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SECTOR INITI TION

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Summary valuation table

CompanyComptt.

MappingRating

CMP(Rs)

Mcap(US$bn)

TargetPrice (Rs)

Upside/Downside

P/E(FY14E)

P/E(FY15E)

ImpliedP/E (FY14)

EPS CAGR(FY08-13)

EPS CAGR(FY13-15)

ROE(FY13)

GSK CH SELL 5,515 4.1 3,945 -29% 45.5 38.0 32.5 22% 18% 35%

Nestle SELL 5,306 9.1 4,389 -17% 43.0 36.7 35.6 21% 14% 70%

Colgate SELL 1,451 3.5 1,227 -15% 38.1 33.8 32.2 16% 8% 107%

Marico SELL 234 2.7 198 -16% 33.0 27.1 27.8 17% *24% 23%

HUL SELL 592 22.7 503 -15% 37.2 32.8 31.6 13% 9% 103%

Dabur SELL 158 4.9 136 -14% 31.2 27.0 26.8 18% 15% 40%

GCPL SELL 873 5.3 792 -9% 32.6 27.2 29.6 21% 28% 23%

Median 37.2 32.8 31.6 18% 15%

Source: Bloomberg, Ambit Capital; superior positioning; intermediate positioning; *one-off impact of Kaya in FY14, 21% YoY growth in FY15

Analyst contacts

Rakshit Ranjan, CFA

Tel: +91 22 3043 [email protected]

Shariq Merchant

Tel .: +91 22 3043 [email protected]

Trade off between defensivenessv/s valuations for discretionary andstaples

0%

10%

20%

30%

40%

20 30 40

EPSCAGR(FY13-

15)

P/E FY14

BATA

TTKPTAPNT

GCPL

TTAN

MRCO

DABUR

BRGR

PIDI

HUVR

CLGT

JUBI

SKB

NEST

ITC

Source: Bloomberg, Ambit Capital researchNote: Bubble size indicates level of defensiveness;

Our competitive advantage framework see

page 12)

I Capital deployment

(a)Returns on deployment initiativesfollowed over the past decade;

(b) Deployment strategy for future

II Product portfolio positioning

(a)Width and depth of portfolio;

(b) Category growth for the portfolio;

(c) Competition displacement capability

(in terms of market share in relevantproduct categories)

III Near term raw material costbenefits

he party is over

The current valuations of FMCG stocks37.2x one-year forward P/E, at~35% premium to their historical three-year averagesdo not reflectthe likely moderation in earnings growth in the near term (to 15% EPSCAGR over FY13-15E from 18% EPS CAGR over FY08-13). Whilst we donot doubt the secular growth trend of the Indian consumption story, therising competitive intensity and saturating penetration in few productcategories would adversely affect the earnings growth and valuationsof FMCG firms. Lack of further softening in raw material costs is a near-term negative catalyst for these companies. We advise investors to SELLthe frontline FMCG stocks (excl ITC, NOT RATED) and invest indiscretionary consumer stories (such as TTK and Asian Paints) owing tothe latters relatively higher EPS growth and cheaper valuations.

Deflating growth rates for staples companies: Penetration levels (at 80-90%) are approaching saturation levels in product categories such as oral care,soaps, detergents, skin creams and hair oils. Furthermore, competitive intensityis rising quickly (owing to new entrants and promotion-led push fromincumbents) in categories such as oral care, chocolates, noodles, premiumedible oils and cosmetics. Thus, revenue growth could moderate (to 15% overFY13-15 vs 19% over FY08-13) and EBITDA margins could contract, therebypulling down the EPS CAGR (by 500bps over FY13-15 vs FY08-13) for thefrontline FMCG stocks covered in this note (HUL, Nestle, Colgate, Marico,GCPL, Dabur, and GSK Consumer).

HUL and Nestle better placed than the rest:HULand Nestleare the bestplaced in the FMCG sector, given HULs ability to leverage on its size to ride a

wave of consumption evolution across most product categories and Nestlesdominant presence in less-penetrated, rapidly-growing and entry-levelaspirational categories. HULs and Nestles consistent strategy of dividendpayouts/share buybacks alongside consistent reinvestment into the corebusiness give them a further edge over competition. Colgate, Marico,GCPL,Daburand GSK Consumerare intermediately placed.

No more support for punchy valuations: Given punchy valuations, weinitiate coverage with a SELLstance on each of these stocks. Our DCF-based

valuation implies a 10-30% downside for most (as we model near-termearnings estimates factoring in lower growth and more importantly no moresoftening in raw material costs). We believe investors should move theirconsumption-focused investments to discretionary consumption stocks in paints,light electricals and apparel, as the rising disposable incomes in India wouldincrease the depth and breadth of consumption to newer categories. Werecommend investors to switch into high-quality discretionary names likeAsianPaints, TTK Prestige and Bata.

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Ambit CapitalPvt Ltd 2

CONTENTS

SECTORInvestment thesis 3

Industry overview 7

Competitive advantage framework 13

- Capital utilisation strategies 13

- Portfolio positioning across segments 19

- Recent raw material trends 26

Valuations set to decline 31

COMPANIES

Hindustan Unilever (SELL) 39

Nestl (SELL) 58

Godrej Consumer (SELL) 73

Dabur (SELL) 89

GSK Consumer (SELL) 105

Colgate Palmolive (SELL) 120

Marico (SELL) 134

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Investment thesis

Indias consumption story is structurally sustainable

Indias consumption story is on a robust structural trend owing to: (a) the influenceof working women on disposable income levels and spending patterns; (b)traditionally backward regions, such as Bihar, Chhattisgarh, Madhya Pradesh andOrissa, driving the next leg of growth; and (c) high Government spending over thenext 2-3 years. (refer pages 8-12)

HUL and Nestle are best placed amongst the seven FMCG plays

Exhibit 1: Competitiveness framework and the relative standing of peers - HUL and Nestle are ahead of the pack

HUL Colgate Dabur Marico Nestle GSK Consumer GCPL

Portfolio positioning(diversification and category growth)

Ability to displace competition

Capital allocation and corporate strategy

Near-term raw material cost benefits

Overall rating

Source: Ambit Capital research; Note: indicates superior positioning relative to peers; indicates intermediate positioning relative to peers;indicates inferior positioning relative to peers

Portfolio positioning: Under this parameter, we rate companies based on:

(a) pace of growth of the relevant categories driven by an increase inpenetration of consumption, increase in frequency of consumption, and therate of premiumisation within the relevant categories; and

(b) spread of the product portfolio across premium/economy brands andacross various product categories.

Nestle (market leader in fast-growing categories) and Dabur (diverseportfolio in moderately growing categories) are best placed on this parameter.Colgate, GSK Consumer and Maricoare poorly placed on this parametergiven their predominant presence in one or two categories, with weak-to-moderate category growth rates. HUL (diverse portfolio and predominantlyweak growth rate of categories) and GCPL (moderate diversification andcategory growth) are placed at the intermediate level. (refer pages 18-25)

Ability to displace competition: The rating on this parameter is based onour expectations of market share gains/losses for the respective companies.

Marico (hair oils and premium edible oils) is the best placed on thisparameter due to its strong potential to gain market share. Dabur is poorly

placed on this parameter due to the likelihood of market share losses incategories such as hair care and oral care. GCPL, GSK Consumer, Colgate,HUL and Nestle are intermediately placed due to a combination of marketshare gains in a few categories (such as soaps and shampoos for HUL, coffeefor Nestle, home insecticides for GCPL and auxiliary income from Sensodynefor GSK) and market share losses in others (such as oral care for Colagte, oralcare and skin creams for HUL, chocolates for Nestle and MFD for GSK).

Capital allocation and corporate strategy: Given the cash-generativenature of the companies in this sector, capital allocation is a key component ofcorporate strategy. We rate HUL, Nestle and Colgate Palmolive as firmswhich have historically been the best allocators of surplus capital, withdividend payouts and capex related to core operations forming over 80% of

cash generated by these companies. GCPL and Marico,on the other hand,have underperformed vis--vis their peers on this metric because they have

Indias consumption story is ona robust structural trend

Nestle and Dabur have thebest portfolio positioning

Marico (domestic portfolio) isbest placed to displace

competition

HUL, Nestle and Colgate havethe best capital allocationstrategy

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invested a large proportion of their capital generated towards a combinationof M&A and international business expansion which have NOT been valueaccretive for shareholders over the past five years. (GCPL has invested 125% ofits cash generated over FY03-12 vs 52% for Marico.) GSK Consumer andDabur are intermediately placed because: (a) GSK Consumer hasaccumulated cash on the balance sheet and no effective means of capitaldeployment; and (b) Dabur has made a value-destructive M&A of Namaste in

the US and Africa despite highly value-accretive expansion of its MiddleEastern business. (refer pages 13-18)

Near-term raw material cost benefits:Input costs for Tea, Milk Food Drinks(wheat) and HDPE (key ingredient used for packaging of most products) havesignificantly increased in YTD CY13 over the previous year. Also, input costs forsoaps (palm oil), rice bran oil and coffee have declined in YTD CY13 over theprevious year. Consequently, in 1HCY13, we expect HUL, GCPL and Maricoto be the key beneficiaries of these trends; whilst GSK Consumeris likely tobe at a disadvantage as compared to its peers. (refer pages 25-30)

However, a derating of the seven stocks under our coverage iswarranted

The table below shows that the FMCG sector (i.e. the seven stocks covered in thisnote) has been rerated by 61% over FY09-13. The rerating from FY09 to FY11 wasjustified by increase in the growth momentum of Indias consumption story overthis period (volume growth increased by 200bps YoY over FY09-11). However, thererating over the past 24 months to current levels of 37.3x one-year forward P/Emultiples is not justified by any fundamental acceleration in volume or earningsgrowth prospects of the relevant stocks. Instead, volume growth has moderated by520bps over the past 24 months (FY11-13) for the sector.

