India Equity Research |FMCG

Sector Update

FMCG Sector Quarterly Update Dec2010

Volume growth intact, Rising Input costs a key concern
FMCG sector registered a strong topline growth of 19.1% to ` 21300 crores in Q3FY11 on the account of strong volume growth seen across the segments. Results for our KRC FMCG Universe were largely inline with our estimates with topline growth of 15% y-o-y. Nestle, GSKCHL & ITC being the top performers registering Net sales growth of 24%, 21% & 19% respectively, on the account of strong volume growth across their categories. EBITDA for the sector was up 13% y-o-y in Q3FY11 on the back of strong momentum in the topline. However margins for the sector continued to remain under pressure & declined by 108 bps y-o-y & for KRC FMCG universe by 59 bps y-o-y mainly due to significant rise in the key raw material prices (Palm oil, copra, Tea, Coffee). PAT for FMCG sector grew by 13% yo-y. Volume growth continues to drive topline: Despite high inflation, FMCG sector continued to witness healthy toplne growth of 19.1% y-o-y primarily driven by the strong volume growth & limited price hikes seen in Q3FY11. Among the KRC universe, Nestle registered highest growth of 24% y-o-y, driven by 27% y-o-y increase in the domestic offtake. HUL continued to post strong topline growth of 11.6% led by 13% volume growth in domestic consumer business. GSKCHL grew by 21% y-o-y with robust volume growth of 18% & 13% in Boost & Horlicks respectively. ITCs topline was up by 19% y-o-y, reporting growth of 19% yo-y in cigarette segment (volume up by2-3%) & 24% y-o-y in the FMCG-Others segment. Colgate registered steady topline growth of 14% driven by volume growth of 13% &24% in the Toothpaste & Toothbrush categories. We believe topline growth for HUL, ITC, Nestle, GSKCHL & Colgate to be steady going forward on the back of product mix, strong brand equity & presence across price points. Input cost inflation leads to Gross profit margin contraction: Significant rise in input costs led to decline in gross margins for the sector. Prices for the key raw materials like palm oil, copra, edible oil, Tea, coffee, PE, milk & barley continued to remain high leading to higher raw material consumption as % to sales for the sector. Gross margins for HPC players like HUL(-216 bps), GCPL(-81 bps), Marico(-530 bps), Emami(-553 bps) & dabur(-282 bps) declined on y-o-y basis due to significant increase in prices of Palm oil(+55%) ,Copra(+62%), Menthol(+75%) & LLP(+35%). As a result, to mitigate rising costs, players like Marico, Emami, Dabur, GCPL & Nestle have taken price hikes in the range of 3-15% in selective brands. Input cost inflation continues to remain key concern for the sector & we do not anticipate any price cuts in Q4FY11 especially in the HPC segment where the raw materials are crude linked derivatives. No decline in Competitive Intensity: Competitive intensity continues to remain high not only with the growth in domestic players but also aggressive strategies by MNC players like P&G, Reckitt Beckinser etc. This is evident from 16% y-o-y increase in the ASP expenses. In the HPC segment we saw ASP expenses as a % to sales increasing for Colgate (626 bps), GCPL(+243bps) & HUL(+73 bps) on the account of brand promotions, new product launches & pushing new categories whereas players like Marico, Emami, Dabur & Britannia reduced promotional expenses to mitigate the rising raw material costs, resulting in moderate decline of 12 bps y-o-y in ASP expenses as a % to sales for the sector. Thus despite EBITDA growth of 13% y-o-y, rising raw material prices along with higher ASP expenses continued to limit margin expansion for the sector in Q3FY11. EBITDA margins for the sector declined by 108 bps y-o-y. Positive measures in Budget to boost FMCG sector growth: We believe measures by the government to improve agricultural output, rural infrastructure & enhance supply chain would reduce raw material costs & boost the consumption in the rural markets which currently account for 40% of the FMCG volumes. This is positive for companies like HUL, ITC, Nestle, & Dabur which have strong presence in the rural markets. Views We expect the growth story to remain intact for the FMCG sector considering the positive budget measures & significant under penetration in many FMCG categories. We believe Foods (Beverages, packaged food, ice-cream) & emerging HPC categories (Skin care, deodorants and Baby oils) to be the key growth areas. We believe diversified presence, robust product mix & strong supply chain would be the key to maintain robust volumes & healthy margins. Considering above key points we maintain our positive outlook on Nestle, ITC & GSKCHL on the account of presence in diversified categories, global presence & strong product mix. www.krchoksey.com 91-22-6696 5203 91-22-6691 9569

