Investec FMCG Research - Jyothy Labs Limited - Septermber 2019 PDF

16 September 2019
India FMCG
$AggregName2$
Sector Research
Sector review Company Rec Target

Britannia Industries Ltd Hold INR2831
Finding resilience in adversity Colgate Palmolive India Sell INR1162
Dabur India Ltd Buy INR522
Emami Ltd Hold INR329
The USD60bn FMCG industry in India is witnessing significant changes across
Godrej Consumer Products Ltd Hold INR657
the key aspects of a) Innovation, b) Distribution, and c) Communication. We
Hindustan Unilever Buy INR2086
believe larger companies with scale, a diversified product presence, and ITC Buy INR285
strong access to all distribution channels will outperform smaller, regional and Jyothy Laboratories Ltd Buy INR186
single category dependant plays over the long term as the former use these Marico Hold INR412
structural changes to their advantage. FY20E is likely to be lower growth year. Nestle India Hold INR13343
However, contrary to street fears, expect larger players to outperform which
when coupled with easing comparables through the year will result in volume
growth to be only 100-200bp below last 5 year averages. Further, benign
inflation and lower competitive intensity will aid earnings growth. Our picks
reflect a mix of long-term growth opportunity and reasonable valuations. We
initiate coverage on the sector with a BUY on Hindustan Unilever, Dabur, ITC
and Jyothy Labs, with a HOLD on Godrej Consumer, Marico, Britannia, Emami
and Nestle India and a SELL on Colgate Palmolive.
 Changing dynamics favour large players: The USD60bn branded FMCG

industry in India has benefited from the strong demographic dividend, rising
incomes, and increasing aspirations of the average Indian consumer. However,
the industry is slowly changing in all key aspects, namely a) distribution b)
communication c) innovation d) specialization/ regionalization. We believe
companies with a diversified or successfully diversifying portfolio have a higher
probability of success under these changing parameters given that they would
have greater opportunities for growth.
 A lesser impact of an evident slowdown: FMCG industry growth has slowed
over the last 2 quarters and is likely to be modest even in Q2. However, given the
fact that larger FMCG companies have gained market share from smaller players,
the impact of the slowdown has hit larger players to a lesser extent. Further, given
the benign inflation and reduced competitive intensity, we believe earnings growth
for consumer staples companies will be resilient. We factor an 11% avg earnings
growth for our coverage, despite average revenue growth at 8.1% for FY20E. Price Performance
 Long-term drivers remain intact: We believe factors such as rising household FMCG sector 1yr fwd PE
60
incomes, higher propensity to spend and continued benefits of premiumization 55
and penetration remain intact, and that will result in sector growth moving back up 5045
to double digits from FY21E. We build a 10% revenue and 13% earnings CAGR 40
35
for our coverage universe over FY19-22E. 30
 Staying selective: Our picks in the sector are reflective of our thesis of diversified 25
20
presence and eventual pick up in rural growth, as well as valuations. We initiate 15

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coverage with a BUY rating on Hindustan Unilever (highest 3 year EPS CAGR;
most diversified and future ready player), Dabur (best diversified play on naturals 1m 3m 12m
and rural), ITC (steady earnings growth and attractive valuations) and Jyothy Labs Price
____________________________
0.1 (4.5) (4.9)
(diversified player with increasing revenue growth focus). We intiate with a HOLD
on Britannia, Emami, Godrej Consumer Products, Nestle India and Marico and a Source: FactSet
SELL on Colgate Palmolive India (single category play impacted by low category
growth and high competitive intensity).
Readers in all geographies please refer to important disclosures and disclaimers starting on page 145 In the United Kingdom Harit Kapoor
this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the FCA +91 (22) 6849 7493
Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any harit.kapoor@investec.co.in
prohibition on dealing ahead of the dissemination of research. The global contacts include: Andrew Fitchie (EU) and Leon
van Heerden (SA). Full analyst and global contact details are shown on the back page. Bhakti Thacker
+91 (22) 6849 7421
Bhakti.Thacker@investec.co.in
Contents
The Changing Dynamics in Indian FMCG ................................................................. 3
Long term drivers Intact ......................................................................................... 3
Divergent incomes, convergent aspirations ........................................................... 5
Large categories, larger potential .......................................................................... 7
Long term themes ..................................................................................................... 9
Competition is heating up ...................................................................................... 9
Innovation ............................................................................................................ 10
Distribution........................................................................................................... 14
Communication.................................................................................................... 18
Dynamic Diversified plays – Can extract more from a changing consumer and
challenging conditions ......................................................................................... 20
India salience – A comforting factor in the long term ........................................... 20
Regulation – Low levels apart from cigarettes ..................................................... 21
Competition – Oscillating intensity across categories .......................................... 21
Market Salience – Rural over urban .................................................................... 22
Picking the winners ................................................................................................. 23
The Market Context – FY20 a lower growth year .................................................... 24
Q1FY20: Slowing but not that sharply ................................................................. 25
Rural remains the maker and breaker ................................................................. 26
Base effect could also provide respite in 2HFY20 ............................................... 29
Profitability to be higher in FY20E ....................................................................... 30
Valuation and View – Stay Selective ....................................................................... 33
Page 2 | 16 September 2019

The Changing Dynamics in Indian FMCG
The FMCG industry in India has evolved over the years in terms of increasing share
of premium products, the democratization of certain categories and emerging
channels other than general trade. However, the pace of change in the last 3 years
in the Indian FMCG industry has been faster than any 3-year period seen before.
Factors such as -
a) the advent of naturals as a theme driving innovation and new companies
b) a change in distribution channels and companies’ strategies towards the same
c) the changing success rates of erstwhile modes of brand communication and
d) an increased willingness of the consumer to spend
have played a key role.
We highlight each of the above themes and more to gauge the direction the industry
will take going forward and who can be the ultimate winners of the same.
Long term drivers Intact

The USD 60bn branded Indian FMCG industry has benefited from the strong
demographic dividend, rising incomes, and increasing aspirations of the average
Indian consumer.
These factors remain long-term demand drivers along with the fact that private
consumption remains India’s primary GDP growth driver coupled with declining
savings rates, implying the increasing propensity to consume.
Figure 1: The longer term drivers for Indian FMCG remain intact
Favourable
Demographics
Large Categories
Large Potential
Rising Incomes
India
FMCG
drivers
Aspirations Lower Savings
Source: Investec Securities Research

Figure 2: Favorable demographics to accelerate consumption spending
AgeDependence Ratio (%)

69% 72%
61%
54% 53% 55%
49% 46% 48%
42%
2020E 2030E 2020E 2030E 2020E 2030E 2020E 2030E 2020E 2030E
India China USA Japan World
Median 27 32 37 42 37 37 47 52 32 32
Age
Source: United Nations, Investec Securities Research
Figure 3: Growth of the upper middle income and high income segments to power consumption spending
(grow from 1in 4 households today to 1 in 2 households by 2030)
Households 219M 293M 386M
High High High

1M (1%)
8M (3%) 29M (7%)
Upper mid Upper mid Upper Mid

16M (7%) 61M (21%) 168M (44%)
Lower Mid Lower Mid Lower Mid

97M (33%) 132M (34%)
51M (23%)
Low Low Low

151M (69%) 127M (43%) 57M (15%)
2005 2018 2030E

Low income: <$4,000, Lower-mid: $4,000-8,500, Upper-mid: $8,500-40,000, High income: >$40,000 basis income per household in real terms;
Projections with annual GDP growth assumed at 7.5%
Source: Emami 2019 Annual report, Investec Securities Research

Figure 4: Fall in savings rate led by continued high consumption by households
140 25%
GDP per capita NNI (in Rs. thousands)
Gross domestic Savings (% of GDP)

120
20%
100
15%
80
60
10%
40
5%
20
0 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18
GDP Per Capita NNI (Rs) Gross domestic saving (%) of GDP (RHS)
Source: RBI, Investec Securities Research
Divergent incomes, convergent aspirations

One of the key factors driving FMCG growth in the country has been the aspirational
“Such packs allow us to reach quotient where which has driven growth for FMCG companies in India. Middle and
first-time users more
effectively, introducing our Rural India has been the key driver here as the consumer in these parts, in spite of
offerings to them. They are having a lower wallet spend, aspires for better products. This has led to specific
particularly useful to drive changes in strategy –
market development of nascent 1) the rise of smaller packs of mid-premium and premium products
categories. Apart from this,
small packs and sachets allow 2) increased direct distribution by FMCG companies
us to make available quality
and aspirational products at We believe Middle and Rural India remains the key driver of growth for the Indian
affordable prices to
FMCG industry, and success here will determine the long-term potential of Indian
consumers." – HUL
spokesperson in news FMCG players.
Figure 5: Rural has grown 1.25x urban over the last 10 quarters in FMCG
1.8
1.5
1.6 1.4
1.4 1.4
1.4 1.2 1.2 1.2 1.2
Rural/Urban (x)
1.2 1.1 1.1 1.1

1.0
0.8
0.6
0.4
0.2
-
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: News articles, Investec Securities Research

Figure 6: Smaller packs to make available aspirational products at affordable prices for Rural India
Source: Companies, Investec Securities Research
“Brands that address consumer Direct distribution push came after GST implementation in July 2017, which unsettled
needs and aspirations and have a the wholesale channel, thus disrupting the rural market. The disruptions led FMCG
purpose at their heart, are companies to look beyond third party distribution. The key benefit of direct distribution
delivering stronger and faster is to cover unattended markets directly.
growth” – HUL FY19 Annual
Report
Figure 7: Focus on increasing direct reach to grow deeper into smaller towns
8.0
FY19 Distribution (Outlets in mns)
6.7
6.0 5.9 6.0
5.0 5.0 5.0

4.5
2.8
50%
43%
42%
22% 17% 17% 20% 20% 21% 31%
HUL ITC Britannia GCPL Dabur Colgate Marico Nestle Emami Jyothy
Direct Reach Indirect Reach
Source: Companies, Investec Securities estimates

Large categories, larger potential
While category sizes are large across several spaces, given the low per capita
consumption and higher premiumization potential, we believe even the largest
categories like soaps, detergents, hair oils, biscuits have potential to grow. Further,
premiumization potential exists in all these categories, which provides a sizeable
opportunity for driving value/ mix led growth, especially for the larger players who are
well entrenched.
Figure 8: An FMCG Category snapshot
Est. mkt size
Category Segment Key players Penetration
(Rs bn)
Detergents 280 HUL, P&G, Rohit Surfactants, Jyothy Labs High
Toilet Soaps 200 HUL, GCPL, Reckitt Benkiser, Wipro Consumer Care, Patanjali High
Home Care
Household
40 GCPL, SC Johnson, Reckitt Benkiser, Jyothy Labs Low
insecticides
Dish wash 40 HUL, Jyothy Labs Medium
Hair oils 130 Marico, Dabur, Emami, Bajaj Consumer High
Shampoos 80 HUL, P&G, Dabur, Cavin Care, Loreal, Himalaya High
Toothpaste 100 Colgate, HUL, Dabur, Patanjali, Anchor High

Personal Care
Skin Care 120 HUL, Emami, Loreal, Patanjali, ITC, Zydus Wellness, J&J, Himalaya Medium
Deodorants 20 Vini Cosmetics, HUL, ITC, McNroe Consumer Products, Marico Low
Hair colours 40 GCPL, Loreal, Revlon, Dabur Low

Britannia, Parle , ITC, Surya Agro, Anmol, Mrs Bectors, Mondelez,
Biscuits 350 High
Unibic
Tea 160 HUL, Tata Global Beverages High
Coffee 25 HUL, Nestle Low

Foods
Cigarettes 600 ITC, Godfrey Phillips, VST Industries Low
Juices 25 Dabur, Pepsico Low
Salty Snacks 250 Pepsico, ITC, Prataap Snacks Medium

Source: Companies, News Articles, Investec Securities estimates
Figure 9: India’s low per capita consumption promises growth Figure 10: India’s smaller premium portfolio provides room for Profits
FMCG market 2018 segmentation (%)
FMCG Per Capita Consumption
India X
Indonesia ~2X
China ~4X
Source: HUL Presentation 2019, Investec Securities Research Source: HUL Presentation 2019, Investec Securities Research
\

Figure 11: Companies focusing on premiumisation will have more levers for profitable growth

Long term themes
Competition is heating up
The FMCG industry is changing in terms of its most material parameters –1)
Distribution 2) Innovation 3) Communication. While we expect new players to
keep coming in given the size and attractiveness of the industry, we believe
competition is heating up as larger players are increasing scale across all metrics.
The smaller and regional players are likely to find it hard to attract shelf space and
those with a focus on e-commerce and modern retail will eventually hit a growth wall.
Figure 12: The key variables of FMCG company quality
Effective
Distribution
Communication
Innovation
FMCG
Moat Diversification
Regulation
Rural
Competitive
Salience
Intensity
India
Salience
Figure 13: Companies investing in Innovation, Distribution and effective communication enjoy long run benefits
Innovation Distribution Communication
• Naturals/ Organic theme • Ecom & MT is gaining ground • Digital to gain significant
• Buying Innovation over GT share
• Pace of Innovation increased • Changing GT distribution • Social marketing could be a
• Creating new Categories • Regionalization - a strategy to differentiator
expand market shares
• International Assets are
viewed cautiously

Innovation
“Younger consumers continue to Differentiation is key in a low success rate market
prioritise meaning over
materialism and are demanding The Indian consumer, though emerging, is fairly brand loyal. Hence, success
more authenticity, transparency rates of FMCG innovation in India are among the lowest in the world, making it
and natural ingredients” – harder to get sustainable innovation-led growth. In this context, we believe
Unilever 2018 Annual Report
differentiation in terms of proposition, product or price is necessary to increase the
The naturals segment of the chances of success. Larger players with established brands have a higher probability
consumer market is projected to of success as they can use this to their advantage. A key example is ‘naturals’, where
grow about 7% annually over the companies re-grouped after the initial Patanjali onslaught to come back to participate
next 5 years. - P&G 2018 annual in what is a sustainable theme.
report
Global consumer products is
growing at 1.6% (Bloomberg)
Naturals/Organic – A theme for the long term
While Patanjali might have been the flag bearer for naturals/herbal/organic products
in India, we believe this theme is bigger than Patanjali, and the company’s recent
challenges on distribution and brands are likely to play into the hands of new players
and incumbent FMCG majors.
Figure 14: Patanjali loses its sheen due to issues on product and distribution
100 140%
90 120%
80
100%
Gross Sales (Rs. bn)
70
YoY growth (%)

60 80%
50 60%
40 40%
30
20%
20
10 0%
- -20%
Gross Sales YoY Growth
Source: Aceequity, Investec Securities Research
Companies have already jumped on the bandwagon and are increasingly diversifying
their portfolio to accommodate this theme. As can be seen below, HUL and Dabur
seem to be at the forefront of this change among larger players.
Figure 15: Race for Naturals
- Lever Ayush
- Lux Botanicals
- Pepsodent Clove - Vatika Naturals
- Lakme Aloe Vera - Acquisition of Namaste - Naturals brand - Kesh King - Maxo incense sticks - Nupur Natural
umbrella: - Zandu Pancharishta - Margo neem soap Henna hair colour
- Lifebouy neem & Labs "Organic root - Colgate Swarna
Turmeric simulator" brands - Nihar Naturals - Zandu Nityam - Neem toothpaste - Natural agarbatti Vedshakti
- Internationally
- Fair & Lovely Ayurveda - Website > - Parachute Advansed - Boro Plus bodylotion - Margo glycerine - Palmolive
> TCB Naturals' & Naturals
- Indulekha mybeautynaturally - Parachute Aloe Vera - BoroPlus Face Wash - Prim Tamarind Millefiori
- Citra
- Clinic Plus Ayurveda
Larger shape reflects larger Naturals portfolio.


A look at global trends suggests that this is not only an Indian theme as consumers
globally seek out products which are chemical-free, have certain health benefits and
contribute socially and environmentally.
Figure 16: “Naturals” is a Global Phenomenon
- Aquired companies focussing on

Natural - "Pukka Herbs", "Equilibra",
"Mãe Terra", "TAZO", "Sundial
Brands" & "Schmidt's Naturals"
 Acquired companies focussing on
- Naturals
Launched- Products
Pukka Herbs,
> OmoEquilibra,
Naturals,
Mae Terra,
Sunlight Tazo,Sunsilk
Naturals, Schmidt's
Naturals
Naturals
- Launched brands > ApotheCARE,
 K-bright,
Launched natural
Korea Glowbrands
& Love-
ApotheCare, Love beauty and
Beauty and Planet
Planet
 Launched Natural Variants -
Sunsilk Naturals, Sunlight
Naturals
- Aquired company "Garden of Life",

company focussing on food - Launched products in natural
supplements from natural sources baby care segment
- Launched Natural Variants under - Introduced products from
its brands - Illuma, Gerbers, natural ingredients such as Tide
Outshine & S. Pellegrino & Perrier Purclean, Herbal Essences,
- Launched all natural snacks Pampers pure and Tampax
 "Yes!"
variants under brand
Acquired a company focussing on Pure
Food supplements from natural  Launched products focussing
sources - Garden of Life on Naturals - Natural baby
 Launched natural variants - care products
Illuma, Gerbers, Outshine  Launched natural Variants -
 Launched all natural snacks Tide Purclean, Herbal
brand - Yes! Essences, Pampers Pure,
Tampax Pure

Buying innovation – A key large player theme
With digital becoming a significant factor in terms of communication and distribution,
the opportunity for startups to create brands which are more niche and premium has
never been better. While scaling up will remain a challenge for these players, we
believe that larger FMCG players that generate significant amount of cash every year
will increasingly look to acquire brands that they think are scalable. Further, regional
brands that have been impacted by demonetization and GST are likely to be open to
conversations at more reasonable valuations than earlier. We expect larger players
to be more acquisitive in nature to fill portfolio gaps, with a greater focus on India than
ever before.
Figure 17: In recent times, multiple Indian FMCG companies have grown their portfolio via acquisition to fill portfolio gaps
Company Target Year Ownership (%) Primary Country of operations
HUL GSK Consumer FY20 72% India
Adityaa Milk FY19 100% India
Indulekha FY17 100% India
Marico Isoplus FY18 100% South Africa
Zed Lifestyle FY17 45% India
Zydus Wellness Heinz India FY19 100% India
Emami Brillare Science FY18 25% India
Crème 21 FY19 100% Middle East
The Man Company FY18 30% India
ITC Nimyle FY19 100% India
Colgate Palmolive Asia Pacific Bombay Shaving Co FY19 14% India
Wipro Consumer Care Splash Corporation FY20 100% Philippines
Lotte Confectionary Havmor Ice Cream FY18 100% India
Company Disposal Year Ownership (%) Primary Country of operations
Godrej Consumer Products Keyline FY19 100% UK
Tata Global Beverages Sunty and Tea Trade FY18 100% Russia

Pace of innovation will increase further
Creating drivers for tomorrow’s growth is likely to be a key theme across companies.
Players that allocate a greater quantum of resources today, coupled with strong
execution, will be able to create sustainable growth. We believe that the pace of
innovation will be far higher than seen in the prior years as companies look to
complement base level growth.
Figure 18: Pace of innovation has increased across most players
29
Number of product launches/Relaunches

28
22
21 21
17 16
14 14 15
10 9
8 8 7
4 4 4 5
3
HUL ITC Dabur Nestle* Britannia Marico GCPL Jyothy Emami Colgate
FY19 FY15
*CY14=FY15, CY18=FY19; Source: Companies, Investec Securities Research
Figure 19: Companies have entered new categories as well in FY19

Company New Category entered
Breakfast cereals, dips and spreads, personal coffee
Nestle
machines
Britannia Croissants, Salted Snacks, Crème wafers, Milk shakes
HUL Male grooming, toilet cleaner

ITC Dairy, Rice, premium skin care, floor cleaner
Marico Hair tonic, premium skin care, gourmet foods
Dabur Few categories in ethicals

GCPL Handwash, repellant agarbatti
Jyothy labs Toilet Cleaner, repellant agarbatti
Colgate Soaps
Emami -
Ranking on basis of Innovation

Figure 20: Nestle tops the list just on sheer number of variants launched as a % of existing products over the last 3 years
Jyothy
HUL Nestle Dabur Marico Britannia Emami ITC GCPL Colgate
Labs
Innovation
Source: Investec Securities estimates

Distribution
Ecommerce and Modern Trade (MT) gaining ground over General
Trade (GT) – Likely to continue
There is less reliance on ‘big box’ Changing distribution has been a theme for the last 20 years in India. However, the
retailers with e-com growing at pace of change has accelerated in the last 3 years post demonetization and GST.
13% globally, driven by direct-to- The expansion of strong modern retail players, as well as e-commerce players, finally
consumer models and platforms
such as Amazon & Alibaba – making a serious play in FMCG has been one of the key factors. E-commerce
Unilever 2018 Annual Report salience has increased by ~100bp in the last 2 years; modern trade salience has also
increased from 6-7% to over 10% since demonetization. Further, channels like
Canteen source department (CSD) continue to shrink, and others like chemist
continue to grow at a faster pace. Companies that have a higher share in the channels
of the future, depending on their portfolio, will see higher growth as relevance of e-
commerce, modern retail and the chemist channel is expected to increase.
Figure 21: Companies with a higher modern trade and e-commerce share better placed
Channel contribution to Company
Revenue %
16 3 15 4 14 1 13 2 12 2 10 2 10 2 8 2 6 0
HUL Marico Dabur GCPL Britannia Nestle Colgate Jyothy Emami

Labs
Modern Trade Ecommerce
GT distribution is also changing – Focus on increasing throughput

India has over 12m retail outlets which sell FMCG products. This channel of
distribution is called general trade. Though salience of general trade is reducing, the
general trade is also evolving into a more efficient channel driven by FMCG
companies. Distribution growth will be led by higher direct distribution for the larger
players and focusing on increasing throughput per store for companies with a
diversified portfolio. We believe it will become harder for new players to establish
a presence in general trade as national players look to increase their shelf
space further and facilitate higher throughput and reduce days of stock at the
same time. Companies like HUL, ITC and Britannia have already created a strong
direct reach base; further players like Dabur, Marico, and Nestle are looking to
increase their direct presence in a significant manner in the next 2-3 years.

Figure 22: Overall reach has sharply increased in the last 4 years Figure 23: Direct reach proportion will keep moving up going forward
9 8.0
8
6.7
7 6.0 6.0
5.9
FY19 Distribution (Outlets in mns)

Distribution (Total outlets mns)
6 26%
25% 5.0 5.0 5.0
5 50% 46% 4.5
47% 39% 28% 13%
4
3 2.8
25%
2
50%
1
43%
42%
0 22% 17% 17% 20% 20% 21% 31%
FY15 Outlets increased to FY19 from FY15 Direct Reach Indirect Reach
Source: Companies, Investec Securities Research Source: Companies, Investec Securities Research
Figure 24: ITC and HUL sweating their reach the best Figure 25: Urban and direct reach plays performed better in disruption
0.07 4
3
Ratio of Domestic Sales/ Total Outlets (x)
0.06
Avg volume in 4 Q (Q3FY17-Q2FY18)
2
0.05
1
0.04 0
0.03 -1
0.02 -2
-3
0.01
-4
0.00 -5
ITC
Britannia
HUL
Colgate
Emami
Dabur
GCPL
Marico
Jyothy Labs
-6
HUL
Emami
Britannia
Colgate
GCPL
Dabur
Jyothy
ITC (Cig)
Marico
Source: Companies, Investec Securities estimates Source: Investec Securities estimates

Regionalization – The key market share expansion strategy
Regional FMCG players have created a niche based on the taste and preference of
their target market and have built a business around that. The strategy of
regionalization on product and distribution was initiated by HUL and Britannia in FY14
and is now being followed by a few other larger players in their respective categories.
GCPL has also rolled out its cluster approach of marketing known as Conquering
Micro Markets in which the company builds regional wise strategy.
We believe national companies that can succeed in altering/introducing product and

distribution based on India’s regional preferences have a higher chance of
succeeding.
Figure 26: Companies that have successfully implemented the cluster approach are seeing benefits in terms of volume growth
30% Increasing share in under indexed markets
25%
Net Sales growth FY18 (%)
20%
15%
10%
5%
0%
UP MP Gujarat Rajasthan
Under Indexed Markets Britannia

International assets to be viewed with high levels of caution
Between 2010 and 2016, India based FMCG companies (Dabur, Marico, GCPL in
our coverage universe) looked to expand horizons beyond their home country to other
emerging markets which had similar dynamics in terms of population density, GDP
growth and premiumization. However, the success rate has been higher when
companies have organically grown in the international business rather than acquiring
companies. Apart from challenges on execution, the macro environment in these
markets has been volatile, which has further impacted growth. Since early 2016, the
number of transactions have come off sharply. We believe even the inorganic focus
will be more India-centric going forward with international assets viewed cautiously.
Figure 27: Number of international acquisitions by Indian FMCG companies has halved
# of International deals by Indian FMCG
2010-2014 2015-2019
Source: Factset, Investec Securities Research
Ranking on the basis of Distribution

Figure 28: HUL tops the list while Colgate, Emami and Jyothy labs need to do more
Jyothy
Labs
Distribution

Communication
Digital to gain a significant share in communication
The traditional modes of advertising for FMCG companies have been print, television,
Digital advertising is playing an
outdoor and radio. However, in the last 5 years, the share of digital advertising has
increasingly important role in
increased sharply. Globally, Unilever already spends 35% of its advertising budgets
brand advertising – now around
on digital. In India as well, while this opens up larger players to competition from
40% of the total advertising
smaller niche companies, the scale advantage does not change. With feature and
market – Unilever 2017 Annual
smartphone proliferation continuing at a rapid pace and the consumer getting
Report
influenced more from this medium, succeeding here will be crucial for FMCG
companies.
Figure 29:Digital as a % of FMCG spends expected to be 50% by CY21E
376
Digital ad spending worldwide ($bn)
342
307
% of total Media Ad spending

266
228
192
50%
47%
45%
42%
39%
35%
2016 2017 2018 2019 2020E 2021E

Digital ad spending worldwide % of total Media ad spending
Source: Companies, News Articles, Investec Securities estimates

Figure 30: Increasing digital presence becoming a key focal point for companies
Companies FY19 Annual Report commentary
Your Company reaches its consumers through traditional media as well as increasingly through digital media. Our People Data
HUL
Centre (PDC) also picks up relevant information on social media through which we strengthen our connect with consumers.
Your Company has specialized digital acceleration and e-commerce teams that are pursuing business opportunities in the
Nestle
space of e-commerce.
We are putting in place annual partnerships/ sponsorships with the digital platforms and have been trying to leverage the OTT
Dabur platform to increase our brand reach to the millennials. We believe content is one of the most important elements of digital media
and will look to invest behind differentiated and disruptive campaigns.
Your company increased the use of digital as a media platform significantly in the current yr, with more brands having their
Marico presence through online, social and mobile media as well as through use of programmatic buying. The share of digital in
the total mix has been in double digitals in percent terms in the past 2 yrs.
Brands like Good Day and Marie Gold established ‘point of view’ and purposive content on various digital platforms. Little
Hearts, a digital only brand, launched a first of- its-kind Heartbreaker’s Handbook - a 101 guide to cutting through the typical mush
Britannia seen amongst millennials. Good Day Chunkies premium gourmet cookie partnered with YouTube to launch a first-of-its-kind Dessert
Carnival. In another first-of-its-kind digital initiative, your Company’s largest brand, Good Day pioneered the launch of India’s first
digital radio station for youth called Campus Radio.
We are tracking a 53% increase in digital reach, and cost per engagement is 2x lower than that in the previous year. As part of the
focus to strengthen our digital ecosystem, 70% of our brand websites have been redesigned for improved consumer user
GCPL
experience, organic traffic and conversion. The average time spent on each site has improved significantly and bounce rate reduced
due to more engaging content.
Several initiatives were implemented during the year towards leveraging the fast growing e-commerce channel with a view to
enhancing the reach of your Company’s products and harnessing digital and social media platforms for deeper consumer
ITC
engagement. Tailored and contextual content on digital platforms were deployed to enhance reach and drive brand
imagery.
The Company has strengthened its capabilities in e-commerce, including developing its relationships with online-only retailers
Colgate
and enhancing its digital marketing capabilities.
We have stepped up our digital presence, partnering several e-commerce players and developing strong digital campaigns to
Jyothy Labs
meaningfully connect with our consumers and create brand awareness.
The Company enhanced its presence on digital platforms through promotions and enhanced product availability. Emami reported
Emami a 112% improvement during FY2018-19 in online offtake compared to FY2017-18 (across a lower base). Keshking leveraged the
digital and social media to enhance brand awareness.
Social marketing could be a differentiator

“Two-thirds of consumers around While still a smaller factor in India, globally socially responsible marketing and brands
the world say they choose brands that stand for a purpose are becoming more relevant. Studies from different market
because of their stand on social research agencies confirm consumer preference towards a social cause. We believe
issues, and over 90% of the scope for brands and companies to be attached to an India centric cause is huge
millennials say they would switch and can improve the stickiness of the brands in the consumer’s mind. We already see
brands for one which champions a change in communication by certain companies in India; in categories where
a cause.” – Unilever Press differentiation is a challenge, companies that use this to their advantage will stand to
Release 11/6/19 benefit.
“Purpose-led, Sustainable Living

Brands are growing 69% faster
than the rest of the business and
delivering 75% of the company’s
growth.” – Unilever Press
Release 11/6/19

Dynamic Diversified plays – Can extract more from a
changing consumer and challenging conditions
Our core investible theme is companies that have a diversified product portfolio and
are developing products, distribution and communication for the changing Indian
consumer. We also believe that diversified plays that have a healthy rural market
salience have a higher chance of surprising on volume growth and hence on earnings
as rural volume growth recovers over the next few quarters.
Ranking on the basis of Diversification

