]

Consumer



Sales (`m) 7,187 7,021 8,058 9,265 10,667

Net profit (`m) 194 363 484 613 797

EPS (`) 8.0 14.9 19.9 25.1 32.7

Growth (%) (22.9) 87.2 33.5 26.5 30.1

PE (x) 51.7 27.6 20.7 16.3 12.6

PBV (x) 5.7 4.8 4.0 3.3 2.7

RoE (%) 12.0 19.0 21.2 22.1 23.4

RoCE (%) 14.1 23.6 27.0 28.7 30.1

Dividend yield (%) 0.4 0.4 0.5 0.5 0.6

Net gearing (%) (25.7) (36.2) (22.6) (19.5) (13.5)



Key data ATFL IN / AGRO.BO52-week high / low `517 / `340Sensex / Nifty 18709 / 56763-m average volume US$0.2mMarket cap `10bn / US$193mShares outstanding 24m






8 October 2012

Agro Tech Foods

Brand power; Buy

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.


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



8 October 2012 Agro Tech Foods – Brand power; Buy




Net revenues 7,187 7,021 8,058 9,265 10,667 Revenue growth (%) 10.6 (2.3) 14.8 15.0 15.1 - Op. expenses 6,912 6,505 7,324 8,331 9,484 EBIDTA 275 517 734 934 1,183 EBITDA margin (%) 3.8 7.4 9.1 10.1 11.1 - Interest expenses 1 1 1 1 1 - Depreciation 46 57 94 112 131 + Other income 69 49 43 54 88 - Tax 103 145 198 263 342 Effective tax rate (%) 35 29 29 30 30 Reported PAT 194 363 484 613 797 +/- Extraordinary items 124 - - - -+/- Minority interest - - - - -Adjusted PAT 318 363 484 613 797 Adj. FDEPS (`/share) 8.0 14.9 19.9 25.1 32.7 Adj. FDEPS growth (%) (22.9) 87.2 33.5 26.5 30.1 Source: Company, Anand Rathi Research


PAT 318 363 484 613 797 + Non-cash items 46 57 94 112 131 Cash profit 185 425 578 725 928 - Incr./(decr.) in WC (541) (126) (55) (82) (91)Operating cash-flow (356) 299 522 643 837 - Capex (45) (288) (250) (250) (250)Free cash-flow (401) 11 272 393 587 - Dividend (42) (49) (57) (64) (71)+ Equity raised - - - - -+ Debt raised - - - - -- Investments - - (400) (300) (600)- Misc. items - - - - -Net cash-flow (443) (38) (185) 29 (84)+ Op. cash & bank bal. 890 448 410 225 255 Cl. cash & bank bal. 448 410 225 255 170 Source: Company, Anand Rathi Research

Fig 5 – PE band

ATFL6x

14x

22x

30x

40x

0

200

400

600

800

1,000

Mar

-02

Oct

-02

May

-03

Dec

-03

Jul-0

4

Feb-

05

Sep-

05

Apr-0

6

Nov

-06

Jun-

07

Jan-

08

Aug-

08

Mar

-09

Oct

-09

May

-10

Dec

-10

Jul-1

1

Feb-

12

Sep-

12

(`)



Share capital 244 244 244 244 244 Reserves & surplus 1,532 1,846 2,273 2,821 3,547 Net worth 1,776 2,089 2,516 3,065 3,791 Minority interest - - - - -Total debt - 94 94 94 94 Def. tax liab. (net) (32) (24) (24) (24) (24)Capital employed 1,744 2,160 2,587 3,136 3,862 Net fixed assets 681 874 1,031 1,168 1,287 Investments 144 431 831 1,131 1,731 - of which, Liquid 144 431 831 1,131 1,731 Net working capital 472 444 500 581 673 Cash and bank balance 448 410 225 255 170 Capital deployed 1,744 2,160 2,587 3,136 3,862 Net debt (592) (747) (963) (1,292) (1,808)WC days 6.6 6.3 6.2 6.3 6.3 Book value (`/sh) 71.6 84.8 102.3 124.8 154.6 Source: Company, Anand Rathi Research


P/E (x) 51.7 27.6 20.7 16.3 12.6 P/B (x) 5.7 4.8 4.0 3.3 2.7 EV/sales (x) 1.3 1.3 1.2 1.0 0.9 EV/EBITDA (x) 33.7 17.9 12.6 9.9 7.8 RoAE (%) 12.0 19.0 21.2 22.1 23.4 RoACE (%) 14.1 23.6 27.0 28.7 30.1 Dividend yield (%) 0.4 0.4 0.5 0.5 0.6 Dividend payout (%) 22.0 11.8 10.1 9.0 7.6 RM to sales (%) 73.3 70.6 67.5 66.0 64.5 Ad-spend to sales (%) 6.5 4.7 6.0 6.5 7.0 EBITDA growth (%) 7.0 87.9 42.1 27.3 26.7 EPS growth (%) (22.9) 87.2 33.5 26.5 30.1 PAT margin (%) 2.7 5.2 6.0 6.6 7.5 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


Refined Edible Oil

83%

Act II14%

Sundrop Extensions

3%






[email protected]


[email protected]