Market Info: Mar 03 2011 SENSEX NIFTY 18,489 5,536

Particular Sales EBITDA PAT OPM NPM

Q3FY11 21300 4366 3125 20.5% 14.7%

Q3FY10 17887 3859 2767 21.6% 15.5%

Y-o-Y 19.1% 13.1% 13.0% -108 bps -80 bps

Particular Sales EBITDA PAT OPM NPM

9MFY11 55876.4 11267.0 8136.5 20.2% 14.6%

9MFY10 48052.7 10324.5 7260.4 21.5% 15.1%

Y-o-Y 16.3% 9.1% 12.1% -132 bps -55 bps

Source: KRChoksey research Price Performance

150 140 130 120 110 100 90 80 Apr-10 Jul-10 Aug-10 Jun-10 Oct-10 May-10 Nov-10 Mar-10 Feb-11 Dec-10 Sep-10 Jan-11

BSE FMCG

Sensex

Source: Bloomberg

Analyst : Mehul Desai mehul.desai@krchoksey.com 91-22-6696 5572

KRC Research is also available on Bloomberg KRCS<GO>, Thomson First Call, Reuters, Factset and Capital IQ

FMCG Sector Update Dec 10Q

1.Volume growth continues to drive Topline & EBITDA

Exhibit 1: Volume Growth (Q3FY11)

Steady Volume growth maintained by FMCG majors

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

18%

18% 12% 12% 13% 13% 15%

10%

6% 2%

Emami

GSK Consumer

Dabur

Britannia

GCPL

HUL

ITC

Asian Paints

Colgate

Vo lu me gro wth (Q3FY11)

Exhibit 2: Net Sales Trend (Q3FY11)

6000 5000 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

89.4%

Double digit growth registered by majority of the players driven by healthy volumes

4000 3000 2000 1000 0 29.6% 22.5%

13.8% 16.6% 14.9%

20.9% 18.6% 22.1% 23.6% 11.6%

4.0%

GSK Consumer

Emami

HUL

Britannia

Dabur

Marico

Asian Paints

Colgate

Net Sales (Rs Cr)

Y-o-Y(%)

Source: Company, KRChoksey Research Exhibit 3: EBITDA Trend (Q3FY11)

2500 2000 45.3% 21.2% 8.5% -7.9% 18.7% 0.9% 500 0 -23.2% -3.0% -6.1% 65.5% 63.9% 45.3% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

Emami

GSK Consumer

Dabur

HUL

ITC

Britannia

GCPL

Asian Paints

Marico

Colgate

EBITDA (Rs Cr)

Y-o-Y (%)

Source: Company, KRChoksey Research

2 KRC Equity Research

Nestle

TGBL

GSKCHL, Nestle, GCPL & ITC registered strong EBITDA growth while HUL, Emami & Colgate saw a decline on y-o-y basis due to rising input cost & ASP expenses

1500 1000

Nestle

TGBL

GCPL

ITC

Marico

FMCG Sector Update Dec 10Q

2.Input cost inflation leads to Gross profit margin contraction

Exhibit 4: Key Raw Material Price trends

Significant increase in Copra, Palm oil led to high input costs for HUL, GCPL, Marico

Raw Material Sugar Tea Coffee Wheat Copra LAB PE Palm oil Sunflower oil Safflower oil Groundnut oil LLP

Y-o-Y Change(%) -13.7% 3.4% 3.1% -5.9% 61.9% -4.4% 4.3% 54.8% 43.5% 3.2% 16.7% 35%

Positive Impact Nestle, Britannia, GSKCHL

Negative Impact Nestle, HUL, TGBL Nestle, HUL,TGBL

GSKCHL, Nestle, ITC, Britannia Marico, Dabur, GCPL HUL,GCPL

HUL,GCPL HUL, GCPL, Marico Marico Marico Marico Marico, Emami

Source: Company,Bloomberg, KRChoksey Research Exhibit 5: Gross Margin Trend (Q3FY11)

600 400 200 0 (200) (400) (600) (800)
(336) (235) (282) (553) (81) (144) (216) (530) (72) 63 (88) 407