Exhibit 2: Rerating in the FMCG sector vis--vis volume and EPS growth trends

FY09 FY10 FY11 FY12 FY13 Current

Sector P/E average (1-yr fwd) 18.5 21.9 26.7 27.4 29.7 37.2

Volume Growth 12% 13% 14% 10% 8% NA

EPS Growth 17% 27% 16% 15% 20% NA

Source: Company, Ambit Capital research; P/E multiples are simple averages of daily P/E multiples for eachyear using Bloomberg consensus forecasts

Over FY13-15, we forecast an EPS CAGR of 15% for the sector, 500bps lower thanthat of FY12-13, and around 300bps lower than the EPS CAGR of FY08-13.

Exhibit 3: Rerating in the FMCG sector given declining volume growth trends

15

18

21

24

27

30

33

FY09 FY10 FY11 FY12 FY13

6%

8%

10%

12%

14%

16%

18%

20%

Average P/E (LHS) Average Volume Growth

Penetration FY07 Advt spends FY07

Skin creams 25% GSK Cons. 12.9%

Biscuits 68% HUL 10.2%Detergents 88% Marico 12.5%

Penetration FY12 Advt spends FY13

Skin creams 62% GSK Cons. 16.3%

Biscuits 89% HUL 12.5%

Detergents 98% Marico 13.6%

Source: Bloomberg, Company, Ambit Capital Research; Average volume growth represents simple average of the annual volume growth reported bythe FMCG companies (excluding GCPL) covered in this note

HUL, GCPL and Marico arebeneficiaries of near termcommodity price movements

Sector has been re-rated to 37xFY14 P/E despite 600bpsmoderation in YoY volumegrowth over FY11-13

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This moderation in EPS CAGR for the sector can be broadly attributed to thefollowing factors:

High penetration levels of several product categories:The penetration ofcategories such as oral care, hair oils, milk/milk products, soaps anddetergents have substantially increased over the past five years. With thecurrent penetration levels exceeding 80% in these categories, growth rates arelikely to moderate going forward as compared to those achieved in the past.

Exhibit 4: High-price and low-utility items have low penetration (percentages inbubbles and size of bubbles indicate penetration levels)

5%

11%

25%

17%

15%

15%

5%

47%

40%

90%

74%

88%

83%

90%

99%

-2

7

0 10

PRI

CE

U T I L I T YLow utility High utility

Baby foods

Premium edible oils

Milk food drinks

InsecticidesOral care

Soaps and detergents

Coffee

Noodles

Milk/milkproducts

Skin care

Fruit juices

Shampoos

Biscuits

Tea

Hair oils

HighPrice

LowPrice

Source: Industry, Ambit Capital research; Size of the bubble = penetration level of the respective category

Increased competitive intensity: Categories such as noodles, premiumbiscuits, premium edible oils, oral care and cosmetics, previously had only oneor two large players controlling the market; however, these categories haveseen an influx of new entrants with large balance sheets, such as HUL and ITCin noodles, ITC in biscuits, P&G and GSK Consumer in toothpastes, and AdaniWilmar in premium edible oils. This has led to a rise in competitive intensity,which is also visible in increased advertising spend to sales ratio for theseplayers over the past five years.

Tailwinds related to raw material cost benefits are fleeting: Over thepast 12 months, although the volume growth of discretionary consumercategories has moderated, most players in the FMCG sector have been able tostimulate consumer spending through accelerated promotions. Also, thecompanies that have gained market shares from competitors have been wellsupported by their ability to increase investment in advertising. This has beenmade possible by weak raw material prices, a tailwind which is likely to befleeting. Gross margins are not likely to expand as substantially as they didover the past 12 months, thereby cushioning EBITDA margins from the impactof rising competitive intensity and saturating the penetration level in FY13.

Penetration levels areapproaching saturation in

several high utility productcategories

Competitive intensity hasincreased substantially forseveral product categories overFY08-13

Tailwinds related to rawmaterial cost benefits arefleeting

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Exhibit 5: Gross margin expansion vs EBITDA margin expansion for FY13 (bps)

430

240170 160

80 80150

120

-10

-220

60 40

-70-50

-250

-150

-50

50

150

250

350

450

550

Marico

Nestle

Dabur

GCPL

HUL

Gross Margin Expansion EBITDA Margin expansion

GCPL

GSK

Consumer

Colgate

Source: Company, Ambit Capital research

Consequently, based on our DCF valuations on these companies, our implied fairmultiple for the frontline FMCG stocks is ~15% lower than the current multiplesand hence warrants a sector-wide derating over the next 12 months.

Exhibit 6: Summary valuation table

CompanyComptt

MappingRating

CMP(Rs)

Mcap(US$ mn)

TargetPrice (Rs)

Upside/Downside

P/E(FY14E)

P/E(FY15E)

ImpliedP/E (FY14)

EPS CAGR(FY08-13)

EPS CAGR(FY13-15)

ROE(FY13)

GSK CH SELL 5,515 4.1 3,945 -29% 45.5 38.0 32.5 22% 18% 35%

Nestle SELL 5,306 9.1 4,389 -17% 43.0 36.7 35.6 21% 14% 70%

Colgate SELL 1,451 3.5 1,227 -15% 38.1 33.8 32.2 16% 8% 107%

Marico SELL 234 2.7 198 -16% 33.0 27.1 27.8 17% *24% 23%

HUL SELL 592 22.7 503 -15% 37.2 32.8 31.6 13% 9% 103%

Dabur SELL 158 4.9 136 -14% 31.2 27.0 26.8 18% 15% 40%

GCPL SELL 873 5.3 792 -9% 32.6 27.2 29.6 21% 28% 23%

Median 37.2 32.8 31.6 18% 15%

Source: Bloomberg, Ambit Capital; superior positioning; intermediate positioning; *one-off impact of Kaya in FY14, 21% YoY growth in FY15

Whilst we retain our SELL stance on the FMCG sector, we believe discretionaryconsumption stocks like Asian Paints (MCap US$7.9bn, 6% upside) and TTKPrestige (MCap US$694mn, 23% upside) offer a significantly stronger growthprofile and are available at more attractive valuations.

Level of defensiveness in consumer stocks highlighting valuations and EPS growth

0%

10%

20%

30%

40%

20 25 30 35 40 45

EPSCAGR(FY13-1

5)

P/E FY14

BataTTK Prestige

Asian Paints

GCPL

Titan

Marico

Dabur

Berger

Paints

Pidilite

HUL

Colgate

Jubilant

Foodworks

GSK Consumer

Nestle

ITC

Source: Bloomberg, Ambit Capital research; Note: Size of the bubble highlights the level of defensivenessdetermined by the coefficient of variation of revenues over the past 24 quarters.

Discretionary consumptionstocks offer a significantlystronger growth profile andmore attractive valuations

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Industry overviewRevenues in the Rs1,807bn Indian FMCG market have increased by ~15% YoY inFY12, with rural revenues accounting for 34% of the overall sector. Whilst untilCY06, urban growth rates were higher than rural growth rates (refer to the exhibitbelow), rural growth has outpaced urban growth by ~200bps over CY07-11(average of 15% growth per annum in rural vs 13% per annum in urban over this

period). The rural and urban markets increased by ~15% YoY in FY12.

Exhibit 9: FMCG industry split across rural and urban

1,566

1,040

526

1,807

1,201

606

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FMCG Industry

size

Urban Rural

FY11 FY12

Source: Industry, Ambit Capital research

Exhibit 10: Rural growth picked up pace after CY05

(10)

(5)

-

5

10

15

20

CY03 CY05 CY07 CY09 CY11

Urban

(%)

Rural

(%)

Overall

FMCG(%)


Revenue growth in rural markets has outpaced those in the urban markets due toa combination of the following factors:

1. Growth led by traditionally backward regions

The traditionally backward Indian states are now leading the charge in terms ofeconomic growth rates. Besides this pick up in income growth in traditionallybackward regions, the phenomenal proliferation of three drivers of aspirationalconsumption over the past decade is likely to propel this story forward, namely,

Improved penetration of electricity access over the past decade which in turnwill facilitate consumption of electricity-based durables;

Improved levels of household sanitation which are likely to drive theconsumption of personal and home care products; and

Revolution in general awareness levels driven by the jump in penetration ofmobile phones and rising penetration of the internet.