Key financials (YE: Mar) FY11 FY12 FY13e FY14e FY15e

Sales (`m) 3,587 4,722 5,684 6,790 8,111

Net profit (`m) 991 1,201 1,433 1,744 2,062

EPS (`) 6.7 8.1 9.7 11.8 14.0

Growth (%) 0.0 21.2 19.3 21.7 18.2

PE (x) 27.8 23.0 19.3 15.8 13.4

PBV (x) 7.3 6.4 5.7 4.9 4.3

RoE (%) 49.3 29.8 31.3 33.4 34.3

RoCE (%) 52.9 28.0 29.7 31.6 32.7

Dividend yield (%) 1.2 2.4 3.0 3.7 4.3

Net gearing (%) (109.3) (79.2) (97.9) (98.7) (100.0)


Consumer


`



BJCOR

Sensex90

110

130

150

170

190

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Jun-

12

Aug-

12

Oct

-12

Source: Bloomberg

Key data BJCOR IN / BACO.BO52-week high / low `195 / `95Sensex / Nifty 18709 / 56763-m average volume US$0.7mMarket cap `28bn / US$536mShares outstanding 148m

Shareholding pattern (%) Sep ’12 Jun ’12 Mar ’12





8 October 2012

Bajaj Corp.

Market-share gains continue; Buy

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.



8 October 2012 Bajaj Corp – Market-share gains continue; Buy




Net revenues 3,587 4,722 5,683 6,789 8,111 Revenue growth (%) 8.7 31.7 20.3 19.5 19.5 - Op. expenses 2,506 3,568 4,285 5,085 6,075 EBIDTA 1,081 1,154 1,398 1,704 2,036 EBITDA margin (%) 30.1 24.4 24.6 25.1 25.1 - Interest expenses - 1 0 0 0 - Depreciation 18 26 38 51 65 + Other income 178 385 453 555 639 - Tax 250 311 381 464 548 Effective tax rate (%) 20.1 20.6 21.0 21.0 21.0 Reported PAT 991 1,201 1,433 1,744 2,062 +/- Extraordinary items (150) - - - -+/- Minority interest - - - - -Adjusted PAT 841 1,201 1,433 1,744 2,062 Adj. FDEPS (`/share) 6.7 8.1 9.7 11.8 14.0 Adj. FDEPS growth (%) 0.0 21.2 19.3 21.7 18.2 Source: Company, Anand Rathi Research


PAT 841 1,201 1,433 1,744 2,062 + Non-cash items 18 26 38 51 65 Cash profit 992 1,227 1,470 1,795 2,127 - Incr./(decr.) in WC 140 (635) 932 177 211 Operating cash-flow 1,132 592 2,402 1,972 2,338 - Capex (62) (626) (180) (200) (200)Free cash-flow 1,070 (33) 2,222 1,772 2,138 - Dividend - (676) (856) (1,027) (1,198)+ Equity raised 2,802 - - - -+ Debt raised - 4 - - -- Investments (3,227) 166 (1,400) (700) (900)- Misc. items - - - - -Net cash-flow 646 (539) (33) 45 40 + Op. cash & bank bal. 168 813 275 241 287 Cl. cash & bank bal. 813 275 241 287 327 Source: Company, Anand Rathi Research

Fig 5 – PE band

Bajaj corp9x

12x

15x

19x

23x

50

90

130

170

210

250

Aug-

10

Oct

-10

Dec

-10

Feb-

11

Apr-1

1

Jun-

11

Aug-

11

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

(`)



Share capital 148 148 148 148 148 Reserves & surplus 3,616 4,131 4,708 5,426 6,290 Net worth 3,763 4,278 4,856 5,573 6,438 Minority interest - - - - -Total debt - 4 4 4 4 Def. tax liab. (net) (0) 10 10 10 10 Capital employed 3,763 4,292 4,870 5,587 6,452 Net fixed assets 220 819 962 1,111 1,246 Investments 3,301 3,135 4,535 5,235 6,135 - of which, Liquid 3,301 3,135 4,535 5,235 6,135 Net working capital (571) 64 (868) (1,045) (1,257)Cash and bank balance 813 275 241 287 327 Capital deployed 3,763 4,292 4,870 5,587 6,452 Net debt (4,114) (3,405) (4,772) (5,517) (6,458)WC days (15.9) 1.4 (15.3) (15.4) (15.5)Book value (`/sh) 25.5 29.1 33.0 37.9 43.7 Source: Company, Anand Rathi Research


P/E (x) 27.8 23.0 19.3 15.8 13.4 P/B (x) 7.3 6.4 5.7 4.9 4.3 EV/sales (x) 6.7 5.1 4.3 3.6 3.0 EV/EBITDA (x) 22.4 21.0 17.3 14.2 11.9 RoAE (%) 49.3 29.8 31.3 33.4 34.3 RoACE (%) 52.9 28.0 29.7 31.6 32.7 Dividend yield (%) 1.2 2.4 3.0 3.7 4.3 Dividend payout (%) 28.3 49.1 51.5 50.7 50.1 RM to sales (%) 43.7 46.6 46.5 46.0 46.0 Ad-spend to sales (%) 20.4 22.5 22.4 22.4 22.4 EBITDA growth (%) 10.9 6.8 21.1 21.9 19.5 EPS growth (%) 0.0 21.2 19.3 21.7 18.2 PAT margin (%) 25.4 27.6 25.4 25.2 25.7 Volume growth (%) 16.4 20.7 16.0 15.0 15.0 Realization growth (%) (4.7) 9.4 4.0 4.0 4.0 Source: Company, Anand Rathi Research