High Raw material prices led to significant decline in GPM on y-o-y basis

Emami

Colgate

Dabur

HUL

ITC

GCPL

GSK Consumer

Marico

Asian Paints

Britannia

GPM change Y-o-Y(bps)

Source: Company, KRChoksey Research Exhibit 6: ASP Expenses as a % to Net Sales (Q3FY11) Company Britannia Decline in promotional expense to offset higher RM costs. We do not forsee any further decline in ASP expenses Colgate Dabur Emami GCPL GSK Consumer HUL Marico TGBL
Q3FY11 Q2FY11 Q3FY10

Q-o-Q -17 bps 731 bps 0 bps 161 bps 51 bps 12 bps 97 bps -116 bps 59 bps

Nestle

Y-o-Y -110 bps 626 bps -210 bps -66 bps 243 bps -273 bps 73 bps -164 bps -79 bps

6.9% 21.6% 12.5% 19.5% 10.8% 17.1% 14.8% 11.0% 17.4%

7.1% 14.3% 12.5% 17.9% 10.3% 17.0% 13.8% 12.2% 16.8%

8.0% 15.3% 14.6% 20.1% 8.4% 19.9% 14.1% 12.7% 18.2%

Source: Company, KRChoksey Research

KRC Equity Research

TGBL

FMCG Sector Update Dec 10Q

Exhibit 7: EBITDA Margin Trend

600 400 200 0 (200) (400) (600) (800) (1000) 491 80 76 239 3 (124)

Rising Input costs led to y-o-y decline in EBITDA margins

(320) (805)

(248) (464)

(306)

(257)

Emami

ITC

Dabur

Colgate

Marico

EBITDA Margin change Y-o-Y(bps)

Source: Company, KRChoksey Research Exhibit 8: Sectoral Snaphot Q3FY11 Net Sales
Q3FY11

EBITDA Y-o-Y 14.8% 19.1%

Q3FY11

GSK Consumer

Asian Paints

Britannia

PAT Y-o-Y 11.9% 13.1%

Q3FY11

Q-o-Q 6.0% 7.1%

Q-o-Q 4.9% 5.7%

Q-o-Q 7.9% 6.8%

Nestle

Y-o-Y 12.5% 13.0%

KRC Universe FMCG

14836.3 21300.0

3380.3 4366.2

2439.9 3125.8

Exhibit 9: Price Hikes & New category additions, Variant Introduction

Company Asian Paints

Majority of the players have gone for price hikes & expected to take hikes in Q4FY11 and also entered new categories, launched new variants to maintain long term growth, mitigate inputs costs & sustain margins

Price hike ~11% price increase taken YTD. 3% price increase undertaken in Dec10. Hiked prices of key SKUs by ~10% in Nov-Dec 10. Recent hike of 3-4% on select SKU's. Price hike in Vatika. 10% price hike in Zandu balm 3-4% in navratana hair oil & talcum powder. 3.-5% price hike in soap segment in jan. 10% price hike in hair color in Q2FY11. ~5% hike in horlicks brand

Product Relaunch/New Launch

Britannia Colgate Dabur Emami

Variant of Nutrichoice (diabetes friendly biscuits). Entered 'Ready to Cook' range of breakfast options like porridge, upma and poha mixes. Malai kesar soap,hairlifehair color,boroplus lotion

GCPL GSKCHL

Variants in Horlicks Biscuit Pepsodent Supersalt in low end toothpastes. Relaunch of Dove hair range with Fiber Actives Close-Up Fire-Freeze was launched Introduction of new brands-Lucky Strike and Players Gold Leaf. New variants under Gold Flake and Classic, Players cigarettes Increased focus in new segments like oats, packaged rice and ayurvedic hair oil to maintain long-term growth. Relaunch of nescafe & Kit Kat, neslac infant food -

HUL

ITC Marico Nestle TGBL

12% price hike in Bristol in January 2011. 24% price hike in parachute between aug to jan. 12% price hike in saffola 3% price hike in nescafe in dec. 8% price hike in tea.