Figure 31: HUL, Nestle, Dabur rank high in diversification
Jyothy
Labs
Diversification
India salience – A comforting factor in the long term

We believe businesses which are more India centric, or are in markets which are very
similar to India in variables (Bangladesh, Indonesia), are better plays than those with
a higher salience in markets like Africa, USA, UK, EU and Latin America where lower
growth, higher regulatory risk and limited success rates of companies makes us more
skeptical.
Figure 32: GCPL has had highest earnings volatility Figure 33: Higher proportion of acquired businesses weaken the
portfolio
GCPL 46%
42%
Dabur 27%
FY19 International ROE %
Marico 22%
International mix (%)
Emami 13%
ITC 8%
Britannia 7% 16%
Nestle 6%
Jyothy 3% 6%
HUL 0%
Colgate 0% Marico Dabur GCPL
Source: Companies, Investec Securities Research Source: Companies, Investec Securities Research
Ranking on the basis of India Salience

Figure 34: GCPL has the highest exposure to international markets
Jyothy
Labs
India salience

Regulation – Low levels apart from cigarettes
Apart from cigarettes, regulation is not a significant factor among players in the FMCG
space. While in isolated circumstances, regulation has impacted companies (Maggi
crisis in 2014; Anti-profiteering under GST; proposed changes to ingredient display
by FSSAI) any change in regulation is typically done after consultation with the
industry players. Cigarettes remain a regulated sector with key regulations being a)
significantly higher taxation b) sale and distribution of cigarettes being governed by
the Cigarettes and Other Tobacco Products Act c) pictorial warnings. However, on an
overall basis, FMCG remains among the most unregulated sectors.
Ranking on the basis of Regulation Risk

Figure 35: ITC has multiple variables contributing to Regulation risk
Jyothy
Labs
Regulation
Competition – Oscillating intensity across categories

The current levels of competitive intensity across most categories have been stable-
to-lessening in the current environment due to a broader slowdown where companies
have cut down on near term innovations and advertising spends. However, given the
penetration potential and high margin profile of the categories, we believe a higher
degree of competitive intensity will be the norm going forward for the sector. We
believe that larger players, given their scale and increasing nimble footedness, will
have a competitive advantage even in that context.
Ranking on the basis of Competition

Figure 36: Nestle, Marico and Britannia face relatively lower competition in few categories (eg Nestle for infant food)
Jyothy
Labs
Competitve intensity

Market Salience – Rural over urban
In the near term, players with a higher degree of urban salience could relatively
outperform given the slower growth in rural markets. However, over a longer period,
rural remains the key given the higher growth potential. We believe companies with
a strong rural salience will be better placed in the longer term.
Figure 37: Within its India business, Dabur and Emami have the highest rural salience
Rural contribution (% of total turnover)
50 50
40 40 40
35
30
25 25
Dabur Emami Colgate HUL Jyothy Marico GCPL Britannia Nestle
Source: Company, Investec Securities Research
Ranking on the basis of Rural Salience

Figure 38: Nestle, Britannia, GCPL and Marico are more urban centric
Jyothy
Labs
Rural Salience

Picking the winners
Our core investible theme is companies that have a diversified product portfolio and
are developing products, distribution and communication for the changing Indian
consumer. We also believe that diversified plays that have a healthy rural market
salience have a higher chance of surprising on volume growth and hence on earnings
as rural volume growth recovers over the next few quarters. Based on our analysis of
various parameters that affect industry dynamics, we believe HUL, Nestle and Dabur
are the best placed from a longer term perspective given their portfolio, management
and distribution strengths.
Figure 39: We rate companies in our coverage universe based on various necessary qualitative metrics
Jyothy
Labs
Diversification
Innovation
India salience
Effective Distribution
Rural Salience
Premiumization
Competitve intensity
Regulation
Average
Source: Company, Investec Securities estimates

The Market Context – FY20 a lower revenue
growth year
We believe the current market context warrants being selective. Volume growth is
moderating, impacted by a macro slowdown and higher base. While our thesis that
larger players will see a lesser impact holds, we pick winners based on relative
valuation, superior growth outlook and better revenue visibility.
Figure 40: Our FY20 variables of revenue and profit for our coverage universe
Revenue Drivers Profit Drivers
• Volume growth same as Pre GST • Competitive intensity manageable

levels • Savings in input cost to aid gross
• Rural - Solving Demand and margins
Liquidity problems • Focus on Overhead cost savings
• Favourable Base for H2FY20 • PAT growth > Revenue growth
• Low Price mix benefit - benign
inflation & Downtrading
The weak end to FY19 across companies was a function of a higher base and an
evident broad-based slowdown across categories. The slower rate of growth has
continued into Q1FY20 also impacted by a higher base of last year. We factor a
volume growth of 4-9% across companies in FY20 taking into account a lower volume
growth in 1HFY20 at least. The reasons for the broader slowdown are 1) overall GDP
growth slowing 2) rural stress across several regions 3) liquidity pressures in
the supply chain impacting wholesale channel sales. Industry data suggest
volume and value growth in CY19 will be 400-450bp lower than CY18; However, as
per industry reports, the impact is expected to be higher in sub Rs6bn turnover
companies with the growth for larger players being affected in a lesser manner. We
believe this is more so due to the fact that lack of scale, limited product portfolio,
financing challenges and increasingly obsolete distribution methods play into the
hands of the larger players.
Figure 41: India’s GDP growth has perceivably slowed over past few quarters
8.1
7.7 8.0
7.0
India GDP at market prices (%)
6.6 6.6
6.0
5.8
5.0
Q1FY18
Q2FY18
Q3FY18
Q4FY19
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: Central Statistics Office, Investec Securities Research

Q1FY20: Slowing but not that sharply
Volume growth for the FMCG companies in Q1FY20 has slowed from the elevated
rates of the last 5 quarters. However, a look at the volume growth rates for our
coverage universe over the last 5 years suggests that Q1 rates of volume growth are
not as bad as being made out to be. This is also a function of market share expansion
by the larger players from regional and smaller companies. We also believe that a
low base and GST led benefits had driven volume growth ahead of historical
averages; the reversion to mean has been starker, led by the overall macro
slowdown. We build in a 4%-10% range of volume growth for our coverage universe.
We believe FY21 could be another strong year if the above mentioned factors kick in.
Figure 42:Q1FY20 volume growth has been lower across the board as compared to FY19….
12
10
8
Volume growth %
0
Nestle Dabur HUL Britannia Jyothy Labs Marico Colgate Emami GCPL ITC
FY19 Q1FY20 (cigarettes)
Figure 43: … but not much slower from the last 5 year average
Volume growth (%)
8% - During GST
6% - Pre &
Post GST
8 10 3 7 5 4 7 9 6 7 8 5 6 11 10 6 9 5 5 7 6 3 6 -
Britannia Colgate Jyothy GCPL Dabur HUL Marico Emami

5 yr avg 7Q avg 1QFY20 FMCG 5 yr Avg 7Q FMCG Avg

Figure 44: Industry growth has significantly slowed from Q2FY19 levels
20.0
16.5 15.8
5.6
India FMCG growth trends (%)

13.0 13.6 13.6
11.0 11.5 5.3
10.3 10.8 5.5
4.2 10.0
5.0 5.1
2.0 4.0 3.8
4.7 3.8
14.4
11.2 10.3
9.0 8.0 8.5 9.4
7.5 7.0 6.2
5.6
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
volume growth (%) pricing growth (%) value growth (%)
Source: Companies, News articles, Investec Securities Research
While industry data suggests that June has been the weakest month in the quarter,
there have been companies that have agreed and disagreed to this thesis. We believe
Q2FY20 volume growth will also be muted and the festive season will play an
important part in determining how growth pans out for the balance of the year.
Rural remains the maker and breaker

Rural demand is part of the problem
Rural India has been a higher contributor to the slowdown, with its rate of growth vis-
à-vis urban coming off from 1.4x to 1.05x from Q2FY19 to Q1FY20. At a time where
urban growth has been fairly steady, rural growth remains the key variable to
determine the trajectory of overall industry growth. We believe in the longer term,
rural and Middle India will grow significantly ahead, in volume terms of urban India
and will be the key drivers of industry growth. Even in the current environment,
liquidity is also a crucial factor impacting rural growth which gives us the sense that
as market liquidity improves rural growth will also pick up to some extent.
A look at key factors that drive rural growth suggest that a gradual pick-up in growth
rates in rural markets may not be too far away. These are
a) the best monsoon since 2013 with good spatial distribution

b) rural incentives announced in the budget and a higher proportion of farm
loan waivers
c) liquidity easing measures by the government that could ease channel
financing pressures
d) interest rate cuts will aid expansion of the consumer wallet.

Figure 45: Rural now growing in line with urban
1.8
1.5
1.6 1.4
1.4 1.4
1.4 1.2
1.2 1.2 1.2
1.2 1.1 1.1 1.1
Rural/Urban (x)
1.0
0.8
0.6
0.4
0.2
-
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: Companies, News Articles, Investec Securities Research
Figure 46: 2019 has seen the best monsoon since 2013 Figure 47: Only few regions have seen deficient rainfall
110% 21%
105% 19%
17%
100%
15%
95%
13%
90%
11%
85% 9%
80% 7%
2010
2011
2012
2013
2014
2015
2016
2017
2018
Jan19 -
Aug19
% of Normal Rainfall (SW monsoon) FMCG sector growth % (RHS)

Source: Companies, IMD, Investec Securities Research
Source: IMD, Investec Securities Research

Figure 48: Support to rural has gone up sharply in the 2019 budget
8,000 4X
7,000
Major Incentive Schemes (in bn)

6,000
3X
5,000
4,000
3,000
2,000 X
1,000
0
FY16A FY18A FY20E
Food Subsidy* Income Support Scheme MGNREGA
National Health Mission Direct Benefit Transfer Others
Source: GoI, News articles, Investec Securities Research
Figure 49: State wise schemes announced since 2018 amount to Rs2.4 tn
4.5%
870
3.4%
3.1%
2.3%
2.0%
482
1.4%
380
1.0% 0.8%
0.4%
180 0.2% 0.2%
120 104 102 30 23 6
61
Centre KA MP RJ TG AP OR CT WB JH AS
Loan Waiver/ Agri Scheme (Rs. bn) % of GSDP
Note: Announced since 2018; KA = Karnataka, MP = Madhya Pradesh, RJ = Rajasthan, TG= Telangana, AP =
Andhra Pradesh, OR = Orissa, CT = Chhattisgarh, WB= West Bengal, JH = Jharkhand, AS = Assam
Figure 50: MSP increases for the FY20 season have been in the 1%-9% range
MSP MSP
Kharif Crops (Rs/Quintal) Increase
(2018-19) (2019-20)
Soyabeen (Yellow) 3,399 3,710 9.1%
Sunflower seed 5,388 5,650 4.9%
Ragi 2,897 3,150 8.7%
Sesamum 6,249 6,485 3.8%
Groundnut 4,890 5,090 4.1%
Tur (Arhar) 5,675 5,800 2.2%
Jowar (Hybrid) 2,430 2,550 4.9%
Jowar (Maldani) 2,450 2,570 4.9%
Cotton (Medium Staple) 5,150 5,255 2.0%
Urad 5,600 5,700 1.8%
Cotton (Long Staple) 5,450 5,550 1.8%
Moong 6,975 7,050 1.1%
Paddy (Common) 1,750 1,815 3.7%
Paddy (Grade A) 1,770 1,835 3.7%
Nigerseed 5,877 5,940 1.1%
Maize 1,700 1,760 3.5%
Bajra 1,950 2,000 2.6%
Source: News, Investec Securities Research

Rural Liquidity – Another key issue depressing growth
Another issue impacting rural growth has been the tight liquidity in the rural
distribution channel. The lower levels of liquidity are constraining the wholesalers and
super stockists, which in turn results in lower primary sales at the brand level. We
believe that the government’s recent measures to boost liquidity and reducing interest
rates could be key factors that result in a gradually improving liquidity situation.
Figure 51: Liquidity easing measures by the government
Government's Measures to Boost Economy will boost Consumption
Upfront release of Rs. 700 bn, additional lending and liquidity to the tune of Rs 5000 bn by
Additional Credit expansion through PSBs
providing upfront capital to PSBs
Banks to effect timely Rate Cuts Banks have decided to pass on rate cuts though MCLR reduction to benefit borrowers
To Reduce harassment and bring in greater efficiency, PSBs to ensure mandated return of loan
Customer Ease
documents within 15 days of loan closure.
Source: RBI, Investec Securities Research
Figure 52: Interest rate reduction to ease pressures on the channel

8.5
8.0
7.5
Repo Rate (%)
7.0
6.5
6.0
5.5
5.4
5.0
Nov13
Nov14
Nov15
Nov16
Nov17
Nov18
Aug13
Aug14
Aug15
Aug16
Aug17
Aug18
Aug19
Feb13
Feb14
Feb15
Feb16
Feb17
Feb18
Feb19
May13
May14
May15
May16
May17
May18
May19
Source: Bloomberg, Investec Securities Research
Base effect could also provide respite in 2HFY20

The benefit of higher volume growth due to GST as well as the impact of slowing
demand started to show up in lower volume growth in 2HFY19. 7 out of 9 companies
that reported volume growth delivered lower volume growth in 2HFY19 as compared
to 1H. We believe this is another factor which can result in volume growth pressures
bottoming out in 2HFY20 across our coverage universe.
Figure 53: 7 out of 9 companies in our coverage universe have a lower base for H2FY20
25
20
Volume growth YoY %
15
10
-5
HUL Dabur GCPL Jyothy Britannia Emami Nestle Marico Colgate
Labs
Q1FY19 Q2FY19 Q3FY19 Q4FY19

Profitability to be higher in FY20E
Promotional intensity mixed; SKU down trading could impact mix
Our survey across general trade and modern retail as well as analysis of
commentaries from domestic players suggests that promotional intensity across
categories remains steady except for a few categories. However, first signs of down
trading to smaller packs are visible. Both these factors impact mix and will reduce the
impact of price increase transmission in the revenue growth for companies in FY20.
We expect price increases to play a greater role in FY21 once growth recovers.
Figure 54: Realization growth is likely to get weaker in Q2FY20E

Q1FY20 Realisation YoY g%
5.6
2.8 3.2
0.2 0.9 1.6
0.7
-2.1 -0.5
-3.8
Jyothy GCPL Marico Colgate Nestle Dabur HUL ITC Britannia Emami
Labs
Figure 55: Promotional intensity visible but not across categories

Inflation – Higher for Foods than for HPC
FY19 was a year of low inflation across companies where average material cost
increase was less than 5% across players, expect Marico and Emami where copra
and menthol prices played spoilsport respectively. For FY20, while CPI is likely to be
in the 3-3.5% range, we expect packaged food companies to be more impacted as
compared to home and personal care companies. Hence, we expect and factor in
higher revenue growth for Nestle and Britannia as they pass on the impact of higher
inflation in wheat, sugar, milk etc. Overall, we do not expect more than a 3-4%
increase in product prices across our coverage universe for FY20.
Figure 56: Key commodity inflation – food higher than non-food

160
150
Inflation (base of 100 for Jan13)
140
130
120
110
100
90
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Apr-13
Jul-13
Oct-13
Apr-14
Jul-14
Oct-14
Apr-15
Jul-15
Oct-15
Apr-16
Jul-16
Oct-16
Apr-17
Jul-17
Oct-17
Apr-18
Apr-19
Jul-18
Oct-18
Jul-19
Non Food Avg Food Avg
Source: Company, Bloomberg, Investec Securities Research
Multiple margin improvement drivers for FY20

6 out of 10 companies in our coverage universe witnessed EBITDA margin expansion
in FY19. We build in margin improvement across most players in our coverage
universe even in FY20E led by IND AS 116 adjustment, benign inflation, and savings
in overheads. As has been in the trend in Q1FY20, we expect a strict control over
overhead costs across companies in our coverage universe which will aid profitable
growth across players.
Figure 57: EBITDA margin improvement built in across FMCG players

1.2
0.9
EBITDA margins %
0.2 2.1
1.2 0.9 2.1
38.5 0.5 0.2
27.7 26.9
22.6 23.1 20.5 20.4 17.5 15.5 15.7
(0.1)
ITC Colgate Emami HUL Nestle GCPL Dabur Marico Jyothy Britannia
Labs
EBITDA Margins FY19 EBITDA Margins Change FY19-FY20E


Figure 58: PAT growth to be higher across most players in FY20E
25%
20%
15%
10%
5%
0%
-5%
FY20E Revenue g % Adj EPS g% - Revenue g% (FY20E)

Figure 59: Adjusted PAT growth not very different from 5 year average across most companies
30%
25%
PAT growth (%)
20%
15%
10%
5%
0%
Britannia Jyothy Marico GCPL HUL Colgate Dabur Nestle ITC Emami
Labs
5 YR EPS CAGR FY20E EPS g

Valuation and View – Stay Selective
The larger companies in the FMCG sector have been more resilient as compared to
most other consumer-centric businesses in FY20 thus far given the sticky nature of
the business and new tailwinds on margins. We believe given the steady growth
profile, higher than other sector cash conversions and return ratios, premium
valuations for the sector are justified. Further, most of the companies in our coverage
universe are trading at below peak valuations which gives us comfort that once
growth recovers, a further re-rate is likely. However, given the changing dynamics in
the industry, we stick with companies that are diversified, have a greater chance of
success given their mix and rural salience. Also, we account for higher earnings
visibility, India business salience and market position as we assign our valuation
multiples. We initiate on the FMCG sector with a BUY rating on Hindustan Unilever,
Dabur, ITC and Jyothy Laboratories, with a HOLD on Godrej Consumer, Britannia,
Emami, Marico and Nestle India and a SELL rating on Colgate Palmolive India.
Figure 60: Premium to 5 year average multiples largely reflect.. Figure 61: …operational outperformance
80 50
70
40
60
50 30
EV/EBITDA (x)
40
20
30
PE (x)
20 10
10
0
0
-10 -10
-20
-20
Current 1yr fwd Difference - Current 1yr fwd - 5yr Avg Current 1yr fwd Difference - Current 1yr fwd - 5yr Avg
Source: Factset, Investec Securities Research Source: Factset, Investec Securities Research
Figure 62: Companies are not trading at their peak valuations

70%
60%
Dicsount to Peak Valuations (%)
50%
40%
30%
20%
10%
0%
PE EV/EBITDA
Source: Factset, Investec Securities estimates

Figure 63: Our Company thesis and rating snapshot
Target PE
Valuation Sep21e Target
Company Rating Summary Assigned
Basis* EPS Price
(Sep21e)
Slowing earnings growth as margin improvement
trajectory and biscuit category growth slows, which will 20%
Britannia Hold not be fully compensated by new category contribution 43x EPS premium to 65.8 2,831
sector avg
Long term company and industry drivers intact
Singular dependence on a category with elevated

competitive intensity and high penetration 5%
Colgate Sell 33x EPS discount to 35.2 1,162
Non oral care strategy yet to fructify into growth sector avg
A diverse portfolio, focus on power brands and a step

up in innovation provides strong levers for growth 25%
Dabur Buy 44.5x EPS premium to 11.7 522
Efficient cost control, accelerating distribution reach sector avg
and a strong rural mix is a big positive
Success in re-aligning its distribution, revitalizing Kesh

King and weathering the lower margin environment 30%
Emami Hold 24x EPS discount to 13.7 329
Weak volume growth visibility given category growth sector avg
challenges and high promoter debt mars the multiples
Strong management team with a healthy innovation

34.5x EPS
success rate In line with
Godrej (SOTP - 38x
Hold Intense competition in soaps and HI, modest hair sector 19.1 657
Consumer India and 22x
colour growth and large international business average
International)
exposure remain concerns
Diversified portfolio outpacing category growth,
superior execution and future readiness to changing
40%
Hindustan FMCG dynamics deserve a significant premium
Buy 48.5x EPS premium to 43 2,086
Unilever Strong earnings growth potential (aided also by GSK
sector avg
acquisition) and focus on cost rationalisation provide
medium term earnings growth visibility
Cigarette taxation, high investments in FMCG and

competition in cigarettes have weighed on earnings.
ITC Buy ITC remains a diversified consumer play, has relatively SOTP SOTP 13.1 285
inelastic category mix and has trades at attractive
valuations
Multi category and brand presence, high salience to
South India, renewed focus on execution and 30%
Jyothy inexpensive valuation
Buy 21.3x EPS discount to 7.4 186
Labs
Focus on volume led growth and leveraging rural sector avg
presence to drive innovation are key positives
With 78% of sales from hair oils and edible oils,

diversification remains the key re-rate variable 10%
Marico Hold 38x EPS premium to 10.9 412
Strong earnings execution; benefit of lower copra sector avg
prices to aid FY20E earnings
Strong volume growth backed by favourable product

mix, regionalisation strategy and innovation led 50%
Nestle Hold success has led to premium valuations 53x EPS premium to 251.8 13,343
sector avg
Await a better entry point given high valuations and
possible inflationary pressures in the near term
Note: *Sector avg multiple is ex ITC, Source: Companies, Investec Securities estimates

Figure 64: FMCG coverage valuation matrix
P/E (x) EV/EBITDA (x) Avg ROCE (%) EPS CAGR
Price Mcap Target
Company Rec PEG (x)
(Rs) (Rsbn) Price
FY19A FY20E FY21E FY22E FY19A FY20E FY21E FY22E FY19A FY20E FY21E FY22E FY19-22E
Hindustan Unilever 1,805 3,907 Buy 2,086 64.3 57.0 45.2 39.2 44.5 37.8 27.7 23.9 78.0% 80.6% 34.7% 23.9% 17.9% 3.6
ITC 240 2,951 Buy 285 23.6 21.5 19.4 17.4 16.1 14.1 12.5 11.0 19.4% 19.4% 19.4% 19.4% 10.7% 2.2
Nestle* 12,697 1,224 Hold 13,343 73.8 66.2 56.6 48.7 45.9 41.6 35.5 30.4 41.7% 58.0% 85.4% 83.2% 14.9% 5.0
Dabur India 452 799 Buy 522 55.5 48.6 41.6 35.8 45.6 39.2 33.5 28.8 20.6% 21.9% 22.7% 23.7% 15.7% 3.5
Britannia Industries 2,675 642 Hold 2,831 55.6 51.5 43.8 37.8 36.6 33.2 28.2 24.1 25.8% 22.8% 22.6% 22.7% 13.7% 4.1
GCPL 623 637 Hold 657 42.9 40.7 35.1 30.6 30.8 28.4 25.0 22.0 23.1% 16.3% 18.1% 19.5% 11.9% 3.6
Marico 382 493 Hold 412 52.0 43.6 37.8 32.9 38.2 31.7 27.7 24.1 34.4% 30.6% 32.3% 33.4% 16.4% 3.2
Colgate 1,252 339 Sell 1,162 45.7 41.3 37.4 33.9 27.2 24.4 22.2 20.1 47.9% 51.3% 56.2% 62.8% 10.5% 4.3
Emami 300 136 Hold 329 27.2 24.7 22.8 21.0 18.6 17.1 15.6 14.1 13.3% 19.3% 20.4% 19.8% 9.1% 3.0
Jyothy Laboratories 148 54 Buy 186 27.2 25.9 21.3 18.6 19.7 17.2 15.0 13.1 13.7% 13.8% 15.5% 16.6% 13.4% 2.0
Mean 46.8 42.1 36.1 31.6 32.3 28.5 24.3 21.2 32% 33% 33% 32% 13.4% 3.4
Median 48.9 42.5 37.6 33.4 33.7 30.0 26.3 22.9 24% 22% 23% 23% 13.6% 3.6
Note: *CY numbers for Nestle Source: Companies, Investec Securities estimates
Page 35 | 16 September 2019| India FMCGt

Britanni a Industries Ltd (Hold - T P: IN R)
Britannia Industries Ltd (BRIT.BO)

India | Food Producers HOLD
Don’t take a bite just yet Price: INR2675
Britannia, among the two largest listed food and beverage companies in India, Target: INR2831
has had a stellar run with the company delivering the highest earnings growth
Forecast Total Return: 6.5%
(20%) in our coverage universe over the last decade. However, as margin
improvement trajectory and biscuits category growth (75% of sales) slows, so Market Cap: INR643bn
too will profit growth (14% CAGR expected over FY19-22E). While we believe
EV: INR621bn
management quality is among the best and the strategy to diversify its
portfolio to be a total foods company is spot on, we believe valuations at 44x Average daily volume: 435k
FY21E and 38xFY22E are fair given the slowing earnings growth trajectory,
weaker than historical return ratios and concerns on capital allocation. Initiate
with a HOLD.
 Total foods will take time – Britannia is on the right path to drive market share
gains in its core biscuits category and create new growth drivers by entering new
categories. However, with biscuits being among the worst hit categories in the
slowdown and new category contribution to not fully compensate for this impact,
we expect volume growth for Britannia to be weaker than its last five year
average in the near term.
 Higher input costs to restrict margin expansion – With full-year inflation
expected at higher levels compared to Q1 and category challenges not providing
sufficient pricing flexibility, we expect Britannia to only maintain margins
(adjusting for IND AS) in FY20E, led by aggressive overhead cost management.
 Long-term drivers remain intact – The USD33bn food and beverage industry
in India is likely to grow at a faster rate than the home and personal care category
over the longer term. Further this industry has a higher proportion of smaller and
unorganized players making the opportunity that much more attractive. We
believe Britannia, with its strong execution and intent to expand into newer
categories, is among the few larger players that stand at the forefront of
Harit Kapoor
capturing this opportunity. +91 (22) 6849 7493
 Valuations fair, given medium term concerns; initiate at HOLD - We initiate harit.kapoor@investec.co.in
coverage at HOLD and a target price of Rs2831 based on 43x FY21E earnings. Bhakti Thacker
Our target multiple is at a 20% premium to sector average and a 20% discount +91 (22) 6849 7421
to Nestle India’s valuations, which we believe is the bellwether F&B player in Bhakti.Thacker@investec.co.in
India with a more diversified portfolio and higher margins and return ratios. Our
multiple also factors the additional concern on capital allocation in the company
with advances to group companies at an all-time high in FY19.
Financials and valuation Year end: 31 March Price Performance
2018A 2019A 2020E 2021E 2022E 3,600
Revenue (INRm) 99,140 110,547 119,664 134,400 149,907 3,400
EBITDA (INRm) 15,017 17,334 19,009 22,175 25,622 3,200
EBITA (INRm) 13,596 15,715 17,149 20,041 23,247
3,000
PBT (normalised) (INRm) 15,184 17,689 19,223 22,571 26,151
Net Income (normalised) (INRm) 10,040 11,555 12,485 14,659 16,984 2,800
2,600
EPS (norm. cont.) - FD (INR) 41.8 48.1 52.0 61.0 70.7
FCFPS - FD (INR) 37.0 67.6 48.8 44.5 64.9 2,400
DPS (INR) 12.5 15.0 16.0 18.0 21.0 2,200
Sep-18 Dec-18 Mar-19 Jun-19
PE (normalised) (x) 64.0 55.6 51.5 43.9 37.9
EV/sales (x) 6.3 5.6 5.2 4.6 4.1 1m 3m 12m
EV/EBITDA (x) 41.4 35.8 32.7 28.0 24.2 Price

____________________________
6.6 (10.4) (11.0)

FCF yield (%) 1.4 2.5 1.8 1.7 2.4
Dividend yield (%) 0.5 0.6 0.6 0.7 0.8
Source: Company accounts/Investec Securities estimates Source: FactSet
Page 37 | 14 September 2019 | Britannia

Industries Ltd
Britannia is among the two largest packaged food companies in India, spanning
categories of biscuits, cakes, value-added dairy, bread, and other sweet and savoury
snacks. The company also has an international business, with a presence in 79
countries largely through the export route. Britannia’s majority shareholders are the
Wadia group (50.66% ownership); however, it is professionally managed with Varun
Berry being the Managing Director since 1 st April 2014. Over the last 5 years, the
company has grown revenues, EBITDA and PAT at a CAGR of 11%, 15% and 14%
respectively.
Near challenges in the core; longer term

outlook remains healthy
Around 75% of Britannia’s sales come from India biscuits; the company is the
market leader in the category. While industry reports have consistently expected this
category to grow in double digits, the category growth has been consistently in mid
to high single digits over the last few years. Britannia has, however, driven double
digit revenue growth led by market share gains. In Q1FY20, category value growth
slumped to ~2.5% which slowed Britannia’s growth despite the market share gains.
We believe for the company’s India biscuits business to grow at 9-10% a) the
category growth needs to pick up to 6-7% b) Britannia needs to grow market
shares by 100bp annually. While we believe market share improvement is still likely
as the company continues to drive its premiumization and distribution agenda, the
challenge of lower category growth could impact overall growth rates for Britannia in
FY20.
Figure 65: Industry reports suggest double digit growth in the category Figure 66: Britannia is the volume share leader
5 yr 12% 11%
CAGR
Branded biscuit market size (Rs bn)
532 Others, 21%

Britannia,
31%
Anmol,
4% Est FY18
316 Surya, 5% Market Share
182 ITC, 10%
Parle, 29%
2013 2018 2023E
Source: Mrs Bectors food specialities DRHP, Investec Securities estimates Source: Mrs Bectors food specialities DRHP, Investec Securities estimates
Figure 67: However, volume growth has sharply slowed vs peers in Q1FY20
10.5
Q1FY20 Vol growth (%)
9.6
6.0 5.6
5.0 5.0
4.0
3.0
0.0
Nestle Dabur Marico Jyothy HUL GCPL Colgate Britannia Emami

Labs
Page 38 | 16 September 2019 | Britannia Industries Ltd

Figure 68:Impacted largely by biscuit category growth slowdown Figure 69: Impacting Britannia’s volume growth
8% 7.0% 13 12 13
Britannia Volume growth