Bajaj Almond Drops92%

Others1%

Amla Shikakai2%

Brahmi Amla5%

Source: Company





[email protected]


[email protected]

India I Equities


Sales (`m) 6,195 9,106 11,997 14,666 17,962

Net profit (`m) 688 446 684 1,126 1,673

EPS (`) 4.3 2.8 4.1 6.8 10.1

Growth (%) (11.1) (35.2) 49.0 64.5 48.6

PE (x) 36.1 55.7 37.4 22.7 15.3

PBV (x) 3.8 4.0 3.8 2.7 2.4

RoE (%) 13.1 7.0 10.5 13.9 16.5

RoCE (%) 10.4 6.1 11.3 15.1 18.9

Dividend yield (%) 1.6 0.8 1.0 1.0 1.3

Net gearing (%) (41.7) 81.6 59.9 11.0 (5.3)


Consumer

Update


Key data JYL IN / JYL.BO52-week high / low `184 / `62Sensex / Nifty 18709 / 56733-m average volume US$0.8mMarket cap `25bn / US$478mShares outstanding 161m



8 October 2012

Jyothy Laboratories

Business reboot to mar FY13 prospects; Sell

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.


JYL

Sensex60

90

120

150

180

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Jun-

12

Aug-

12

Oct

-12

Source: Bloomberg


Estimates revision (%) FY13e FY14e FY15e

Sales - - -EBITDA - - -EPS - - -Target Multiple (x) - - -



8 October 2012 Jyothy Laboratories – Business reboot to mar FY13 prospects; Sell




Net revenues 6,195 9,106 11,997 14,666 17,962 Revenue growth (%) 3.9 47.0 31.7 22.2 22.5 - Op. expenses 5,471 8,269 10,356 12,623 15,361 EBIDTA 724 837 1,641 2,043 2,601 EBITDA margin (%) 11.7 9.2 13.7 13.9 14.5 - Interest expenses 20 238 560 318 160 - Depreciation 130 247 337 390 410 + Other income 238 231 111 72 86 - Tax 154 199 171 281 445 Effective tax rate (%) 19 34 20 20 21 Reported PAT 688 446 684 1,126 1,673 +/- Extraordinary items - - - 2,000 -+/- Minority interest (30) (62) - - -Adjusted PAT 688 446 684 3,126 1,673 Adj. FDEPS (`/share) 4.3 2.8 4.1 6.8 10.1 Adj. FDEPS growth (%) (11.1) (35.2) 49.0 64.5 48.6 Source: Company, Anand Rathi Research


PAT 688 446 684 3,126 1,673 + Non-cash items 130 247 337 390 410 Cash profit 596 183 1,021 3,515 2,082 - Incr./(decr.) in WC (583) 584 654 83 290 Operating cash-flow 13 767 1,676 3,598 2,372 - Capex (348) (3,535) (325) (350) (375)Free cash-flow (335) (2,769) 1,351 3,248 1,997 - Dividend (338) (469) (289) (289) (385)+ Equity raised 2,805 - - - -+ Debt raised - 5,244 (1,500) (2,800) -- Investments (2,172) (2,779) - - -- Misc. items - - - - -Net cash-flow (40) (773) (438) 160 1,612 + Op. cash & bank bal. 303 1,212 662 224 383 Cl. cash & bank bal. 262 439 224 383 1,995 Source: Company, Anand Rathi Research

Fig 5 – PE band

5x

12x

20x

27x

35x

0

40

80

120

160

200

Dec

-07

Apr-0

8

Jul-0

8

Nov

-08

Feb-

09

Jun-

09

Sep-

09

Jan-

10

May

-10

Aug-

10

Dec

-10

Mar

-11

Jul-1

1

Oct

-11

Feb-

12

May

-12

Sep-

12

(`)



Share capital 81 81 83 83 83 Reserves & surplus 6,230 6,044 6,439 9,275 10,563 Net worth 6,311 6,124 6,522 9,358 10,646 Total debt 691 5,726 4,226 1,426 1,426 Minority interest 5 67 - - -Def. tax liab. (net) 216 161 161 161 161 Capital employed 7,222 12,078 10,909 10,946 12,233 Net fixed assets 2,607 10,366 10,289 10,249 10,215 Investments 607 571 571 571 571 - of which, Liquid 607 571 571 571 571 Net working capital 1,199 479 (175) (258) (548)Cash and bank balance 2,809 662 224 383 1,995 Capital deployed 7,222 12,078 10,909 10,946 12,233 Net debt (2,510) 4,654 3,592 632 (979)WC days 19.3 5.3 (1.5) (1.8) (3.1)Book value (`/sh) 40 39 40 57 65 Source: Company, Anand Rathi Research


P/E (x) 36.1 55.7 37.4 22.7 15.3 P/B (x) 3.8 4.0 3.8 2.7 2.4 EV/sales (x) 4.8 3.3 2.6 2.1 1.7 EV/EBITDA (x) 41.4 35.8 18.8 15.1 11.9 RoAE (%) 13.1 7.0 10.5 13.9 16.5 RoACE (%) 10.4 6.1 11.3 15.1 18.9 Dividend yield (%) 1.6 0.8 1.0 1.0 1.3 Dividend payout (%) 58.6 45.2 36.4 22.1 19.9 RM to sales (%) 51.7 55.2 51.8 51.6 51.0 Ad-spend to sales (%) 9.0 7.6 8.0 8.0 8.0 EBITDA growth (%) (21.1) 15.6 96.1 24.5 27.3 EPS growth (%) (11.1) (35.2) 49.0 64.5 48.6 PAT margin (%) 10.6 4.2 5.7 7.7 9.3 Volume growth (%) Realization growth (%) Source: Company, Anand Rathi Research