The traditionally backwardIndian states are now leadingthe charge in terms ofeconomic growth rates

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Exhibit 11: The traditionally backward states in thelate-1990s

6.5%

5.4%4.9%

4.3%3.7% 3.4%

0%

1%

2%

3%

4%

5%

6%

7%

India

MP

Bihar

Orissa

Uttaranchal

Chattisgarh

Avg GDP growth over FY95-99 (YoY, in %)

Source: CSO, Industry, Ambit Capital research

Exhibit 12: are now leading the charge in terms ofeconomic growth rates

13.7%

11.1%

9.4% 8.4% 8.2% 7.9%

4%

6%

8%

10%

12%

14%

16%

Uttaranchal

Bihar

MP

Chattisgarh

Orissa

India

Avg GDP growth over FY07-12 (YoY, in %)

Source: CSO, Industry, Ambit Capital research

2. Rise in Governments welfare spends

Rural development spends by the Government have recorded a CAGR of 33% overFY05-11 and 20% over FY05-13 (see the exhibit below). This has been achievedthrough Government schemes such as MGNREGA (a rural employment schemewhich is likely to spend Rs294bn in FY13), Indira Awas Yojana (a rural housingscheme with an estimated spend of Rs81bn in FY13), and the Pradhan MantriGram Sadak Yojana and Central Road Fund (road development schemes with anFY13 estimated spend of Rs91bn).

Exhibit 13: Rural development spends have recorded a CAGR of 33% over FY05-11

0

100

200

300

400

500

600

700

800

900

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

-40%

-20%

0%

20%

40%

60%

80%

100%

Rural Spends (Rs bn) % Growth


The long-term prospects of structural growth inconsumption remain intact

Besides the benefits related to a high economic growth rate, we expect thefollowing factors to drive growth of consumption over the longer term in India:

1. Influence of women on disposable income levels

Improving economic opportunities for women, which have been a function ofrising female literacy levels, have helped in the economic empowerment of

women. More women are increasingly employed in the non-farm sector, which ischaracterised by higher income levels vis--vis the farm sector. Furthermore,

Rural development spends bythe Government - 20% CAGRover FY05-13

Household incomes willcontinue to rise in India drivenby increased employment ofwomen in the non-farm sector

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international experience suggests that as a country develops economically (asmeasured by per capita income), the non-farm sector employs most of the women.For instance, only 35% of Indias working women are currently employed in thenon-farm sector at a point where Indias per capita income is US$3,400 (in PPPterms). At the other end of the spectrum is the US where 99% of working womenare employed in the non-farm sector, as its per capita income is at US$46,900 (inPPP terms). Therefore, we expect household incomes to continue to rise in India

driven by increased employment of women in the non-farm sector.

Exhibit 14: Female literacy levels are rising faster thanmale literacy levels in India

10%20%

30%

40%

50%

60%

70%

80%

90%

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

YouthLiteracyRatios(in%)

Males Females Gap

Source: CEIC, IMF, Ambit Capital research

Exhibit 15: The rising employment of women in thehigher-paying non-farm sector

25% 26%

29%

35%

20%

22%

24%

26%

28%

30%

32%

34%

36%

CY94 CY00 CY05 CY10ShareofIndian

womenemployedinthe

non-fa

rms

ector(in%)

Source: World Bank, Ambit Capital research

2. Revival of discretionary spends by the Government

Whilst discretionary spending increased by only 12% in FY13, we expect a 19%increase in FY14 in these spends based on the Governments FY14 budget. These

benefits given out before the elections are likely to help rural consumers over thenext 12-18 months.

Exhibit 16: Allocation to NREGA by the Governmenthas declined since FY11

113 120

300

391 401 400

330

-

50

100150

200

250

300

350

400

450

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

NREGA Allocation (Rs Bn)

Source: Budget transcripts, Ambit Capital research

Exhibit 17: Discretionary spends by the Governmentpick up in the two years before the general elections

3%6%

12%

22%

25%

19%

0%

5%

10%

15%

20%

25%

30%

Gen Election

2004

Gen Election

2009

Gen Election

2014

Year 1,2 and 3 Year 4 and 5

Source: Ambit Capital research

We expect 19% YoY increase indiscretionary spending by theGovernment in FY14

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3. Evolution of consumption patterns

The factors highlighted above will have a structurally positive impact on householdincomes across most segments of the Indian population and hence will lead to alarge proportion households shifting from illiterate daily wage manual labourerstowards educated salaried/small business controllers.

Exhibit 18: Shift in proportion of Indian consumers across various categoriesbased on household income and segregation into rural vs urban

50%

24%

6% 6% 8%

2% 4%

28% 30%

6%

13%

10%5%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Strugglers

Smalltown

nextbillion

Largetown

nextbillion

Rural

Aspirers

Urban

Aspirers

Traditional

Affluent

Professional

Affluent

2010 2020

Source: The Tiger Roars - Boston Consulting Group & CII; Ambit Capital research

This shift in household profiles is likely to lead to a change in consumptionpatterns for various categories of consumption due to:

Spending patterns of the next generation: When consumers who arecurrently in the age group of 15-25 years become decision-makers forconsumption, they would significantly change the consumption patterns intheir respective households. They would have observed wealth creation andthe influx of foreign brands first hand. Thus, they are likely to spendsignificantly more on consumer products as compared to the previousgenerations. Consequently, the definition of fashion/luxury/leisure willevolve over the next decade.

Migration from rural to urban areas:Urban dwellers have better access togoods and are exposed to more consumerism. Therefore, a migration to largercities tends to increase a households spending on various categories. This is

likely to add more depth to consumption in India and widen the range of SKUsconsumed in a typical household.

Nuclear families: Anecdotal data suggests that nuclear families spend 20-50% more per capita as compared to traditional joint families in the samehousehold income group. These higher spends are mostly related todiscretionary consumption categories rather than staples.

This is likely to lead to the evolution of consumption spends across all productsegments along the following lines:

Several product categories within the staples segment as well as others includinglight electricals, brown goods, white goods, auto and luxury spending categories

are currently under-penetrated in India. Penetration in these categories is likely toincrease either for the overall product segment or from a shift from theunorganised product segment into the organised segment.

Professional

Affluent

Income overUS$18,500. Educated,

professionals

TraditionalAffluent

Income overUS$18,500. Lesseducated, self-employed, valueconscious

UrbanAspirers

Income betweenUS$7,400-18,500. Highaspirations, live in urbancities

RuralAspirers

Income betweenUS$7,400-18,500. lessaspirational, live in rural

areas

Large TownNext Billion

Income betweenUS$3,300-7,400. Live inlarge towns. Basiceducation/lifestyle.

Small TownNext Billion

Income betweenUS$3,300-7,400.Live in

small towns. Basiceducation/ lifestyle.

StrugglersIncome less thanUS$3,300. Illiterate,daily wage earners

Penetration of severalcategories (relatively more

discretionary in nature) is likelyto increase going forward

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The chart below maps FMCG product categories across a price vs utility matrix,with categories being more discretionary in nature at the top-left of the chart andthe ones that are more staple in nature at the bottom-right of the chart. Alongsidethe price and utility, we map category penetration and find categories such asbaby foods and milk food drinks are the least penetrated across the country whilstthose such as soaps, detergents, biscuits and tea are almost completely penetratedgiven their higher utility and smaller ticket size.

Exhibit 19: High-price and low-utility items have low penetration (percentages inbubbles and size of bubbles indicate penetration levels)

5%

11%

25%

17%

15%

15%

5%

47%

40%

90%

74%

88%

83%

90%

99%

-2

7

0 10

PRICE

U T I L I T YLow utility High utility

Baby foods

Premium edible oils

Milk food drinks

InsecticidesOral care

Soaps and detergents

Coffee

Noodles

Milk/milk

products

Skin care

Fruit juices

Shampoos

Biscuits

Tea

Hair oils

HighPrice

LowPrice

Source: Industry, Ambit Capital research; Size of the bubble indicates penetration level of the respectivecategory

Premiumisation is likely to be a strong driver of growth in well-penetratedcategories such as soaps, detergents and biscuits, as higher disposable householdincomes will be spent towards lifestyle upgrades for existing consumers of theseproducts. Also, the frequency of consumption of categories such as noodles, fruitjuices, deodorants and cosmetics are also likely to propel consumption goingforward.

Staples growth in wellpenetrated categories will bedriven by premiumisation andfrequency of consumption

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Competitive advantage frameworkOur framework analyses the following competitive advantages of theseven companies covered in this report:

1. Capital utilisation strategies: Given the high cash generation in this

sector, this section compares the efficiency of capital utilisationstrategies adopted by the respective companies over the past decadeand the intended strategy for the next 3-5 years.

2. Portfolio positioning: This section analyses the drivers of growth of keyproduct categories in the FMCG universe and identifies the winnersand losers within each of these product categories for FY13-15.

3. Raw material cost benefits: This section looks at the short-term gainsor losses that are likely at a gross margin level for various companiesfrom the changes in commodity prices over the past three months.

I - Capital utilisation strategies in a sector with

strong cash generationAs shown in the table below, cash generation in the FMCG sector has remainedstrong for most companies over the past decade.