Source: Company, KRChoksey Research

4 KRC Equity Research

TGBL

GCPL

HUL

FMCG Sector Update Dec 10Q

3.Positive measures in Budget to boost FMCG sector growth

Exhibit 10 : Budget Measure Key Measures
Increased focus on Agriculture, Supply Chain & Rural development Raised income tax exemption limit for sales

Impact
Positive for all FMCG companies as rural markets account for 40% of FMCG

Budget measures to improve rural infrastructure & supply chain would lead to lower RM costs, reduced prices & higher volumes for FMCG players

general tax payers from ` 1.6 lacs p.a to 1.8 lacs p.a Marginal hike in MAT, offset by reduced surcharge No hike in standard rate of excise duty No hike in excise duty on Cigarettes Increased focus on cold storage chains & setting up of mega food parks Full exemption from basic customs duty to Crude Palm Stearin for use in the manufacture of laundry soap 1% excise duty on products like coffee, ketchup, soups, ready to eat ` 300 cr allocation on increasing palm oil cultivation Positive for all HPC companies Marginally negative for HUL, Nestle, ITC Positive for HUL Positive for Food companies(Nestle, Dabur, HUL) No major impact on GCPL, Dabur Positive for all FMCG companies Positve for ITC,VST & Godfrey Phillips Positive for all FMCG companies as discretionary spending would increase

Source: Company, KRChoksey Research

Exhibit 11: Revenue CAGR (FY10-12E)

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

GCPL, Nestle, Asian Paints, ITC to grow at a CAGR of 20% & above over FY10-12E

GSK Consumer

Emami

HUL

Britannia

Dabur

GCPL

Marico

Asian Paints

Colgate

CAGR (FY10-12E)

Source: Company,Bloomberg, KRChoksey Research

KRC Equity Research

Nestle

TGBL

ITC

FMCG Sector Update Dec 10Q

4. Key Emerging Categories for the FMCG Sector

Exhibit 12:

Category Food Biscuits Ice-cream Milk powder Chocolates Ketchup Noodles Baby Food Coffee Malted Health drinks Fruit Juice Carbonated drinks HPC Toothpaste Shampoo Balms Utensils Cleaners Menz Skin Care Talcum Powder Skin cream Deodorants Baby oils

Urban Penetration(%) 87 26 7 25 15 Medium Medium 24 Medium Medium Medium 89 62 58 59 Low 48 30 6 8

Rural Penetration(%) 65 9 3 7 low low low 8 Low low low 45 46 38 17 25 19 2

Market Size (` bn) 125 20 9 28 5 18 7 10 30 5 75 38 30 11 5 54 12 3

Growth Rates 15-18% 12-15% 15-17% 15% 18-20% 15-20% 8-10% 12-15% 30% 5% 12-15% 8-10% 20-25% 20-25% 12-15% 40% 15-17%

Key Players Parle, ITC, Britannia Amul, HUL Amul, Nestle Amul, Cadbury, Nestle Nestle, HUL Nestle, GSKCHL Nestle TGBL, Nestle GSKCHL, Nestle, Cadbury Dabur, Pepsi, Coke Pepsi, Coke CPIL,HUL,P&G HUL,GCPL,P&G Emami HUL, Reckitt Bekinser, GCPL HUL HUL HUL, Emami HUL Johnson & Johnson

Source: Company Presentations, KRChoksey Research Exhibit 13: Top Picks Particulars (` Cr) Sales EBITDA PAT EPS OPM NPM PE CMP TP Key Points

ITC
25092.3 8531.4 5871.6 7.7 23.4% 34.0% 22.3 172 200 Diversified Business model Cigarette volume growth turning positive Strong revenue growth in FMCG Others Robust Distribution network Strong rural presence

Nestle
8893.7 1901.9 1214.1 125.9 21.4% 13.7% 28.5 3590 3780 Strong growth in all its key categories Market leader in key categories Robust distribution channel Product across price points Strong parent company expertise

GSKCHL
3126 522 419.1 99.7 16.7% 13.4% 21.5 2145 2392 Presence in low penetrated categories Market leader in malt based drinks Strong brand equity

Source: Company, KRChoksey Research

KRC Equity Research

FMCG Sector Update Dec 10Q

Exhibit 14: Revenue Trend (9MFY11 v/s 9MFY10)

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Asian 68% 80% 70% 60% 50% 25% 19% 13% 40% 17% 22% Colgate Britannia Dabur GCPL Emami HUL 20% 10% Nestle ITC Consumer Marico TGBL 17% 16% 22% 5% 30% 20% 10% 0% Paints GSK