11
7%
Biscuits Category growth
6% 5.0%
7 7
(YoY%)
5% 6
4%
(%)
3
3% 2.5% 2
2%
1%
Q1FY
Q2FY
Q3FY
Q4FY
Q1FY
Q2FY
Q3FY
Q4FY
Q1FY
18
18
18
18
19
19
19
19
20
0%
Jan-Jul'18 Jan-Jul'19 Q1FY20
Source: News Reports, Investec Securities estimates Source: Company, Investec Securities estimates
We believe Britannia is well placed to gain market shares in a category that is large
and has several players. The category has 4 serious players, of which 3 have a
national and diversified product presence. Apart from the above, the category has
several smaller players as well. Britannia’s product innovation, coupled with
continued distribution expansion are both ahead of peers in the space; this long term
competitive advantage creator will be more visible once category growth picks up.
We are building a 9.5% CAGR for biscuits over FY19-22E for Britannia.
Figure 70: Britannia continues to improve its competitive advantage over Parle
Figure 71: Led by a strong improvement in rural distribution
19,000
Rural Distribution (# of Rural
18,000
Preferred Dealers)
14,000
10,000
8,000
7,000
FY15 FY16 FY17 FY18 FY19 Q1FY20

Figure 72: Visible premiumization trend as value pack share has reduced
~55%
Industry Contribution of Value

portfolio (Re5-10 pack)
~40%
5-6 yrs ago Today
Innovations to drive incremental growth

Aside from biscuits, Britannia has a presence in the bread cakes and rusk space. It
has revamped this portfolio also over the last one year and added new products
across these categories. Apart from this, the company entered 4 new categories in
FY19 (Croissants, Crème Wafers, Milkshakes and Salty Snacks). While the
cumulative market size of the new categories currently is ~Rs280bn, our estimates
suggest that the company could add another Rs14bn from these categories itself at
a conservative level over the next 5 years. These categories themselves could add
over 200bps to growth annually for the company. We understand that initial feedback
for milk drinks, croissants and crème wafers has been positive; it is too early to
comment on the salty snacks business which remains the largest opportunity. Over
and above, we believe category launches will continue as the company looks to
diversify beyond biscuits. Further, the company has the scale now for a strong rollout
for the categories that it wants to address.
Figure 73: Significant step up in the Britannia’s innovation pipeline
 NutriChoice Heavens
FY15  Britannia Nut n Raisin Romance Cake
 Good Day Chunkies
 Time Pass, Groovy Chip, Time Pass

Funsticks
 Croissants
 Treat Crème Wafers
 Winkin Cow Thick Shakes
 Treat Stars - Open sandwich biscuit
 Treat Burst - Premium choco creme
cookies
 Cake Roll Yo - Swiss Roll
FY19  Layerz Choco - Chocolate sandwich
cake
 Muffills Double Choco - Muffins
 Fudge it - Choco brownie
 Re-launched Pure Magic Chocolush
 Re-launched Chunkies Triple Choco
Chips
 Wonderfulls Butter Jeera and Mixed
Fruit

Figure 74: 5 year potential for each of these categories
27%
25%
280
20%
5 28
Cream wafers Milk Shakes Salty snacks*
Market Size - Rs. bn Growth witnessed in past (%) RHS
*Salty snacks size market represents segment in which company operates

International – Middle East to be weak; but

new market approach correct
Britannia’s international market business is spread across the Middle East, Africa,
Americas, Asia Pacific and South Asia with a presence in 79 countries. Apart from its
2007 acquisition of Middle East based entities, Strategic Food International Co LLC
and Al Sallan Food Industries Co SAOG, the company has not ventured
internationally through acquisitions. We believe that the strategy of going organic
internationally is likely to generate more success; hence its investments into Nepal
and setting up a plant in Mundra SEZ to cater to Africa and Americas makes more
sense. As a stated intent, the company will be adding one new market (as it did Nepal
in FY19) where it will set up facilitates (Egypt, Nigeria, Uganda, Bangladesh and
Ghana are markets being explored). We believe that this is the right approach to grow
the international business and will aid overall consolidated growth going forward. We
are building in a 12% revenue CAGR coming from the international business over
FY19-22E.
Higher promotional intensity to drive the core

The clear signs of biscuit category growth decelerating were visible in Q1; growth
slowed to 2.5%. Though Britannia grew faster than the category, the 6% growth (3%
volume growth) was below historical levels for the company. Parle Products, the No2
player, also expressed concerns over demand slowdown which the company
attributed to higher GST rates (biscuits of value < Rs100/kg have seen an increase
in tax rates post GST). As per Parle’s management, Q1FY20 witnessed an 8%
decline in value packs of Rs100/kg whereas packs valued over Rs 100/kg witnessed
a 7% growth.
In our recent channel checks, we noticed promotional intensity in biscuits higher than
usual. These offers are a clear function of the slowdown and the attempts from
players to drive volumes, even at the cost of margins. Overall, given the strength of
Britannia’s portfolio and its accelerated innovation and promotion agenda, we expect
a gradual return to 6-7% volume growth levels for the company in biscuits.

Figure 75: Promotional Offers by Britannia to boost volumes
Inflation at higher end of the recent band

Over the last 2 years, annual inflation has been around ~3% for Britannia. Given the
recent commodity price trends, we expect the inflation levels of ~4% of Q1 to sustain
at 4-5% levels for the full year. While wheat and milk prices continue to move up, the
lower palm oil and crude prices will partially compensate. The price increases thus
far have not been significant; and we believe in the current environment price hikes
will continue to remain insignificant, which could impact gross margins.
Figure 76: Inflation expected to sustain at 5% for FY20

7%
Raw material Inflation growth (% YoY)
6%
5%
5%
4%
3%
2%
1%
0%
FY20E
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
In order to sustain profitability and in the absence of strong revenue growth, the
company is looking to extract more from cost efficiencies. This, coupled with product
mix improvement, will result in Britannia maintaining consolidated margins in FY20.
We are building in a 140bp margin improvement for the company over FY19-22E
leading to a 14% EBITDA CAGR for the same period.

Figure 77: Improvement in margins by constantly focusing on… Figure 78: … cost savings on all fronts
17.1%
4.7x
Costs savings across supply chain

4.5x 4.5x
16.5%
EBITDA Margin (% YoY)
(indexed to FY14)
15.9%
15.7%
3.1x
15.1%
2.2x
14.5% 1.8x
14.1%
1x
FY16
FY17
FY18
FY19
FY21E
FY22E
FY20E
FY14 FY15 FY16 FY17 FY18 FY19 FY20E
Source: Company, Investec Securities estimates Source: Company, Investec Securities estimates
Return Ratios declining as capacity building continues

Over the last 3 years, Britannia has doubled its gross block as it invested to a)
increase the proportion of in house manufacturing to 55% b) added new lines and
capacities to build for the future and for new category and product lines. As a result,
RoE has come off from 46% to 30%. With the ramp-up continuing (Rs4.5bn capex in
the current year), we believe there will be further pressure on return ratios in the next
1-2 years. Our estimates build in RoEs declining to 26% from FY19-22E.
Figure 79: Pressure on ROEs due to Capacity building
50% 46% 5.0

45% 4.5
40% 37%
4.0
33%
35% 30% 3.5
30% 27% 27% 26%
3.0
25%
2.5
20%
15% 2.0
10% 1.5
5% 1.0
FY16 FY17 FY18 FY19E FY20E FY21E FY22E
ROE % Profit Margin (%)
Asset Turnover (x) (RHS) Equity Multiplier (x) (RHS)
ICD to group: No real threat but an overhang

In FY19, Britannia’s advances to group companies increased to Rs6.85bn, which is
the highest in its history. The two entities receiving these loans are Bombay Dyeing
and Go Airlines (India) (Rs3.5bn and Rs3.35bn respectively). A look at the financials
(FY19 for Bombay Dyeing and FY18 for Go Airlines) of both entities suggest servicing
or even repaying this debt will not be a challenge as both entities are profitable. Also,

the management has committed to not increasing these loans any further. However,
the issue of capital allocation comes into question and becomes an overhang for the
business; FMCG companies enjoy the best multiples as they do not have issues of
capital allocation and we believe Britannia would be better placed to square these
advances over a period of time.
Figure 80:Recent ICDs have been to Bombay Dyeing and Go Air Figure 81: Both entities are in a comfortable financial position
4.0 30 28.7
3.5
25
ICD closing balance (Rs bn)
3.0
2.5 20
2.0 15
1.5
10
1.0
5 3.5 2.8
0.5
0.0 0
Bombay Bombay Go Airlines Scal Services Interest Coverage Ratio (x)
Burmah Dyeing Bombay Burmah - FY19 Bombay Dyeing - FY19
FY15 FY16 FY17 FY18 FY19
Go Airlines - FY'18

Source: Ace Equity, Investec Securities Research
Valuations fair given medium term concerns

Britannia has re-rated significantly over the last 5 years as earnings growth has been
consistently better than the peer set. As earnings growth slows, we still believe the
trajectory of growth will be in the top quartile of our coverage universe. However,
given the fact that biscuits still accounts for 75% of overall sales, we believe
valuations at 43xFY21E does not factor the risk of sustained category slowdown.
Also, the continued salience of advances to group companies has us worried about
the use of the group’s cash cow to fund the other businesses which may deteriorate
in health given the macro environment.
We initiate coverage on Britannia with a HOLD with a target price of Rs2831 based
on 43x September 2021E earnings. Our target multiple is at a 20% premium to sector
average and a 20% discount to Nestle India’s valuations, who we believe is the
bellwether food and beverage player in India with a more diversified portfolio and
higher margins and return ratios.

Figure 82: Britannia’s P/E multiples are now in line with 5 yr avg Figure 83: At an EV/EBITDA level, multiples are higher than 5 yr avg
65 PE(x) 45 EV/EBITDA
60 (x)
40
55 47.4
31.4
50 35
45 30
40 42.7
25 28.6
35
30 32.7 20 22.3
25
20 15
15 10
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
12m fwd PE 10 yr avg PE 5 yr avg PE 12m fwd EV/EBITDA 10 yr avg EV/EBITDA
5 yr avg EV/EBITDA

Summary Financials (INRm) Year end: 31 March
Income Statement 2018 2019 2020E 2021E 2022E
Revenue 99,140 110,547 119,664 134,400 149,907
EBITDA 15,017 17,334 19,009 22,175 25,622
Depreciation and amortisation -1,421 -1,619 -1,860 -2,135 -2,375
Operating profit 13,596 15,715 17,149 20,041 23,247
Other income 1,664 2,065 2,374 2,730 3,003
Net interest -76 -91 -300 -200 -100
Share-based-payments 0 0 0 0 0
PBT (normalised) 15,184 17,689 19,223 22,571 26,151
Impairment of acquired intangibles 0 0 0 0 0
Non-recurring items/exceptionals 0 0 0 0 0
PBT (reported) 15,184 17,689 19,223 22,571 26,151
Taxation -5,142 -6,125 -6,728 -7,900 -9,153
Minorities & preference dividends -2 -10 -10 -12 -14
Discontinued/assets held for sale 0 0 0 0 0
Net Income (normalised) 10,040 11,555 12,485 14,659 16,984
Attributable profit 10,040 11,555 12,485 14,659 16,984
EPS (reported) 41.8 48.1 52.0 61.0 70.7
EPS (norm., cont.) – FD (INR) 41.8 48.1 52.0 61.0 70.7
EPS (norm., cont., IAS19R adj.) – FD 41.8 48.1 52.0 61.0 70.7
DPS (INR) 12.5 15.0 16.0 18.0 21.0
Average number of group shares - FD (m) 240 240 240 240 240
Average number of group shares (m) 240 240 240 240 240
Total number of shares in issue (m) 240 240 240 240 240
Cash Flow 2018 2019 2020E 2021E 2022E
Depreciation & amortisation 1,421 1,619 1,860 2,135 2,375
Other cash and non-cash movements 18,417 19,283 21,083 24,706 28,525
Change in working capital 0 409 -124 -494 233
Operating cash flow 18,417 19,692 20,959 24,211 28,758
Interest -964 314 300 200 100
Tax paid -4,965 -418 -6,728 -7,900 -9,153
Dividends from associates and JVs 0 0 0 0 0
Cash flow from operations 12,488 19,588 14,531 16,511 19,706
Maintenance capex -9,563 304 -5,226 -4,799 -3,879
Free cash flow 2,925 19,892 9,305 11,712 15,827
Expansionary capex - - - - -
Exceptionals and discontinued operations - - - - -
Other financials 856 -2,965 1,690 -1,832 -1,114
Acquisitions - - - - -
Disposals - - - - -
Net share issues 151 0 0 0 0
Dividends paid -3,174 -219 -4,637 -5,217 -6,086
Change in net cash 758 16,707 6,357 4,664 8,626
Net cash/(debt) 409 19,964 21,693 29,976 37,983
FCFPS - FD (INR) 37.0 67.6 48.8 44.5 64.9
Balance Sheet 2018 2019 2020E 2021E 2022E
Property plant and equipment 15,484 17,895 20,835 24,560 27,320
Intangible assets 0 0 0 0 0
Investments and other non current assets 4,657 9,122 10,034 11,037 12,141
Cash and equivalents 10,432 8,597 14,654 17,458 23,950
Other current assets 11,507 14,910 15,736 16,611 17,539
Total assets 51,654 62,281 73,718 83,660 96,557
Total debt 1,782 1,380 3,380 1,761 761
Preference shares 0 0 0 0 0
Other long term liabilities 26 174 174 174 174
Provisions & other current liabilities 5,622 6,348 6,885 7,470 8,855
Pension deficit and other adjustments 0 0 0 0 0
Total liabilities 17,460 19,421 23,011 23,511 25,511
Net assets 69,113 81,702 96,729 107,171 122,069
Shareholder's equity 34,062 42,532 50,380 59,822 70,719
Minority interests 131 327 327 327 327
Total equity 34,194 42,859 50,707 60,149 71,046
Net working capital 15,014 16,749 20,745 24,839 31,872
NAV per share (INR) 142.4 178.3 211.0 250.3 295.6
Source: Company accounts, Investec Securities estimates

Sel ecti on.Tables(1).R ang e.Fi elds .Update
Calendarised Valuation Year end: 31 March

2018 2019 2020E 2021E
Calendar PE (x) 57.5 52.6 45.4 39.2
Calendar Price/NAVPS (x) 15.8 13.2 11.1 9.4
EV/sales (x) 5.8 5.3 4.7 4.3
EV/EBITDA (x) 37.1 33.5 29.0 25.1
FCF yield (%) 2.2 2.0 1.7 2.2
Dividend yield (%) 0.5 0.6 0.7 0.8
Ratios and Metrics Year end: 31 March

Ratios and metrics 2018 2019 2020E 2021E 2022E
Revenue growth (y-on-y) (%) 9.5 11.5 8.2 12.3 11.5
EBITDA growth (y-on-y) (%) 17.5 15.4 9.7 16.7 15.5
Net income (normalised) growth (yoy) 13.5 15.1 8.0 17.4 15.9
EPS (normalised) growth (y-on-y) (%) 13.4 15.0 8.0 17.4 15.9
FCFPS growth (y-on-y) (%) 1,051.9 82.8 (27.7) (8.9) 46.0
NAVPS growth (y-on-y) (%) 26.6 25.2 18.3 18.6 18.1
DPS growth (y-on-y) (%) (48.1) 20.0 6.7 12.5 16.7
Interest cover (x) 179.1 172.9 57.2 100.2 232.5
Net debt/EBITDA (x) (0.0) (1.2) (1.1) (1.4) (1.5)
Net debt/equity (%) (1.2) (46.6) (42.8) (49.8) (53.5)
Net gearing (%) (1.2) (87.2) (74.8) (99.4) (114.9)
Dividend cover (x) 3.3 3.2 3.2 3.4 3.4
EBITDA margin (%) 15.1 15.7 15.9 16.5 17.1
EBITA margin (%) 13.7 14.2 14.3 14.9 15.5
ROE (%) 29.5 27.2 24.8 24.5 24.0
ROCE (%) 23.4 22.6 20.6 21.6 21.9
NWC/revenue (%) 15.1 15.2 17.3 18.5 21.3
Tax rate (normalised) (%) 33.9 34.6 35.0 35.0 35.0
Tax rate (reported) (%) 33.9 34.6 35.0 35.0 35.0
Target Price Basis

43x Sep-21 EPS
Key Risks
a) Increased comptetitive intensity in biscuits b) Higher advances to group companies c) Management change

Colgate Pal moli ve Indi a (Sell - T P: 1162INR)
Colgate Palmolive India (COLG.NS)

India | Personal Goods SELL
Not all smiles just yet Price: INR1252
Target: INR1162
Colgate, the India and global leader in oral care, is finally stemming the
continued loss of market share that it faced over the last 3 years. While we Forecast Total Return: -5.2%
believe management’s focus is in the right direction, medium-term challenges
of category growth, the high base of operating margins and no incremental Market Cap: INR341bn
material driver of growth apart from oral care are likely to keep earnings growth EV: INR335bn
below our coverage universe average. We believe for a sustained re-rating, the Average daily volume: 470k
innovation success rate of the non-oral care portfolio has to increase
substantially. We value Colgate at 33x September 2021 earnings and arrive at
a
target price of Rs1162.
An intensely Initiate
competitive at SELL.
category - While the competitive landscape remains
intense, the inability of HUL to revive Pepsodent and Patanjali facing challenges
in its traditional captive distribution model have resulted in Colgate’s share not
deteriorating at the same pace as it was over the past 3 years. The company
itself has stepped up investments through innovation and on-ground aggression
with the sole aim of driving revenue and market share growth. While we believe
the company’s strategy of focusing on revenues is correct, competitive intensity
in the category will result in earnings CAGR being below peers in our coverage
universe.
 Non-oral care yet to take off – Non-oral care is still 4% of overall revenues for
India whereas globally non-oral care is 53% of sales. Colgate’s unwillingness to
venture outside oral care and current pace of non-oral care launches make us
believe that growth dependence will continue on oral care (90%+ urban and
75%+ rural penetration in toothpastes).
 Earnings outlook remains weaker than peers – Over the last 5 years, Colgate
has outperformed only ITC and Emami on earnings growth. Over the next 3
years, we factor a 10.5% earnings CAGR led by market share recovery and lower
commodity costs aiding margins. However, even as we factor all the likely Harit Kapoor
+91 (22) 6849 7493
positives in our earnings estimates, the earnings CAGR is only ahead of Emami harit.kapoor@investec.co.in
based on our estimates.
Bhakti Thacker
 Too early to declare victory; Initiate at SELL - Given the growth context for +91 (22) 6849 7421
the category and continued competitive intensity, we believe it is too early to Bhakti.Thacker@investec.co.in
conclude that Colgate will be able to drive sustained double-digit revenue growth
with improving operating margins. We believe valuations at 37xFY21E and
34xFY22E adequately factor the likely positives to growth. Initiate at SELL.
2018A 2019A 2020E 2021E 2022E 1,450
Revenue (INRm) 41,880 44,624 47,908 52,485 57,509 1,400
EBITDA (INRm) 11,137 12,361 13,694 15,040 16,555 1,350
1,300
EBITA (INRm) 9,572 10,769 11,662 12,873 14,222
1,250
1,200
Net Income (normalised) (INRm) 6,734 7,756 8,239 9,099 10,057
1,150
EPS (norm. cont.) - FD (INR) 25.2 27.4 30.3 33.5 37.0 1,100
FCFPS - FD (INR) 17.8 32.3 32.8 37.2 41.5 1,050
DPS (INR) 24.0 23.0 24.4 27.0 29.8 1,000
Sep-18 Dec-18 Mar-19 Jun-19
PE (normalised) (x) 49.7 45.7 41.3 37.4 33.9
EV/sales (x) 8.0 7.5 7.0 6.4 5.8 1m 3m 12m
EV/EBITDA (x) 30.1 27.1 24.5 22.3 20.2 Price

____________________________
3.3 6.4 13.0

FCF yield (%) 1.4 2.6 2.6 3.0 3.3
Dividend yield (%) 1.9 1.8 2.0 2.2 2.4
Page 48 | 14 September 2019 | Colgate

Palmolive India
Revenue growth to lag peers even building
for share gains
Colgate is India’s market leader in the oral care segment with 52.1% volume market
share in toothpastes and 45.2% volume market share in toothbrushes. The
company’s revenues have grown at a 3% CAGR over FY15-19 impacted by modest
category growth and market share losses, especially in toothpastes. The share loss
over this period have been partly to Dabur and mostly to Patanjali, as the
consumer shift to naturals took the company unawares. While the impact was more
in the premium segment, the base Colgate Dental Cream variant also lost shares.
Figure 84: Market share loss has been significant – some signs of stabilizing now visible
Others
0.1 0.4 0.6 1.2 2.9 6.8 8.6 9.5 9.6 Patanjali
14.0 13.4 13.4 14.0 15.3 15.4 15.1 15.1 15.3 Dabur
23.5 22.8 21.7 19.8 19.2 17.7 17.3 16.8 16.5 HUL
54.5 56.1 56.8 57.2 55.5 53.6 52.4 52.0 52.1 Colgate
2012 2013 2014 2015 2016 2017 2018 Q1CY19 Apr-19
, Low (Cibaca) and high priced brands (Colgate total) grew slower
Figure 85: Mix change towards the base variant (Colgate Dental Cream) as
Others, 2.5% Colgate Others, 3.6% Colgate
Total, 1.4% Total, 0.8%
Active Salt, Active Salt,
10.5% 9.5%
Max Fresh, Max Fresh,

12.4% Colgate 14.3% Colgate
2016 Dental 2018 Dental
Cream, Cream,
53.0% 54.2%
Cibaca, Cibaca,
20.2% 17.6%
The management has re-iterated its priorities to focus now on revenue growth and
market share expansion. This will be driven by a) regionalization in 7-8 states b)
increasing naturals share through its three brands c) leveraging full benefits of
its direct distribution expansion d) revamping variants like Total. While we
believe these are all steps in the right direction, factoring an increase in market share
also does not allow us to build in revenue growth in double digits.
Page 49 | 16 September 2019 | Colgate Palmolive India

Figure 86: Colgate has grown slower than the category over last 3 years Figure 87:Expect a pickup in revenue growth going forward
17.8% 17.5%
14.0% 13.1%
Revenue growth (YoY%)

11.3%
9.6% 9.6%
7.4%
6.6%
5.2%
7.0% 7.3% 2.9%
6.6%
5.2%
2.9%
-2.9%
2016 2017 2018
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
FY22E
Toothpaste Category Value g (%) Colgate Value g (%)*
*FY numbers for Colgate, eg-2016=FY17 Source: Company, Investec Securities estimates
Source: Company, News, Investec Securities Research
Figure 88: Last 5 year revenue growth has been challenging for Colgate
9.8%
5 Yr Net Sales CAGR (FY14-FY19)
9.4%
8.1%
7.0%
6.2% 6.3% 6.6%
4.4% 4.5%
3.8%
ITC
Colgate
HUL
Emami
Dabur
Britannia
GCPL
Jyothy
Nestle*
Marico
Labs
*CY numbers for Nestle

Cost of growth to remain high

The cost of regaining market share is typically higher than a linear increase in share.
Colgate has increased its operating margins by 340bp over the last three years in
spite of the drop in market shares. With competitive intensity remaining high in the
segment, the management’s priority of driving revenues and with continued high
levels of promotional and price intensity, we do not expect margins to improve; we
believe there exists a risk to even our flat margin (adjusting for IND AS 116) in FY20
assumption. While we build some margin improvement in FY21E, however the
visibility on the same remains weak, given the above variables.

Figure 89: Negative Correlation of EBITDA margins and Market Share for Colgate
33% 58%
31% 30%
57%
29%
56%
27%
55% 55%
25%
23% 54%
21% 21%
52% 53%
19%
17% 52%
15% 51%
EBITDA Margins % Market Share % (RHS)
Figure 90: Competitive intensity high as Colgate looks to re-gain lost market share

Figure 91: Companies (ex Nestle due to Maggi) with a lower earnings Figure 92: Lowest EPS CAGR vs Peers
growth have de-rated 20%
25% 18%
16%
3Yr Adj EPS CAGR (FY19-FY22E)

20%
5 Yr Adj EPS CAGR (FY14-FY19)
14%
15% 12%
10%
10% 8%
6%
5%
4%
0% 2%
0%

Source: Investec Securities estimates *CY numbers for Nestle
Non oral care – Not sizeable to boost growth

Colgate’s non oral care portfolio in India constitutes only ~4% of its total sales. This
is very unlike the global portfolio mix where oral care constitutes only ~48% of
sales, while the balance is split across personal care, home care and pet nutrition.
While the India management is looking at increasing salience of the non-oral care
piece under Palmolive premium soap bar and hand washes, we believe the modest
pace of innovation and minuscule salience in the overall mix will keep any growth
impact in non-oral care insignificant.
Figure 93: Global portfolio is more diversified for Colgate
Categories FY19 Colgate India CY18 Colgate Global
Oral care 96% Colgate 47% Colgate, Elmex, Tom's
Personal care 4% Palmolive, Halo 20% Palmolive, Protex, Softsoap, Tom's

Palmolive, Fabulose, Soupline, Ajax,
Home care NA - 18%
Axion
Pet nutrition NA - 15% Hills
Source: Colgate global, Investec Securities estimates
Figure 94: Product innovation pipeline has been light

Launches under Palmolive in last 5 yrs
Year Products Available Today?
FY15 - -
FY16 Foaming Hand wash Yes
New variants of Liquid Hand wash Yes
FY17 Body Wash Men’s Range Yes
Men Shaving Foams No
FY18 - -
FY19 Facial Bar in select markets Yes
Naturals Liquid Hand wash Yes
Figure 95: Inadequate launches in overcrowded market

Valuations fair for growth trajectory

The evolution of Indian mid-cap FMCG companies has been towards diversification
of product portfolio and growing geographic reach both India and International.
Colgate, on the other hand has lagged thus far in both these areas which explains
why valuations for companies like Dabur, Marico, GCPL, Britannia are ahead of their
historical averages while Colgate has been in line with the same. Another factor to
look at is the fact that return ratios have come off from historical levels as the company
has invested in manufacturing. Our FMCG coverage valuations are at 35x September
21E earnings ex ITC. We value Colgate at a 5% discount to average sector valuations
given single product risk and lower than historical return ratios. Initiate with a SELL
with a TP of 1162.
Figure 96: Improving ROEs but below historical highs
110% 8
81.0%
70.6% 7
90% 67.6%
61.1% 6
55.6%
50.1% 49.0% 50.1%
70% 5
4
50% 3
2
30%
1
10% 0
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
PAT Margins (%) ROE (%)
Equity Multiplier (x) - RHS Asset Turnover (x) - RHS
Figure 97: Improvement in PAT margins offset by declining asset turnover

Du Pont FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
PAT Margins (%) 14.0% 15.8% 14.5% 16.4% 16.7% 17.2% 17.3% 17.5%
Asset Turnover (x) - RHS 5.9 4.3 3.4 2.9 2.8 3.0 3.4 3.9
Equity Multiplier (x) - RHS 1.0 1.0 1.0 1.0 1.1 1.1 1.0 1.0
ROE (%) 81.0% 67.6% 50.1% 49.0% 50.1% 55.6% 61.1% 70.6%

Figure 98: Colgate trades at a significant premium to its 10yr avg PE Figure 99: Overall valuations have corrected from peak
45 PE (x) 31 EV/EBITDA (x)
40.6
29
40
27
35 38.5 24.2
25
33.3
30 23
21
25
19 22.9
20
17
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
5 yr avg EV/EBITDA

Revenue 41,880 44,624 47,908 52,485 57,509
EBITDA 11,137 12,361 13,694 15,040 16,555
Other income 375 377 565 621 683
Net interest 0 -25 -90 -90 -90
PBT (normalised) 9,947 11,121 12,137 13,404 14,815
Non-recurring items/exceptionals -117 305 0 0 0
PBT (reported) 9,830 11,426 12,137 13,404 14,815
Taxation -3,097 -3,670 -3,898 -4,305 -4,759
Minorities & preference dividends 0 0 0 0 0
EPS (reported) 24.8 28.5 30.3 33.5 37.0
DPS (INR) 24.0 23.0 24.4 27.0 29.8
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital -829 1,494 158 364 403
Interest -290 -317 90 90 90
Tax paid -3,474 -4,144 -3,898 -4,305 -4,759
Maintenance capex -2,073 -957 -1,500 -1,500 -1,500
Free cash flow 4,866 8,873 9,019 10,220 11,384
Other financials -92 -231 788 -503 -660
Disposals - - - - -
Net share issues -92 0 0 0 0
Dividends paid -3,705 -7,916 -7,974 -8,807 -9,734
Change in net cash 976 726 1,833 910 990
Net cash/(debt) 3,054 3,780 5,613 6,522 7,513
FCFPS - FD (INR) 17.8 32.3 32.8 37.2 41.5
Investments and other non current assets 312 765 787 811 836
Total assets 25,639 26,265 27,418 28,311 29,175
Total debt 0 777 0 0 0
Net assets 36,031 38,062 39,225 41,134 43,108
Total equity 15,246 14,468 15,610 15,489 15,242
NAV per share (INR) 56.1 53.2 57.4 56.9 56.0


2018 2019 2020E 2021E
Calendar PE (x) 46.6 42.4 38.3 34.7
EV/sales (x) 7.6 7.1 6.5 6.0
EV/EBITDA (x) 27.8 25.1 22.7 20.7
FCF yield (%) 2.3 2.6 2.9 3.2
Dividend yield (%) 1.9 1.9 2.1 2.3