Exhibit 20: High asset turns and pre-tax CFO/EBITDA indicate strong cashconversion

Average AssetTurnover

Average PATMargin

AverageROCE

Average Pre-taxCFO/EBITDA

Colgate 5.8 14.4% 84% 126%

Nestle 6.4 12.3% 82% 118%

HUL 5.3 12.8% 66% 114%

GCPL 3.9 14.0% 62% 96%Dabur 2.6 11.5% 34% 100%

ITC 1.1 23.2% 27% 114%

Marico 3.2 7.7% 24% 75%

GSK Consumer 2 11.5% 23% 137%

Source: Company, Ambit Capital research; Note: Average =ten-year period over FY03-12

In this section we analyse the various modes of capital deployment adopted bylarge listed FMCG companies over the past decade, the consequent impact felt ontheir return ratios, and the corporate strategy over the next 3-5 years.

Capital deployed over the past ten years

Modes of surplus capital deployment have varied across the sector and can beclassified into the following categories (see the exhibit below):

Dividend paid to shareholders through a combination of normal dividend,special dividend and buybacks;

Core investments to expand the core product portfolio i.e. manufacturingcapacity, R&D facilities and distribution network;

Investments in non-coreactivities i.e. expanding presence in geographiesoutside India or M&A around product categories which are not directly relatedto the core business;

Surplus capital accumulation in the absence of appropriate avenues forcapital deployment;

Strong cash generation in theFMCG sector over the pastdecade

calls for a need to choosefrom amongst various capitaldeployment initiatives

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Accumulation of unutilised cash which neither has been returned toshareholders nor has been invested in core/non-core activities.

Exhibit 21: Avenues of capital deployment for various companies over FY03-12

-20%

0%

20%

40%

60%

80%

100%

HUL

Nestle

Colgate

GSK

Consumer

Dabur

Marico

GCPL

Investment in core Dividend Paid Non core Inv./Intl. M&A Change in cash Others

Source: Company, Ambit Capital research; Note: height of the bar for each company refers to the sum ofoperating cash flows, new equity raised and increase in gross debt.

Segregation of companies into three buckets

HUL, Nestle and Colgate repatriation to shareholders: Thesecompanies are best placed with over 80% of the cash generated deployedtowards either investments in the core business or share buybacks/dividendpayouts to shareholders. Moreover, across these ten years, the payout ratiohas reduced for these firms only during years where deployment opportunitiesin the core business have been exploited (e.g. Nestles payout below 70% onlyover the past three years due to the capex towards doubling manufacturingcapacities in its core business). As a result, these three companies haveconsistently had high RoEs and RoCEs over the past ten years.

GSK Consumer attempted to expand core business, but has ended up

accumulating unutilised cash: Whilst GSK Consumers working capitalmanagement and cash generation is amongst the best in the sector, thecompanys dividend payout ratio has been between 35% and 50% over thepast ten years, leaving ~50% of the cash generated over the past ten years(after capex) unutilised. Attempts to leverage on the Horlicks brand to enterinto categories like biscuits, noodles, energy drinks and health bars have notbeen successful. Consequently, GSK Consumers RoEs have been consistentlyat 20-30% over the past ten years, several notches below that of its peers.

Dabur, Marico and GCPL substantial non-core investments/International M&A: These firms have ventured into newgeographies/product categories through M&A which has been funded by acombination of reduction in the dividend payout ratio (see chart below) and

new capital raised in the form of equity and debt. An analysis on the returnsgenerated through these non-core capital deployment initiatives (provided inthe next section of this note) suggests that the incremental returns generatedon these non-core investments/International M&A have been either at orbelow par as compared to the cost of equity of the corresponding capitalemployed.

Capital deployment strategieshave varied substantially acrossthe sector

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Exhibit 22: Dividend payout trends over the past decade

0%

20%

40%

60%

80%

100%

120%

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

GCPL

Marico

Dabur

Colgate

HUL

GSK

Consumer

Nestle


Exhibit 23: Acquisitions made by FMCG companies since FY08

CY GCPL Marico Dabur

2007 NAEnaleni Pharma (South

Africa)NA

2008 Kinky NA NA

2009 NA NA NA

2010 Tura, Megasari, Issue,Argencos

Code 10 (Malaysia) Namaste Labs, HobiKozmetik

2011 Darling (On going)International ConsumerProducts (Vietnam)

30 Plus

2012 Cosmetica Nacional Paras (Personal Care) NA

Total increase in Debt overFY08-12 (Rs mn)

10,925 552 6,033

Total dividend retained overFY08-12 (Rs mn)

11,500 9,553 14,212

Total equity diluted overFY08-12 (Rs mn)

18,263 NA NA


Analysis of investments in non-core M&A by Dabur, Marico and

GCPL

Whilst the RoAs (see chart below) have significantly declined for all threecompanies, an RoA-based analysis is not the best way to compare capitaldeployment of these companies because: (1) Goodwill paid for acquisitions is adrag on the RoA; and (2) since FMCG businesses are capital-light in nature, anysmall reduction in the dividend payout ratio leads to a significant increase in theasset base, irrespective of the capital deployment initiative (eg: cash held on thebooks of HUL is higher than its equity).

International M&A has NOTgenerated substantialshareholder returns so far

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Exhibit 24: RoA trends as reported

-10%

10%

30%

50%

70%90%

110%

130%

150%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Dabur

Marico

GCPL


Exhibit 25: RoA trends after adjusting for goodwill

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Dabur

Marico

GCPL


To analyse the returns generated on capital deployed, we have comparedthe incremental EPS generated by the three firms on incremental capitaldeployed towards M&A or international growth.

The underlying assumptions for this approach are: (a) the current gap between thestandalone and consolidated accounts almost fully reflects growth of internationalentities over FY08-12; and (b) capital deployed towards non-core acquisitionsrelates to a combination of retained earnings (which otherwise would have beenpaid out as dividends to shareholders) and new equity/debt issuance. Also, wehave assumed a 13% cost of equity on this capital deployed over this period. Theconclusions from our analysis are:

Exhibit 26: Analysis of value created by the M&A strategy of Indian FMCG companies

Sum of standaloneEPS (FY08-12)

Retainedearnings/ share

(FY08-12)

Equitydiluted/share

13% Cost ofEquity

Standalone EPS +Return on Equity

Sum ofconsolidated EPS

(FY8-12)% Gain

Dabur 11.85 8.16 0 1.06 12.91 14.06 9%

Marico 19.17 15.54 0 2.02 21.19 19.52 -8%

GCPL 53.40 33.79 53.67 11.69 65.09 63.66 -2%

Source: Company, Ambit Capital research; Note: EPS is bonus adjusted and retained earnings/share is based on shares outstanding as on 31 March2012.

Maricoas well as GCPLhave generated incremental earnings from non-corebusinesses, lower than the cost of equity deployedover FY08-12. Dabur,on the other hand, has generated incremental value for shareholdershigher than the cost of equity.

GCPL and Maricoboth had a debt:equity of 0.67x in FY12. Since this doesnot form a part of the deployed capital considered in our analysis above, thetotal return on incremental capital deployed is further dragged down beyondwhat is highlighted in the analysis above.

Daburappears to be unleveraged, with an FY12 net debt of only Rs730mn ona consolidated basis. However, the company holds Rs10.7bn of gross debt,largely in foreign currency at a subsidiary level, and holds Rs10bn of cash onthe standalone balance sheet in FY12. This is driven by the companys strategyof NOT deploying capital from the parents balance sheet to fund expansion ofthe subsidiary entity. Therefore, note the incremental debt capital is used tofund the return generated from non-core investments.

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FY13 acquisitions NOT taken into account: Our analysis does NOT takeinto account either Maricos acquisition of Paras or the phase-2 integration ofGCPLs Darling business in Africa. These two transactions were executed inFY13, the annual report for which is not yet available to us. Whilst our analysison GCPLs historical capital allocation is unlikely to change after theintegration of the Darling Groups phase-2 acquisition, we expect furtherdeterioration of Maricos performance relative to its peers once the Paras

acquisition is factored into our analysis. The acquired portfolio of Paras willbring revenues of ~Rs1.5bn, and for this, the consideration paid by Maricowas Rs7.4bn. Consequently, even if the acquired entity generates PAT marginsof 10%, the corresponding annual return on capital deployed towards theacquisition is only ~2-3%.

Future growth prospects of businesses acquired in the past:Our analysisabove is based on historical data. With each of these three businessesplanning to become an emerging market MNC, there is a possibility ofderiving growth from the acquired entities which has not been part of thehistorical performance. However, whilst there have been examples ofsuccessful integration over the past five years, such as GCPLs Megasariacquisition in Indonesia and Daburs Middle East business, there have also

been examples of headwinds related to political/economic turmoil, businessdisruptions due to labour strikes/transporters strikes, and execution-relatedissues in a new geography.

Capital deployment strategy going forward

HUL, Colgate and Nestle: Based on their historical approach towards capitalallocation, we see limited risk of these companies deploying their surplus capitaltowards value-destructive non-core investments.

GSK Consumer: Over the past three years, the company has highlightedprospective M&A as a mode of surplus capital deployment. Moreover, over thepast four years, GSK Consumer has tried to leverage on the brand recall of

Horlicks and Boost to enter into new product categories including biscuits, cookies,and nutribars and has also tried to launch new brands/products including Foodles(noodles). Most of these initiatives are yet to gather momentum materially for GSKConsumer. At the same time, the company has seen a consistent moderation involume growth of its Milk Food Drinks categories over the past four quarters,which is on account of increased competition from Complan in non-southgeographies and high penetration of Horlicks in south India. Based on acombination of these factors/initiatives/comments made by the company, webelieve that: (a) GSK Consumer is NOT likely to repatriate/distribute a significantproportion of surplus capital; and (b) the risk of making a non-core acquisitionremains high in the future and until then surplus capital will remain a drag onreturn ratios.