Healthy topline growth for 9MFY11 as volume growth remains steady

9M FY11

9M FY10

Y-o-Y

Exhibit 15: EBITDA Trend (9MFY11 v/s 9MFY10)

6000 5000 4000 3000 2000 1000 0 52% 20% 12% 8% 5% Colgate Dabur Em ami ITC GCPL GSK Consum er H UL 21% -5% -13% Britannia Asian Paints 5% Nestle Marico 21% 14% -16% 60% 40% 20% 0% -20% TGBL

EBITDA growth lower than topline growth

9M FY11

9M FY10

Y-o-Y

Exhibit 16: Profitability Trend (9MFY11 v/s 9MFY10)

4000 3000 2000 1000 0 Colgate Dabur Britannia Emami Nestle ITC GCPL Asian Paints GSK Consumer HUL Marico 2% -25% -7% 15% 48% 34% 29% 7% 22% 60% 40% 20% 0% -20% -53% -40% -60% TGBL
(7) (244) N estle IT C M rico a T BL G

19%

27%

9M FY11

9M FY10

Y-o-Y

Exhibit 17: EBITDA Margin (9MFY11 v/s 9MFY10) Margins under pressure due to higher RM & ASP expenses
200 0 (200) (400) Pa ints A n sia (125) (221) Brita nnia E a i mm C lga o te D bur a (341) (94) (193) G PL C C nsum o er (216) G SK H L U (78) (131) 44 17

Y-o-Y (bps)

Net Sales 9MFY11 KRC Universe FMCG

7

EBITDA Y-o-Y 9MFY11 9MFY10 Y-o-Y 9MFY11

PAT 9MFY10 Y-o-Y

9MFY10

38202 55876

33887 48052

13% 16%

8550 11267

7964 10324

7% 9%

6200 8136

5555 7260

12% 12%

KRC Equity Research

FMCG Sector Update Dec 10Q

Exhibit 18: Q3FY11 Result Snapshot

Company Q3FY11 Asian Paints 2099.6 Sales Q-o-Q 16% Y-o-Y 30% Q3FY11 344.91 EBITDA Q-o-Q 4% Y-o-Y 8% Q3FY11 220.33 PAT Q-o-Q 3% Y-o-Y 11% Robust topline growth led by double digit volume growth,price increases(11.36% YTD) & festive season in Q3FY11 Growth in subsdiaries was flat except for south asia & margins continue to remain under pressure GPM declined by 336 bps y-o-y on the back increase in RM(Titanium dioxide) & packaging costs OPM declined by 320 bps y-o-y on the back of higher input costs & other expenses(higher promotion & freight costs) Net profit grew 11% y-o-y on the back of lower operating profit & higher depreciation cost Key Comments

Britannia

1080

-1%

23%

55.2

4%

45%

37.3

17%

5%

Strong revenue growth of 22.5% on the back oprice hike of 10% in key SKU's. Gross margins declined on the back of high cost sugar & wheat inventory OPM improved due to 110 bps y-o-y decline in ASP expenses as a % to sales High interest cost(issue of bonus debentures) & increase in effective tax rate resulted in muted net profit growth Launched nutrichoice oats & entered ready to cook segment by launch of porridge upma & poha mix under 'healthy start' brand

Colgate

558.2

1%

14%

93.1

-28%

-23%

66.24

-34%

-43%

CPIL registered topline growth of 14% y-o-y, with underlying volume growth of 12% y-o-y The 12% volume growth was primarily driven by Toothpaste & Toothbrush categories which reported a volume growth of 13% y-o-y & 24% y-o-y

110 bps & 120bps increase in volume market share in the Toothpaste & Toothbrush
Despite 409 bps y-o-y increase in Gross margins on the account lower RM, OPM declined by 805 bps yo-y on the back of steep rise in ASP expenses Net Profit declined by 43% y-o-y on the back of higher effective tax rate (27% in Q3FY11 compared to 5% in Q3FY10), increase in depreciation.