FCFPS growth (y-on-y) (%) 32.3 81.1 1.6 13.5 11.5
NAVPS growth (y-on-y) (%) 19.7 (5.1) 7.9 (0.8) (1.6)
DPS growth (y-on-y) (%) 140.0 (4.2) 6.2 10.4 10.5
Interest cover (x) ns 430.8 129.6 143.0 158.0
Net debt/EBITDA (x) (0.3) (0.3) (0.4) (0.4) (0.5)
Net debt/equity (%) (20.0) (26.1) (35.9) (42.1) (49.3)
Net gearing (%) (25.0) (35.4) (56.1) (72.7) (97.2)
Dividend cover (x) 1.0 1.2 1.2 1.2 1.2
EBITDA margin (%) 26.6 27.7 28.6 28.7 28.8
EBITA margin (%) 22.9 24.1 24.3 24.5 24.7
ROE (%) 44.2 53.6 52.8 58.7 66.0
ROCE (%) 32.4 35.1 36.3 38.5 41.0
NWC/revenue (%) 5.4 2.5 4.1 4.7 5.3
Target Price Basis

33x Sep-21 EPS
Key Risks
a) Weakness in category growth b) Increased competitive intensity

Dabur India Ltd ( Buy - TP: INR)
Dabur India Ltd (DABUau.NS)

India | Food Producers BUY
Ahead of the pack Price: INR452
Dabur, among the most diversified FMCG companies in India, is looking to
Target: INR522
leverage its Ayurveda positioning and knowledge to capture a higher share of
the growing naturals wave in India. With a focus on its power brands, a step Forecast Total Return: 16.6%
up in innovation and accelerating distribution reach ahead of its current
strengths, we believe the company is on course to deliver ahead of peers Market Cap: INR799bn
domestic volume growth (9%) over FY19-22E. Benign inflation, efficient cost EV: INR792bn
control and improving international profitability will aid earnings; we build a Average daily volume: 2.7m
15.5% earnings CAGR for the company over FY19-22E. As the company’s
strategy fructifies into brand growth and rural markets revive, we expect
Dabur’s valuation premium over large Indian mid-cap peers like Marico, GCPL
and Britannia to expand. We initiate on Dabur with a BUY rating and a target
price of Rs522, based on 44.5x September 2021E earnings.
 A diverse product and region portfolio - With no category over 20% of sales,
a strong rural mix in the India portfolio and a largely organically built international
business, we believe Dabur’s sales mix has the highest potential to deliver ahead
of peers growth in our coverage universe.
 Accelerating and focused innovation agenda – Dabur’s innovation success
rate has been low over the past 3 years. As the company looks to invest
disproportionately in power brands and innovate and renovate to plug portfolio
gaps within its categories, we believe the current strategy has a higher chance
of delivering successes which will aid volume growth in India and internationally.
 Distribution a key driver – Increasing village coverage (25% in FY20E),
enhancing direct distribution (9% in FY20E), increasing focus on South India
through its regionalization strategy (only 16% of India sales) and populating its
products in the traditional and modern chemist channels are initiatives that will
drive volume growth ahead of market growth. We factor a 9% volume and 16%
EBITDA CAGR for Dabur’s India business over FY19-22E.
 International businesses to see gradual revival – International business has Harit Kapoor
underperformed over the last 3 years. Driven by a stabilizing currency, pick up in +91 (22) 6849 7493
harit.kapoor@investec.co.in
GCC markets, low base of profitability and increasing presence in SAARC
markets, we expect a modest 12.5% EBITDA CAGR for the international Bhakti Thacker
business for Dabur over FY19-22E. +91 (22) 6849 7421
 Our top FMCG pick; Initiate with Buy - The inherent advantage of a diversified Bhakti.Thacker@investec.co.in
sales and region mix and encouraging steps to drive ahead of peers execution
will drive Dabur’s valuation premium over large Indian mid-cap peers like Marico,
GCPL and Britannia to expand.
2018A 2019A 2020E 2021E 2022E 500
Revenue (INRm) 77,219 85,150 94,293 106,157 119,613 480
EBITDA (INRm) 16,175 17,396 20,089 23,292 26,899 460
EBITA (INRm) 14,553 15,627 18,041 21,046 24,455
440
Net Income (normalised) (INRm) 13,578 14,463 16,443 19,190 22,305 420
400
FCFPS - FD (INR) 4.5 5.6 8.3 10.0 11.8 380
DPS (INR) 7.5 2.8 4.5 5.5 6.5 360
Sep-18 Dec-18 Mar-19 Jun-19 Sep-19
PE (normalised) (x) 58.0 55.5 48.6 41.6 35.8
EV/sales (x) 10.3 9.3 8.4 7.5 6.6 1m 3m 12m
EV/EBITDA (x) 49.0 45.5 39.4 34.0 29.4 Price

____________________________
4.8 12.7 (3.3)

FCF yield (%) 1.0 1.2 1.8 2.2 2.6
Dividend yield (%) 1.7 0.6 1.0 1.2 1.4
Page 57 | 14 September 2019 | Dabur

India Ltd
Structural acceleration in revenue growth
Ayurvedic products market in Dabur’s performance in Q1FY20 (9.6% volume growth; highest among the coverage
India is estimated at Rs1600bn universe) underpins our thesis that the company is on course to fulfil its potential as
and is growing at 16% - Dabur the best play on the longer-term mid-cap growth and naturals theme in India. Dabur,
FY19 Annual report one of the oldest FMCG companies in India, has historically been known for its
Ayurveda lineage. It has the most diverse portfolio after HUL with over 25 brands
across home, personal care and foods categories. The company also has an
international business, which spans Asia, Middle East and African markets.
Figure 100: Diversified Portfolio … Figure 101: … provides immense opportunities for growth
Skin
Care,
Home
5% Hair Care,
Care, 7%
International, 21%
27%
Digestives,
OTC &
FY19 Revenue Mix Ethicals, 15% FY19 Category
Mix
Health
Supplements,
18%
Foods, 17%
India, 73% Oral Care,

17%
Source: Company, Investec Securities Research Source: Company, Investec Securities Research
Rural – Coverage and portfolio expansion to drive

growth
Rural India contributes ~48% of India sales for the company. While this could be an
issue in the near term, Dabur has grown rural sales almost 1.4x urban sales even in
Q1FY20 where rural growth for the industry had become aligned with urban growth.
Even in the period post Q1FY20, rural growth has been higher than urban growth for
the company even when it has been slower for the industry. With portfolio expansion
into access packs, continued increase in village coverage, the company is readying
itself for when growth picks up in rural markets.
Figure 102: Dabur’s rural mix is among the highest – Rural as a % of Sales (Datasheet) vs others
50 50
40 40 40
35
30
25 25
Dabur Emami Colgate HUL Jyothy Marico GCPL Britannia Nestle
Page 58 | 16 September 2019 | Dabur India Ltd

Figure 103: Strong rural growth on back of… Figure 104: …Increasing villages under coverage
55,000
Villages under coverage

48,103
1.6 x 44,068
41,473
Rural/ Urban growth (x)
1x
FY18 FY19 Q1FY20 FY20E

FMCG Industry Dabur
Source: Company, News Reports, Investec Securities Research
Power brand strategy is to create

Power brands strategy to provide a method to the
more value through extensions & madness
innovations in Power brands –
Dabur’s focus will be to extract higher growth from its power brands which constitute
Dabur Red Paste, Dabur Amla
70% of India sales. Given the depth of the portfolio, the strategy to take on bigger
Hair Oil, Real, Dabur Honey and
challenges which can provide more potential for growth seems logical. Also, the focus
Dabur Chywanprash.
will be on leveraging its Ayurveda franchise and making these brands more
& contemporary which will result in entering into adjacencies as well across power
To scale 2-3 smaller but high brands. This does not mean 30% of the India portfolio will not receive investments; it
potential brands each year and implies disproportionate investments in power brand portfolio. For example,
put disproportionate investment innovation and renovation have been seen in brands like Babool, Fem, Odonil,
behind them with an intent to Hajmola, Glucose and innovations have taken place in the ethical segment. Higher
make each of them a 100-crore A&P for focus brands as seen in FY19 (Focus Brands media spends increased by
brand – Dabur FY19 Annual 20%, while for domestic business the increase was 6%)
Report We are building in 8% volume growth in the India business in FY20 (management
guidance is mid to high single-digit volume growth for the year) and a 10% volume
growth in FY21E which is at the top end of our FMCG coverage universe average.
We expect Q2FY20 to be weaker given the general slowdown in rural India and
Dabur’s lower salience to South India (16% of sales) which has been affected to a
lesser extent.
Figure 105: Power brands to be key growth drivers
30%
Others
70%
Powerbrands
Real
Dabur Red
Dabur Amla
Dabur Honey
Dabur Chyawanprash
+
Dabur Lal Tail
Dabur Honitus
Pudin Hara
Vatika

Figure 106: Adding value to Power brands via Extensions and Innovations
Figure 107: Increased focus led growth in Power brands is generating results
Dabur Red paste 22.4%
Pudin Hara 21.1%
Dabur Honitus 17.3%
Dabur Honey 17.3%
Dabur Lal Tail 14.9%

Dabur
13.7%
Chyawanprash
Real 9.3%
Dabur Amla 9.3%
FY19 Revenue growth (%)

Figure 108: Non power brands also getting support on a case by case basis

Distribution remains a key driver
Expanding direct distribution and village coverage will be a key factor driving growth
for Dabur. Over the next few years, the management expects to expand village
coverage from 48000 in Q1FY20 to 55000 by FY20 end. Given that the reachable
village universe is 80,000, we expect the company to continue on its expansion spree
even post FY20. On the direct coverage side, the management is aiming to increase
direct distribution from 1.1m outlets to 1.2m in FY20.
As Dabur looks to contemporise its portfolio and its major brands, channels of the
future like modern trade and E-commerce will become a key driving factor; it is
expected that the salience of this channel will increase from current levels of 16-17%.
Further, under Regional Insights and Speed of Execution (RISE), the company is
looking to increase presence in South India which currently contributes only ~16%.
Customized packaging for Anmol and communication for Honey and Amla are
initiatives in South India that the company has recently taken to start on its path of
increasing South India salience.
Figure 109: Dabur has among the largest distribution footprints in India; second only to HUL
Distribution details for FY19
Total outlets 6.7 mn
Direct outlets 1.1 mn
Villages 48,000
Ecommerce share 1.4%
Modern Trade share 15.0%

India margins to be stable in FY20E; to expand

thereafter
We believe the benefits of operating cost control and improved gross margins will be
re-invested in the India business as the management looks to beat the slowdown and
increase market shares across brands. We expect India margins to resume
expansion from FY21E led largely by operating leverage. Overall, we build in 16%
EBITDA CAGR over FY19-22E for the India business; FY20E margin expansion is
also due to IND AS 116 impact.
Figure 110: We expect continued improvement in India EBITDA margins going forward
25 25%
24%
20
23%
15 22%
10 21%
20%
5
19%
0 18%
FY16 FY17 FY18 FY19 FY20E FY21E FY22E
EBITDA (Rs bn) EBITDA Margins % (RHS)

International – Stability achieved; improvement to
follow
While Dabur’s international business (27% of sales) has underperformed in the last
3 years, it has largely been due to the acquired businesses which constitute ~32% of
international sales. In FY19, Dabur’s international business growth was ~6%;
however, margins declined by ~350bp impacted by the Middle East, Turkey and
The acquired business
contributes to 32% of Namaste business. First signs of improvement are visible; CC growth has accelerated
International business. (Hobi & to 7.7% with margins improving by ~60bp. As MENA and Turkey lap up their low base
Namaste) and margins in US and Turkey recover, we expect the international business to
deliver a 10% revenue and 12.5% EBITDA CAGR over FY19-22E, slower than the
India business but significantly better than recent performance (10% overall decline
in international EBITDA from FY16-19).
Figure 111: A well-diversified India business with a focus on emerging markets
Europe,
12%
Middle East,
27%
Americas,
14%
FY19 business
mix
Africa,
22% Asia, 25%
Figure 112: International EBITDA margins to gradually improve from FY20E

35 19%
30
18%
25
20
17%
15
10
16%
5
0 15%
Net Sales (Rs bn) EBITDA Margin (%) - RHS

Figure 113: International innovations have also been stepped up
Operating Margins to improve from FY21

Aggregating the operating leverage led India margin improvement and the low base
and improving revenue growth led International margin improvement, we expect the
overall EBITDA margin improvement for Dabur of 210bp over FY19-22E. We expect
EBITDA and earnings CAGR of 15.5% over FY19-22E, which is in the top quartile of
our coverage universe.
Figure 114: Dabur’s earnings growth in FY20E is second only to Figure 115:… and good growth at a 3 year CAGR level
Marico...
20%
20% 18%
18% 16%
3 Yr EPS CAGR (FY19-FY22E)
16% 14%
14% 12%
12% 10%
FY20E EPS g%
10% 8%
8% 6%
6% 4%
4% 2%
2% 0%
0%

*CY numbers for Nestle Source: Companies, Investec Securities estimates

Valuation and View
We believe Dabur fits perfectly in our thesis of playing the sector through companies
with a diversified portfolio, strong rural presence and a right to win in the channels
and product themes (naturals) of tomorrow. Management is taking steps to
proactively leverage Dabur’s portfolio potential, ensuring the company grows ahead
of peers. We believe in Dabur’s growth strategy and expect the company to have the
best chance to drive higher growth given the depth of the portfolio and distribution
reach. While valuations at 42xFY21E and 36xFY22E are not cheap, they are below
peak levels by 10%. Also as the company’s strategy fructifies into brand growth and
rural markets revive, we expect Dabur’s valuation premium over large Indian mid-cap
peers like Marico, GCPL and Britannia to expand. We initiate on Dabur with a BUY
rating and a target price of Rs522, based on 44.5x September 2021E earnings which
implies a 10% discount to HUL’s target multiple and a 25% premium to FMCG sector
average (ex ITC).
Figure 116: Premium valuations for … Figure 117: …Premium visibility

45.1
(x)
45 40 37.3
40 35
35 36.7 30
30.8
30 31.4 25
25.4
25 20
20 15
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
12m fwd EV/EBITDA 10 yr avg EV/EBITDA
12m fwd PE 10 yr avg PE 5 yr avg PE
5 yr avg EV/EBITDA

Revenue 77,219 85,150 94,293 106,157 119,613
EBITDA 16,175 17,396 20,089 23,292 26,899
Other income 3,052 2,962 3,258 3,747 4,309
Net interest -531 -596 -746 -818 -896
PBT (normalised) 17,074 17,993 20,553 23,975 27,868
Non-recurring items/exceptionals -145 -753 0 0 0
PBT (reported) 16,929 17,239 20,553 23,975 27,868
Taxation -3,354 -2,786 -4,120 -4,799 -5,578
EPS (reported) 7.7 8.2 9.3 10.9 12.6
DPS (INR) 7.5 2.8 4.5 5.5 6.5
Average number of group shares - FD (m) 1,762 1,767 1,767 1,767 1,767
Average number of group shares (m) 1,762 1,767 1,767 1,767 1,767
Total number of shares in issue (m) 1,762 1,767 1,767 1,767 1,767
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital -1,381 -181 -775 -767 -877
Interest -1,991 -2,002 746 818 896
Tax paid -3,249 -3,507 -4,120 -4,799 -5,578
Maintenance capex -5,400 3,369 -3,000 -3,000 -3,000
Free cash flow 5,515 18,360 15,452 18,473 21,753
Other financials -1,001 -2,912 451 -805 -881
Disposals - - - - -
Dividends paid -4,770 -15,970 -9,586 -11,717 -13,847
Change in net cash -256 -517 6,316 5,952 7,025
Net cash/(debt) 1,465 2,779 6,693 12,645 19,669
FCFPS - FD (INR) 4.5 5.6 8.3 10.0 11.8
Total assets 87,016 84,366 95,002 105,754 117,799
Total debt 8,288 5,243 5,741 6,289 6,892
Other long term liabilities 1,133 277 277 277 277
Net assets 116,702 112,102 125,275 139,224 154,855
Total equity 57,331 56,631 64,730 72,284 80,743
NAV per share (INR) 32.5 32.0 36.6 40.9 45.7


2018 2019 2020E 2021E
Calendar PE (x) 56.1 50.2 43.1 37.1
EV/sales (x) 9.5 8.6 7.7 6.8
EV/EBITDA (x) 46.3 40.9 35.1 30.5
FCF yield (%) 1.2 1.7 2.1 2.5
Dividend yield (%) 0.9 0.9 1.2 1.4

FCFPS growth (y-on-y) (%) (8.5) 23.8 49.7 20.1 18.1
NAVPS growth (y-on-y) (%) 17.7 (1.5) 14.3 11.7 11.7
DPS growth (y-on-y) (%) 233.3 (63.3) 63.6 22.2 18.2
Interest cover (x) 27.4 26.2 24.2 25.7 27.3
Net debt/EBITDA (x) (0.1) (0.2) (0.3) (0.5) (0.7)
Net debt/equity (%) (2.6) (4.9) (10.3) (17.5) (24.4)
Net gearing (%) (2.6) (5.2) (11.5) (21.2) (32.2)
Dividend cover (x) 1.0 3.0 2.1 2.0 1.9
EBITDA margin (%) 20.9 20.4 21.3 21.9 22.5
EBITA margin (%) 18.8 18.4 19.1 19.8 20.4
ROE (%) 23.8 25.7 25.5 26.7 27.8
ROCE (%) 15.0 16.2 16.7 17.5 18.3
NWC/revenue (%) 13.0 10.9 17.2 21.5 25.5
Target Price Basis

44.5x Sep-21 EPS
Key Risks
a) Extended FMCG slowdown especially in rural markets b) currency or oher volatility in international markets

Emami Ltd (H old - TP: INR)
Emami Ltd (EMAM.NS)

Not out of the woods Price: INR300

Target: INR329
Emami, a niche home growth health and personal care player, has had a
challenging 3 years navigating a changing distribution structure, volatile Forecast Total Return: 11.3%
seasonality, brand level issues and a higher input cost environment. While we
believe that some of these issues are now in the past, volume growth visibility Market Cap: INR136bn
compared to peers remains weak, given the high rural salience and category EV: INR133bn
growth challenges. Further, the high promoter pledge remains an overhang Average daily volume: 1m
which will abate only once group assets are successfully monetized. Initiate
with HOLD with a target price of Rs329.
 Some concerns resolved – Emami has had success in re-aligning its
distribution structure, resolving growth issues in a key brand Kesh King, and
weathering the lower margin environment due to higher input costs. Going
forward, we expect the 4.5% revenue CAGR of the last 3 years to improve to
7% over FY19-22E. Further, we expect earnings CAGR to be higher at 9% as
the benefits of lower input costs start to kick in.
 But some remain – Emami still has a higher wholesale and lower new channel
mix as compared to peers. Its product categories have the highest salience to
seasonality in our coverage universe. Key category growth continues to be
challenging. The weakness in rural is a higher impact variable for the company,
given that salience to rural markets is a little over 50%.
 Promoter level debt high; committed to significantly reducing it – A key
overhang is that 47% of the promoter group’s 53% stake is pledged to support
group companies. The recent stake sales and the commitment to reduce these
pledges over the next 6-9 months by monetizing group assets are encouraging.
However, until then, this remains a key overhang on the stock’s valuations and
will also result in sharing of management bandwidth to resolve these issues.
Harit Kapoor
 Inexpensive valuations; Initiate with HOLD – We believe over the longer term, +91 (22) 6849 7493
Emami will have to further align distribution and product portfolio to benefit from harit.kapoor@investec.co.in
changing consumer preferences and market dynamics. However, given the
Bhakti Thacker
modest recovery in growth, a possible to leverage healthcare opportunity and +91 (22) 6849 7421
inexpensive valuations of 22.8FY21E and 21.0FY22E earnings, we do not Bhakti.Thacker@investec.co.in
expect much downside from current levels. Initiate at HOLD with a target price
of Rs329 based on 24x Sep21 earnings; a successful promoter deleveraging
exercise will re-rate the stock from current valuations.
2018A 2019A 2020E 2021E 2022E 600
Revenue (INRm) 25,305 26,929 28,617 30,782 33,133
EBITDA (INRm) 7,195 7,256 7,761 8,384 9,062 550
EBITA (INRm) 6,522 6,487 6,853 7,335 7,898 500
EPS (norm. cont.) - FD (INR) 10.9 11.0 12.1 13.1 14.3 400
FCFPS - FD (INR) 10.9 4.0 6.1 10.6 12.0
DPS (INR) 4.2 4.2 4.7 5.2 5.8 350
PE (normalised) (x) 27.4 27.3 24.8 22.9 21.0 300

EV/sales (x) 5.3 5.0 4.7 4.3 4.0 1m 3m 12m
250
EV/EBITDA (x) 18.5 18.4 17.2 15.9 14.7 Price
____________________________
Sep-18 Dec-18 (3.5)

(11.7)
Mar-19 (45.2)
Jun-19 Sep
FCF yield (%) 3.6 1.3 2.0 3.5 4.0
Dividend yield (%) 1.4 1.4 1.6 1.7 1.9
Page 67 | 13 September 2019 | Emami

Ltd
Emami – A diverse business mix
Emami is a home-grown FMCG company with a diverse presence in personal care.
The category presence is across hair care, skincare, pain management and health
care. It has niche positions across most of its categories and a heavy dependence to
rural India as compared to its peer in our coverage universe. It also derives 13% of
its business from international markets, with key markets being select Asian and
European countries.
Figure 118: A diverse India mix; no significant category concentration Figure 119: International business in emerging markets
Others, Africa &

8% Navratna, Others,
20% 11%
International,
13% CIS, 11%
Revenue Mix International SAARC &

Healthcare,
7% FY19 business mix South East
Pain FY19 Asia, 46%
Managem
Kesh King, 9% ent, 20%
Male MENAP,
Grooming, 32%
Boroplus ,
8% 15%
Brand equity strong; category growth is a

challenge
Emami has leading positions in 4 out of its 5 key categories, namely cooling oils,
balms, male grooming and antiseptic creams. Additionally, the penetration levels for
the majority of its brands are below 30%. On the market shares front as well, the
company has held shares across its key brands. However, the category growth rates
have remained muted which we believe is more a function of the company not being
able to create the adequate excitement to drive growth, consumers using alternative
problem-solving products (80% of sales) and negative effect of large wholesale and
rural salience. Seasonality has impacted growth in Q1FY20 as well, with new product
launches postponed given the lower growth in markets, FY20 is also likely to deliver
below peer growth rates.
Figure 120: A snapshot of Emami’s category presence and opportunity
Est Market Size Category
Brands Category 8Q avg growth
(Rs bn) penetration
Cool Oil 10.1 16%
Navratna 10%
Talc 5.5 41%
Zandu Balm 11.9 31% 10%
Boroplus Antiseptic Cream 6.4 28% 5%
Men's fairness Cream 4.2 5%
Fair and Handsome 6%
Facewash 3.0 8%
Kesh King Ayurvedic Medicinal Oil 7.1 9% 7%
HE Deodrants Deodrants 9.4 8% 7%
Page 68 | 16 September 2019 | Emami Ltd

Figure 121: High seasonality risk in the portfolio gives poor earnings visibility
Contribution to
Brand Category Seasonality
Revenue %
Cool Oil Summer

Navratna 20%
Talc Summer
Boroplus Antiseptic Cream Winter 15%
Fair and
Men's fairness Cream Winter 8%
Handsome
Zandu Balm Monsoon 20%
Execution challenges being handled; rural

At Emami, we are very highly
dependent on the season and if
an incremental headwind
there is any disruption in that, then Emami’s growth challenges began with demonetization and GST; a larger wholesale
we lose – Emami Management salience resulted in the company taking more time to sort out distribution.
commentary in the Q1FY20 Further, a lower salience of e-commerce and modern trade, the fastest-growing
conference call channels currently, impacted growth. Specific brand and distribution-led adjustments
also impacted growth over the last years. Additionally, the loss of share in Kesh King
and men’s fairness products added to sales pressure. While Kesh King has recovered
since Q3FY19, weak growth across seasonal products and continued issues in men’s
fairness will keep growth subdued. Further, Emami is the most susceptible to rural
markets given its higher share as compared to peers, and this would keep revenue
growth subdued for FY20. We believe a lot of the business re-alignment work is
complete; overall, we build in a 7% revenue CAGR for the company over FY19-22E.
Figure 122: Wholesale dependence reducing; but still higher than peers Figure 123: Modern trade and e-commerce share lower than peers
Channel contribution to Company Revenue %
Wholesale channel contribution to
53%
Revenue %
40%
16 3 15 4 14 1 13 2 12 2 10 2 10 8 2 6 0
2
HUL
Colgate
Emami
Dabur
Britannia
GCPL
Nestle
Marico
Jyothy Labs
Q3FY17 Q1FY19
Modern Trade Ecommerce
Source: Company, Investec Securities Research Source: Companies, Investec Securities Research

Figure 124: Acceleration in direct reach happened after demonetization Figure 125: Higher rural share makes it more susceptible to slowdown
Total Outlets> 4.5mn

9.4
Direct reach (in lakh outlets)
8.5
7.3
6.3 6.4 6.4
6.0
5.0 50 50
40 40 40
35
30
25 25
Emami
Colgate
HUL
Britannia
Jyothy
Dabur
GCPL
Nestle
Marico
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, Investec Securities Research Source: Companies, Investec Securities Research
Slow innovation intensity in the near term

Over the last 3 years, the focus on innovation has largely been to expand the umbrella
brands for Emami. However, innovations in new categories like hair colours, variants
in male grooming and pain relief have not hit the mark. By management’s own
admission, the innovation in FY20 will depend on when it sees an uptick in consumer
demand; hence, FY20 innovation intensity will be low.
However, we believe the bigger opportunity lies in the 7 in 1 oils franchise as a) the
company understands the hair oils space b) value-added hair oils are the fastest
growing hair oils category c) market size (overall hair oils is Rs130bn market) is large
and 7 in 1 is still a sub Rs500m brand.
Figure 126: Decent launch survival rate but has not moved the needle for Emami

Figure 127: 7 in 1 oils has seen strong initial success
36%
Revenue growth in 7 oils in 1 YoY%

33%
30% 31%
25%
24%
Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
International – Small exposure to emerging

markets
Emami’s International business (13% of consolidated sales) consists of acquired
businesses and organic expansion. While the company reported 5 years Revenue
CAGR of 13.8% for international business, it grew marginally by 3.3% in the last 3
years due to a weak macro in some of the international markets. Profitability in the
international business is lower than the India piece. However, higher exposure to
SAARC (46%) and MENAP (32%) is a positive as these economies have reflected a
stable macro environment in the past.
Figure 128: International acquisition details Figure 129: We build in stable double digit revenue growth
Primary
15%
Target Year Stake Country of 14%
12%
Emami International business
12% 12% 12%

operations
growth (%)
Brillare Science FY18 25% India
Crème 21 FY19 100% Middle East
Fravin FY15 85% Australia

-16%
Pharma Derm FY11 91% Egypt


Near term weakness on input costs; H2FY20
to be better
Gross margins have been weak over the last 6 quarters, impacted by the sharp
increase in prices of mentha oil and no significant price increases. However, prices
have corrected by 30% from their peak in August 2018; we expect the benefits of the
same to accrue to Emami in H2FY20. The lower costs of crude led derivatives and
packing costs will also aid margins; we are building in flat gross margins for FY20
despite a 200bp contraction in Q1. This, coupled with savings in advertising spends,
should lead to improving operating margins; we factor 20bp operating margin
improvement in FY20E and 150bp improvement over FY19-22E.
Figure 130: Mentha oil prices have dropped 30% from their peak Figure 131: HDPE prices coming off savings packaging costs
2300 1600
2100 1500
1900 1400
HDPE ($/MT)
Mentha (Rs/Quintal)
1700 1300
1500 1200
1300 1100
1100 1000
900 900
700 800
Jun16
Jun17
Jun18
Jun19
Mar16
Mar17
Mar18
Mar19
Dec15
Dec16
Dec17
Dec18
Sep15
Sep16
Sep17
Sep18
Sep19
Jan17
Jan16
Jan18
Jan19
Sep15
Sep16
Sep17
Sep18
Sep19
May16
May17
May18
May19
Source: Bloomberg, Investec Securities Research Source: Bloomberg, Investec Securities Research
Figure 132: At an aggregate level, crude oil prices have also come off
95
85
75
Crude prices ($/barrel)
65
55
45
35
25
Jun16
Jun17
Jun18
Jun19
Dec15
Mar16
Dec16
Mar17
Mar18
Mar19
Dec17
Dec18
Sep15
Sep16
Sep17
Sep18
Sep19

Figure 133: After 2 years of declining margins, trajectory to improve from FY20E
68.0% 66.0%
65.7% 65.5% 66.5%
Margins (%)
28.4% 26.9% 27.1% 27.2% 27.4%
FY18 FY19 FY20E FY21E FY22E

Gross Margins EBITDA Margins
Promoter group debt remains an overhang

Over the last eight months, the promoter group in Emami has reduced its stake in the
company from 72.74% to 52.74%, to reduce debt levels at the promoter level. We
estimate the current promoter level debt at ~Rs24bn; the current pledge % of the
promoter’s holding stands at 46.8%. The promoter group is looking to reduce debt at
the group level by monetizing its cement, real estate, power, hospital and paper
holdings with a few to reduce leverage significantly in the next 6 months. None of
these exercises has fructified just yet; we believe a substantial reduction in promoter
level debt will be a key re-rating factor but till then remains a significant overhang on
the stock.
Figure 134: Fall in promoter stake coincides with higher pledges created to deleverage
80%
72.7% 72.7%
70%
60%
47.7% 52.7%
50%
46.8%
40%
30%
22.1%
20%
Sep17
Dec17
Sep18
Dec18
Mar15
Mar16
Mar17
Mar18
Mar19
Jun17
Jun18
Jun19
Promoter Shareholding % Pledge % (% of shares held)
Source: BSE, Investec Securities Research