Godrej Consumer: Our recent discussions with GCPLs management teamsuggest that the company is likely to focus on subsequent phases of integration ofthe Darling acquisition in Africa rather than seeking new M&A opportunities overthe next 12-18 months. The surplus cash generated from its existing businesses inthe near future is likely to be used for consolidation of Darling in Africa, debtrepayment, and growth of the acquired businesses.

Dabur: Based on our discussions with Daburs management team, although thecompany is holding a large amount of cash on the standalone balance sheet, thiswill not be used to repay debt on the subsidiary balance sheets. Instead, thecompany is looking at M&A opportunities within India for standalone surpluscapital deployment going forward. Until such M&A opportunity is explored, themanagement is comfortable with the treasury income being generated on thebalance sheet surplus capital. Consequently, we see Dabur also running the risk ofdiversifying into non-core areas - both domestic as well as international.

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Marico: Our discussion with Maricos management team suggests that theimmediate goal of the company is to bring its core operations in India to aconsistent double-digit YoY volume growth rate. Once this goal is achieved, thecompany intends to explore M&A opportunities in Indonesia and Africa, with theintention of evolving into an emerging market MNC firm. However, with anunattractive track record of capital deployment through M&A over the past fiveyears, we consider this strategy to be a key risk to shareholder returns.

Overall conclusion on capital deployment

We rate HUL, Nestle and Colgate Palmoliveas the best allocators of surpluscapital, with dividend payouts and capex related to core operations likely tocontinue forming over 80% of cash generated by these companies. GCPL andMarico, on the other hand, have underperformed vis--vis their peers on thismetric with their capital deployment initiatives NOT been value accretive forshareholders over the past five years. GSK Consumer and Dabur areintermediately placed.

Exhibit 27: Summary of ratings around capital deployment

CompanyHistorical capital

deployment

Deployment

strategy in future

Overall

rating

Comments

HULHigh dividend payout ratio historically (ten-year average of92%); high RoEs (103%); strategy unlikely to change goingforward

NestleHigh (ten-year average of 80%) dividend payout ratiohistorically; high RoEs (70%); strategy unlikely to change goingforward

ColgateAround Rs4.5bn cash on books; going by historical trends,surplus likely to be repatriated through special dividends

GSK ConsumerAverage ten-year dividend payout ratio of 46% in the past; noadditional capital deployment initiatives followed so far;management highlights M&A as a likely option in the future

DaburM&A has been value accretive in the past; acquisition of entitieslike Namaste have not been successful; management intends todeploy over Rs10bn of surplus towards M&A in India

Marico

M&A historically has NOT been value accretive; strategy going

forward focuses on acquisitions in Indonesia and Africa

GCPLM&A historically has NOT been value accretive forshareholders; strategy going forward includes integration ofDarlings businesses in Africa and debt repayment

Source: Company, Ambit Capital research; indicates superior positioning; indicates intermediate positioning; indicates inferior positioning

HUL, Nestle and ColgatePalmolive are the bestallocators of surplus capital

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II - Portfolio positioning across segments

We have categorised the growth drivers of each product segment intoPenetration, Premiumisation, and Frequencyof consumption, which is our PPFframework, which have been defined as follows:

Rate of increase in penetration:This relates to an increase in the number ofconsumers within the relevant population size for that product category.

Premiumisation: This relates to an up-trading of consumers towards morepremium products and hence leads to a growth in realisation rates per productfor the FMCG players.

Frequency of consumption: This relates to an increase in the frequency ofthe consumption of products within the penetrated population of consumers.

We have divided the FMCG universe into four broad categories: PackagedFoods, Personal Products, Beverages and Home care. These four categoriesare further divided into 25 product-based sub-categories. The framework thenanalyses, for each sub-category, the following:

Sustainability of the three PPF growth drivers;

Extent of and the change in competitive intensity for each of the productcategories based on both the aggression from existing players as well as fromthe aggressive entry of new players; and

Market share gainers and losers amongst key players prevalent in therespective product category.

The outcome of this portfolio analysis for each category as well as for eachcompany is used in our company specific forecasts highlighted later in this note.

Overall conclusion: Nestle has the best portfolio positioning

Whilst each of the seven companies mentioned in the table below are marketleaders in at least one of the product categories, we rate the companies on thebasis of overall diversification, macro growth in the categories of presence andability to win market share from competitors. On this basis, we find Nestle to bethe best placed whilst GSK Consumer is the worst placed vs peers.

Exhibit 28: Overall rating of companies on portfolio positioning

Diversificationof portfolio

Categorygrowth

Competitiondisplacement

ability

Overallportfolio

positioningComments

HULDiverse portfolio (presence in over 12 categories) + marketshare gains in soaps & shampoos; losses in oral, skin care.

NestlePresent in four categories, market leader in three;competitive intensity and focus on margins will restrict

share gains

ColgatePresent in only oral care; strong brand and dentist tie-ups.Competition from GSK and P&G.

MaricoOwn the strongest brands in the hair and edible oils;innovation and marketing to drive gains in hair oils

DaburDiversified portfolio; present in few growth categories likejuices; share gains restricted due to mass focus

GCPLHair colours, insecticides and soaps only; gains likely indomestic business; modest positioning in Africa and LatAm

GSKCHOver 90% = MFD portfolio; Will face challenges from morepremium positioned competitors

Source: Ambit Capital research; indicates superior positioning; indicates intermediate positioning; indicates inferior positioning

Nestle has the best portfoliopositioning across the sector

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Packaged foods: Penetration-led 15-20% CAGR; moderate butrising competitive intensity

Exhibit 29: Packaged foods market key players and growth drivers

Key players (mkt share) Key segment growth drivers CommentsProductcategory

MarketSize (Rsbn)(+) Rank 1 Rank 2 Rank 3

ExpectedsegmentFY13-15CAGR#

Freq. ofconsumption

Penetr-ation

Premium-isation

Biscuits 140Parle(34%)

Britannia(32%)

ITC(8%)

12%Fully penetrated (90%);Premiumisation - glucose tocreams/cookies

Chocolates 55Cadbury

(67%)Nestle(21%)

Ferrero(6%)

15%Increased frequency, penetrationincreasing in urban and rural(urban - 5% in 07 to 16% in 12)

Noodles(exclpastas)

20Nestle(75%)

ITC (10%)HUL(3%)

20%Penetration (19% urban, 3% rural),migration to healthier variants(premium of 20-50%)

Ice Cream 18Amul(41%)

HUL(18%)

Vadilal(18%)

15%Distribution growth - investment incold chains, shift from unbrandedto branded

BabyFoods

15Nestle(88%)

Farex(7%)

15-20%Penetration increasing in urbanpopulation

Premium

Edible Oils10

Marico

(58%)

Agro

Tech(42%)15%

Rising spends on health based

products, shift from base topremium edible oils

Sauces 8Nestle(29%)

HUL(25%)

GDFoods(15%)

26%Penetration (15% in urban;negligible in rural), shift fromunorganised to branded

Overall 266 15-20%

Source: Company, Ambit Capital research; Note: #Based on Ambits estimates; / / indicates strong/moderate/weak driver of growthrespectively

Exhibit 30: Packaged foods market competitive positioning of various players

Market share changesProductcategory

Competitive

intensityComments

Gainers LosersNo

ChangeComments

Biscuits Medium andflat

New players: Cadbury's;80bps increase in A:S forBRIT over FY09-12

Britannia,ITC

Parle

Britannia = wide portfolio, first mover in health

biscuits; ITC = advertising muscle, strong balancesheet; Parle = portfolio offers limitedpremiumisation

ChocolatesMedium andrising

New entrants: Ferrero andKraft

Cadburys,Ferrero

Nestle

Cadburys = wide portfolio, A&P up 300bps overfive years, strong brand recall; Ferrero = strongpremium offering; Nestle = focus on margins, priceincreases

Noodles(exclpastas)

Medium andrising

New entrants: GSKCH,Ching's; Increasedaggression from HUL

ITC NestleHUL,

GSKCHITC = marketing, distribution, differentiatedoffering; Nestle= low media spends

Ice CreamMedium andrising

HUL Vadilal AmulHUL = strong distribution, advertising, newlaunches; Amul = strong distribution, brand recall,leadership in economy segment

BabyFoods

Low and flatRestrictions around advertscurb competitive intensity

Nestle,Farex

Nestle = strong brand recall, good quality; highentry barriers for competition

Prem.Edible Oils

Medium andrising

New entrant: Adani Wilmar Marico AgroTechFoods

New entrants, disruptive adverts; Marico = strongerbrand recall for Saffola vs Sundrop, higher A&P

SaucesMedium andflat

Media spends and pricediscounting frequent

Nestle HULNestle = strong brand recall for Maggi, superiorproduct quality

OverallMedium &rising

Mainly aggression fromnew entrants

Source: Ambit Capital research, Company

Overall summary: The Packaged foods market in India is akin to an aspirationalconsumption segment with the following key characteristics:

Biscuits, the largest product category within packaged foods, has seensaturation in penetration rates, with penetration level of ~65% in 2007rising to ~90% in 2012. Consequently, as shown in the table below,premiumisation is the largest driver of growth for biscuits.