Dabur

1079.9

11%

17%

216.4

9%

21%

154.4

-4%

11%

Consolidated sales up by 11% y-o-y led by 9.5% volume growth & realizations growth of 4% International business reported 15% volume growth & 14% value growth, impacted by 5% due to translational losses Topline growth was driven by Health supplements, digestives & Home care segment which grew by 13%,11% & 24% respectively Muted performance in Hair care(4%) with hair oil growing by 12%.Oral Care grew by 10% led by 15% rise in toothpaste revenue. CHD & Food division registered revenue growth of 14% & 42% y-o-y Input cost inflation lead to 280 bps y-o-y decline in GPM, however OPM improved by 76 bps on the back of lower Ad Spend & Other expenses. EBITDA improved by 21% y-o-y to ` 216 crores Net profit up by only 11% y-o-y due to lower other income, higher interest expense & effective tax rate

KRC Equity Research

FMCG Sector Update Dec 10Q

Company Q3FY11

Sales Q-o-Q Y-o-Y Q3FY11

EBITDA Q-o-Q Y-o-Y Q3FY11

PAT Q-o-Q Y-o-Y

Key Comments

Emami

406.0

49%

15%

101.8

76%

-3%

85.5

60%

10%

Net sales up by 15% y-o-y,led by 12% volume growth Strong growth across key Oil brands (20%), : Zandu Boroplus balm(20%), Navratna

cream(6%,impacted by delayed winter) Higher Methanol prices (cost up 75%) & LLP prices(up 35%) lead to decline in GPM by 550 bps y-o-y. Operating profit declined by 3% y-o-y to ` 102 crores. Company has taken a price hike of 10% in Zandu balm & 3-4% in boroplus cream Net profit up by 10% y-o-y on the back of higher other income & lower interest expense Net sales up by 15% y-o-y,led by 12% volume growth

GCPL

980.4

3%

89%

167.81

-1%

65%

118.82

-9%

40%

GSK Consumer

524.2

-17%

21%

74.9

-35%

45%

53.4

-32%

59%

Home care business drive topline with 24% & 27% y-o-y growth in GHPL & Megasari Subdued revenue growth of 9% in domestic personal care with soaps & Hair colors growing by 6% & 9% respectively. Margins for the segment were impacted by higher palm oil prices Weak overseas performance with keyline reporting 15% sales decline on the back of high base & unfavorable currency movement. Rapidol & KINky performance was not impressive. Megasari reported robust 27% topline growth, however margins declined. Price increase of 3-5% in the soaps to mitigate rising palm oil costs Home care business drive topline with 24% & 27% y-o-y growth in GHPL & Megasari Net sales driven by strong volume growth of 18% & 13% in its key brands Boost & Horlicks respectively and price growth of 7% in Q4CY10. Horlicks maintained its dominant position with a market share of 53% & Boost improved its share by ~100 bps to 15% in CY10. Foodles continues to penetrate strongly with market share of 6% in South & East and pan India share of 3% Operating profit was up by 45% y-o-y to R 74.9 crore on the back of y-o-y decline in ASP & Other expenses as a % to sales, partially offset by higher raw material costs. Consequently gross margins declined by 144 bps y-o-y, however OPM improved by 239 bps y-o-y Net profit increased significantly by 58% y-oy to R 53.4 crore on the back of strong operating performance & higher other income, partially offset by higher tax rate Net sales driven by strong volume growth of 18% & 13% in its key brands Boost & Horlicks respectively and price growth of 7% in Q4CY10.
KRC Equity Research

Source: Company, KRChoksey Research

9

FMCG Sector Update Dec 10Q

Company Q3FY11

Sales Q-o-Q Y-o-Y Q3FY11

EBITDA Q-o-Q Y-o-Y Q3FY11

PAT Q-o-Q Y-o-Y

Key Comments

HUL

5027.01

7%

12%

725

12%

-8%

637.5

13%

-2%

Double digit volume growth of 13% y-oy in the domestic consumer business, resulting in robust topline growth of 11.6% to ` 5027 crores Domestic HPC segment grew by 11.6% y-o-y to ` 3847.6 crores led by 20% & 6% y-o-y growth in Personal products and Soaps & Detergents respectively while growth in Food Business was 13% y-o-y on the back of robust performance in Processed foods (19%), Beverages (9%) & ice-cream categories (31%) Operating profit de-grew 7.9% y-o-y on account of increase in key raw material prices (Palm oil, crude derivatives).The impact of input cost inflation & brand investments was seen in the EBIT margins for Soaps & Detergents(down 572 bps y-o-y) & Personal Products(down 313 bps y-o-y) segments Net profit declined marginally by 1.8% y-o-y on the back of exceptional income of ` 64.3 crores from sale of properties & long term trade investments
Net sales increased by 20% y-o-y largely driven by Cigarette & FMCG-Others categories which grew by 19% & 24% y-o-y respectively. The Hotel, Agri & paper business grew by 14%, 18% & 8 % y-o-y respectively. Cigarette business which registered a positive turnaround in volumes (up by 23% v/s 2% decline in Q2FY11). EBIT margins also improved by 69 bps y-o-y.