Valuation and View
We expect Emami, after 3 years of weak earnings, to get back to the growth path in
FY20. Additionally we build in an improving volume growth trend and margin
expansion as lower raw material prices result in double digit earnings growth for the
first time in 4 years. We view Emami’s earnings multiple in light of the following factors
a) category level growth challenges impacting volume growth visibility b) lower
salience than peers to channels of the future c) lack of success in new product
launches d) promoter debt overhang. While we believe valuations are attractive at
23xFY21E earnings (trading at 30% discount to last 5 year average multiples), our
target multiple at 24x September 21E earnings (30% discount to coverage universe)
factors the above concerns. Initiate with HOLD; successful promoter deleveraging
could drive a re-rate from current multiples.
Figure 135: While earnings growth will improve, it is likely to be below FMCG peers
16 15%
14
10%
Adjusted EPS YoY growth (%)

12
5%
Adjusted EPS (Rs)
10
8 0%
6
-5%
4
-10%
2
0 -15%
FY17 FY18 FY19 FY20E FY21E FY22E
Adjusted EPS Growth YoY (%) (RHS)
Figure 136: Promoter stake sale and pledge remains a … Figure 137: …significant overhang on the stock
50 40 EV/EBITDA (x)
PE (x)
45
35
40 36.4
30 27.5
35
29.7
30 23.6
25
25
20
20 22.1
15 15
10 15.9
10
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19

5 yr avg EV/EBITDA


Revenue 25,305 26,929 28,617 30,782 33,133
EBITDA 7,195 7,256 7,761 8,384 9,062
Other income 195 366 421 484 557
Net interest -343 -214 -180 -135 -101
PBT (normalised) 3,938 4,154 5,819 6,784 7,453
Non-recurring items/exceptionals 0 -98 0 0 0
PBT (reported) 3,938 4,056 5,819 6,784 7,453
Taxation -863 -1,009 -1,280 -1,493 -1,640
Minorities & preference dividends -12 -22 -33 -38 -42
EPS (reported) 6.7 6.7 9.9 11.6 12.7
DPS (INR) 4.2 4.2 4.7 5.2 5.8
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital -672 -739 -27 12 24
Interest 316 42 180 135 101
Tax paid -809 -927 -1,280 -1,493 -1,640
Dividends from associates and JVs -807 -10 0 0 0
Maintenance capex -2,791 -234 -1,544 -1,549 -1,553
Free cash flow 3,087 5,303 4,058 4,938 5,550
Other financials -1,814 -2,374 -1,311 -173 -143
Disposals - - - - -
Dividends paid -1,423 -1,902 -2,133 -2,360 -2,633
Change in net cash -150 1,027 613 2,404 2,774
Net cash/(debt) 1,999 3,354 2,877 4,182 6,956
FCFPS - FD (INR) 10.9 4.0 6.1 10.6 12.0
Total assets 27,978 28,185 30,032 33,593 37,474
Total debt 3,259 1,099 0 0 0
Net assets 35,815 35,612 36,930 41,160 45,783
Minority interests 6 -2 0 0 0
Total equity 20,142 20,759 23,133 26,027 29,165
Net working capital -132 1,694 3,417 5,793 8,524
NAV per share (INR) 88.7 45.7 51.0 57.3 64.3


2018 2019 2020E 2021E
Calendar PE (x) 27.3 25.4 23.3 21.5
EV/sales (x) 5.0 4.7 4.4 4.1
EV/EBITDA (x) 18.4 17.5 16.2 15.0
FCF yield (%) 1.9 1.9 3.2 3.9
Dividend yield (%) 1.4 1.5 1.7 1.9

EBITDA growth (y-on-y) (%) (5.2) 0.8 7.0 8.0 8.1
Net income (normalised) growth (yoy) (9.9) (1.2) 48.9 16.6 9.9
EPS (normalised) growth (y-on-y) (%) (9.7) 0.5 10.2 8.3 8.7
FCFPS growth (y-on-y) (%) 76.0 (63.4) 54.4 72.6 13.4
NAVPS growth (y-on-y) (%) 14.7 (48.5) 11.4 12.5 12.1
DPS growth (y-on-y) (%) 0.0 (0.5) 12.2 10.6 11.5
Interest cover (x) 19.0 30.3 38.1 54.3 78.0
Net debt/EBITDA (x) (0.3) (0.5) (0.4) (0.5) (0.8)
Net debt/equity (%) (9.9) (16.2) (12.4) (16.1) (23.8)
Net gearing (%) (11.0) (19.3) (14.2) (19.1) (31.3)
Dividend cover (x) 2.6 2.6 2.6 2.5 2.5
EBITDA margin (%) 28.4 26.9 27.1 27.2 27.4
EBITA margin (%) 25.8 24.1 23.9 23.8 23.8
ROE (%) 15.2 14.6 19.5 20.2 19.8
ROCE (%) 12.5 12.5 16.8 17.3 16.9
NWC/revenue (%) (0.5) 6.3 11.9 18.8 25.7
Target Price Basis

24x Sep-21 EPS
Key Risks
a) Futher slowdown in rural markets b) Promoter deleverage timeline extends

Godrej C onsumer Produc ts Ltd (H old - TP: INR)
Godrej Consumer Products (GOCP.NS)

Navigating multiple challenges Price: INR623
Godrej Consumer Products Ltd (GCPL) has had a challenging FY19, impacted Target: INR657
by continued weakness in HI, slowing value growth in soaps, and extremely Forecast Total Return: 7.0%
weak margins in Latin America and Africa. While we believe GCPL has among
the best management teams and highest success rate in domestic innovations, Market Cap: INR637bn
the medium term headwinds in India and international geographies impact EV: INR632bn
earnings visibility compared to peers. We value GCPL at 34.5x September Average daily volume: 1.1m
2021E earnings, which implies a 38x PE for the India business and a 22x PE for
the international business. Initiate with HOLD with a target price of Rs657.
 India to remain a mixed bag – We believe there are concerns in each large India
category for GCPL. Competitive intensity in soaps is only increasing, HI continues
to face issues regarding seasonality and illegal incense sticks competition and
hair colour growth ex crème format has been muted for GCPL. We expect
increased innovation intensity and higher operating margins to make up for some
of these challenges in FY20E for the India business.
 Gradual receding of international headwinds – With the significant currency
headwinds behind, growth in international EBITDA should resume from Q2FY20.
However, growth will continue to be modest at the mid to high single digit levels.
Over FY19-22E, we build in a 7% revenue and 13% EBITDA growth which will
bring international profits in FY22E to FY16 levels.
 Earnings pick up from FY21E – We believe a stabilization of margins in Latin
America, cost optimization led margin improvement in Africa and pick up in
revenues from a low base in India is likely to result in a better FY21E earnings
growth performance as compared to the last 4 years. However, currency volatility
and regulatory uncertainties in markets such as Africa are variables which could
affect this; we are building a 16% earnings growth for GCPL in FY21E.
Harit Kapoor
 Valuations fair given large international exposure – While the recent stock +91 (22) 6849 7493
price correction has resulted in valuations coming off from their peak, they still harit.kapoor@investec.co.in
trade in line with their 5 year average both on PE and EV/EBITDA. We believe in
Bhakti Thacker
an environment where visibility in certain key areas of GCPL’s business is weaker +91 (22) 6849 7421
than before, multiples are unlikely to re-trace to the recent highs. Initiate with Bhakti.Thacker@investec.co.in
HOLD; our earnings multiple implies a significantly lower multiple to the
international business given the higher degree of challenges and lower return
ratio (6% international vs 75% India RoCE in FY19).
2018A 2019A 2020E 2021E 2022E
Revenue (INRm) 98,474 103,143 106,143 117,317 129,509 850
EBITDA (INRm) 20,671 21,176 23,081 26,028 29,201 800
EBITA (INRm) 19,114 19,476 21,141 23,958 27,001
750
650
FCFPS - FD (INR) 7.5 9.4 5.2 11.9 14.4 600
DPS (INR) 10.0 11.0 9.0 10.0 12.0 550
PE (normalised) (x) 44.2 42.9 40.7 35.1 30.6
EV/sales (x) 6.4 6.1 6.0 5.4 4.9 1m 3m 12m
EV/EBITDA (x) 30.6 29.8 27.4 24.3 21.6 Price

____________________________
(1.0) (6.1) (27.9)

FCF yield (%) 1.2 1.5 0.8 1.9 2.3
Dividend yield (%) 1.6 1.8 1.4 1.6 1.9
Page 77 | 14 September 2019 | Godrej

Consumer Products Ltd
GCPL – Speed bumps in the way of an
execution machine
GCPL is an emerging markets FMCG player having presence across home and
personal care categories and businesses in three continents. Prior to FY19, GCPL
had delivered a 5 year earnings CAGR of 17%, higher than 6 out of 10 companies in
our FMCG coverage universe. However, FY19 was a challenging year for the
company as growth in the India business slowed and international margins were
impacted by higher brand investments and a weak currency environment.
Figure 138:Highest international salience across peers Figure 139: GCPL has a strong home and personal care presence
GCPL 46% Others,
Dabur 27% Air Care, 4%
8%
Marico 22% Hair Care,
International mix (%)
32%
Emami 13%
ITC 8% Personal
FY19
Wash, 27% Revenue mix
Britannia 7%
Nestle 6%
HUL 4%
HI, 29%
Jyothy 3%
Colgate 0%
We believe the worst is behind GCPL in terms of its earnings growth trajectory as is
also evidenced by the management’s commentary. However, there do exist certain
headwinds which can potentially impact earnings visibility for the company as
compared to peers.
Page 78 | 16 September 2019 | Godrej Consumer Products Ltd

Category growth and competition –
headwinds in core categories
Godrej Consumer has strong positions in each of the four key categories that it
operates in, being the market leader in HI, hair colours and air fresheners as well as
ranking second in soaps. Given that these are the key growth drivers, we believe a
mix of category headwinds and an intensifying competitive landscape could
impact volume growth visibility.
 Soaps – GCPL has a market share of ~12%. This share has increased by 150-
200bp over the last 2 years as the company has taken share directly from the
market leader HUL in the mass segment. With HUL’s aggressive plan to retaliate in
order to re-gain lost ground in mass soaps now rolled out (change in
communication, product and price of Lifebuoy and Lux), the cost of gaining market
share is likely to increase for GCPL going forward. Given higher competitive
intensity and an overall high penetration in the category, we believe over a longer
term, soaps cannot be the revenue growth driver for the company.
Figure 140: Soaps growth for GCPL has been volume led; expect the same going forward
18%
Soaps growth (%)
9% 9%
7%
5%
3%
-2%

Figure 141: Competition in soaps has always been high; HUL has now responded with its own price cuts
Fair & Lovely Lux Lifebouy Pears Dove
Dettol Cinthol & Godrej no. 1 Santoor Medimix Fiama
However, our largest category,  Household Insecticides – In spite of the lower levels of penetration and GCPL’s
Household Insecticides, was increasing market share in the segment, HI has grown at a muted 6% CAGR over
significantly impacted by a surge FY14-19. While we believe that GCPL will expand its innovation agenda in the
in illegal and unsafe mosquito segment as well as drive increased distribution of its own incense stick variant,
incense sticks, and an
we expect that the continued competitive intensity from the regional incense sticks
unfavourable season – GCPL
management in FY19 Annual players and seasonality dependence to limit revenue growth visibility.
report
Figure 142: Growth impacted by seasonality & illegal incense sticks Figure 143: Incense sticks are now 14-15% of the mosquito repellent
growth market and growing rapidly
13.1% 41.6
Cards, 3.4 -5%
Household Insecticides growth (%)
8.0% 8.0%
Incense Sticks, 5.5
5.0% 101%
3.0%
2.0% LV- Refills, 15.8 10%
Coils, 16.9
3%
-12.4%
2018 Market size (Rs bn) 3 yr CAGR %

FY16 FY17 FY18 FY19 FY20E FY21E FY22E (FY15 - FY18)
Source: Jyothy Labs, Investec Securities Research

 Hair Colours – The metrics in hair colours are attractive; a low penetration
market, few larger players and high margin profile. However, growth for market
leader GCPL has still only been in line with higher penetration categories like
soaps and HI. While we like the category and GCPL’s efforts in democratizing it,
the lack of recent growth reduces our confidence level on this being among the
primary driver of revenue growth for GCPL.

Figure 144: Unimpressive growth over last 4 years for a high potential category
11.0% 11.0%
10.0% 10.0%
8.5%
Hair Care growth (%)

5.0%
4.2%
 Others – This segment has been the key growth driver, led by Aer and other new
product launches. We continue to expect this to be the highest growing segment for
GCPL; however our calculation suggests that this segment will need to grow
volumes at 15% for GCPL to achieve an ~8% domestic volume growth, assuming
8% volume growth in HI.
Figure 145: We build in 8% volume growth for GCPL from FY21 led by new category growth
10.3%
8.3%
Domnestic Volume growth (%)
8.0% 8.0%
6.6%
5.3%
3.5%

International business – Likely to improve
but cannot escape volatility
GCPL has its international business spread across Indonesia, Latin America, Africa,
Bangladesh and Sri Lanka. GCPL’s products are available in 80 countries and the
company is present in the core categories of home and personal care.
Figure 146: FY19 international revenue breakup geography wise Figure 147: FY19 international EBITDA breakup – Indonesia the key
Others,
Others, 4%
16%
Africa, Africa,
FY19 Revenue USA & USA &
FY19 EBITDA Middle
Middle
Indonesia, East, Indonesia, East,
33% 52% 55% 41%
Others – include Latin America & SAARC

Source: Investec Securities Research Others – include Latin America & SAARC
Figure 148: International EBITDA growth could remain volatile

30%
20%
10%
0%
-10%
-20%
-30%
-40%
International Revenue g (%) International EBITDA g (%)
Over the last two years, revenues for the international business have been flat while
EBITDA has declined by 24%. This has been largely due to a weak currencies in
Latin America, slowing organic constant currency growth and lower margins in Africa.
We expect improvement in operating margins, especially in Latin America and Africa
given the management’s aggressive focus on driving cost savings and sales growth.
We are building in a 7% revenue and an 13% EBITDA CAGR over FY19-22E;
however given that these markets are subject to regulatory and currency fluctuations
and have a structurally lower growth as compared to India, the volatility in growth is
likely to sustain.

Figure 149: No real green shoots on currency from international markets
Currency Movement (YoY%) - Base INR FY18 FY19 YTDFY20
S. Africa 3.8% 2.4% -4.8%
Argentina -21.0% -72.3% -34.0%
Chile 0.2% 4.5% -4.8%
Nigeria -24.8% 3.3% -0.3%
USA -4.0% 7.7% -0.8%
Indonesia -5.4% 1.4% 0.4%
Figure 150: All GCPL’s emerging markets have GDP growth significantly lower than India
8
2018 GDP, Constant prices (% change)
-2
-4
India Indonesia Chile USA Nigeria S. Africa Argentina
2018 2019E 2020E
Source: WEO, Investec Securities Research
Pick up in earnings trajectory to be led by international

base
We are factoring in a consolidated revenue, EBITDA and PAT CAGR of 8%, 11% and
12% for GCPL over FY19-21E. The pick-up in earnings growth over the last two years
performance will be the function of higher India revenue growth, lesser impact of
currency in international markets and cost led benefits in Africa and Latin America.

Figure 151: We build in an international recovery; however the visibility of the same remains
low
10.5% 10.4%
10.0%
Revenue growth (%)

6.3%
4.7%
2.9%
1.8%
2016 2017 2018 2019E 2020E 2021E 2022E
Valuation and View

Given the management’s history of strong execution, we are confident of an
improvement in the India revenue growth and the international earnings growth.
However, we believe that a confluence of macro and competitive factors increase
volatility and hence, the inherent risk in the business. We believe giving a
consolidated multiple to this business is inaccurate as the India business cannot be
compared with the international business on any parameter. We value the India
business at a 10% premium to our India FMCG coverage universe (ex ITC) and the
international business at a lower 22x earnings. Our SoTP valuation implies a
consolidated P/E multiple of 34.5x September FY21E earnings; given the current
market price and lower visibility on earnings, we believe the current market price
adequately factors upsides. Initiate with HOLD.
Figure 152: Target price based on SOTP Calculation

Particulars Value
Current Market price (Rs) 624
O/s shares 1,022
Market cap (Rs m) 637,831.6
Valuation PAT FY19 PAT Sep21E Multiples (Sep Sept21 Value Price
Segmental
Method (Rs mn) (Rs mn) 21) (Rs mn) (Rs / share)
Domestic PE 12,143.4 15,195.2 38.0 577,418.8 564.9
International PE 2,706.6 4,284.2 22.0 94,251.7 92.2
Consolidated PE 14,850.0 19,479.4 34.5 671,670.5 657.1

Figure 153: Valuations have corrected due to international concerns… Figure 154: ... lower revenue growth visibility
55 PE (x) EV/EBITDA
38
50 (x)
45 33
37.4 27.3
40
28
35
35.3
25.7
30 23
31.2
25 23.1
18
20
15 13
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
5 yr avg EV/EBITDA

Revenue 98,474 103,143 106,143 117,317 129,509
EBITDA 20,671 21,176 23,081 26,028 29,201
Other income 1,076 1,088 1,088 1,196 1,316
Net interest -1,607 -2,243 -2,190 -1,905 -1,620
PBT (normalised) 18,582 18,321 20,039 23,249 26,698
Non-recurring items/exceptionals 1,796 2,526 0 0 0
PBT (reported) 20,378 20,847 20,039 23,249 26,698
Taxation -4,047 2,562 -4,409 -5,115 -5,873
EPS (reported) 16.0 22.9 15.3 17.7 20.4
DPS (INR) 10.0 11.0 9.0 10.0 12.0
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital -2,192 6 -4,411 182 203
Interest 922 1,375 340 -245 -880
Tax paid -3,928 -4,351 -4,409 -5,115 -5,873
Maintenance capex -3,398 2,516 -1,175 -875 -525
Free cash flow 13,835 19,804 12,323 19,266 21,822
Other financials -6,461 -5,601 -7,647 -3,677 -2,159
Disposals - - - - -
Dividends paid -7,379 -14,786 -11,073 -12,301 -14,761
Change in net cash -5 -583 -6,397 3,289 4,902
Net cash/(debt) 13,813 12,012 5,168 8,457 13,358
FCFPS - FD (INR) 7.5 9.4 5.2 11.9 14.4
Total assets 138,638 136,208 132,193 140,303 150,255
Total debt 25,347 28,757 26,028 23,326 20,654
Other long term liabilities 9,509 -2,510 -2,288 -2,044 -1,775
Net assets 214,692 199,746 189,617 198,775 210,156
Total equity 62,583 72,669 74,769 81,830 90,354
NAV per share (INR) 61.2 71.1 73.1 80.1 88.4

elec tion.T abl es(1) .Range.Fields.U pdate

2018 2019 2020E 2021E
Calendar PE (x) 43.2 41.3 36.3 31.6
EV/sales (x) 6.2 6.0 5.5 5.0
EV/EBITDA (x) 30.0 28.0 24.9 22.2
FCF yield (%) 1.4 1.0 1.7 2.2
Dividend yield (%) 1.7 1.5 1.6 1.8

Net income (normalised) growth (yoy) 24.9 43.3 (33.2) 16.0 14.8
FCFPS growth (y-on-y) (%) (33.3) 25.5 (45.1) 131.1 20.4
DPS growth (y-on-y) (%) (33.3) 10.0 (18.2) 11.1 20.0
Interest cover (x) 11.9 8.7 9.7 12.6 16.7
Net debt/EBITDA (x) (0.7) (0.6) (0.2) (0.3) (0.5)
Net debt/equity (%) (22.1) (16.5) (6.9) (10.3) (14.8)
Net gearing (%) (28.3) (19.8) (7.4) (11.5) (17.3)
Dividend cover (x) 1.4 1.3 1.7 1.8 1.7
EBITDA margin (%) 21.0 20.5 21.7 22.2 22.5
EBITA margin (%) 19.4 18.9 19.9 20.4 20.8
ROE (%) 26.1 32.2 20.9 22.2 23.0
ROCE (%) 12.2 13.0 14.9 15.9 16.7
NWC/revenue (%) 10.1 7.7 5.8 8.0 11.0
Tax rate (normalised) (%) 21.8 (14.0) 22.0 22.0 22.0
Tax rate (reported) (%) 19.9 (12.3) 22.0 22.0 22.0
Target Price Basis

34.5x Sep-21 EPS
Key Risks
a) Increased volatility in international markets b) Increased pricing pressure in soaps

Hindustan Unil ever (Buy - T P: 2086INR)
Hindustan Unilever (HLL.NS)

India | Personal Goods BUY
More than a bellwether Price: INR1805

Target: INR2086
Hindustan Unilever, the largest FMCG company in India, remains a strong
proxy on domestic FMCG consumption. A diversified India centric portfolio, Forecast Total Return: 17.0%
superior execution, future readiness to changing FMCG dynamics and strong
Market Cap: INR3,907bn
medium-term earnings growth potential (aided also by the GSK acquisition)
make HUL an attractive play. We view earnings multiples in the context of EV: INR3,898bn
earnings growth relative to our coverage universe over the FY19-22E period, Average daily volume: 1.5m
superior return ratios and its historical premium over the sector. We arrive at a
target price of Rs2086, valuing the company at 48.5x September 2021 earnings,
based on a 40% premium to our FMCG coverage universe (ex ITC).
 HUL to outpace key category growth – HUL’s future-readiness, higher share in
channels of tomorrow, superior execution and innovation pipeline should drive
growth ahead in most categories it has a presence in. We factor a 15.3% revenue
CAGR (including GSK consumer acquisition) for the company over FY19-22E.
 Mix benefits and cost control to drive margin improvement – Within the major
categories that the company operates in (soaps, detergents, skincare, tea etc)
the company’s premium products are consistently growing at a faster pace.
Further, continued focus on cost savings and volume led operating leverage will
drive gradual margin expansion; we factor 380bps EBITDA margin improvement
over FY19-22E for the company. FY20, however, could be an aberration as lower
price point packs outpace their higher counterparts and HUL’s price
competitiveness in mass soaps impacts mix.
 GSK acquisition a medium-term trigger – We expect the GSK Consumer
acquisition to be a near-term trigger on earnings growth; we build 6% earnings
accretion for HUL in FY21 and 1-2% earnings accretion for HUL in FY22 on
account of the acquisition due to higher margin profile of the company and
synergies that HUL can derive from the same. Harit Kapoor
+91 (22) 6849 7493
 High growth cycle deserves premium multiples – While longer term earnings harit.kapoor@investec.co.in
growth will retrace back to early teens, we believe HUL is currently in the midst of
Bhakti Thacker
a 5 year high growth cycle (EPS CAGR of 19% over FY17-22E). We believe HUL,
+91 (22) 6849 7421
in the current context deserves a significant premium over peers given the Bhakti.Thacker@investec.co.in
medium term earnings growth visibility, higher than average return ratios and an
overall consistent premium to the sector. We value HUL at a 40% premium to our
FMCG coverage universe (ex ITC), and initiate on HUL with a Buy.
2018A 2019A 2020E 2021E 2022E 2,200
Revenue (INRm) 345,250 382,240 413,431 519,386 578,575 2,100
EBITDA (INRm) 72,760 86,370 101,626 135,650 156,508 2,000
EBITA (INRm) 67,980 81,130 93,146 124,894 144,592
1,900
1,700
FCFPS - FD (INR) 22.7 23.1 31.2 (66.1) 49.7 1,600
DPS (INR) 18.0 21.0 24.0 30.0 35.0 1,500
PE (normalised) (x) 73.7 64.3 57.0 45.2 39.2
EV/sales (x) 11.3 10.2 9.4 7.5 6.7 1m 3m 12m
EV/EBITDA (x) 53.6 45.1 38.4 28.7 24.9 Price

____________________________
(1.8) (1.1) 10.7

FCF yield (%) 1.3 1.3 1.7 (3.7) 2.8
Dividend yield (%) 1.0 1.2 1.3 1.7 1.9
Page 88 | 14 September 2019 |

Hindustan Unilever
The sector proxy and all that comes with it
HUL is by far the largest FMCG Company in India, which has revenues 3 x the size
of the second-largest players (Nestle, Britannia, Procter and Gamble) in the market.
Further, given the product basket of the company and its fair rural salience (~35% of
revenues), it is the closest proxy to FMCG growth as compared to other players.
Figure 155: The largest and most diverse FMCG portfolio in India with over 30 brands
Category Brand name
Skin Care
Hair Care
Beauty &
Personal Care Salon Services
Cosmetics
Deodrants
Oral Care
Detergents
Fabric Softener
Home Care
Dishwash
Toiletries
Beverages
Frozen Desserts
Foods &
Refreshments
Foods
Health Food Drinks
Water purifier Water purifier
Page 89 | 16 September 2019 | Hindustan Unilever

Figure 156: A diversified portfolio Figure 157: HUL is in the top 2 players in over 90% of its portfolio
Ranked # 1 Ranked # 2
Laundry Coffee
Household Care Ice cream
Skin Care Oral Care
Skin Cleansing
Hair Care
Makeup
Tea
Ketchup
Jams
Source: Company, Investec Securities estimates Source: Company, Investec Securities Research
A two year dream run – FY20 likely to be

slower
We estimate 7%+ volume growth A four-year stretch of 4% revenue CAGR and 6% earnings CAGR from FY13-17 was
in H2FY20 driven by recovery in followed by two years of extremely strong performance – 10% revenue and 20.5%
mass soaps, low base and some earnings CAGR over FY17-19. This was due to a favorable macro environment
recovery in rural growth rates
(market share gains due to GST and demonetization), continued improving mix and
parent-driven margin improvement targets which were achieved.
Figure 158: Volume growth acceleration led by a favourable macro and market share gains
10
Volume g (%)
7
6 6
5
4

Figure 159: HUL is in the midst of a 5 year high earnings growth cycle: 19% CAGR over FY17-
22E
24%
23%
14% 15% 14%

16%
19.3 19.7 24.5 28.1 32.0 39.4

45.8
2% EPS EPS g (%) - RHS

FY20 a slower growth year – but relative to

peer growth should be healthy
Around 35-40% of HUL’s sales come from India Rural; the company occupies leading
Adjusting for international business in the positions in mass categories. With rural growth having slowed to close to urban levels,
revenue mix of peers, HUL’s salience to we expect FY20 volume growth to be in line with HUL’s average volume growth for
India rural will be next to Emami & Dabur
if comparing India revenues the last 5 years. The 5% volume growth in Q1FY20 was healthy in the slowdown
context (market share gains across most categories); this could accelerate during the
latter half of FY20 if rural demand begins to pick and base quarter comparables get
easier.
Figure 160: We build in volume growth recovery through the year… Figure 161: …as Rural India recovers
12
11 11
Rural contribution (% of turnover)
10 10
Quarterly Volume g (%)
7
6.5
5
4 50 50
40 40 40
35
30
25 25
0
Emami
HUL
Colgate
Britannia
Dabur
Jyothy
GCPL
Nestle
Marico
FY20E
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: Company, Investec Securities estimates Source: Companies, Investec Securities Research

Figure 162: HUL is likely to show best 5 Yr EPS CAGR (FY17-FY22E)
20%
18%
5 Yr Adj.EPS CAGR (FY17-FY22E)

16%
14%
12%
10%
8%
6%
4%
2%
0%

We estimate that crude,

derivatives used for RM and
FY20 margin expansion to continue
packaging would constitute ~35% While competitive intensity in mass soaps has intensified with HUL looking to regain
of HUL’s COGS; this salience is lost shares from challengers like Godrej Consumer, Wipro Consumer Care and
among the highest in our Reckitt Benckiser, the overall competitive environment at a portfolio level is not as
coverage universe heightened as in FY19. Additionally, inflation levels are benign, which could play into
HUL’s hands driving margin improvement. Key RMs like crude oil, LAB, palm oil, and
“The overall competitive intensity
in the sector, given the macro chemicals have deflated which will aid margin improvement in FY20.
economic conditions, has been
lower” – HUL management on
Q1FY20 conference call
Figure 163: HUL’s A&P spends ratio has come off as competitive Figure 164: Deflation to help gross margin expansion as the year
intensity has eased progresses
Advertisement as a % of Net Sales
12.9% Tea 7%
Price Change YTD' 20 vs FY19
12.4%
12.3%
12.2%
11.8% 12.0% HDPE -17%
11.5%
11.1%
Palm Oil -7%
10.6%
Crude -7%
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: Company, Investec Securities Research YTD’20 numbers are taken till 31st Aug’19

Looking beyond the near term – Clearly
ahead of the curve
Sufficient revenue growth drivers
We believe the key drivers for HUL’s revenue growth are a) market share gains in
key categories b) strong innovation pipeline with increasing presence in foods
and naturals c) continued distribution led gains coming from using digital and
technology. We are factoring a 15% revenue CAGR for HUL over FY19-22E led by a
11% volume CAGR. 7% of this volume growth will be organic and the remainder from
the GSK Consumer integration.
Figure 165: Innovation intensity clearly increasing ahead of peers
Figure 166: Improvement in sales/store Figure 167: HUL’s expanding assortment
Higher sales per store and 1.9X

increased assortment per store 1.8X
Effective coverage
increases growth and competitive

Assortment
advantage for HUL
1X 1X
2015 MQ19 2015 MQ19
No. of outlets with monthly avg billing > INR 500 Source: Company, Investec Securities Research

Figure 168: HUL’s revenue growth acceleration in FY21 led by GSK acquisition
26%
Revenue growth (%)