Packaged foods market inIndia is akin to an aspirationalconsumption segment

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Exhibit 31: Biscuits face premiumisation from glucose to cookies/creams (share ofcategory within biscuits in percentage)

Apr-Sep 2012 Apr-Sep 2011 Apr-Sep 2010 % Change (FY10-12)

Glucose 19.3 21.8 26.7 -28%

Sweet/cookies 26.2 26.9 23.8 10%

Cream 22.2 18.7 16.6 34%

Marie 10.7 10.9 11.1 -4%

Non-salt cracker 9.3 9.7 9.7 -4%

Salt cracker 6.0 6.2 6.5 -8%

Milk 4.3 4.1 4.1 5%

Arrowroot 0.8 0.6 0.6 33%

Wafer cream 0.9 0.8 0.5 80%

Other biscuits 0.1 - 0.1 0%

Assorted biscuits 0.2 0.2 0.2 0%

Cereal bars - - 0.1 -100%


Excluding biscuits, most other product categories are small in size, with strongrevenue growth rates (15-25% CAGR over FY13-15).

Excluding biscuits, revenue growth is predominantly led by increasedpenetration, with average current penetration levels of 15-20% for mostproduct categories.

Competitive intensity is medium and risingin most categories due to: (a)entry of new players like Cadburys in biscuits, Adani Wilmar in edible oils,Ferrero in chocolates and Chings in noodles; and (b) increased competitiveintensity through advertising spends by incumbents like Britannia (80bpsincrease in advertising spends to sales ratio over FY09-12) and Cadburys(250bps increase in A:S over FY05-11 see the table below).

Exhibit 32: Cadbury - financial summary (Rs mn)

CY05 CY06 CY07 CY08 CY09 CY10 CY11

Net Sales 8,798 10,582 12,935 15,886 19,344 25,032 33,595

YoY Sales Growth (%) NA 20.3% 22.2% 22.8% 21.8% 29.4% 34.2%

EBITDA Margin (%) 13.3% 14.0% 13.9% 15.3% 14.5% 12.5% 13.4%

PAT Margin (%) 5.2% 6.5% 9.1% 10.4% 9.8% 8.3% 8.8%

Adv/Net Sales (%) 10.9% 11.5% 12.2% 11.8% 12.3% 13.3% 13.4%

Source: Ambit Capital research

Packaged foods = Penetrationled 15-20% CAGR; medium butrising competitive intensity

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Beverages: ~15% revenue CAGR over FY13-15; high and risingcompetitive intensity

Exhibit 33: Beverages market key players and growth drivers

Key players (marketshares)

Key segment growth drivers Comments

Productcategory

MarketSize (Rsbn)(+) Rank 1 Rank 2 Rank 3

ExpectedsegmentFY13-15

CAGRFreq. of

consumptionPenetr-ation

Premium-isation

Milk/MilkProducts

250+ Amul Nestle NAShift to branded and value-added products; organisedpenetration only 15%

Tea79

TataTea

(22%)

HUL(22%)

WaghBakri(8%)

10%Slow rate of premiumisation; shiftfrom loose to packaged tea;

volume growth of 1-3%

Milk FoodDrinks

40GSKCH

(63%)Heinz(20%)

Cadbury (13%)

15%Penetration especially in ruralareas; premiumisation to value-added variants

Coffee25

HUL(50%)*

Nestle(49%)

10-12%Shift from loose to branded;premiumisation to 100% coffee;changing tastes

Fruit Juices15

Dabur(52%)

PepsiCo(38%)

15-20%Penetration; increasingconsumption with meals, shiftfrom nectar to 100% juice

Overall 409 15%

Source: Ambit Capital research; / / indicates strong/moderate/weak driver of growth respectively

Exhibit 34: Beverages market competitive positioning of various players


Competitiveintensity

CommentsGainers Losers

NoChange

Comments

Milk/MilkProducts

Low andrising

Private Equity backednew entrants Nestle Amul

Nestle = Aggressive marketing; brandstrength and premium positioning

TeaMedium andflat Tata Tea

WaghBakri HUL

Playing out of benefits from Tata Global's'Jaago re' marketing campaign

Milk Food

Drinks High and flat

MNC fight for marketshare to keep A&P

elevated Heinz GSKCH Cadbury

Heinz to benefit from presence in lower-penetrated north and west markets and

premium positioning

CoffeeMedium andrising

Nestles increasedaggression recently Nestle HUL

Nestle to gain from stronger brandespecially in the 100% coffee segment

FruitJuices

Medium andrising

High growth categoryattracting new entrants

Newentrants Pepsico Dabur

Dabur to gain from strong brand andfrequent innovation; new entrants includeDel monte, Parle, Godrej , Cavin care, KDD

OverallMedium andrising

Select high-growth segments facing aggression fromMNCs


Overall summary: The market for beverages in India can be divided into twosegments: (a) tea and coffee; and (b) milk, milk food drinks and fruit juices. Thecharacteristics of these two segments are exactly opposite to each other.

Whilst tea and coffee are highly-penetrated slow-growing categories

(~10% CAGR over FY13-15) driven predominantly by premiumisation, otherbeverage categories have low penetration rates with relatively higherrevenue growth of over 15% YoY.

Competitive intensity is either high or rising across all beveragescategories. This includes a strong distribution and advertising push from Heinz(27% sales CAGR and 30% EPS CAGR over CY06-11) for Complan in northand west India, and a large number of new entrants in packaged milk andmilk products (Danone) and fruit juices (Parle, Coca Cola and KDD).

Beverages = ~15% revenueCAGR over FY13-15; high and

rising competitive intensity

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Personal products: Saturating penetration; premiumisation-ledgrowth; high and rising competitive intensity

Exhibit 35: Personal products market key players and growth drivers


Key segment growth driversComments

Productcategory

MktSize

(Rs bn) Rank 1Rank

2Rank

3


CAGRFreq. of


Premium-isation

Soaps100 HUL

(45%)GCPL(12%)

ReckittBenck.

(9%)8-10% Premiumisation only driver;

fully penetrated segment

Toothpaste

52Colgate

(53%)HUL

(29%)Dabur(12%)

12-13%Overall penetration 83%;conversion from toothpowder totoothpaste; premiumisation

Toothbrushes

14Colgate

(39%)Oral B(20%)

15%

Conversion from toothpowderto toothpaste; premiumisation;lower replacement cycles oftoothbrushes

Toothpowder

6Colgate

(42%)Dabur(32%)

-5%Declining market due to theshift to toothpaste

Shampoos40

HUL(43%)

P&G(29%)

CavinCare(9%)

16%Penetration (urban 57%, rural37%) and frequency drivers;strong premiumisation trends

Skincreams

40 HUL(58%)

L'Oreal(13%)

P&G(10%)

15%

Premiumisation led; Penetration

up substantially over five years(fairness creams fullypenetrated)

Hair Oils40

Marico(43%)

Dabur(14%)

Bajaj(12%)

10-15%Shift to value-added hair oils;75-80% current penetration;

Cosmetics11

HUL(29%)

L'Oreal(13%)

Revlon(18%)

20%Low penetration;premiumisation; entry ofseveral new global players

Deodorants

6HUL

(42%)

McNROE

(16%)

Marico

(15%)25-30%

Currently low penetration; shiftfrom grey market to organised;increasing frequency

Overall 305 15%


Exhibit 36: Personal products market competitive positioning of various players


Competitiveintensity

CommentsGainers Losers

NoChange

Comments

SoapsHigh andrising

Low commodity pricesproviding additionalsurplus for A&P

HUL,GCPL,Reckitt

Wipro, ITC

HUL = strong portfolio, weak premiumportfolio from competitors; GCPL =gains from the rejuvenated Cintholportfolio

Tooth pasteHigh andflat

MNCs control 80% share,fighting for share

GSKHUL,Dabur

ColgateColgate = better association withdentists; HUL = weaker productportfolio

Toothbrushes

Mediumand rising

Commoditised, fight forportfolio premiumisation

Colgate,P&G

Localorganised

HULColgate: Launch of new variants,brand, wider range, strong distribution

Toothpowder

Low anddeclining

Declining segment, lowerfocus

Regionalplayers

Colgate DaburColgate: reducing focus on category

ShampoosHigh andrising

MNC fight for share in thepremium space

HUL,LOreal

P&G,Cavin-Care,Dabur

HUL: strong portfolio across segmentsand innovation; L'Oreal: high spenders(A:S 35%); Dabur: lacks premiumportfolio

Skincreams andlotions

High andrising

Besides premium, slowingmass-end segment

witnessing pushLOreal HUL

LOreal: significantly aggressive andstrong innovation; HUL: overhang fromFair & Lovely

Hair OilsHigh andrising

Strong competition ininflexion point- valueadded segment

MaricoDabur,Bajaj

EmamiMarico: strong brand, value-addedportfolio; Dabur: slowest growingcategory (amla);

CosmeticsHigh andrising

New entrants in MNC-dominated category

LOreal RevlonOriflame,HUL

Aggressive investments from LOreal;weaker innovation and marketing fromRevlon

DeodorantsMediumand rising

New entrants in fast-growing category

Newentrants

HUL MaricoNew entrants - backed by heavymarketing spends; eats into HULsshare

OverallHigh andrising

Innovation and fight forpremium portfolio


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The Personal products market has rapidly progressed towards highpenetrationover the past five years, with categories such as soaps, oral care,skin care and hair care having over 83% penetration currently.