ITC

5453.49

8%

19%

1969.04

5%

19%

1389.08

11%

21%

Paper segment saw subdued growth due to inventory depletion

ITCs Hotel division reported sales growth of 14% y-o-y & EBIT margin was up by 65 bps y-o-y. The growth was mainly due to higher occupancy in the festive season & increase in ARR OPM remained flat at 36.1% on the back of increase in purchase of traded goods offset by lower raw material consumption & lower other expenses Net profit grew by 21% y-o-y on the account of increase in other income & decline in effective tax rate partially offset by higher interest (net)

Source: Company, KRChoksey Research

10

KRC Equity Research

FMCG Sector Update Dec 10Q

Company Q3FY11

Sales Q-o-Q Y-o-Y Q3FY11

EBITDA Q-o-Q Y-o-Y Q3FY11

PAT Q-o-Q Y-o-Y

Key Comments

Marico

817.7

5%

22%

99.7

0%

1%

69.5

-5%

12%

Nestle

1671

2%

24%

334.3

3%

64%

221.7

1%

66%

Net sales up by 225 y-o-y on the back of 15% volume growth.Realization up by 7% due to price hike in Parachute & Saffola Healthy performance across key brands with Saffola, hair oils & Parachute registering a volume growth of 13%,31% & 5% due to strong festive demand GPM contracted by 530 bps on the back of high input cost (Copra & Edible oil).However lower ad spends led to lower contraction in EBITDA margins Subsidiaries (international business and Kaya) registered topline growth of 26% and margins expanded 540bp, leading in PAT growth of 95%. Nestles double digit topline growth was on the account of strong domestic business performance which grew by 27% y-o-y to ` 1596.1 crores. Domestic sales improved on the back of robust volume growth, better product mix & price hikes taken by the company Exports declined by 17% y-o-y to ` 74.9 crores on the back of diversion of capacity for Domestic markets. Gross margins improved by 72 bps y-o-y on the back of price hikes taken to offset input cost inflation. Also employee expense & Other expenses declined on y-o-y basis resulting in OPM expansion by 493bps y-o-y Net profit increased by 66% y-o-y to ` 221.7 crores on the back of 99% y-o-y increase in other income partially offset by higher effective tax rate.
Muted topline growth of 4% y-o-y due to subdued performance in the tea business Standalone EBITDA declined by 50% due to high raw material costs Gross margins for TATA GB improve ddue to decline in RM cost as a % to sales JV with pepsi & MOU with kerala ayurveda to be key for growth going forward

TGBL

1602.4

11%

4%

184.0

42%

-6%

71.9

39%

-22%

Source: Company, KRChoksey Research

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KRC Equity Research

FMCG Sector Update Dec 10Q

Rajiv Choksey Anuj Choksey Naveen Fernandes Kunal Dalal

Co-Head Institutional Equities Co-Head Institutional Equities Head-Institutional Broking Research Head

rajiv.choksey@krchoksey.com anuj.choksey@krchoksey.com naveen.fernandes@krchoksey.com kunal.dalal@krchoksey.com

+91-22-6696 5555 +91-22-6696 5500 +91-22-6696 5554 +91-22-6696 5574

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. As per SEBI requirements it is stated that, Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.

Please send your feedback to research.insti@krchoksey.com Visit us at www.krchoksey.com Kisan Ratilal Choksey Shares and Securities Pvt. Ltd. Registered Office: 1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai 400 001. Phone: 91-22-6633 5000; Fax: 91-22-6633 8060. Corporate Office: ABHISHEK, 5th Floor, Link Road, Dalia Industrial Estate, Andheri (W), Mumbai 400 058. Phone: 91-22-6696 5555; Fax: 91-22-6691 9576.

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KRC Equity Research