Fabric care 47%

Mosquito repellents

14%

Surface cleaning23%

Other products16%






[email protected]


[email protected]

Consumer



Sales (`m) 1,040 1,329 1,712 2,204 2,837

Net profit (`m) 141 217 265 314 377

EPS (`) 8.4 12.9 15.8 18.7 22.5

Growth (%) (3.3) 53.7 22.4 18.4 20.3

PE (x) 45.4 29.6 24.1 20.4 17.0

PBV (x) 4.5 4.0 3.5 3.1 2.7

RoE (%) 16.8 14.3 15.5 16.0 16.7

RoCE (%) 21.6 14.1 15.3 17.0 18.9

Dividend yield (%) 0.4 0.5 0.6 0.8 1.0

Net gearing (%) (75.5) (59.3) (50.3) (41.0) (33.6)



Key data LLL IN / LOVA.BO52-week high / low `531 / `278Sensex / Nifty 18709 / 56763-m average volume US$1.5mMarket cap `6.4bn / US$123bnShares outstanding 17m




Sales (5.5) (5.1)EBITDA (21.6) (11.4)EPS (12.8) (3.2)Target multiple (x) - -


8 October 2012

Lovable Lingerie

Strong volumes; Buy

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.


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



8 October 2012 Lovable Lingerie – Strong volumes; Buy




Net revenues 1,040 1,329 1,712 2,204 2,837 Revenue growth (%) 19.6 27.8 28.8 28.8 28.8 - Op. expenses 845 1,099 1,417 1,819 2,342 EBIDTA 195 231 295 384 495 EBITDA margin (%) 18.8 17.4 17.2 17.4 17.4 - Interest expenses 5 6 5 5 5 - Depreciation 14 15 27 43 60 + Other income 9 67 85 87 80 - Tax 44 61 84 110 133 Effective tax rate (%) 23.9 21.9 24.0 26.0 26.0 Reported PAT 141 217 265 314 377 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted PAT 141 217 265 314 377 Adj. FDEPS (`/share) 8.4 12.9 15.8 18.7 22.5 Adj. FDEPS growth (%) (3.3) 53.7 22.4 18.4 20.3 Source: Company, Anand Rathi Research


PAT 141 217 265 314 377 + Non-cash items 14 15 27 43 60 Cash profit 143 186 292 356 437 - Incr./(decr.) in WC (146) (132) (57) (97) (125)Operating cash-flow (3) 53 235 259 312 - Capex 15 158 225 275 300 Free cash-flow (18) (105) 10 (16) 12 - Dividend 9 29 39 44 59 + Equity raised 1,057 - - - -+ Debt raised (3) 34 - - -- Investments 911 14 (100) - (50)- Misc. items - - - - -Net cash-flow 116 (113) 70 (60) 3 + Op. cash & bank bal. 26 142 33 103 43 Cl. cash & bank bal. 142 29 103 43 47 Source: Company, Anand Rathi Research

Fig 5 – PE band

18x

25x

32x

39x

45x

200

350

500

650

800

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

(`)



Share capital 168 168 168 168 168 Reserves & surplus 1,244 1,422 1,648 1,917 2,236 Net worth 1,412 1,590 1,816 2,085 2,404 Minority interest - - - - -Total debt - 45 45 45 45 Def. tax liab. (net) 9 10 10 10 10 Capital employed 1,422 1,646 1,871 2,141 2,460 Net fixed assets 129 234 471 703 943 Investments 931 1,018 918 918 868 - of which, Liquid 931 1,018 918 918 868 Net working capital 218 323 380 477 602 Cash and bank balance 143 33 103 43 47 Capital deployed 1,422 1,646 1,871 2,141 2,460 Net debt (1,065) (994) (965) (905) (858)WC days 21.0 24.3 22.2 21.6 21.2 Book value (`/sh) 84.9 95.5 109.0 125.1 144.1 Source: Company, Anand Rathi Research


P/E (x) 45.4 29.6 24.1 20.4 17.0 P/B (x) 4.5 4.0 3.5 3.1 2.7 EV/sales (x) 5.2 4.1 3.2 2.5 1.9 EV/EBITDA (x) 27.9 23.6 18.5 14.2 11.0 RoAE (%) 16.8 14.3 15.5 16.0 16.7 RoACE (%) 21.6 14.1 15.3 17.0 18.9 Dividend yield (%) 0.4 0.5 0.6 0.8 1.0 Dividend payout (%) 17.8 15.5 14.2 16.0 17.8 RM to sales (%) 44.2 40.3 40.5 40.2 40.2 Ad-spend to sales (%) 3.1 2.1 2.1 2.1 2.1 EBITDA growth (%) 20.9 18.2 27.7 30.4 28.7 EPS growth (%) (3.3) 53.7 22.4 18.4 20.3 PAT margin (%) 13.5 16.3 15.5 14.2 13.3 Volume growth (%) 22.3 32.0 25.0 25.0 25.0 Realization growth (%) (2.1) 2.6 3.0 3.0 3.0 Source: Company, Anand Rathi Research