Premiumisation is the biggest driver of growth in personal productcategories.

Competitive intensity has remained exceptionally highand continues to

rise further with: (a) entry of new players like Sensodyne in oral care, andothers like Marico, Bodyshop and several international brands; and (b)significant investments behind advertising and new product launches byplayers such as P&G and LOreal, as highlighted below.

Aggression from P&G: P&G Home Products (with a presence in detergents,shampoos, skincare and diapers) has seen its A&P spends increase at a CAGR of52% from 12.3% of sales in FY06 to 28.9% of sales in FY11. The parent companyrecently infused more equity (Rs15.4bn) into the company, adding to its advertisingfirepower. We expect the increasing competitive intensity to have the largestimpact on HUL (whose A&P has increased from 8.8% of sales in CY05 to 14% inFY11). P&G Home Products has reported revenue CAGR of 28% over FY06-11.

Exhibit 37: P&G Home Products - financial summary (Rs mn)FY07 FY08 FY09 FY10 FY11 FY12

Net Sales 9,937 13,037 16,991 21,042 28,329 39,304

Sales growth (%) 22.4% 31.2% 30.3% 23.8% 34.6% 38.7%

EBITDA Margin 9.9% 10.5% 1.5% 14.5% -9.2% -6.2%

PAT Margin 4.6% 6.0% -0.9% 9.1% -11.8% -9.0%

Adv/Net Sales 12.0% 13.5% 21.7% 21.3% 28.9% 16.5%

Source: Company

Increased aggression from LOreal (Not listed): LOreal has seen 26%revenue CAGR over CY06-11 and 31% CAGR over CY08-11, with advertisingspends as a percentage of sales of around 35% (compared with 12-18% for mostFMCG companies). With new launches at aggressive price points (especiallyshampoos), we do not expect any reduction in advertising spends and expectcompetitive intensity to remain high in the segment, putting pressure on marketleaders like HUL. LOreal maintains EBITDA margins of around 6%. We expectLOreals strong brands and aggressive marketing to help it gain share in thecosmetics, haircare and skincare space.

Exhibit 38: LOreal - financial summary (Rs mn)

CY06 CY07 CY08 CY09 CY10 CY11

Gross Sales 4,590 6,190 6,383 9,112 12,033 14,396

Sales growth (%) NA 34.9% 3.1% 42.8% 32.1% 19.6%

EBITDA Margin 7.7% 8.8% -0.5% 5.5% 5.9% 6.4%PAT Margin 4.9% 4.8% -5.6% 1.9% 3.6% 4.1%

Source: Company

Personal products = Saturated

penetration; premiumisation-led growth; high and risingcompetitive intensity

LOreal and P&G have beensubstantially aggressive morerecently

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Home care: 10-12% revenue CAGR; moderate but rising competitiveintensity

Exhibit 39: Home care market key players and growth drivers


Key segment growth drivers CommentsProductcategory

MarketSize (Rsbn)(+)

Rank1

Rank 2 Rank 3


CAGRFreq. of


Premium-isation

Detergents 130 HUL(38%)

Ghari(17%)

P&G(15%)

10%Fully penetrated segment;growth driven bypremiumisation

Insecticides 30GCPL(42%)

ReckittBenckiser

(17%)

SCJohnson

(17%)12-14%

Penetration (60% urban, 18%rural); rising incomes and focuson sanitation driving frequency

DishwashingProducts

10HUL

(60%)Jyothy(20%)

20%Penetration and shift toorganised segment

SurfaceCleaners

3Reckitt(74%)

HUL(13%)

30%Penetration and shift toorganised segment

Overall 173 12%


Exhibit 40: Home care products market competitive positioning of various players

Market share changes

Productcategory Competitiveintensity Comments Gainers Losers No Change Comments

Detergents Medium and risingOnly premium segmentgrowing; MNC marketshare fight

GhariP&G,Nirma

HULGhari: distribution expansion led gains;HUL: gains in premium to make uplosses in the mass segment

Insecticides Medium and risingIncreasing aggressionfrom GCPL

GCPLReckitt, SCJohnson

GCPL: frequent innovation, distributionexpansion, marketing investments

DishwashingProducts

Medium and rising HUL JyothyHUL: gain backed by strong brand andmarketing

SurfaceCleaners

Low and rising Reckitt, HUL No material changes expected

Overall Medium and rising


Detergents form the bulk of the homecare market, with high penetration,weak volume growth and increasing competition for especially from playerssuch as Rohit Surfactants (Ghadi) at the mass end and HUL at the premiumend (highlighted below).

Insecticides is the other decently sized, underpenetrated and fast-growthcategory in this market dominated by GCPL.

Ghadis aggression likely to accelerate further: Rohit Surfactants Ghadidetergent recently displaced HULs Wheel to become the largest detergent brandin India. The company targets only the mass end of the market, and recordedrevenue CAGR of 21% over FY07-11 and has maintained an average EBITDAmargin of 11% over the same period (broadly in line with HULs soaps anddetergent margins). We expect Ghadi to continue its competitive intensity at the

mass-end and gain further share as it expands its distribution across India.Exhibit 41: Rohit Surfactants - financial summary (Rs mn)

RohitSurfactants

FY07 FY08 FY09 FY10 FY11 FY12

Net Sales 9,169 10,846 14,158 18,003 19,366 25,588

Sales Growth (%) NA 18.3% 30.5% 27.2% 7.6% 32.1%

EBITDA Margin 6.5% 9.3% 16.4% 15.6% 9.3% 10.2%

PAT Margin 3.1% 4.5% 9.4% 9.9% 5.4% 6.7%

Adv/Net Sales 4.1% 4.4% 4.9% 4.7% 4.7% 3.4%

Source: Company

Reckitt looking for new growth avenues: With more than 50% of revenuescoming from the highly penetrated soaps business, Reckitt has still managed torecord revenue CAGR of 20% over CY06-11. With healthy EBITDA and PAT

Competitive intensity fromGhadi and Reckitt is likely toaccelerate further goingforward

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margins (averaging at least 200bps above industry average), the company stillmaintains aggression, with advertising spends averaging 15% of sales over CY06-11. Its recent acquisition of Paras Pharmaceuticals is indicative of the companysaggression. We expect Reckitt to gain share in the soaps space, as it benefits fromfaster than market growth in the germicidal category. However, we expect it tolose share to GCPL in the insecticides space, as GCPL will benefit from itsdistribution expansion and aggressive promotions.

Exhibit 42: Reckitt Benckiser - financial summary (Rs mn)

Reckitt Benckiser CY06 CY07 CY08 CY09 CY10 FY12

Net Sales 11,019 13,131 15,296 17,901 21,658 27,947

Sales Growth (%) NA 19.2% 16.5% 17.0% 21.0% 29.0%

EBITDA Margin 18.6% 22.5% 21.8% 19.9% 20.6% 20.5%

PAT Margin 14.2% 19.2% 18.3% 16.3% 15.6% 15.4%

Adv/Net Sales 16.7% 15.8% 15.6% 16.6% 14.1% 10.9%

Source: Ambit Capital research. Note: FY12 figures are adjusted for a 12M year ending

III - Recent raw material trendsCY13 YTD has seen the following key input cost trends:

Significant increasein input costs for tea, milk food drinks (wheat) and HDPE(key ingredient used for packaging of most products) over the previous year;and

Significant declinein input costs for soaps (palm oil), rice bran oil and coffeeover the previous year.

However, the prices of tea, safflower oil and Palm Fatty Acid Distillate (PFAD) havedeclined by over 10% decline.

Manufacturing for most product segments (excluding tea, coffee, coconut hair oilsand soaps) includes an average holding period of 30-40 days. Therefore, near-term gross margins for most FMCG categories will be driven by input cost trendsover the past two months. Given that the raw material holding period for tea,coconut oils and soaps, on average, is 2-3 months, we expect soaps and coffee toreport a continued gain in gross margins in early FY14 due to weak raw materialcosts (palm oil and coffee respectively) in 4QFY13. We see no major commodityprice increases in 4QFY13.

The historical price trends of key raw materials used in manufacturing FMCGproducts by listed companies are highlighted on pages 28-30. Based on thecontribution of each of these raw material inputs towards CoGS for variouscompanies, the key trends affecting the FMCG companies are:

Gross margin benefit over in FY13: As highlighted in the exhibit below,gross margins for most companies in the sector have increased by a median of160bps YoY in FY13. This gross margin gain has been predominantly led byraw material cost declines for these companies.