11% 12%
8% 9%
4%
3%

Higher share of channels of the future

Modern Trade is growing by 15- As distribution evolves, companies must have the right distribution mix. With HUL’s
17% - HUL, Q1FY20 conference
share of revenues from e-commerce and modern retail higher than the industry
call
average, the company will be a benefactor from the change in channel significance.
The company has also shown its intent in using its balance sheet and driving
acquisitions (Indulekha, GSK, Aditya Milk) where it believes portfolio gaps exist. The
proliferation of new brands on digital, we believe, does not threaten HUL’s positioning
given its acquisitive intent and benefit of Unilever’s portfolio.
Figure 169: In spite of being most penetrated in GT, HUL has a strong MT and E-com presence
Distribution #
Total outlets 8 mn
Direct outlets 4 mn
Ecommerce contribution 3.0%
Supermarkets & Hypermarkets contribution 15.0%
CSD contribution 7.0%
Figure 170: HUL is well placed to service channels of the future Figure 171: India catching up on e-commerce salience for Unilever
20%
Channel contribution to Company
Unilever's e-commerce revenue

contribution (%)
Revenue %
5%
16 3 15 4 14 1 13 2 12 2 10 2 10 2 8 2 6 0
3%
Modern Trade Ecommerce India Global China
Source: Company, Investec Securities Research Source: Unilever Annual Report, Investec Securities Research

Figure 172: HUL’s premium mix significantly higher than FMCG average
36%
Premium as a % of Portfolio
28%
India FMCG Market* HUL
Acquisitions plug portfolio gaps... add new drivers

HUL has shown intent as far as acquisitions are concerned over the last 3 years.
Interestingly, each of the acquisitions plugs different gaps for the company.
Indulekha enhanced the company’s naturals portfolio – the brand has grown
4x since its acquisition. GSK Consumer will give the company scale in the food and
refreshment portfolio and catapult it to the size of F&B majors Britannia and Nestle
India. Adityaa Milk, while small, provides regional learnings in the ice cream portfolio
which are already being leveraged to drive market shares in the category. We believe
the company will not shy away from acquisitions in India to fill any perceived gaps.
Further, having a parent which has upped the ante on acquisitions also helps as the
company can bring some these of these products to better navigate an ever-changing
consumer and market requirements in the country.
Figure 173: HUL’s recent acquisitions fill important portfolio gaps

Target Year Stake Filling Portfolio gaps by
GSK Consumer FY20 72% Providing the scale in Food

Adityaa Milk FY19 100% Regional learnings in the ice cream portfolio
Indulekha FY17 100% Enhance Natural's portfolio

Figure 174: Unilever has upped the pace of acquisitions over the last 5 years
Year of
Acquisition Category Location Focus
Acquisition
Tacha Beauty & Personal Care US Premium 2019
Olly Nutrition Beauty & Personal Care US Naturals/ Health 2019
Fluocaril & Parogencyl Personal Care Spain & France Distribution 2019
Garancia Beauty & Personal Care France Premium 2019
The Laundress Home Care US Premium 2019
Graze Foods & Refreshment UK Naturals/ Health 2019
Quala Beauty & Personal Care Latin America Naturals/ Health 2018
Aaditya Milk Foods & Refreshment India Distribution 2018
Equilibra Beauty & Personal Care Italy Naturals/ Health 2018
Betty Ice Foods & Refreshment Romania Distribution 2018
Denny Ice Foods & Refreshment Bulgaria Distribution 2018
Vegetarian Butcher Foods & Refreshment Netherlands Naturals/ Health 2018
GSK Foods & Refreshment India Naturals/ Health 2018
Living proof Beauty & Personal Care US Premium 2017

Kensingtons Foods & Refreshment US Naturals/ Health 2017
EAX Myanmar Personal & Home Care Myanmar Distribution 2017
Hourglass Beauty & Personal Care US Premium 2017
Pukka herbs Foods & Refreshment UK Naturals/ Health 2017
Weis Foods & Refreshment Australia Naturals/ Health 2017
Carver Korea Beauty & Personal Care S. Korea Premium 2017
Mãe Terra Foods & Refreshment Brazil Naturals/ Health 2017
Tazo Foods & Refreshment US Naturals/ Health 2017
Sundial Brands Beauty & Personal Care US Naturals/ Health 2017
Schmidt's Naturals Beauty & Personal Care US Naturals/ Health 2017
Indulekha & Vayodha Beauty & Personal Care India Naturals/ Health 2016
Dollar Shave Club Beauty & Personal Care US Distribution 2016
Seventh Generation Personal & Home Care US Naturals/ Health 2016
Blueair Home Care Multiple Naturals/ Health 2016
REN Skincare Personal & Home Care UK Premium 2015

Camay & Zest Personal Care Mexico Distribution 2015
Kate Somerville Skincare Personal & Home Care US Premium 2015
Dermalogica Personal & Home Care Multiple Premium 2015
Murad Personal & Home Care US Premium 2015
Grom Foods & Refreshment Multiple Premium 2015
Source: Unilever Global, Investec Securities Research

Unilever and HUL’s margins can still improve
“Through sharper financial A consensus question is that can HUL continue to increase margins from current
discipline governing overhead levels at a steady pace. A look at the company’s gross margins and overheads
spending, and our zero-based suggest that HUL is not the most efficient player as yet and even in our current
budgeting approach, we are coverage; hence we believe there is still scope for the company to squeeze out costs.
reducing costs and uncovering Further, the performance in Q1FY20 re-inforces our belief on the same. Globally,
innovative ways of working.” – Unilever continues to squeeze out higher than expected cost savings as seen in
Unilever 2018 Annual Report recent results. We believe this is a global change which is flowing from the top and is
visible in other subsidiaries as well. The key is that HUL is not favoring margins over
market share; a fact that can be endorsed by the increasing value proposition in the
soaps portfolio.
Figure 175: HUL still not the most efficient player… could get better Figure 176: Unilever entities have clearly accelerated margin expansion
40% focus since CY16/FY17
35% 25.1
24.6
Operating Expenses as a % of Sales - FY19
24.4
30% 23.1
EBITDA Margins (%)
25% 22.1 21.9
20.8
20%
21.2
15% 18.4 19.7
10% 17.4 17.5
5% 17.7
16.4
0%
CY14 CY15 CY16 CY17 CY18
Unilever Global Unilever Indonesia HUL
*HUL - FY numbers
*CY numbers for Nestle Source: Unilever Global, Unilever Indonesia, Company, Investec Securities Research
Sharp cut in mass soap price in response to

competition
Given that the commodity prices Our channel checks suggest that the price cuts have happened across key brands
are expected to remain benign for (Lifebuoy, Lux, Pears, Dove) in select SKU’s in July. The cuts are only on select
a certain time period, we have SKU’s and range from single digits to ~30%. Rs10 SKU has been unchanged. The
taken price reductions in the major price cuts have occurred in Lifebouy and Lux, where prices of the Rs100gm
range of 4% to 6% in Lux and bar have been cut from Rs28-30 to Rs20-22.
Lifebuoy portfolio, while it may be We view the move by HUL as necessary and a positive as it is in line with its strategy
higher on certain packs in order to of protecting and gaining back market share over everything else. Interestingly,
pass on the benefits to the channel checks suggest that there also has been a slight enhancement of the product
consumers – HUL media quality as well.
spokesperson As far as impact is concerned, we believe that a 6% cut for the brands would translate
into, based on our estimates, a Rs2.5bn negative impact. However, assuming that
the increased volume offtake would partially compensate and that HUL can play the
portfolio to recover pricing from other categories, we do not expect a significant
impact of EBITDA on account of this move. Additionally, a pick up in volume offtake
in mass soaps would aid underlying volume growth in an environment where overall
volume growth has been more challenging.

Figure 177: Soap continues to be a competitive category on pricing
Fair & Lovely Lux Lifebouy Pears Dove
Dettol Cinthol & Godrej no. 1 Santoor Medimix Fiama
GSK led earnings accretion to drive FY21 and FY22

earnings
Figure 178: HUL’s revenue and PAT growth to benefit from GSK’s acquisition
33.5%
16.6% 15.3% 26.3% 16.3%

14.9%
8.5%
3.7% 10.7% 11.4%
8.3% 8.8%
2.7%
-4.1%

Revenue growth (%) PAT growth (%)
In December 2018, HUL board approved a scheme of amalgamation between the

company and GSK Consumer Healthcare (GSKCH) India subject to requisite
approvals from statutory authorities/ shareholders.
 Transaction details – a) The transaction was an all-equity merger with 4.39

shares of HUL being allotted for every share in GSKCH India b) the Horlicks brand
in India and International markets (Bangladesh and 20 other markets) currently
owned by GSK Plc was to be acquired by Unilever Plc. Brands owned by GSKCH
India (Boost, Viva and Maltova) would be retained by the merged entity. Further,
the merged entity would continue to distribute GSK’s OTC & oral health products
under a consignment selling agreement (5years).

 Deal Size - The transaction valued the GSKCH India business at equity value of
Rs317bn (32xFY19 earnings/6.6x FY19 sales). The deal is expected to be
completed by end FY20.
 Estimates - We are building in 10% revenue CAGR for the GSK portfolio over
FY19-22E led by new product launches, positive rub off due to HUL’s distribution
(HUL’s direct reach is 3x that of GSK) and consequent market share gains.
Further, we are building in a 600bps EBITDA margin improvement over FY19-
22E led by price increases and overhead cost savings. HUL has already
estimated 800-1000bp savings due to the merger on GSK’s margins. We believe
this leads to a 6% earnings accretion to HUL in FY21 (assuming the first full year
of consolidation with no impact in FY20) and a further 1-2% in FY22. We believe
the Horlicks brand can be leveraged into a more holistic foods brand which will
drive forward HUL’s growth agenda in this category.
Figure 179: We build in consistent revenue growth and strong margin improvement in GSK
30%
28%
24% 26%
GSK Revenue growth & EBITDA
20%
margin(%)
21%
11% 10% 11%
8% 11%
-4%
FY17 FY18 FY19 FY20E FY21E FY22E

Revenue growth EBITDA margin
Source: GSK company, Investec Securities estimates
Figure 180: HUL ahead of peers on 5 year… Figure 181: and 3 year earnings CAGR
20% 20%
18% 18%
3 Yr Adj EPS CAGR (FY19-FY22E)
5 Yr Adj.EPS CAGR (FY17-FY22E)
16% 16%
14% 14%
12% 12%
10% 10%
8% 8%
6% 6%
4% 4%
2% 2%
0% 0%


Key risks
 Extended rural slowdown
 Rural markets continue to witness lower growth. While mitigating factors are
likely to play a part in H2FY20; we believe a protracted and even more
severe slowdown from current levels will impact industry and HUL’s growth
rates for FY20.
 Increased market liquidity due to GSK’s shares - GSK’s India divestment
was to partly fund the Novartis acquisition globally. 184.6m HUL shares
would be issued, and at some point, GSK would have to liquidate these
shares to utilize the proceeds to fund their purpose. In the likely event that
Unilever does not buy these shares from GSK, we believe the increased
liquidity could have a short term impact on the stock price.
Valuation and View

We believe HUL is in the middle of a 5 year high earnings growth cycle. We estimate
an 18% earnings CAGR over FY17-22E also aided by the GSK Consumer
acquisition. A 5 year earnings growth cycle of over 18% earnings CAGR was last
seen was in the CY97-2002 cycle where earnings CAGR was ~23%. Given HUL’s
market-leading position, management and infrastructure readiness for the future,
strong earnings growth outlook and ahead-of-peers financial metrics, we believe a
significant premium over sector average multiples is warranted. This also ties in with
the fact that larger players, who are now more nimble to react to market dynamics
and adapt to changing FMCG variables, will be at a significant advantage as
compared to smaller players. At the current market price, the stock trades at
45xFY21E and 39xFY22E earnings. We Initiate coverage on HUL with a BUY, valuing
the stock at 48.5x September earnings which is a 40% premium to our coverage
average; HUL is one of our top picks in the sector.
Figure 182: HUL’s valuation reflects superior model and … Figure 183: …high earnings visibility
53.4
55 (x)
40 36.4
50
35
45
40 44.1 30 31.2
35 36.4 25 26.7
30
20
25
15
20
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19

12m fwd PE 10 yr avg PE 5 yr avg PE 5 yr avg EV/EBITDA

Revenue 345,250 382,240 413,431 519,386 578,575
EBITDA 72,760 86,370 101,626 135,650 156,508
Other income 5,690 6,640 7,170 13,279 14,695
Net interest -200 -280 -950 -1,000 -1,050
PBT (normalised) 73,470 87,490 99,367 137,173 158,238
Non-recurring items/exceptionals 1,020 -2,270 0 0 0
PBT (reported) 74,490 85,220 99,367 137,173 158,238
Taxation -22,120 -24,860 -30,804 -43,329 -49,998
EPS (reported) 24.2 27.9 31.7 39.9 46.1
DPS (INR) 18.0 21.0 24.0 30.0 35.0
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital 2,070 -2,610 -3,832 16,268 9,288
Interest -2,340 -2,950 950 1,000 1,050
Tax paid -22,680 -26,850 -30,804 -43,329 -49,998
Dividends from associates and JVs -1,030 -1,030 -28 -32 -37
Maintenance capex -10,680 -2,640 -7,232 -276,120 -12,591
Free cash flow 49,960 54,640 66,901 -154,284 117,865
Other financials -3,070 -30 -950 315,999 -1,050
Disposals - - - - -
Dividends paid -46,680 -54,590 -62,338 -84,569 -98,664
Change in net cash 210 20 3,612 77,330 18,150
Net cash/(debt) 9,260 5,750 9,362 86,508 104,658
FCFPS - FD (INR) 22.7 23.1 31.2 (66.1) 49.7
Total assets 168,940 175,260 178,822 538,615 565,378
Total debt 0 0 0 0 0
Other long term liabilities 4,110 4,650 4,650 3,511 2,372
Net assets 267,130 273,930 274,825 668,139 712,089
Total equity 70,754 76,595 82,819 409,092 418,667
NAV per share (INR) 32.7 35.4 38.3 174.1 178.2


2018 2019 2020E 2021E
Calendar PE (x) 66.4 58.7 47.5 40.5
EV/sales (x) 10.4 9.6 7.9 6.9
EV/EBITDA (x) 47.0 39.9 30.6 25.7
FCF yield (%) 1.3 1.6 (2.3) 1.2
Dividend yield (%) 1.1 1.3 1.6 1.9

FCFPS growth (y-on-y) (%) 28.1 2.0 35.1
DPS growth (y-on-y) (%) 8.9 16.7 14.3 25.0 16.7
Interest cover (x) 339.9 289.8 98.0 124.9 137.7
Net debt/EBITDA (x) (0.1) (0.1) (0.1) (0.6) (0.7)
Net debt/equity (%) (13.1) (7.5) (11.3) (21.1) (25.0)
Net gearing (%) (15.1) (8.1) (12.7) (26.8) (33.3)
Dividend cover (x) 1.4 1.3 1.3 1.3 1.3
EBITDA margin (%) 21.1 22.6 24.6 26.1 27.1
EBITA margin (%) 19.7 21.2 22.5 24.0 25.0
ROE (%) 74.0 78.8 82.8 22.9 25.9
ROCE (%) 36.7 43.1 48.2 22.1 24.1
NWC/revenue (%) 7.2 7.9 7.5 17.6 17.0
Target Price Basis

49x Sep-21 EPS
Key Risks
a) Increase in liquidity if GSK's HUL shares come in the market for sale b) Prolonged slowdown in FMCG market

ITC (Hol d - T P: INR)
ITC (ITC.NS)
India | Tobacco BUY
Resilient growth... Clear value… Price: INR240

Target: INR285
In possibly the company’s most challenging 5 year cycle, ITC posted a 7%
Forecast Total Return: 21.9%
earnings CAGR over FY14-19, of which the last 2 years were at 10%. We believe
ITC, the largest cigarette company in India and a diversified consumer play,
Market Cap: INR2,944bn
has sufficient drivers to continue on its path of delivering double-digit
earnings growth (10.7% CAGR expected from FY19-22E) led by margin drivers EV: INR2,913bn
in the cigarette business and positive contributions from its non-cigarette Average daily volume: 12.3m
segments (200bp accretion to EBIT growth annually). In an environment of
slowing growth, ITC’s diverse business model, relatively inelastic category
presence and attractive valuations (20xFY21E earnings) more than
compensate for the several concerns associated with the cigarette business.
We initiate coverage on ITC with a BUY and SOTP based target price of Rs285.
 Modest growth in challenging times – The last 5 years have been challenging
in all respects for ITC. Increasing cigarette taxation and regulation, high
investment stage in FMCG and organized and unorganized competition in
cigarettes have weighed on earnings. Despite this, ITC has delivered a 7%
earnings CAGR. Over the last two years, when some of these pressures eased,
earnings CAGR accelerated to 10%; we believe ITC can maintain this
momentum going forward.
 Relevant concerns… – Slowing rural growth, signs of share loss to smaller
competitors and tightening regulations are all legitimate concerns that are
impacting growth for ITC’s cigarette division. However, the company has
managed to deliver an 8% EBIT growth in Q1FY20 in cigarettes.
 …but positive triggers exist - Reducing tobacco prices and lower capsule
sourcing will aid margin expansion in cigarettes; further we expect the margin
improvement in non-cigarette businesses to add another 200bp to EBIT growth;
we build in a 10.7% earnings CAGR for ITC over FY19-22E. Harit Kapoor
+91 (22) 6849 7493
 Valuations compelling; Initiate with Buy – The sharp de-rating in ITC over the harit.kapoor@investec.co.in
last 2 years (35% contraction from peak multiples of 31x) has been more led by
the contraction in global tobacco multiples as compared to ITC’s on performance Bhakti Thacker
+91 (22) 6849 7421
(10% earnings CAGR over FY17-19). We expect ITC to see a gradual re-rating
Bhakti.Thacker@investec.co.in
going forward from current multiples which are close to their 10 year lows; Initiate
with BUY and an SOTP based target price of Rs285.
2018A 2019A 2020E 2021E 2022E 310
Revenue (INRm) 406,275 449,957 493,379 546,776 606,133 300
EBITDA (INRm) 155,410 173,055 195,832 218,869 245,538 290
EBITA (INRm) 143,956 159,938 180,020 200,958 225,526 280

PBT (normalised) (INRm) 164,388 184,442 206,750 229,004 254,957 270
250
FCFPS - FD (INR) 8.2 7.3 7.0 8.2 9.6 240
DPS (INR) 5.2 5.8 7.0 8.0 9.0 230

PE (normalised) (x) 26.7 23.6 21.5 19.4 17.4
EV/sales (x) 7.2 6.5 5.9 5.3 4.8
EV/EBITDA (x) 18.7 16.8 14.9 13.3 11.9 1m 3m 12m
FCF yield (%) 3.4 3.0 2.9 3.4 4.0 Price
____________________________
(3.6) (13.7) (21.8)

Dividend yield (%) 2.1 2.4 2.9 3.3 3.8
Page 103 | 14 September 2019 | ITC

Cigarettes – Steady growth amidst concerns
After 11 consecutive years of double-digit EBIT growth in cigarettes (FY04-15), ITC’s
cigarette division has posted a muted 8% EBIT CAGR over FY15-19. This was a
function of a ~13% CAGR of increase in taxation and the consequent weakness
in cigarette industry volumes, increase in the prevalence of smuggled and
illegal cigarettes and the recent increase in higher cost tobacco and capsule
procurement. We evaluate the various concerns of the market regarding the
business as well as enumerate the positives that could keep EBIT growth for the
segment steady.
Concern 1: Change in cigarette taxation

The perennial concern in ITC remains an increase in cigarette taxation. The weaker
GST collections have prompted expectations of increasing cess on cigarettes.
However, since the steep 13% increase in July 2017 (20% increase in the king-
size segment), the government has not changed cess rates on cigarettes. Even
when there was an increase in rates, ITC posted a cigarette EBIT CAGR of 8% over
FY17-19. We do not expect an increase in rates and are factoring 9.7% EBIT CAGR
for the cigarette business. We expect even a modest increase to have no significant
impact on EBIT growth as has been evidenced in the recent past, and hence expect
limited downside to our EBIT growth estimates. We note that ITC’s cigarette EBIT
growth has never fallen below 5% since the company provided segmental data
(2002).
Figure 184: ITC’s EBIT growth has been steady in times of higher taxation
19%
17%
Tax g and ITC Cigarette EBIT g (%)
16%
13%
12%
10%
9%
8%
6% 7%
5%
4%
FY15 FY16 FY17 FY18 FY19 5 year

Tax increase % Cigarette EBIT growth % CAGR
Concern 2: Amendment of Cigarettes and Other Products Act

(COTPA)
There have been news reports that suggest that the Health Ministry is looking to
amend the Cigarettes and Other Products Act 2003 (COTPA). We recall that a similar
exercise was undertaken in November 2014, and a host of proposals were made
(refer Figure 2). While some of these proposals would hurt the industry (capsule
cigarettes banned, ban on sale of loose cigarettes) most of these would be hard to
implement. Even if a few of these amendments fructify, we believe implementation
will be a challenge; either way this will be a onetime impact on the business.

Figure 185: The amendments proposed in 2014 to COTPA; this was then put on the back burner
Proposed rules Impact Analysis on ITC
Big negative as 2/3rd of cigarette sale is in the loose form;

Ban on sale of loose cigarettes or in single sticks; packs to be sold in intact
implementation a challenge as it is the retailer's highest margin
packages of content, size, weight as prescribed by rules
product
Negative as it takes out the last point of advertising for cigarettes;
Ban on point of sale advertising and in / on packs of tobacco products
unlikely to impact volume offtake though
Prohibition on advertisement, promotion, sponsorship of tobacco products to all
Negligible impact
mediums of communication such as films, internet, mobile,etc
Prohibition on brand sharing/ brand stetching of tobacco brands/ trademarks and
No impact
visible stacking (at point of sale) of tobacco products
Prohibition on import, distribution or sale of any product, package or toy that
No impact
resembles a tobacco product
Prohibition on distribution of free samples of a tobacco product or offer to give a
No impact
tobacco product as a prize
Prohibition on use of additives in any form that impart, intensify, modify or enhance Negative as it implies that flavours like menthol cigarettes may
the flavour or increase dependence on tobacco products have to be stopped
Increasing the prohibited area of sale of tobacco products from 100 yard radius to
Near term negative; will not have a major impact though
100 mtrs radius of an educational institution
Increasing the minimum legal age for sale of tobacco products from 18 yrs to 21
Implementation is a challenge
yrs; subsequent increase to 23 yrs and then 25 yrs
Ban on designated smoking areas in restaurants and hotels; only designated areas
Negative for the industry as it reduces outlets of smoking
in international airports is allowed
Prohibition on smoking in public place extended to include spitting of tobacco in
No impact
public place
COTPA to have overriding effect over all other tobacco related laws No impact
Packs to display "constituents and emissions" rather than "nicotine and tar
No impact
contents"
Setting up of a National Tobacco Control Organisation Could facilitate implementation; enforcement remains a challenge
Fine for not putting warnings on the package increased from Rs. 5000 to Rs.
Negative though implementation is a challenge
50,000 for first conviction and from Rs 10,00 to Rs. 100,000 for second conviction
Fine for selling a tobacco products without a warning increased from Rs 1000 to Rs
10,000 for first conviction and from Rs 3000 to Rs 25000 for second conviction
Penalty for not disclosing to the government the constituents and emissions -
person is punishable for 2 yrs/ fine of Rs 50,000 or both for first conviction and 2 No impact
yrs/fine of Rs. 50,000 or both for second conviction
Penalty for not disclosing on the pack the constituents and emissions - person is
punishable for 2 yrs/ fine of Rs 50,000 or both for first convction and 2 yrs/ Fine for No impact
Rs 50,000 or both for second conviction
Fine for smoking and tobacco use in certain places increased from Rs 200 to Rs
1000
Fine for smoking in public places and for selling cigarette to under aged adults
increased from Rs 200 to Rs 1000
Source: Ministry of Health, Investec Securities estimates

Concern 3: Loss of market share
Over the last few quarters, ITC has grown at a slower pace as compared to smaller
competitors like Godfrey Philips and VST Industries. While we do not rule out some
market share erosion, we expect increased aggression from the company going
forward and do not expect significant long-term market share erosion given ITC’s size
and scale. We believe portfolio level tweaks will follow, thereby minimizing the impact
of market share erosion. We are building a 9% revenue CAGR for the cigarette
business for ITC over FY19-22E.
Figure 186: ITC’s underperformance vs peers has been recent
40%
30%
Net Sales g (%)
20%
10%
0%
-10%
ITC VST Godfrey Phillips
Q2FY19 Q3FY19 Q4FY19 Q1FY20
Lower capsule procurement cost & declining

tobacco prices to aid cigarette margins
The increase in the salience of capsule cigarettes resulted in ITC having to import
capsules, thereby increasing overall costs. The company is now increasingly sourcing
from India as well as manufacturing in-house; we estimate that 35% of capsules are
now manufactured in-house by ITC. Further, we expect that with the entire production
moving in-house over the next 9-12 months, ITC’s cigarette margins could benefit by
30-50bp.
After the spike in tobacco prices in 2018 season, the recent Andhra auction pricing is
suggesting a sharp 20% dip in auction prices thus far. A sustained fall in tobacco
prices will further aid margins for ITC; we expect the full benefit of the same only in
FY21 and beyond given the 2 year blending cycle and high inventories of the raw
material on the book.
Figure 187: Andhra Pradesh tobacco prices have sharply come off Figure 188: We expect improving EBIT growth trajectory to continue
170
11.8%
160
150 10.0% 10.0%
Average tobacco prices (Rs/kg)
9.1% 9.3%
140
ITCCigarette EBIT g (%)
130
120 6.5%
5.0% 6.6%
110
100
90
80
70
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD
2019 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: Tobacco board, Investec Securities Research Source: Company, Investec Securities estimates

Non Cigarettes – A positive contributor
As has been the case in FY19 (25% EBIT growth for the non-cigarette business), we
expect the non-cigarette business to deliver a higher EBIT growth as compared to
the cigarette business (20% CAGR over FY19-22E) led by the FMCG and Hotels
division. Scale benefits and rationalization of loss-making segments in FMCG and an
improving macro for the hotels segment will be key drivers while agri and paper
segments sustain stable margins. The FMCG and hotel businesses are also the most
capital intensive; as margins improve and capital intensity remains stable (for FMCG)
to reducing (for hotels), we expect the single-digit RoCEs in these segments to also
gradually improve.
Figure 189: Non cigarette share of EBIT has remained stable; likely to increase going forward
15% 15%
44%
59%
85% 85%
56%
41%
FY15 FY19 FY15 FY19

Revenue % EBIT %
Cigarette Others
Figure 190: Estimated revenue mix for ITC’s FMCG business

Figure 7: Foods contribute 77% to
ITC’s FMCG sales; with new
launches heavily centred around
this category and lifestyle retail
Candyman, Others, 18%
contribution falling we expect the Aashirvad,
3%
proportion of foods in ITC’s overall 25%
FMCG mix to increase
Mangaldeep,
3%
ITC FMCG
Vivel, 3% FY19 brand mix
Yippee, 6%
Classmate, 8% Sunfeast,
21%
Bingo, 14%

Figure 8: We expect a steady Figure 191: Expect improvement in FMCG Return ratios
100bp EBIT margin improvement 16% 15%
in FMCG driven by scale and
consolidation of the retail 14%
business. As margins improve 12%
ITC FMCG performance (%)

and capex intensity comes off; 12%
return ratios will trend towards the 10%
sector average over the period of 10%
time.
8%
8%
6% 6%
6%
4% 3%
2%
2% 1%
0%
Revenue g (%) EBIT margins (%) ROCE (%)
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Figure 192: We expect demand supply mismatch to aid hotels Figure 193: Paper business grew on back of higher realization, capacity
profitability additions in value added paper. Agri impacted due to reduced demand
20% 30% 27%
17% 17% 23%
18% 25% 22%
ITC Agri & Paper business performance (%)
ITC Hotel business performance (%)
16% 15%
20%
14% 15% 14% 14%
15% 13%
12% 11%
11%
10%
10%
8%
5%
8%
6%
6% 0%
4%
4% 3% -5%
2% 1% -10% -6%
Revenue g (%) EBIT margins (%) ROCE (%)
0%
Revenue g (%) EBIT margins (%) ROCE (%) FY15 FY16 FY17 FY18
FY15 FY16 FY17 FY18

Valuation and View
ITC’s P/E multiple has seen a steady de-rating ever since the sharp increase in
cigarette taxation in July 2017 which at that time was the 2nd increase in six months.
The stock’s P/E multiple has contracted in spite of a 10% earnings CAGR over FY17-
19E. The 35% contraction in earnings multiples, in our view, has been more led by
the global de-rating of tobacco names than ITC’s own performance. As a result, the
stock now trades at an over 40% discount to our FMCG coverage universe and is at
its lowest valuation in the last 5 years. Given the expectation of a steady earnings
growth trajectory (10.7% earnings CAGR expected over FY19-22E) and increasing
return ratios of the non-cigarette businesses (12.5% to 18% over FY19-22E), we
believe ITC will see a gradual re-rating going forward from current multiples which
are close to their 10 year lows. We Initiate coverage on ITC with a BUY rating and an
SOTP based target price of Rs285 based on September 2021 sum of the parts value.
Figure 194: Target price of Rs285 based on SOTP
Particulars Value
Current Market price (Rs) 240
O/s shares 12,259
Market cap (Rs m) 2,942,071.6
Debt -
Cash 216,657.0
Enterprise Value 2,725,414.6
Segmental Valuation Sales EBIT Value Multiples Value Price

Method (Rs mn) (Rs mn) (Rs mn) (Sep 21) (Rs mn) (Rs / share)
Cigarettes PE 244,642.1 192,347.4 120,830.7 20 2,416,614.0 197.1
FMCG EV/
152,743.0 10,297.4 162,182.9 4 648,731.6 52.9
Revenues
Hotels EV/ EBIT 22,025.6 4,306.0 3,694.8 15 55,421.9 4.5
Agri EV/ EBIT 115,765.4 12,097.5 11,258.2 5 56,290.9 4.6
Paper EV/ EBIT 73,509.8 18,112.8 17,142.5 6 102,855.0 8.4
Enterprise
315,109.1 3,279,913.4 267.6
value
Debt - -
Cash 216,657.0 17.7
Equity value 3,496,570.4 285