Lovable58%

Daisy Dee42%






[email protected]


[email protected]

Consumer



Sales (`m) 5,784 6,801 7,693 8,452 9,274

Net profit (`m) 963 1,425 1,641 1,876 2,096

EPS (`) 62.4 92.3 106.3 121.5 135.7

Growth (%) 36.0 48.0 15.2 14.3 11.7

PE (x) 28.5 19.3 16.7 14.7 13.1

PBV (x) 11.0 9.9 8.4 7.1 6.0

RoE (%) 39.8 53.9 54.3 52.5 49.7

RoCE (%) 46.8 68.2 70.0 66.3 61.7

Dividend yield (%) 2.5 3.7 3.9 4.5 5.1

Net gearing (%) (79.8) (85.2) (102.2) (109.5) (114.1)



Key data VST IN / VST.BO52-week high / low `2,025 / `1,025Sensex / Nifty 18709 / 56763-m average volume US$0.4mMarket cap `27bn / US$529mShares outstanding 15m






8 October 2012

VST Industries

Cigarette well-lit; Buy

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.


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



8 October 2012 VST Industries – Cigarette well-lit; Buy




Net revenues 5,784 6,801 7,693 8,452 9,274 Revenue growth (%) 22.5 17.6 13.1 9.9 9.7 - Op. expenses 4,420 4,747 5,289 5,771 6,334 EBIDTA 1,364 2,055 2,404 2,681 2,940 EBITDA margin (%) 23.6 30.2 31.2 31.7 31.7 - Interest expenses 0 - - - -- Depreciation 231 248 282 309 337 + Other income 232 300 291 387 479 - Tax 402 681 772 883 986 Effective tax rate (%) 29.5 32.4 32.0 32.0 32.0 Reported PAT 963 1,425 1,641 1,876 2,096 +/- Extraordinary items (13) - - - -+/- Minority interest - - - - -Adjusted PAT 950.1 1,425.1 1,641.1 1,876.1 2,095.9 Adj. FDEPS (`/share) 62.4 92.3 106.3 121.5 135.7 Adj. FDEPS growth (%) 36.0 48.0 15.2 14.3 11.7 Source: Company, Anand Rathi Research


PAT 5,784 6,801 7,693 8,452 9,274 + Non-cash items 231 248 282 309 337 Cash profit 1,093 1,534 1,923 2,185 2,433 - Incr./(decr.) in WC (171) 90 528 337 287 Operating cash-flow 922 1,624 2,451 2,522 2,720 - Capex (426) (292) (325) (350) (350)Free cash-flow 496 1,333 2,126 2,172 2,370 - Dividend (540) (808) (1,164) (1,254) (1,433)+ Equity raised - - - - -+ Debt raised - - - - -- Investments 270 (455) (500) (500) (500)- Misc. items 0 - - - -Net cash-flow 226 70 461 418 437 + Op. cash & bank bal. 64 290 360 821 1,239 Cl. cash & bank bal. 290 360 821 1,239 1,676 Source: Company, Anand Rathi Research

Fig 5 – PE band

VST

2x

5x

8x

12x

15x

0

300

600

900

1,200

1,500

1,800

2,100

Jan-

00Au

g-00

Mar

-01

Oct

-01

Jun-

02Ja

n-03

Aug-

03M

ar-0

4N

ov-0

4Ju

n-05

Jan-

06Au

g-06

Apr-0

7N

ov-0

7Ju

n-08

Jan-

09Se

p-09

Apr-1

0N

ov-1

0Ju

l-11

Feb-

12Se

p-12

(`)



Share capital 154 154 154 154 154 Reserves & surplus 2,490 2,748 3,224 3,847 4,509 Net worth 2,644 2,902 3,379 4,001 4,664 Minority interest - - - - -Total debt - 5 5 5 5 Def. tax liab. (net) (139) (115) (115) (115) (115)Capital employed 2,506 2,792 3,268 3,891 4,553 Net fixed assets 1,593 1,635 1,679 1,720 1,733 Investments 1,710 2,301 2,801 3,301 3,801 - of which, Liquid 1,710 2,301 2,801 3,301 3,801 Net working capital (1,087) (1,505) (2,033) (2,370) (2,657)Cash and bank balance 290 360 821 1,239 1,676 Capital deployed 2,506 2,792 3,268 3,891 4,553 Net debt (2,138) (2,772) (3,733) (4,651) (5,588)WC days (18.8) (22.1) (26.4) (28.0) (28.7)Book value (`/sh) 162.3 180.5 211.3 251.6 294.6 Source: Company, Anand Rathi Research




Cigarettes88%

Unmanufactured Tobacco

12%






[email protected]


[email protected]

Consumer



Sales (`m) 3,354 3,302 3,731 4,335 5,042

Net profit (`m) 595 677 752 859 1,021

EPS (`) 15.2 17.3 19.2 22.0 26.1

Growth (%) 25.3 13.8 11.1 14.2 18.8

PE (x) 28.0 24.6 22.1 19.4 16.3

PBV (x) 11.6 8.7 6.8 5.5 4.4

RoE (%) 48.8 40.5 34.5 31.4 30.0

RoCE (%) 67.2 42.9 36.6 33.9 31.9

Dividend yield (%) 0.9 1.2 1.4 1.4 1.6

Net gearing (%) (88.2) (67.9) (72.7) (75.8) (79.8)



Key data ZYWL IN / ZYWL.BO52-week high / low `609 / `320Sensex / Nifty 18709 / 56763-m average volume US$0.5mMarket cap `17bn / US$320mShares outstanding 39m






8 October 2012

Zydus Wellness

Out of the woods; Buy

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.