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Exhibit 43: Gross margin expansion YoY recorded inFY13 (bps)

430

240

170 160

80 80

-50

-100

0

100

200

300

400

500

Marico

Nestle

Dabur

GCPL

HUL

GSK

Consumer

Colgate


Exhibit 44: Increase in advertisement to sales ratio inFY13 (bps)

180

145

120

95

60

20

0

40

80

120

160

200

Marico

Colgate

Dabur

GCPL

HUL

GSK

Consumer


A&P spends over the FY13: As highlighted in the exhibit above, theexpansion in gross margins in FY13 so far has been ploughed back intoadvertising and promotions for most of the FMCG companies, therebysupporting category volume growth (through promotions) and market sharegains (through investments in advertising).

Conclusions

Based on these observations, we expect the following sector-wide and stockspecific implications:

Impact on the sector: Whilst most players have seen the benefit of low inputcosts over the past three quarters, the pace of gross margin expansion is likelyto recede in the near term, as (1) some commodities (especially copra, tea,wheat and packaging materials) have displayed inflationary trends in 4QFY13;and (2) FY13 forms a high base for gross margins for the sector.

Impact on Marico:Whist Marico benefitted from lower copra prices throughFY13, the past two quarters have seen a strong escalation in prices of copra(14% from October 2012 to March 2013), the key raw material for its coconutoil portfolio. With favourable copra prices seen throughout FY13, it will bedifficult for Marico to sustain the pace of margin expansion in FY14, assumingno changes to commodity prices from current levels.

Impact on HUL and GCPL:A high inventory situation in Malaysia and strongsoybean crop in the West has led to palm oil prices correcting by 20% fromSeptember 2012 to April 2013 (30% over the past one year). This is a key rawmaterial for soaps, and the price correction is likely to positively impact HULand GCPL, both of which derive ~20% of their consolidated revenues fromtheir soaps business.

Impact on GSK Consumer:Given the price increase of ~25% YoY in wheatin 4QFY13, we expect GSK Consumers gross margin to contract as it entersFY14.

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Exhibit 45: Impact of recent raw material price trends on various players in the industry

Source: Ambit Capital research; indicates superior positioning; indicates intermediate positioning; indicates inferior positioning

HUL Nestle Dabur Marico GCPLGSKCons

ColgateRecentpricetrends

Recent raw material movements

Copra

Whilst copra prices sharply trendeddownwards until Oct12, they saw a 25%increase over Oct12-Jan13. However, copra

prices have eased 7% over February-April2013.

Sugar

Whilst sugar prices have shown signs ofmoderation over the past quarter, they stillremain higher by 10% YoY. Reduction in sugarprices augurs well for GSK and Nestle.

Milk

Milk prices have remained relatively stable ona QoQ basis, helping GSK and Nestle containcost inflation.

Tea

HUL and Tata Global will see impact of teaprices inching up from 2HFY13 onwards dueto production shortages (note that prices arecurrently 25% higher YoY)

Coffee

With coffee prices having eased by around

30% YoY until April 2013, Nestle and HUL willbe key beneficiaries.

Wheat

GSK will be the most impacted by the 20-30%YoY increase in wheat prices, whilst HUL andNestle will also see a small impact.

LAB (LinearAlkyl Benzene)

LAB prices have remained fairly stable withprices increasing by about 6% YoY in April.

Polyethylene(PE)

With a 10-15% YoY increase in 4QFY13, PEprices have led to packaging cost pressuresbut prices have moderated slightly in 1QFY14.

Safflower Oil

The sharp rise of around 50% in safflower oilprices in FY13 will negatively impact Marico.However, there has been a sharp correction inSafflower prices in March.

Rice Bran Oil

Prices of Rice bran oil, an input for the Saffolaportfolio, has been on declining trend overFeb-April 2013, a 13% decline from January2013 prices (April 2013 prices are down 21%

YoY).

Liquid ParaffinLiquid paraffin prices have been fairly stablethis year and they are down 10% YoY.

HDPE

Prices of a key component of plasticpackaging, HDPE, have risen around 14% YoYover the previous quarter.

CalciumCarbonate

Prices of a key raw material for toothpastes,Calcium Carbonate, have been flat YoY.

Palm Oil

Both palm oil and PFAD prices have seen adecline of 30-40% YoY, which will benefit allsoap manufacturers.

Caustic Soda &Soda Ash

Caustic soda prices have risen around 10-15%YoY, with prices strengthening fromSeptember onwards.

Barley

Whilst October-January saw sharp increases inBarley prices (30% YoY), February-April sawsharp cooling in prices (down 13% YoY in

April).

Net RM impact

Contributes more than 20% of Raw materials

Contributes up to 20% of Raw materials

Contributes up to 10% of Raw materials

Contributes 0% of Raw materials

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Exhibit 46: Copra (Rs/100Kg)

2,0003,000

4,000

5,000

6,000

7,000

8,000

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: Marico, Ambit Capital research

Exhibit 47: Sugar M-grade (Rs/tn)

2,0002,500

3,000

3,500

4,000

4,500

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: NCDEX, Ambit Capital research

Exhibit 48: Milk WPI (Indexed)

120

140

160

180

200

220

Apr-09

Sep-0

9

Mar-10

Aug-1

0

Jan-1

1

Jul-11

Dec-11

Jun-1

2

Nov-1

2

Apr-13

Source: Bloomberg, Ambit Capital research

Exhibit 49: Tea (Rs/Kg)

60708090

100

110120130140

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: Tea Board, Ambit Capital research

Exhibit 50: Coffee (US$/lb)

100

150

200

250

300

Jan/10

Jun/10

Dec/10

Jun/11

Nov/11

May/12

Oct/12

Apr/13


Exhibit 51: Wheat New Delhi(Rs/quintal)

1,000

1,100

1,2001,300

1,400

1,500

1,600

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: NCDEX, Ambit Capital research

Exhibit 52: Coconut oil (Rs/100Kg)

3,0004,0005,0006,0007,0008,000

9,00010,00011,000

May/09

Oct/09

Mar/10

Aug/10

Feb/11

Jul/11

Dec/11

May/12

Oct/12

Apr/13


Exhibit 53: LAB (Rs/Kg)

60708090

100110

120130

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: Reliance Industries, Ambit Capitalresearch

Exhibit 54: Polyethylene (Rs/Kg)

6065707580859095

100

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: Reliance Industries, Ambit Capitalresearch

Exhibit 55: Sunflower oil (Rs/10Kg)

300

400

500

600

700

800900

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 56: Kardi oil (Rs/10Kg)

400600800

1,0001,2001,4001,6001,800

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 57: Rice bran oil (Rs/10Kg)

200

300

400

500

600700

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


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Exhibit 58: Liquid paraffin (Rs/lt)

20

30

40

50

60

70

80

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 59: HDPE* (Rs/Kg)

606570

7580859095

100

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13

Source: Marico, Ambit Capital research. *stands for High density polyethylene

Exhibit 60: Calcium Carbonate(Indexed)

115

120

125

130

135

140

145

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 61: India RBD Palmolein(Rs/tonne)

600700800900

1,0001,1001,200

1,3001,400

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 62: Caustic Soda/ Soda Ash(Indexed)

100

120

140

160

180

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 63: Palm Fatty AcidDistillate (Rs/tonne)

400500600700800900

1,0001,100

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


Exhibit 64: Barley India UP(Rs/quintal)

700800900

1,0001,1001,2001,3001,4001,500

Apr/09

Sep/09

Mar/10

Aug/10

Jan/11

Jul/11

Dec/11

Jun/12

Nov/12

Apr/13


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Valuations set to declineWe adopt a DCF-based approach to value the FMCG sector because itappropriately captures: (a) the varied capital reinvestment/allocation strategieslikely to be adopted in the future; (b) earnings growth moderation attached torising competitive intensity and penetration saturation; and (c) the relative

defensive/ predictable nature of the respective businesses. Thus, we initiatecoverage on the sector with a SELL stance on the seven stocks, as shown in thetables below.

On one-year forward P/E multiples, the sector has rerated by over 70% sinceFY08. Whilst two-thirds of this re-rating is backed by an improved fundamentalperformance of the respective stocks, the balance we believe is not justified giventhe moderation in volume growth related to an increase in competitive intensityand saturating penetration in several large product categories over the past fiveyears.

Also, a comparison with other listed emerging market plays in countries, such asIndonesia, Brazil and China, suggests that the Indian FMCG sector currently trades

at a 40% premium to these international peers despite having generated 300bpslower revenue CAGR and 500bps lower EPS CAGR over FY08-13 with 100bpslower revenue and 500bps lower EPS forecasts over the next 24 months.

Finally, we briefly compare the valuation gap between large-cap discretionaryconsumer stocks and the seven FMCG stocks covered in this report. We concludethat the seven FMCG stocks compare unfavourably against major FMCGcompanies such as ITC as well as discretionary names such as Asian Paints, BergerPaints, Titan and TTK Prestige

Our DCF-based valuation suggests ~15% derating of valuations

Exhibit 65: Summary valuation table

CompanyComptt

MappingRating

CMP(Rs)

Mcap(US$ mn)

TargetPrice (Rs)

Upside/Downside

P/E(FY14E)

P/E(FY15E)

ImpliedP/E (FY14)

EPS CAGR(FY08-13)

EPS CAGR(FY13-15)

ROE(FY13)

GSK CH SELL 5,515 4.1 3,945 -29% 45.5 38.0 32.5 22% 18% 35%

Nestle SELL 5,306 9.1 4,389 -17% 43.0 36.7 35.6 21% 14% 70%

C

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