Figure 195: PE de-rating a global phenomenon for … Figure 196: … tobacco companies
35 30 45%
30 40%
25
Discount to 3 yr PE (%)
35%
25
1yr fwd PE (x)
1yr fwd PE (x)

20 30%
20 25%
15
15 20%
10 15%
10
10%
5
5 5%
Sep,16
Dec,16
Sep,17
Dec,17
Sep,18
Dec,18
Sep,19
Mar,17
Mar,18
Mar,19
Jun,18
Jun,17
Jun,19
0 0%
ITC Gudang Altria Phillip British
ITC Gudang Garam Garam Morris American
Altria Phillip Morris Tobacco
British American Tobacco 3 Yr Avg PE 5-Sep-19 PE Difference (RHS)
Source: Bloomberg, Investec Securities estimates Source: Bloomberg, Investec Securities estimates
Figure 197: ITC’s valuations are close to 10 year lows… Figure 198: across all metrics
33 PE (x) 24 EV/EBITDA
31 (x)
22
29
25.5 20
27
18 17.1
25
23 16
25.2 16.8
21
14
19 20.0
13.3
17 12
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19

12m fwd PE 10 yr avg PE 5 yr avg PE 5 yr avg EV/EBITDA

Revenue 406,275 449,957 493,379 546,776 606,133
EBITDA 155,410 173,055 195,832 218,869 245,538
Other income 21,298 24,845 27,330 28,696 30,131
Net interest -867 -342 -600 -650 -700
PBT (normalised) 164,388 184,442 206,750 229,004 254,957
Non-recurring items/exceptionals 4,129 0 0 0 0
PBT (reported) 168,517 184,442 206,750 229,004 254,957
Taxation -56,285 -59,798 -69,675 -77,174 -85,921
EPS (reported) 9.2 10.2 11.2 12.4 13.8
DPS (INR) 5.2 5.8 7.0 8.0 9.0
Cash Flow 2018 2019 2020E 2021E 2022E
Change in working capital 0 -4,997 -5,079 -6,009 -6,706
Interest -8,312 -12,084 600 650 700
Tax paid -57,196 -54,859 -69,675 -77,174 -85,921
Dividends from associates and JVs -4,098 -4,159 -27,330 -28,696 -30,131
Maintenance capex -66,912 -50,818 -7,670 -6,304 -4,869
Free cash flow 59,596 66,673 113,408 129,383 148,043
Other financials 8,604 8,863 17,709 14,060 14,010
Disposals - - - - -
Net share issues 9,128 9,691 0 0 0
Dividends paid -68,803 -74,869 -102,973 -117,683 -132,393
Change in net cash 8,526 10,359 28,144 25,760 29,660
Net cash/(debt) 1,039 736 28,890 54,572 84,231
FCFPS - FD (INR) 8.2 7.3 7.0 8.2 9.6
Total assets 623,813 697,979 760,471 821,172 885,503
Total debt 111 79 0 0 0
Other long term liabilities 19,916 20,860 21,860 22,860 23,860
Net assets 733,626 816,461 888,953 961,498 1,038,806
Total equity 514,001 579,498 631,989 680,846 732,199
NAV per share (INR) 42.1 47.3 51.6 55.5 59.7


2018 2019 2020E 2021E
Calendar PE (x) 24.3 22.0 19.8 17.9
EV/sales (x) 6.6 6.0 5.4 4.9
EV/EBITDA (x) 17.3 15.3 13.6 12.2
FCF yield (%) 3.1 2.9 3.3 3.8
Dividend yield (%) 2.3 2.8 3.2 3.6

FCFPS growth (y-on-y) (%) 41.5 (11.9) (4.0) 17.1 17.2
DPS growth (y-on-y) (%) 8.4 11.7 21.7 14.3 12.5
Interest cover (x) 166.1 467.8 300.0 309.2 322.2
Net debt/EBITDA (x) (0.0) (0.0) (0.1) (0.2) (0.3)
Net debt/equity (%) (0.2) (0.1) (4.6) (8.0) (11.5)
Net gearing (%) (0.2) (0.1) (4.8) (8.7) (13.0)
Dividend cover (x) 1.7 1.8 1.6 1.5 1.5
EBITDA margin (%) 38.3 38.5 39.7 40.0 40.5
EBITA margin (%) 35.4 35.5 36.5 36.8 37.2
ROE (%) 21.8 21.5 21.7 22.3 23.1
ROCE (%) 21.2 21.0 21.7 22.4 23.3
NWC/revenue (%) 38.6 44.3 46.9 47.9 49.0
Target Price Basis

SOTP
Key Risks
a) Harsh change in cigarette regulations b) sharp increase in cigarette taxation

Jyothy Laboratori es Ltd (Buy - TP: INR)
Jyothy Laboratories Ltd (JYOI.NS)

India | Food Producers BUY
Moving in the right direction Price: INR148

Jyothy Laboratories (JYL), a diversified FMCG player with a presence across Target: INR186
home and personal care categories, has the portfolio balance and geographic Forecast Total Return: 28.0%
mix to grow at a pace faster than its larger FMCG peers. The management’s
increased focus on driving revenue growth is likely to result in better Market Cap: INR54bn
execution; we expect a 9.5% volume CAGR over FY19-22E for the company. EV: INR53bn
Though earnings growth will be muted in FY20E, we expect an 18% earnings
Average daily volume: 305k
CAGR thereafter (FY20-22E). Further, near term tailwinds (lower commodity
costs, the low base from the Kerala floods, and high salience of South which
has been impacted to a lesser extent in the slowdown) and inexpensive
valuations (21.3xFY21E and 18.6xFY22E) make the company an attractive
small-cap FMCG play. We initiate on Jyothy Labs with a BUY with a target price
of Rs186, based on 25x September 2021 earnings.
 The right portfolio and geographic balance - A multi category and brand
presence (no brand is more than 25% of sales), a close to 100% India salience,
and increased exposure to South India (least impacted region in the slowdown)
are all positive factors in the current environment which make Jyothy’s Lab’s sales
mix attractive as compared to other smaller FMCG players.
 Renewed focus on sales execution – Under-investment in the brands and
increased competitive intensity have been key factors pulling down growth for the
company in the last 2 years but more specifically in FY19. The management’s
renewed focus in FY20 on increasing investments behind existing and new
brands is likely to provide the much needed impetus to volume growth. We factor
a 9.5% volume CAGR for the company over FY19-22E.
 Healthy earnings growth visibility – In spite of a step up in advertising spends
in FY20E (40% growth), we expect benign commodity costs and cost savings in
FY20E will result in margins being maintained. Additionally, transitioning from net
debt to net cash by FY21E will aid PAT growth. We build a 13% earnings CAGR
over FY19-22E; we expect this to be back-ended as we expect a higher earnings
Harit Kapoor
growth in FY21E and FY22E. +91 (22) 6849 7493
 Inexpensive valuations; Initiate with a Buy - The stock trades at 21.3xFY21E harit.kapoor@investec.co.in
and 18.6xFY22E which is a 35% discount to its last 5 year average, 21% discount
Bhakti Thacker
to its 10 year average and an 46.4% discount to our FMCG coverage universe ex
+91 (22) 6849 7421
ITC. We believe that as earnings growth recovers, multiples will also recover. We Bhakti.Thacker@investec.co.in
initiate with a Buy rating on the stock; Jyothy Labs is our top FMCG small-cap
pick in the space.
2018A 2019A 2020E 2021E 2022E 240
230
Revenue (INRm) 16,724 18,136 19,693 21,963 24,532
220
EBITDA (INRm) 2,574 2,810 3,141 3,491 3,903 210
EBITA (INRm) 2,263 2,504 2,643 2,931 3,300 200
180
160
150
FCFPS - FD (INR) 6.4 (0.9) 1.4 4.3 7.4 140
DPS (INR) 0.5 3.0 2.9 4.2 4.8 130
PE (normalised) (x) 33.3 27.3 25.9 21.4 18.7
EV/sales (x) 3.2 2.9 2.7 2.4 2.2 1m 3m 12m
EV/EBITDA (x) 20.5 18.8 16.8 15.1 13.5 Price

____________________________
(3.5) (10.7) (26.2)

FCF yield (%) 4.3 (0.6) 0.9 2.9 5.0
Dividend yield (%) 0.3 2.0 1.9 2.8 3.2
Page 113 | 14 September 2019 | Jyothy

Laboratories Ltd
A higher focus on revenue growth – the key
change in strategy
Focus on volume growth and market share gain
Within our coverage universe, JYL had the third highest volume growth in FY19 (lower
due to the impact of the Kerala floods). Over a 5 year period, the company’s volume
CAGR is second only to Britannia (7% vs 8%). While we believe this is not as
impressive given the company’s revenue base, it is also at a time where business
models changed, impacting companies with higher CSD, wholesale and rural
dependence. In that context, we believe the company - with its portfolio of products -
has posted a satisfactory performance.
Figure 199: Volume growth has been satisfactory as compared to its peers given its low base
8.1
7.0
5 year avg volume growth FY15
6.6 6.2
5.6 5.4 5.3
to FY19 (%)
2.8
2.1
Britannia Jyothy Labs GCPL Dabur HUL Emami Marico Colgate Nestle
Figure 200: A snapshot for key category performance – Growth has been strong across all key categories except repellants
Net Sales FY15 Net Sales FY19 Category
Category 5yr Avg g (%) EBIT% (FY19) Brands
(Rs mn) (Rs mn) Size (Rs bn)
Ujala, Henko, Mr. White,
Fabric care 6,412 7,297 14% 22% 285
Chek, More Light
Dishwash 4,166 5,873 41% 12% 40 Exo, Pril
Mosquito repellant 2,356 2,243 -5% 1% 40 Maxo
Personal care 1,411 1,919 36% 30% 230 Margo, Neem, Fa
Others 287 403 40% -7% NA Maya, T-shine
Figure 201: Company’s market shares across key brands has only increased
4.6
Market Share change from CY14 to
4.2
2.7
MQFY19
1.6
1.0 0.3
0.4
(0.6)
T-Shine Ujala fabric Maxo Coil Margo Pril Liquid Exo Bar Maxo LV Ujala
(Kerala) whitener detergent
(Kerala)
Page 114 | 16 September 2019 | Jyothy Laboratories Ltd

Figure 202: Apart from Ujala, market share expansion potential is available across categories
81.2
Market Share % (March Q FY19)

19.7
16 15.5
11.0
6.5 4.6 1.6
Ujala fabric Maxo Coil Pril Liquid Ujala Exo Bar Maxo LV T-Shine Margo
whitener detergent (Kerala)
(Kerala)
Increased aggression to drive growth & market shares

As visible in Q1FY20, the pace of aggression in JYL is likely to be materially higher
as compared to earlier years. Investments behind Henko Stain Care, Ujala Crisp and
Shine, Maxo LVs, Margo and T-Shine will drive growth. Further, continued share gain
in dish-wash (through Margo and Pril) and Ujala are likely to support growth. While
we believe the environment is challenging and competitive intensity will be high in
each of the above categories, a different proposition in each brand and willingness to
invest behind the same are the key differentiators for the company which we believe
will likely aid growth.
Figure 203: A comparison of the past and present reflects the increased innovation intensity within the company
FY 15 FY 19 / Q1FY20
Channel checks suggest that from a regional perspective, the macro slowdown has
been more in the North, West and East markets as compared to South. Jyothy Labs
derives ~38% of its revenues from South India, which is the highest among
companies in our coverage universe. We believe this, coupled with a low base due
to Kerala floods in FY19 (impacted Q2 and Q3 results in FY19; floods impact in
FY20E not as severe), could drive volume outperformance for Jyothy Labs in FY20E.

Figure 204: South is a significant portion of Jyothy Lab’s mix
Non
South,
Q1FY19
South,
62% geographic mix 38%
Figure 205: We expect a pick-up in volume growth for the company from FY17 and FY18 levels
11.5 11.7
10.0 10.0
9.3
8.5 8.4 8.5 8.6
6.7
5.6 5.7
2.0
(0.6)
Volume g % Value g %
Margin management in high investment

phase
Historically, Jyothy Labs advertising spends as a % of sales has been lower than
HPC peers. This is due to a lower level of investment that was required in Ujala, the
company’s largest brand and cash cow. A number of factors are driving the higher
level of investment committed for FY20 (expect 40% growth in advertising) and
beyond: a) Ujala needs to be revamped, and offshoots like Crisp and Shine need
support as they expand into new states b) Revamp of Henko’s brand name in the
washing powder segment and advertising support for the same c) continued
investments behind dish wash and Margo. We believe a large part of the space to
increase investments will come from cost savings on freight, supply chain and other
GST benefits.

Figure 206: We expect a re-basing of advertising spends in FY20 for the company
2,500 9%
8%
2,000
7%
Advertising Cost (Rs. mn)
% of Net Sales
1,500 6%
5%
1,000 4%
3%
500
2%
0 1%
Advertising Cost % of Net Sales (RHS)
Figure 207: Cost savings in other overheads to be invested in advertising spends

26.2%
26.0%
Oher expenses (ex advertising) as a % of net
24.7%
24.8%
sales
23.0% 23.1% 23.2%

Figure 208: We expect overall EBITDA margins to stabilize around 16%
4,500 16.5%
4,000 15.9%
16.0%
3,500 15.5%
3,000
15.0%
2,500
14.5%
2,000 13.9%
14.0%
1,500
1,000 13.5%
500 13.0%
0 12.5%
EBITDA (Rs. mn) EBITDA Margin % (RHS)
Debt reduction to drive incremental PAT

growth and return ratio improvement
JYL’s debt reduction has been sharp; net debt levels have reduced from Rs8.1bn in
FY17 to Rs802m in FY19. We expect the company to be net cash positive in FY20
and believe this will continue to be a driver of incremental PAT growth going forward.
We are building in a PAT CAGR of 13% of FY19-22E for the company. Further, we
believe no interest burden, no significant capex and gradual improvement in
profitability will result in gradual improvement in ROEs going forward.
Figure 209: We expect Jyothy Labs to be net cash company by end FY21
10
6
Net Debt (Rs. bn)
(2)
(4)

Figure 210: PAT growth is expected to sharply pick up in FY21E
24.8%
23.5%
21.3%
Adjusted PAT g %
14.9% 14.4%
14.5%
5.1%
Improving outlook and inexpensive valuations

In an environment where smaller FMCG companies have struggled to grow due to
changing FMCG dynamics, and rural growth has steadily slowed, JYL has also seen
growth come off as compared to historical levels. We believe the renewed focus on
driving volume-led revenue growth by increasing investment behind brands is a very
important step for the company, as it recognizes the need to provide support to a
diverse product portfolio and create new pockets of growth in a changing FMCG
environment. Over the longer term, we believe this strategy of investing in growth will
keeping profitability stable as well as having a strong rural markets salience will work
in the company’s favour.
In the near term, we expect savings from commodity costs, (crude led input costs
have been deflationary), a low base (Q2 and Q3 were impacted by Kerala floods in
FY19 more than FY20) and higher South salience (lesser affected as compared to
other regions in the slowdown) to play into to Jyothy’s favour as it delivers volume
growth in the top quartile of our coverage universe coupled with double digit earnings
growth. Jyothy Labs’ is trading at a sharp discount to its 5 year average (30.8%) as
well as its 10 year average (25.1%); as earnings growth recovers, we believe
earnings multiples will also recover. We initiate coverage on the stock with a Buy
rating and a target price of Rs186, based on a 25x September 2021E earnings
multiple (30% discount to coverage universe ex ITC).

Figure 211: Jyothy Labs multiple is now below … Figure 212: .. its 10yr avg
45 PE (x) 30 EV/EBITDA
(x)
40
25
35 21.6
30.8
30 20 17.6
25.1
25
15
20 22.9 16.1
15 10
10
5
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
5 yr avg EV/EBITDA

Revenue 16,724 18,136 19,693 21,963 24,532
EBITDA 2,574 2,810 3,141 3,491 3,903
Depreciation and amortisation -311 -306 -498 -561 -603
Other income 625 278 220 270 330
Net interest -481 -352 -308 -100 -80
PBT (normalised) 2,407 2,430 2,555 3,101 3,550
PBT (reported) 2,407 2,430 2,555 3,101 3,550
Taxation -619 -454 -537 -651 -745
EPS (reported) 5.1 5.6 5.7 6.9 7.9
DPS (INR) 0.5 3.0 2.9 4.2 4.8
Cash Flow 2018 2019 2020E 2021E 2022E
Depreciation & amortisation 311 306 498 561 603
Change in working capital 108 409 -82 -125 23
Interest 413 314 88 -170 -250
Tax paid -251 -418 -537 -651 -745
Maintenance capex -753 304 -80 -30 -70
Free cash flow 1,681 3,319 2,442 2,685 3,110
Other financials -141 -2,965 -1,777 -372 141
Disposals - - - - -
Dividends paid -1,312 -219 -1,263 -1,741 -1,962
Change in net cash 228 134 -597 572 1,289
Net cash/(debt) 171 3,391 1,570 1,488 2,028
FCFPS - FD (INR) 6.4 (0.9) 1.4 4.3 7.4
Other current assets 639 653 778 926 934
Total assets 18,887 18,495 18,210 19,179 20,845
Total debt 2,806 2,174 770 20 20
Other long term liabilities -860 -893 -893 -893 -893
Net assets 26,472 23,939 22,678 23,430 25,698
Minority interests -140 -215 -215 -215 -215
Total equity 11,303 13,051 13,741 14,928 15,991
Net working capital -1,481 269 1,173 2,646 3,954
NAV per share (INR) 31.1 35.5 37.4 40.7 43.5


2018 2019 2020E 2021E
Calendar PE (x) 28.5 26.3 22.3 19.3
EV/sales (x) 3.0 2.7 2.5 2.2
EV/EBITDA (x) 19.2 17.3 15.5 13.9
FCF yield (%) 0.6 0.6 2.4 4.5
Dividend yield (%) 1.6 1.9 2.6 3.1

Revenue growth (y-on-y) (%) (0.6) 8.4 8.6 11.5 11.7
Net income (normalised) growth (yoy) (10.6) 10.2 2.2 21.3 14.5
FCFPS growth (y-on-y) (%) 206.5 72.5
DPS growth (y-on-y) (%) (91.7) 500.0 (4.9) 45.6 14.5
Interest cover (x) 4.7 7.1 8.6 29.3 41.2
Net debt/EBITDA (x) (0.1) (1.2) (0.5) (0.4) (0.5)
Net debt/equity (%) (1.5) (26.0) (11.4) (10.0) (12.7)
Net gearing (%) (1.5) (35.1) (12.9) (11.1) (14.5)
Dividend cover (x) 8.9 1.8 2.0 1.7 1.7
EBITDA margin (%) 15.4 15.5 16.0 15.9 15.9
EBITA margin (%) 13.5 13.8 13.4 13.3 13.5
ROE (%) 16.3 15.5 15.0 16.8 18.0
ROCE (%) 8.9 11.1 12.5 13.6 14.0
NWC/revenue (%) (8.9) 1.5 6.0 12.0 16.1
Target Price Basis

25x Sep-21 EPS
Key Risks
a) Increased competition in key categories b) Prolonged slowdown in industry growth, especially rural

Marico (H old - TP: INR)
Marico (MRCO.NS)
Well ‘oiled’ engine but needs more for the future Price: INR382
Target: INR412
Marico, among the two largest hair care companies in India, had a challenging
FY19 impacted by weaker than expected volume growth in two of its three key Forecast Total Return: 9.4%
segments and margin pressures due to higher commodity prices. FY20E is
Market Cap: INR493bn
likely to be a strong earnings growth year led by lower copra prices and
healthy performance of its international business. Over a longer-term, a EV: INR489bn
sustained re-rating in the company is contingent on the company’s success Average daily volume: 1.9m
rate in driving product diversification as hair oil still constitutes 65% of
consolidated sales and is a highly competitive category. We build in growth
from innovations as we model a 16% earnings CAGR over FY19-22E and value
the company at 38x September 2021E earnings, which is a 10% premium to the
sector average. Given the current market price, we believe upsides are limited.
Initiate with a HOLD.
 The hair oils market leader - Marico is among the largest Indian FMCG players
with a presence across hair oils, edible oils and emerging personal care and
food categories. However, hair oil remains its largest segment; it has a ~46%
domestic share of the category, and the category (India+International) constitute
~65% of consolidated sales.
 FY20E to be a strong year – Led by a decline in copra prices both in India and
Bangladesh, healthy revenue growth in the international business and modest
volume growth in India (we estimate 6%), we expect Marico to deliver the highest
earnings growth in our coverage universe (19%) in FY20E; an increase in copra
prices remains a key risk to these estimates.
 Innovation success rate key factor to watch – Hair and edible oils constitute
78% of sales for Marico; a slower rate of growth in these categories for the
company over the last 2 years has impacted Marico’s volume growth and makes
it imperative for the company to build growth drivers for the future. We build in
9% volume CAGR for Marico for India business over FY20-22E; however this
will also be contingent on a certain rate of new product successes. Harit Kapoor
+91 (22) 6849 7493
 Upsides limited; Initiate with a HOLD – Our preference for playing FMCG harit.kapoor@investec.co.in
through diversified companies in the current slowdown as well as on an overall
Bhakti Thacker
basis precludes us from recommending Marico, especially at current stock price +91 (22) 6849 7421
levels as we believe absolute returns are limited from here. We value the Bhakti.Thacker@investec.co.in
company at a 10% premium to our coverage universe at 38x September 2021E
earnings which gives us a target price of Rs412. Initiate with a HOLD.
2018A 2019A 2020E 2021E 2022E 440
Revenue (INRm) 63,220 73,340 78,461 87,400 97,500 420
EBITDA (INRm) 11,370 12,810 15,380 17,613 20,170 400
EBITA (INRm) 10,480 11,850 14,189 16,312 18,759 380
EPS (norm. cont.) - FD (INR) 6.4 7.3 8.8 10.1 11.6 320
FCFPS - FD (INR) 3.8 6.8 8.5 9.5 11.0 300
DPS (INR) 4.3 4.8 5.5 6.0 6.5 280
PE (normalised) (x) 59.6 52.0 43.6 37.8 32.9
EV/sales (x) 7.7 6.7 6.2 5.6 5.0 1m 3m 12m
EV/EBITDA (x) 43.1 38.2 31.8 27.8 24.3 Price

____________________________
(2.8) 3.4 10.3

FCF yield (%) 1.0 1.8 2.2 2.5 2.9
Dividend yield (%) 1.1 1.2 1.4 1.6 1.7
Page 123 | 14 September 2019 | Marico

Marico – Healthy earnings visibility
Marico is among the largest Indian FMCG players with a presence across hair oils,
Hair oil is a Rs130 bn edible oils and emerging personal care and food categories like deodorants, oats,
market, which is expected health foods, hair gels and premium hair care products. However, a significant share
to double by FY25 – Bajaj of the company’s India sales is from the large hair oil category. The bulk of the
Corp Q1FY20 Presentation company’s international business (88-89%) is in Asia, with Bangladesh and Vietnam
being key markets.
Figure 213: Hair oils constitute ~68% of India sales Figure 214: International business is primarily in Asia
Others, 6%
International,
Personal
22%
Care, 12%
Coconut Oil,
Edible Oils, FY19 Category 45%
mix FY19 Business
13% Mix
Value Added
India, 78%
Hair oils,
23%
Figure 215: Marico’s hair oils value growth has been ahead of market for 4 of the last 5 years
36%
18%
12%
18%
Growth rates (%)
9%
11%
8%
6%
2%
-5%
FY15 FY16 FY17 FY18 FY19
Hair Oil market g (%) Marico Hair Oil g (%)
Source: Company, Bajaj Consumer Care, Investec Securities Research

Figure 216: Marico is the hair oils market leader – has 4 of the top 10 brands in the category
Others
26%
Parachute
35%
Shalimar3% Marico
46% Nihar Shanti
Emami Badam
7% 6%
Dabur
8% Bajaj
10% Parachute
Hair & Care Jasmine
2% 3%
Source: Bajaj Consumer care, Investec Securities Research
Figure 217: Marico’s international business is centered around Asian markets
Others, 9%
S Africa, 8%
Bangladesh,
MENA, 15% FY19 International 46%
business mix
Vietnam, 22%
India – Volume growth momentum to

resume in FY20
After two consecutive years of growing volumes at a slower pace than larger peers
like HUL, Dabur, Nestle and Britannia, Marico’s volume growth is likely to match
peers from FY20 onwards. While Parachute should maintain its 5 year average
volume growth trajectory, a recovery in the value-added hair oils volume
growth (FY16-19 average of 5% vs FY13-16 average of 16%) and increased
contribution from new products will be the key factors; we build in 8% volume CAGR
for the company over FY19-22E with FY20 being slower at 6%. The key drivers for
the company’s volume growth are a) share gain for Parachute b) plugging the
portfolio and price point gaps in the value-added hair oils segment c)
accelerating pace of innovations. Further, though FY20 revenue growth will be
muted due to cost deflation on copra, we expect a resumption of double-digit India
revenue growth for the company from FY21.

Figure 218: Impressive Value added hair oil portfolio
Figure 219: Marico has upped the ante on innovations in the last two years
Number of Product launches
FY17 FY18 FY19
4 13 16
Key : Saffola Aura Beardo & Revofit Parachute Just for baby
launches Parachute advansed Hair & Care Fruit Oils True Roots
gold hair oil Parachute advansed Coco Soul Range
men range Saffola Fittify
Parachute Creme Oil range
Figure 220: Channels pf the future growing at a faster pace
76%
FY19 Distribution contribution (%)
18% 18%
13%
7% 9% 7%
4%
e-commerce CSD Modern Trade General Trade
Contribution Growth

Figure 221: Marico has a healthy distribution footprint in India
Distribution Q1FY20
Retail outlets 5 mn
Direct Reach 1 mn
Distributors & Stockists 5,600
Towns covered 53,600
What is different about this

slowdown is that there is a liquidity
crunch in the overall system, not
International – The least risk international
just a part of it. Marico’s way to
deal with the problem has been to
business among HPC peers
build direct distribution and reduce The salience of Marico’s business is lower than HPC peers like Dabur and GCPL.
reliance on wholesalers – Further, the bulk of its business is in Asia of which over 50% comes from Bangladesh,
Commentary from CEO Saugata a market which enjoys higher margins than the India business as well. Further, ~60%
Gupta in the Q1FY20 conference of Marico’s international business has been built organically, which we believe is less
call
prone to risk. We factor a 12% revenue CAGR over FY19-22E for the business, driven
by Bangladesh and entry into new neighbouring markets. Further, margins are likely
to remain healthy given that copra prices are ~15% below FY19 averages.
Figure 222: Stronger growth than other FMCG companies in international business
International 27% 46%
22%
Revenue Mix
20%
International Revenue growth (%)
15%
10%
5%
0%
-5%
-10%
Marico Dabur GCPL
growth FY19 (%) growth FY18 (%)
Figure 223: Bangladesh and Vietnam are key performing markets

FY19 Revenue and EBITDA mix (%)
3%
28% 16%
26%
81%
46%
Revenue Mix % EBITDA Mix %

Bangladesh Vietnam Others

Well placed to gain from copra correction
Copra forms 40% of Marico’s consolidated RM basket. Prices of the commodity
peaked in January 2018 at Rs14k per quintal and since then they have steadily
declined to Rs10k per quintal in March 2019. Average prices for FY19 were in line
with FY18; however, for YTD FY20, prices are down ~15% from FY19 averages
though prices spiked in August. We believe a 15-20% decline in copra prices are a
sweet spot situation for the company as they would be able to pass on some of the
impact and partly retain the benefit. We see this as the single largest driver of margins
for FY20; this will also be the enabler for investing behind new products. However, a
sharp rise in prices from current levels could negate some of the benefits the
company stands to get in FY20E on account of the same. As shown in the historical
context below, Marico’s EBITDA growth does have an inverse relation with copra
price movements.
Figure 224: High Correlation between copra price change and Marico Figure 225: Falling Copra prices to aid margins
EBITDA change
80% 35% 14,000
30%
60% 13,000
25%
Monthly Copra prices (Rs/ton)
40% 12,000
20%
20% 15%
11,000
10%
0%
5% 10,000
-20%
0%
9,000
-40% -5%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
8,000
Jun-18
Feb-19
Jun-19
Aug-18
Dec-18
Aug-19
Apr-18
Oct-18
Apr-19
Avg Copra prices g (%) Marico's EBITDA g (%) - RHS

Figure 226: 210bp EBITDA margin expansion for Marico in FY20E led by copra savings which will be partly be re-invested in advertising
EBITDA margin movement (%)
4%
0% -1.7% 2.1%
-0.3%
17%
FY19 EBITDA% Raw material Manufacturing Employee Selling & Distribution FY20E EBITDA%

Figure 227: PAT growth to recover in FY19
30%
25%
Consolidated growth (%)

20%
15%
10%
5%
0%
-5%
EBITDA g (%) Adj PAT g (%)
Diversification – Initial steps to change

course
We believe for Marico to drive sustainable long-term growth, category diversification
is imperative. Within our coverage universe, Marico ranks 3rd of out 10 companies in
our coverage universe in single category dependence, with salience on hair oils being
65% at a consolidated level. While the company’s efforts over the last few years and
particularly in the last 12 months are apparent in terms of a diversification focus, the
company’s attempts in the past have had limited success. While we believe that the
increased investments bode well, the change is likely to be gradual going forward
given NPD success rates in general for the industry.
Figure 228: Marico’s hair oil contribution has only increased in its consolidated sales mix
39% 37% 40% 36% 35%