ZYWL

Sensex

300350400450500550600650

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Jun-

12

Aug-

12

Oct

-12

Source: Bloomberg



8 October 2012 Zydus Wellness – Out of the woods; Buy




Net revenues 3,354 3,302 3,731 4,335 5,042 Revenue growth (%) 25.4 (1.6) 13.0 16.2 16.3 - Op. expenses 2,521 2,542 2,880 3,338 3,871 EBIDTA 833 760 852 997 1,170 EBITDA margin (%) 24.8 23.0 22.8 23.0 23.2 - Interest expenses 0 2 2 3 4 - Depreciation 15 39 47 56 66 + Other income 82 103 168 175 219 - Tax 305 137 204 234 277 Effective tax rate (%) 34 17 21 21 21 Reported PAT 595 686 767 879 1,042 +/- Extraordinary items - - - - -+/- Minority interest - 9.1 15.0 20.0 21.0 Adjusted PAT 595 677 752 859 1,021 Adj. FDEPS (`/share) 15.2 17.3 19.2 22.0 26.1 Adj. FDEPS growth (%) 25.3 13.8 11.1 14.2 18.8 Source: Company, Anand Rathi Research


PAT 595 677 752 859 1,021 + Non-cash items 15 39 47 56 66 Cash profit 597 736 814 935 1,108 - Incr./(decr.) in WC (73) (58) 81 79 101 Operating cash-flow 524 678 895 1,014 1,210 - Capex (170) (83) (180) (200) (200)Free cash-flow 354 595 715 814 1,010 - Dividend (136) (181) (227) (272) (272)+ Equity raised - - - - -+ Debt raised - - - - -- Investments (397) 1 (1,500) (700) (700)- Misc. items - - - - -Net cash-flow (180) 415 (1,012) (158) 38 + Op. cash & bank bal. 1,005 898 1,315 303 146 Cl. cash & bank bal. 825 1,313 303 146 183 Source: Company, Anand Rathi Research

Fig 5 – PE band

ZYWL

4x

14x

23x

33x

42x

0

200

400

600

800

1,000

Mar

-05

Nov

-05

Jun-

06

Feb-

07

Sep-

07

May

-08

Dec

-08

Aug-

09

Mar

-10

Oct

-10

Jun-

11

Jan-

12

Sep-

12

(`)



Share capital 391 391 391 391 391 Reserves & surplus 1,028 1,478 2,003 2,590 3,339 Net worth 1,419 1,869 2,394 2,981 3,730 Minority interest - 9 24 44 65 Total debt - 6 6 6 6 Def. tax liab. (net) 11 45 45 45 45 Capital employed 1,430 1,929 2,470 3,077 3,846 Net fixed assets 535 961 1,094 1,238 1,371 Investments 397 36 1,536 2,236 2,936 - of which, Liquid 397 36 1,536 2,236 2,936 Net working capital (367) (383) (464) (543) (645)Cash and bank balance 865 1,315 303 146 183 Capital deployed 1,430 1,929 2,470 3,077 3,846 Net debt (1,262) (1,345) (1,834) (2,376) (3,114)WC days (10.9) (11.6) (12.4) (12.5) (12.8)Book value (`/sh) 36.6 49.0 62.4 77.5 96.6 Source: Company, Anand Rathi Research


P/E (x) 28.0 24.6 22.1 19.4 16.3 P/B (x) 11.6 8.7 6.8 5.5 4.4 EV/sales (x) 4.6 4.6 4.1 3.5 3.0 EV/EBITDA (x) 18.4 20.2 18.0 15.4 13.1 RoAE (%) 48.8 40.5 34.5 31.4 30.0 RoACE (%) 67.2 42.9 36.6 33.9 31.9 Dividend yield (%) 0.9 1.2 1.4 1.4 1.6 Dividend payout (%) 26.3 28.9 31.2 27.3 26.8 RM to sales (%) 35.8 35.3 35.6 35.4 35.2 Ad-spend to sales (%) 27.5 20.3 20.3 20.3 20.3 EBITDA growth (%) 25.1 (8.8) 12.1 17.1 17.4 EPS growth (%) 25.3 13.8 11.1 14.2 18.8 PAT margin (%) 17.7 20.8 20.6 20.3 20.7 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


EverYuth25%

Nutralite35%

Sugar Free40%

Source: Company





Sales (`m) 9,464 11,439 13,484 15,899 18,752

Net profit (`m) 773 762 916 1,152 1,432

EPS (`) 5.8 5.7 6.9 8.7 10.8

Growth (%) 85.1 (1.5) 20.2 25.8 24.3

PE (x) 20.2 20.5 17.1 13.6 10.9

PBV (x) 2.2 2.1 1.9 1.7 1.5

RoE (%) 10.3 8.8 11.6 13.1 14.4

RoCE (%) 11.3 10.9 11.7 13.3 14.8

Dividend yield (%) 0.6 0.7 0.7 0.7 0.8

Net gearing (%) 58.6 72.8 67.0 60.5 52.3


India I Equities


[email protected]


[email protected]

Consumer

Update 25

8 October 2012

Radico Khaitan

Orchestrating successful product launches; Buy

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.



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

Shareholding pattern (%) Jun’12 Mar ’12 Dec’11

Promoters 40.4 40.4 40.4 - of which, Pledged 43.6 45.5 45.4 Free Float 59.6 59.6 59.6 - Foreign Institutions 25.6 25.4 24.4 - Domestic Institutions 10.2 10.7 14.0 - Public 23.8 23.5 21.2



Sales 2.6 2.5EBITDA (9.3) (12.8)EPS (15.7) (18.3)Target multiple (x) - -



8 October 2012 Radico Khaitan – Orchestrating successful product launches; Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m) Year-end: Mar FY11 FY12e FY13e FY14e FY15e

Net revenues 9,464 11,439 13,484 15,899 18,752 Revenue growth (%) 18.5 20.9 17.9 17.9 17.9 - Op. expenses 7,905 9,709 11,437 13,461 15,852 EBITDA 1,559 1,730 2,047 2,438 2,901 EBITDA margin (%) 16.5 15.1 15.2 15.3 15.5 - Interest expenses 359 621 690 695 695 - Depreciation 271 328 382 431 482 + Other income 111 214 245 245 238 - Tax 267 233 305 405 530 Effective tax rate (%) 25.6 23.4 25.0 26.0 27.0 Reported cons. PAT 694 637 916 1,152 1,432 +/- Extraordinary items (79) (125) - - -+/- Minority interest - - - - -Adjusted cons. PAT 773 762 916 1,152 1,432 FDEPS (`/share) 5.8 5.7 6.9 8.7 10.8 Adj. FDEPS growth (%) 85.1 (1.5) 20.2 25.8 24.3 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY11 FY12e FY13e FY14e FY15e

Consolidated PAT 694 637 916 1,152 1,432 + Non-cash items 271 328 382 431 482 Cash profit 1,125 1,171 1,298 1,583 1,914 - Incr./(decr.) in WC (1,007) (152) (374) (578) (665)Operating cash-flow 118 1,019 924 1,005 1,249 - Capex (540) (873) (900) (950) (1,000)Free cash-flow (421) 146 24 55 249 - Dividend (92) (108) (123) (131) (154)+ Equity raised 60 9 - - -+ Debt raised 450 689 100 - -- Investments (246) (614) - - -- Misc. items 11 - - - -Net cash-flow (238) 121 1 (75) 95 + Op. cash & bank bal. 332 89 210 211 136 Cl. Cash & bank bal. 94 210 211 136 231 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (PE band)

12x

18x

24x

30x

36x

0

50

100

150

200

250

300

Apr-0

6

Sep-

06

Feb-

07

Jul-0

7

Dec

-07

May

-08

Oct

-08

Apr-0

9

Sep-

09

Feb-

10

Jul-1

0

Dec

-10

May

-11

Oct

-11

Mar

-12

Sep-

12

(`)


Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12e FY13e FY14e FY15e

Share capital 265 265 265 265 265 Reserves & surplus 6,249 6,687 7,480 8,502 9,780 Net worth 6,514 6,953 7,746 8,767 10,045 Minority interest - - - - -Total debt 4,912 6,219 6,319 6,319 6,319 Def. tax liab. (net) 498 563 563 563 563 Capital employed 11,923 13,735 14,628 15,649 16,928 Net fixed assets 4,904 5,071 5,589 6,107 6,626 Investments 709 2,243 2,243 2,243 2,243 - of which, Liquid 709 2,243 2,243 2,243 2,243 Net working capital 6,217 6,211 6,585 7,163 7,828 Cash and bank balance 94 210 211 136 231 Capital deployed 11,923 13,735 14,628 15,649 16,928 Net debt 4,607 4,329 4,428 4,504 4,408 WC (%) 65.7 54.3 48.8 45.1 41.7 Book value (`/sh) 52.9 56.7 62.7 70.4 80.0 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `118 Year-end: Mar FY11 FY12e FY13e FY14e FY15e

P/E (x) 20.2 20.5 17.1 13.6 10.9 P/B (x) 2.2 2.1 1.9 1.7 1.5EV/sales (x) 2.2 1.8 1.6 1.3 1.1 EV/EBITDA (x) 13.5 12.2 10.3 8.7 7.3 RoAE (%) 10.3 8.8 11.6 13.1 14.4 RoACE (%) 11.3 10.9 11.7 13.3 14.8 Dividend yield (%) 0.6 0.7 0.7 0.7 0.8 Dividend payout (%) 12.0 13.9 11.6 9.8 9.3 RM to sales (%) 47.5 47.7 47.7 47.5 47.4 Admin exps to sales (%) 22.5 23.5 23.5 23.5 23.5 EBITDA growth (%) 16.9 11.0 18.3 19.1 19.0 EPS growth (%) 85.1 (1.5) 20.2 25.8 24.3 PAT margin (%) 8.2 6.7 6.8 7.2 7.6 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


IMFL50%

Country liquor24%

Subsidiary sales8%

Grain spirit4%

Pet bottles3%

Others3%

Silent spirits6%

Rectified spirits2%

Source: Company





Sales (`m) 4,623 5,478 6,531 7,787 9,288

Net profit (`m) 396 472 616 822 1,077

EPS (`) 3.4 4.1 5.1 6.9 9.0

Growth (%) (4.6) 19.2 25.4 33.5 31.0

PE (x) 16.0 13.4 10.7 8.0 6.1

PBV (x) 1.5 1.3 1.1 1.0 0.9

RoE (%) 12.4 10.2 11.3 13.2 15.3

RoCE (%) 13.2 12.6 13.6 15.5 17.7

Dividend yield (%) 1.5 1.5 1.5 1.5 1.8

Net gearing (%) 97.7 98.3 77.6 68.0 57.1


India I Equities


[email protected]


[email protected]

Consumer

Update

8 October 2012

Tilaknagar Industries

South siren; Buy

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.