43%
Revenue mix (%)
61% 63% 60% 64% 65%

57%
FY14 FY15 FY16 FY17 FY18 FY19

Hair Oil Others

Valuation and View
Over the last 2 years, Marico’s volume growth has been impacted by slower growth
in edible oils and increasing competition in value-added hair oils. These issues
continue but to a lesser extent in FY20E; we expect volume growth of 6% in FY20E
due to the same. While earnings growth in the current year has strong visibility
provided copra prices stay benign, we expect FY21E and beyond to be more revenue
led. It is here that the success rate of the company’s new initiatives will matter. The
dependence on the highly competitive hair oil category for growth remains a longer-
term challenge for Marico, and hence innovation success becomes that much more
important for it. Given a stronger international business relative to peers and efficient
earnings execution, we believe the company deserves a premium over the sector
average while valuing it; however we value it lower than diversified players like HUL,
Dabur and Nestle on account of the significant single category dependence (~65% of
consolidated sales). In this context, we believe its recent re-rate leaves upsides
limited from current levels. We value Marico at 38x September 2021 earnings which
is 10% premium to our FMCG coverage universe (ex ITC). Initiate with Neutral with
a target price of Rs412.
Figure 229: Stock has re-rated due to strong earnings execution.. Figure 230: …and is trading at a significant premium to historical avg
50 35 EV/EBITDA
PE(x)
30.1
45 41.3 30
40
38.4 25 26.7
35
30 31.7 22.1
20
25
20 15
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Marico 12m fwd PE Marico 10 yr avg PE 12m fwd EV/EBITDA 10 yr avg EV/EBITDA
5 yr avg EV/EBITDA

Revenue 63,220 73,340 78,461 87,400 97,500
EBITDA 11,370 12,810 15,380 17,613 20,170
Depreciation and amortisation -890 -960 -1,191 -1,301 -1,411
Other income 850 1,030 1,185 1,362 1,498
Net interest -160 -240 -314 -306 -315
PBT (normalised) 11,170 12,640 15,060 17,369 19,943
PBT (reported) 11,170 12,640 15,060 17,369 19,943
Taxation -2,900 -1,280 -3,765 -4,342 -4,986
Minorities & preference dividends 0 -10 -10 -10 -10
EPS (reported) 6.4 8.8 8.8 10.1 11.6
DPS (INR) 4.3 4.8 5.5 6.0 6.5
Cash Flow 2018 2019 2020E 2021E 2022E
Depreciation & amortisation 890 960 1,191 1,301 1,411
Change in working capital -1,262 210 -557 -1,036 -1,165
Interest -174 -300 314 306 315
Tax paid -2,949 -3,200 -3,765 -4,342 -4,986
Maintenance capex 169 -3,510 -1,000 -1,000 -1,000
Free cash flow 5,714 6,670 11,243 12,597 14,517
Other financials 683 290 -304 -296 -305
Disposals - - - - -
Dividends paid -6,357 -6,820 -8,131 -8,870 -9,609
Change in net cash 40 140 2,809 3,431 4,604
Net cash/(debt) -187 90 3,299 6,730 11,334
FCFPS - FD (INR) 3.8 6.8 8.5 9.5 11.0
Total assets 40,720 45,540 49,093 54,436 61,183
Total debt 3,090 3,490 2,850 2,350 1,850
Other long term liabilities 200 -1,760 -1,760 -1,760 -1,760
Net assets 55,890 60,980 65,022 71,541 79,677
Total equity 25,550 30,100 33,274 37,441 42,799
NAV per share (INR) 19.8 23.3 25.8 29.0 33.2


2018 2019 2020E 2021E
Calendar PE (x) 53.7 45.5 39.0 34.0
EV/sales (x) 6.9 6.4 5.7 5.2
EV/EBITDA (x) 39.3 33.3 28.6 25.1
FCF yield (%) 1.6 2.1 2.4 2.8
Dividend yield (%) 1.2 1.4 1.5 1.7

EBITDA growth (y-on-y) (%) (1.9) 12.7 20.1 14.5 14.5
Net income (normalised) growth (yoy) 2.0 37.2 (0.6) 15.3 14.8
FCFPS growth (y-on-y) (%) 0.3 80.6 24.9 12.5 15.6
DPS growth (y-on-y) (%) 21.4 11.8 15.8 9.1 8.3
Interest cover (x) 65.5 49.4 45.3 53.4 59.6
Net debt/EBITDA (x) 0.0 (0.0) (0.2) (0.4) (0.6)
Net debt/equity (%) 0.7 (0.3) (9.9) (18.0) (26.5)
Net gearing (%) 0.7 (0.3) (11.0) (21.9) (36.0)
Dividend cover (x) 1.5 1.5 1.6 1.7 1.8
EBITDA margin (%) 18.0 17.5 19.6 20.2 20.7
EBITA margin (%) 16.6 16.2 18.1 18.7 19.2
ROE (%) 32.5 37.8 34.0 34.9 35.0
ROCE (%) 22.3 22.4 25.1 26.4 27.3
NWC/revenue (%) 21.1 20.6 19.6 21.1 23.4
Target Price Basis

38x Sep-21 EPS
Key Risks
a) Increasing competition in hair oils b) Volatility in copra prices

Nestl e India (H old - TP: 13343INR)
Nestle India (NEST.NS)

India | Food Producers
HOLD
A great story but adequately priced Price: INR12697
Nestle India, among the two largest packaged food companies in India, has Target: INR13343
recently delivered volume growth ahead of peers, driven by favourable product Forecast Total Return: 6.6%
and market mix as well as a strategy of distribution and innovation-led
success. We believe this is the right strategy as the opportunity in the food and Market Cap: INR1,224bn
beverages segment is immense. We are positive on Nestle’s long term EV: INR1,196bn
trajectory and agree that Nestle’s valuations have to be looked at in the context
Average daily volume: 81k
of a full tax rate, historical premiums to the FMCG universe and superior cash
flow generation. We value Nestle India at 53x September 2021 earnings, which
implies a 50% premium to our coverage universe average and a 10% premium
to HUL target multiple. Initiate with HOLD; we await a better entry point which
we believe will present itself once rural growth picks up (making other names
more attractive) and the technical buying due to NIFTY inclusion abates.
 Volume growth ahead of peers – Nestle has outperformed peers in recent
quarters due to a better product and market mix and stronger focus on innovation
and distribution. We are factoring a 10% volume CAGR for Nestle over CY18-
21E, ahead of any other peer in our coverage universe, driven by a mix of a)
accelerated new product launches b) effective leveraging of the distribution, and
c) broadening the region horizon.
 Operating leverage led margin expansion; near term to be under pressure
– We expect flat EBITDA margins in CY19; this too could be at risk if Nestle does
not increase prices to compensate for the higher rate of inflation in H2CY19. Over
CY18-21E, we believe margin expansion will be more operating leverage-led as
Nestle looks to increase brand investments and drive direct distribution.
 Return ratios to consistently trend up – While other MNC FMCG players in
our coverage universe (HUL due to GSK acquisition and Colgate due to
increased investments) have weakening return ratios, we expect Nestle’s return
ratios to improve led by improving capacity utilization and no significant capex
over the next 3 years. Harit Kapoor
 Valuations prohibitive; initiate with a HOLD – We value Nestle India at 53x +91 (22) 6849 7493
September 2021 earnings, which implies a 50% premium to our coverage harit.kapoor@investec.co.in
universe average and a 10% premium to HUL’s target multiple. Initiate at HOLD
Bhakti Thacker
with a target price of Rs13,343. We await a better entry point, which we believe +91 (22) 6849 7421
will present itself once rural growth picks up (which will reduce Nestle’s volume Bhakti.Thacker@investec.co.in
growth outperformance as compared to other peers), and the technical buying
due to NIFTY inclusion abates.
Financials and valuation Year end: 31 December Price Performance
2017A 2018A 2019A 2020E 2021E 14,500
14,000
Revenue (INRm) 99,525 112,162 125,800 141,349 158,033
13,500
EBITDA (INRm) 21,260 25,942 28,912 33,748 38,999 13,000
EBITA (INRm) 17,837 22,585 25,550 29,937 34,849 12,500
PBT (normalised) (INRm) 19,258 24,816 28,035 32,790 38,108 12,000
11,500
10,500
10,000
FCFPS - FD (INR) 168.2 195.6 171.3 212.5 279.6 9,500
DPS (INR) 86.0 113.0 300.0 150.0 175.0 9,000
PE (normalised) (x) 93.3 73.8 66.2 56.6 48.7
EV/sales (x) 12.0 10.7 9.5 8.5 7.6 1m 3m 12m
EV/EBITDA (x) 56.3 46.1 41.4 35.4 30.7 Price

____________________________
5.5 10.5 22.8

FCF yield (%) 1.3 1.5 1.3 1.7 2.2
Dividend yield (%) 0.7 0.9 2.4 1.2 1.4
Page 133 | 14 September 2019 | Nestle

India
Ahead of peers on volume growth
While one can argue that Nestle India has seen strong double-digit volume growth
for 3 consecutive years and hence has a high base, we look at absolute volumes;
Nestle India’s volumes for CY18 are still not even at CY13 pre-Maggi levels.
Additionally, the performance during H1CY19 (10% volume growth) underpins this
thesis. Externally, we believe the branded food and beverage market in India (~56%
of total FMCG) will likely grow faster than the home and personal care market in the
longer term especially given factors of convenience, shift to branded products and its
characteristic of being more discretionary. Nestle, being among the largest names in
the food and beverage space, stands to gain from this trend.
Figure 231: Nestle’s share of the overall market remains miniscule
Nestle
Categories
India F&B $32.8 bn $5.4 bn
Nestle India
$1.5 bn
Figure 232: Nestle has recently outperformed its high performing peers over last 2 quarters
10.5 9.6
Quarterly volume g (%)
5.0 3.0 4.3

8.9
7.0 7.0
12.4
9.4 7
10.0
8.1
11.0
16.5 10.0
12.0 13.0 21.0

11.7
11.0 12.0
7.4 7.7
Nestle HUL Britannia Dabur

Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Page 134 | 16 September 2019 | Nestle India

Figure 233: Milk product and prepared dishes remain the largest categories for the company
Segmental Contribution to Revenue (%)

14% 10%
12% 14%
28% 29%
46% 47%
CY2018 H1'19
Milk Products Prepared dishes Confectionery Beverages
Internally, we believe Nestle over the last 2-3 years has taken the right steps to be in
a better position to capture this opportunity. We enumerate the various variables that
we believe have resulted in an improved volume growth outlook for the company.
A volume growth focused leadership

Unlike the Nestle of the past where pricing was freely used as a tool to drive revenue
growth, the last 10 quarters have shown a different trend. The pricing lever has been
used to a lesser extent as the company focuses on driving volumes even at the
expense of sacrificing near term profitability. Fortunately for Nestle, it enjoys market
leading positions across ~85% of the portfolio where price transmission is easier;
despite this, the company has increased its focus on driving volumes before
extracting profits. The result is visible; ahead-of-peer volume growth and improving
shares across a majority of the portfolio. We believe this is a key current and future
factor driving volume growth.
Figure 234: Sharp contrast in pricing – recent vs historical trends Figure 235: Volume growth has benefitted from the lower pricing
growth
20%
Average pricing growth (%)
7.3%
15%
10%
YoY Growth (%)
5%
0%
0.4% -5%
Q1CY18 Q2CY18 Q3CY18 Q4CY18 Q1CY19 Q2CY19
CY'05-CY'14 (10yr) Q1CY18-Q2CY19 (6Q)
Volume growth Price growth

Figure 236: Gained market share in 6 out of 8 categories
Movement
Market Share
Category Position
(MAT Jan-Jun'19)
(vs Jan-Jun'18)
Infant Formula 66.6 1 
Instant Pasta 73.7 1 
White & Wafers 63.4 1 
Infant Cereals 96.5 1 
Instant Coffee 50.5 1 
Instant Noodles 59.2 1 
Tea Creamer 44.1 1 
Ketchup & Sauces 20.5 2 
Current and future – Opportunities across

the portfolio
Nestle’s innovation pipeline has been significantly enhanced in the last 3 years – 61
innovations (including variants) since 2016, resulting in innovations constituting 3.7%
of sales. As per the management’s own admission, the new product pipeline
continues to be robust. Apart from the multiple opportunities that exist in its current
broader categories (value added milk products, protein-based powders, packaged
food, chocolates and confectionery, beverages) we believe the company’s global
portfolio can also be tapped and Indianized to drive innovation and premiumization.
Figure 237: Success rate of 70%; New product development (NPD) contribution continues to
grow
3.7%
NPD contribution to Revenue (%)
3.0%
2.6%
1.5%
CY16 CY17 H1CY18 H1CY19

Figure 238: A vast global portfolio – significant cross pollination opportunities
Categories Brands
Baby Foods
Bottled Water
Cereals
Chocolates &
Confectionery
Coffee
Culinary, Chilled &

Frozen foods
Dairy
Healthcare nutrition
Icecream
Petcare
Source: Nestle Global, Investec Securities Research

Distribution aggression – The key change
We believe that apart from innovation, the key changes in Nestle are the increased
aggression on distribution, time to market and willingness to go regional. The
company’s overall reach has increased 30% since 2015. Additionally, the split
coverage system has driven greater throughput per store for the larger stores,
and its cluster strategy enforced last year has allowed the company to win
regionally in certain categories. We believe these are steps in the right direction.
With the company looking to go deeper in the country and increase overall distribution
by another 20-30% over the next few years, volume growth should improve going
forward, especially given that Nestle’s rural contribution is the least within our
coverage universe.
Figure 239: 30% increase in overall distribution since Maggi crisis Figure 240: Strong coverage structure
Distribution #
Outlets 4.6 mn
Maggi 6.0
crisis Direct coverage 1 mn
Outlets (mn)
5.0
4.5 4.6 Distribution Centers 29
4.0 4.2
3.5 Cash Distributors 1,700
Redistributors 7,000
Wholesale Hubs 2,600
27 Customers –
Organized trade
CY14 CY15 CY16 CY17 CY18 H1 CY19 Target 8,400 stores
Villages under coverage 52,000
Towns under coverage 8,000
Figure 241: Addressing clusters as individual silos Figure 242: 15 clusters spanning the country
Portfolio
Distribution NPD
Field Force
Media
Development
Promotion

Visible measures to get future ready
Sustainable organic sourcing, introducing products on the health platform, increasing
its salience of e-commerce sales and increasing its manufacturing footprint are all
positive steps for the company as it looks to continue growing ahead of its categories
in the future and drive growth. As covered in our industry piece, these are all future
trends that need to be adopted today to be ahead of peers tomorrow; Nestle seems
to be scoring well on these parameters. Also, the company has significantly reduced
its pace of time to market on its innovations. From the drawing board to market
landing is now a 3 month process as against 6 months in the past.
Food retailing on e-commerce is Figure 243: Ecommerce salience increasing steadily
relatively smaller as compared to
other categories – Nestle India’s E-commerce contribution to Sales (%)
Aug 2019 Investor Meet 1.5%
1.3%
0.9%
0.6%
CY16 CY17 CY18 H1 CY19
Figure 244: Increased new launches are in the organic and health based space

Profitability - Near term challenge on input
costs; operating leverage will be the longer
term driver
A look at the key costs suggests that prices of milk and milk derivatives as well as
green coffee, together constituting ~45% of material costs, are higher than their
1HCY19 average. We expect CY19 inflation to increase from current levels of 5% to
9% for 2HCY19 which in turn could keep margin expansion subdued; however, we
believe gradual price increases and a high base of A&P spends (127% growth in
2HCY18 based on our estimates) will aid margins. We are building in flat margins for
CY19; we expect margin improvement trajectory to resume in CY20 as the benefit of
revenue growth led operating leverage and continued cost management plays out.
We are building an 16% earnings CAGR for Nestle India over CY18-21E.
Figure 245: Our input cost index suggests higher inflation in H2CY20 Figure 246: A&P growth could be lower in H2 given the high base
9.0%
Price change of Nestle commodities
149.6%
6.4% Marketing Spends growth (%)
5.0%
basket (%)
-0.3%
-2.7%
5.4% 20.5%
-5.7%
H1CY18 H2CY18 H1CY19
CY15 CY16 CY17 CY18 H1CY19 H2CY19E
Strong outlook but priced in

As mentioned, we expect Nestle to report a 16% earnings CAGR over CY18-21E.
Also, given the inherent cash generation in the business, high capacity utilization and
modest capacity expansion requirements, Nestle’s return ratios will see a sharp jump
over CY18-21E. Over the longer term, Nestle remains a strong play on India’s rapidly
organizing food and beverage market of which its share is still miniscule.
However, we believe the stock price is factoring most of the medium-term positives,
and we await a better entry point. The key reasons for the same are:
1. The stock has outperformed peers even as consensus earnings have been
downgraded. This is due to its relative outperformance on volume growth,
driven by internal initiatives and the company significantly higher urban mix
(~75).
2. The likely near term weakness on earnings v/s consensus estimates due to
a higher rate of inflation cannot be ruled out.
3. From a valuation perspective, the stock is trading at a 45% premium to our
coverage universe average (ex ITC) which is its highest premium in the last
5 years.
4. The recent stock outperformance appears to be more technical in nature
likely due to its impending NIFTY inclusion on September 27 2019.

Figure 247: Nestle has significantly outperformed peers YTD Figure 248: Earnings have been downgraded in the process
Nestle 204
202
Marico
202
Dabur
Consensus Estimate of EPS (Rs)

200
HUL
Colgate 198
Britannia 196
ITC
194 193
GCPL
Emami 192
Jyothy Labs 190
May-19
May-19
Jan-19
Jan-19
Feb-19
Mar-19
Mar-19
Jun-19
Aug-19
Apr-19
Jul-19
Jul-19
-40 -30 -20 -10 0 10 20
YTD Stock Performance %
Source: Bloomberg, Investec Securities Research Source: Bloomberg, Investec Securities Research
Valuation
We value Nestle at 53x September 2021 earnings, a little above its 5-year average.
Our multiple is based on a 50% premium to our coverage universe P/E, and implies
a 10% premium to HUL’s target multiple. Our target price also implies a 50% premium
to coverage universe EV/EBITDA ex ITC. We await a better entry point which we
believe will present itself once rural growth picks up (making other names more
attractive) and the technical buying due to NIFTY inclusion abates. Initiate coverage
with a HOLD rating.
Figure 249: Expect a steady 16% earnings CAGR over CY18-21E
31.2%
22.0%
YoY growth (%)
16.7% 17.0%
15.1% 15.6% 16.2%
11.4%
CY18 CY19E CY20E CY21E

EBITDA growth PAT Growth

Figure 250: Strong accretion in return ratios on higher payouts and improved utilization
100% 95.0% 92.1% 3.0
90%
2.5
80%
70% 2.0
60% 64.5%
1.5
50% 46.8%
39.1%
36.4%
40% 1.0
30%
0.5
20%
10% 0.0
CY16 CY17 CY18 CY19E CY20E CY21E
ROE % Profit Margin (%)
Asset Turnover (x) (RHS) Equity Multiplier (x) (RHS)
Figure 251: The stock trades at close to peak valuations on P/E Figure 252: and on an EV/EBITDA basis
60 PE(x) 56.7 40 EV/EBITDA (x) 36.4
55
35
50
45 46.7 30
28.1
40 40.6 25
35 24.7
20
30
25 15
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
12m fwd PE 10 yr avg PE 5 yr avg PE 12m fwd EV/EBITDA 10 yr avg EV/EBITDA Aug-19
5 yr avg EV/EBITDA

Summary Financials (INRm) Year end: 31 December
Income Statement 2017 2018 2019 2020E 2021E
Revenue 99,525 112,162 125,800 141,349 158,033
EBITDA 21,260 25,942 28,912 33,748 38,999
Other income 2,340 3,350 3,685 4,053 4,459
Net interest -919 -1,120 -1,200 -1,200 -1,200
PBT (normalised) 19,258 24,816 28,035 32,790 38,108
Impairment of acquired intangibles -372 -111 -100 -100 -100
Non-recurring items/exceptionals -865 -526 0 0 0
PBT (reported) 18,022 24,179 27,935 32,690 38,008
Taxation -6,141 -8,220 -9,532 -11,149 -12,957
EPS (reported) 127.1 166.7 191.9 224.5 260.9
DPS (INR) 86.0 113.0 300.0 150.0 175.0
Cash Flow 2017 2018 2019 2020E 2021E
Change in working capital 1,414 4,128 3,341 4,084 4,611
Interest 7 41 -2,283 -2,631 -3,014
Tax paid -6,041 -8,813 -9,532 -11,149 -12,957
Dividends from associates and JVs 0 0 -202 -222 -245
Maintenance capex -1,306 -524 -1,315 -947 1,959
Free cash flow 16,872 20,000 21,406 25,737 32,612
Other financials 13 -41 -911 -1,200 -1,200
Disposals - - - - -
Dividends paid -9,980 -13,134 -34,854 -17,427 -20,332
Change in net cash 6,906 6,826 -14,360 7,110 11,080
Net cash/(debt) 28,412 35,239 20,879 27,990 39,070
FCFPS - FD (INR) 168.2 195.6 171.3 212.5 279.6
Balance Sheet 2017 2018 2019 2020E 2021E
Other current assets 949 1,116 1,228 1,351 1,486
Total assets 73,626 80,881 69,817 79,816 91,077
Total debt 351 351 351 351 351
Other long term liabilities 1,226 593 594 594 595
Net assets 113,046 125,024 118,959 134,743 152,444
Total equity 34,206 36,737 20,675 24,890 29,709
NAV per share (INR) 354.8 381.0 214.4 258.1 308.1

Calendarised Valuation Year end: 31 December

2017 2018 2019 2020E
Calendar PE (x) 93.3 73.8 66.2 56.6
EV/sales (x) 12.0 10.7 9.5 8.5
EV/EBITDA (x) 56.3 46.1 41.4 35.4
FCF yield (%) 1.3 1.5 1.3 1.7
Dividend yield (%) 0.7 0.9 2.4 1.2
Ratios and Metrics Year end: 31 December

Ratios and metrics 2017 2018 2019 2020E 2021E
FCFPS growth (y-on-y) (%) 20.2 16.3 (12.4) 24.0 31.6
NAVPS growth (y-on-y) (%) 4.2 7.4 (43.7) 20.4 19.4
DPS growth (y-on-y) (%) 47.0 31.4 165.5 (50.0) 16.7
Interest cover (x) 19.4 20.2 21.3 24.9 29.0
Net debt/EBITDA (x) (1.3) (1.4) (0.7) (0.8) (1.0)
Net debt/equity (%) (83.1) (95.9) (101.0) (112.5) (131.5)
Net gearing (%) (490.4) (2,351.8) 10,233.1 902.8 417.4
Dividend cover (x) 1.6 1.5 0.6 1.5 1.5
EBITDA margin (%) 21.4 23.1 23.0 23.9 24.7
EBITA margin (%) 17.9 20.1 20.3 21.2 22.1
ROE (%) 34.7 43.4 89.0 86.5 84.3
ROCE (%) 22.7 26.0 33.1 33.8 34.4
NWC/revenue (%) 24.6 25.7 10.7 13.5 18.0
Target Price Basis

53x Sep-21 EPS
Key Risks
a) Sharp increase in key commodity costs b) Prolonged slowdown in FMCG sector

Disclosures
Third party research disclosures Research recommendations framework
This report has been produced by a non-member affiliate of Investec Securities bases its investment ratings on a stock’s expected total return (ETR) over the next 12 months (with total return
Investec Securities (US) LLC and is being distributed as third- defined as the expected percentage change in price plus the projected dividend yield). Our rating bands take account of differences
party research by Investec Securities (US) LLC in the United in costs of capital, risk premia and required rates of return in the various markets that we cover. Prior to 21st January 2013 our rating
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Stock ratings for European/Hong Kong stocks Stock ratings for research produced by Investec Bank plc
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issuance of this report when distributed in the United States to
entities who meet the definition of a US Major Institutional 12m performance Count % of total Count % of total
Investor or an Institutional Investor. Buy greater than 10% 210 70% 93 44%
Hold 0% to 10% 72 24% 5 7%
Sell less than 0% 20 7% 0 0%
Analyst certification Source: Investec Securities estimates
Each research analyst responsible for the content of this research
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Stock ratings for Indian stocks Stock ratings for research produced by Investec Bank plc
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be, directly or indirectly, related to the specific recommendations Buy greater than 15% 77 62% 0 0%
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report. Sell less than 5% 13 10% 0 0%
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Stock ratings for African* stocks Stock ratings for research produced by Investec Securities Limited
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Company disclosures
Britannia Industries Ltd Emami Ltd ITC Nestle India
Colgate Palmolive India Godrej Consumer Products Ltd Jyothy Laboratories Ltd
Dabur India Ltd Hindustan Unilever Marico

Key:  Investec has received compensation from the company for investment banking services within the past 12 months,
Investec expects to receive or intends to seek compensation from the company for investment banking services in the next 6
months, Investec has been involved in managing or co-managing a primary share issue for the company in the past 12 months,
Investec has been involved in managing or co-managing a secondary share issue for the company in the past 12 months,
Investec makes a market in the securities of the company, Investec holds/has held more than 1% of common equity securities
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held more than 5% of common equity securities in Investec in the past 90 days, The analyst (or connected persons) is a director
or officer of the company, The analyst (or connected persons) has a holding in the subject company, The analyst (or connected
persons) has traded in the securities of the company in the last 30 days.  Investec Australia Limited holds 1% or more of a
derivative referenced to the securities of the company.  Investec holds a net long position in excess of 0.5% of the total issues
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company.  The sales person has a holding in the subject company.

Recommendation history (for the last 3 years to previous day’s close)
Colgate Palmolive India (COLG.NS) – Rating Plotter as at 16 Sep 2019
1,200
1,000
800
600
400
200
Price Target
Buy Hold Sell Not Rated
Source: Investec Securities / FactSet
Nestle India (NEST.NS) – Rating Plotter as at 16 Sep 2019
12,000
10,000
8,000
6,000
4,000
2,000
Price Target
Hindustan Unilever (HLL.NS) – Rating Plotter as at 16 Sep 2019
1,800
1,600
1,400
1,200
1,000
800
600
400
200
Price Target
ITC (ITC.NS) – Rating Plotter as at 16 Sep 2019

340
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
Price Target
Marico (MRCO.NS) – Rating Plotter as at 16 Sep 2019
380
360
340
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
0
Price Target
Britannia Industries Ltd (BRIT.BO) – Rating Plotter as at 16 Sep 2019
3,000
2,500
2,000
1,500
1,000
500
Price Target
Dabur India Ltd (DABUau.NS) – Rating Plotter as at 16 Sep 2019

450
400
350
300
250
200
150
100
50
Price Target
Emami Ltd (EMAM.NS) – Rating Plotter as at 16 Sep 2019
650
600
550
500
450
400
350
300
250
200
150
100
50
0
Price Target
Godrej Consumer Products Ltd (GOCP.NS) – Rating Plotter as at 16 Sep 2019
900
800
700
600
500
400
300
200
100
Price Target
Jyothy Laboratories Ltd (JYOI.NS) – Rating Plotter as at 16 Sep 2019

240
220
200
180
160
140
120
100
80
60
40
20
0
Price Target

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16 September 2019

Sector review Company Rec Target

 Changing dynamics favour large players: The USD60bn branded FMCG

presence and eventual pick up in rural growth, as well as valuations. We initiate 15

0.1 (4.5) (4.9)

Long term drivers Intact ......................................................................................... 3

Divergent incomes, convergent aspirations ........................................................... 5

Large categories, larger potential .......................................................................... 7

Long term themes ..................................................................................................... 9

Competition is heating up ...................................................................................... 9

India salience – A comforting factor in the long term ........................................... 20

Regulation – Low levels apart from cigarettes ..................................................... 21

Competition – Oscillating intensity across categories .......................................... 21

Market Salience – Rural over urban .................................................................... 22

Picking the winners ................................................................................................. 23

The Market Context – FY20 a lower growth year .................................................... 24

Q1FY20: Slowing but not that sharply ................................................................. 25

Rural remains the maker and breaker ................................................................. 26

Base effect could also provide respite in 2HFY20 ............................................... 29

Profitability to be higher in FY20E ....................................................................... 30

Valuation and View – Stay Selective ....................................................................... 33

Page 2 | 16 September 2019

Long term drivers Intact

Aspirations Lower Savings

Source: Investec Securities Research

Page 3 | 16 September 2019

AgeDependence Ratio (%)

Source: United Nations, Investec Securities Research

Households 219M 293M 386M

High High High

Upper mid Upper mid Upper Mid

Lower Mid Lower Mid Lower Mid

Low Low Low

2005 2018 2030E

Page 4 | 16 September 2019

GDP per capita NNI (in Rs. thousands)

Gross domestic Savings (% of GDP)

Source: RBI, Investec Securities Research

Divergent incomes, convergent aspirations

1.2 1.1 1.1 1.1

Source: News articles, Investec Securities Research

Page 5 | 16 September 2019

Source: Companies, Investec Securities Research

5.0 5.0 5.0

Direct Reach Indirect Reach

Source: Companies, Investec Securities estimates

Page 6 | 16 September 2019

Hair oils 130 Marico, Dabur, Emami, Bajaj Consumer High

Shampoos 80 HUL, P&G, Dabur, Cavin Care, Loreal, Himalaya High

Toothpaste 100 Colgate, HUL, Dabur, Patanjali, Anchor High

Hair colours 40 GCPL, Loreal, Revlon, Dabur Low

Coffee 25 HUL, Nestle Low

Juices 25 Dabur, Pepsico Low

Salty Snacks 250 Pepsico, ITC, Prataap Snacks Medium

Page 7 | 16 September 2019

Source: Companies, Investec Securities Research

Page 8 | 16 September 2019

Source: Investec Securities Research

Innovation Distribution Communication

Page 9 | 16 September 2019

YoY growth (%)

Source: Aceequity, Investec Securities Research

Larger shape reflects larger Naturals portfolio.