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

Shareholding pattern (%) Jun ’12 Mar’12 Dec ’11




Sales 3.9 6.0EBITDA 10.7 13.3EPS (4.5) (6.2)Target multiple (x) - -



8 October 2012 Tilaknagar Industries – South siren; Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues 4,623 5,478 6,531 7,787 9,288

Revenue growth (%) 21.4 18.5 19.2 19.2 19.3

- Op. expenses 3,487 4,071 4,862 5,802 6,923

EBITDA 1,136 1,407 1,668 1,986 2,365

EBITDA margin (%) 24.6 25.7 25.5 25.5 25.5

- Interest expenses 388 562 544 517 500

- Depreciation 131 223 250 288 307

+ Other income 26 78 32 29 27

- Tax 248 228 290 387 507

Effective tax rate (%) 38.5 32.6 32.0 32.0 32.0

Reported cons. PAT 396 472 616 822 1,077

+/- Extraordinary items - - - - -

+/- Minority interest - 0 - - -

Adjusted cons. PAT 396 472 616 822 1,077

FDEPS (`/share) 3.4 4.1 5.1 6.9 9.0

Adj. FDEPS growth (%) (4.6) 19.2 25.4 33.5 31.0 Source: Company, Anand Rathi Research


Consolidated PAT 396 472 616 822 1,078 + Non-cash items 131 223 250 288 307 Cash profit 62 800 866 1,110 1,385 - Incr./(decr.) in WC (108) (568) (383) (514) (615)Operating cash-flow (46) 233 483 597 770 - Capex (107) (1,127) (350) (400) (450)Free cash-flow (153) (894) 133 197 320 - Dividend (11) (112) (111) (111) (139)+ Equity raised 172 333 352 - -+ Debt raised (17) 884 (400) (100) (200)- Investments (1) (162) - - -- Misc. items - - - - -Net cash-flow (10) 49 (26) (15) (19)+ Op. cash & bank bal. 27 86 198 172 157 Cl. cash & bank bal. 17 134 172 157 138 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (PE band)

4x

10x

16x

21x

26x

0

40

80

120

160

Apr-0

6

Oct

-06

Apr-0

7

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

(`)



Share capital 1,250 1,202 1,250 1,250 1,250 Reserves & surplus 2,811 3,549 4,358 5,069 6,008 Net worth 4,061 4,751 5,608 6,319 7,258 Minority interest - 0 0 0 0 Total debt 4,333 5,147 4,747 4,647 4,447 Def. tax liab. (net) 199 281 281 281 281 Capital employed 8,593 10,178 10,635 11,246 11,985 Net fixed assets 4,714 5,403 5,503 5,615 5,758 Investments 3 66 66 66 66 - of which, Liquid 3 66 66 66 66 Net working capital 3,710 4,511 4,894 5,408 6,023 Cash and bank balance 166 198 172 157 138 Capital deployed 8,593 10,178 10,635 11,246 11,985 Net debt 4,363 5,163 4,790 4,705 4,524 WC (%) 80.2 82.4 74.9 69.4 64.9 Book value (`/sh) 37.0 43.7 49.1 55.0 62.8 Source: Company, Anand Rathi Research


P/E (x) 16.0 13.4 10.7 8.0 6.1 P/B (x) 1.5 1.3 1.1 1.0 0.9 EV/Sales (x) 2.4 2.1 1.8 1.5 1.3EV/EBITDA (x) 9.9 8.0 7.0 5.9 5.0 RoAE (%) 12.4 10.2 11.3 13.2 15.3 RoACE (%) 13.2 12.6 13.6 15.5 17.7 Dividend yield (%) 1.5 1.5 1.5 1.5 1.8 Dividend payout (%) 23.3 19.6 15.6 11.7 11.1 RM to sales (%) 34.7 35.8 35.9 35.9 36.0 Admin exps to sales (%) 24.5 24.3 24.4 24.4 24.4 EBITDA growth (%) 41.9 23.9 18.5 19.0 19.1 EPS growth (%) (4.6) 19.2 25.4 33.5 31.0 PAT margin (%) 8.6 8.6 9.4 10.6 11.6 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research

Fig 6 – Revenue breakdown (FY12)

Subsidiary sales, 37%

Tie up units, 25%

IMFL lease units, 24%

IMFL - own unit, 11%

Industrial alcohol, 3%

Source: Company



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.

© 2012 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited.

Additional information on recommended securities/instruments is available on request.



India Consumer - Enjoying a Slice of Luxury.248.175.146

Documents

Transcript of India Consumer - Enjoying a Slice of Luxury.248.175.146