b2c distributors survey

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 not consider this report as the only factor in making their investment decision.

Waiting for the festive season

Overall consumer purchase behaviour in 1QFY16 was just as weak as in 4QFY15, with no incremental moderation in demand. Channel partners in most categories expect the festive season to be the only positive catalyst, especially for urban demand. We expect an average volume growth of 6.5% for the FMCG sector in 1QFY16 (vs 4.5%/5.6% in 4QFY15/1QFY15), due to the low base effect. Demand for paints and jewellery has remained exceptionally weak. The benefits of softening input costs continue to be passed on to customers through price cuts and/or incremental promotions in paints and FMCG. Company-specific factors are likely to drive a revival in revenue growth for TTK Prestige and Bata in 1QFY16. We highlight ITC, Page, Bata and TTK Prestige as our key BUY recommendations.

Summary of our findings from the Distributors Survey

Category Volume Growth

Price Growth

Promotional Intensity

Most at Risk

Most Secure

FMCG & staples Increased Nestle, ITC Britannia, Marico

Paints Increased Akzo, Kansai Berger, Asian

Kitchenware Flat Hawkins, Butterfly TTK Prestige

Footwear retailers Flat Unorg/Regional Bata, Relaxo

Jewellery Increased All jewellery players

Light electricals Increased Bajaj, Havells V-Guard, Crompton

Source: Ambit Capital research; Note: ‘’ indicates acceleration of YoY growth vs 4QFY15; ‘’ indicates unchanged YoY growth rates vs 4QFY15; and ‘ ‘ indicates deceleration in YoY growth vs 4QFY15.

Market share shifts: Key market share changes in FMCG in 1QFY16: (a) Dabur and GSK Consumer gained share from Colgate and HUL in modern trade; (b) ITC gained share from Nestle in noodles; and (c) HUL gained share in soaps and detergents. Berger and Asian Paints have both gained share from Akzo and Kansai. TTK Prestige has gained share particularly in north India. Regional players such as V-Guard (water heater, fans and wires) and Finolex Cables (cables and wires) have gained market share in non-south markets.

Key recommendations: 1QFY16 is likely to act as a negative catalyst for firms like HUL and for paint stocks where consensus earnings estimates overestimate the input cost benefits. We highlight Page, Bata and TTK Prestige as our key BUY recommendations, with 1QFY16 likely to be a positive catalyst for these firms. ITC is our other BUY, albeit 1QFY16 is NOT likely to be a positive catalyst.

Summary of our volume and value growth expectations for 1QFY16

Ticker 1Q volume 1Q value 1Q =

Ticker 1Q volume 1Q value 1Q =

growth growth Catalyst? growth growth Catalyst? GSKCH 5% 12% Neutral APNT 4% 8% Negative NEST -12% -2% Negative BRGR 4% 8% Negative CLGT 6% 11% Neutral BATA 4% 8% Positive HUVR 6% 9% Neutral JUBI 5% 27% Neutral DABUR 8% 10% Neutral BJE -5% 95% Negative MRCO 6% 15% Positive PAG 24% 32% Positive GCPL 8% 13% Neutral PIDI 7% 11% Negative BRIT NA 12% Positive HAVL 0% 5% Negative ITC -13% 6% Negative VGUARD 5% 7% Positive TTKPT 6% 10% Positive

Source: Ambit Capital research; Note: Volume growth is YoY and pertains to the domestic business based on our channel checks; Value growth pertains to revenue growth based on Ambit estimates

B2C DISTRIBUTORS SURVEY QUARTERLY July 06, 2015

ConsumerNEGATIVE

Analyst Details

Consumer Rakshit Ranjan, CFA +91 22 3043 3021 [email protected] Ritesh Vaidya, CFA +91 22 3043 3246 [email protected] Aditya Bagul +91 22 3043 3264 [email protected]

Light Electricals Bhargav Buddhadev +91 22 30433252 [email protected] Deepesh Agarwal +91 22 30433275 [email protected]

Jewellery Abhishek Ranganathan, CFA +91 22 3043 3085 [email protected]

B2C Distributors Survey

July 06, 2015 Ambit Capital Pvt. Ltd.

Survey summary During the second half of June 2015, we conducted a survey of more than 100 large distributors and unlisted companies spread across India and across most of the key consumption segments. This survey focuses on identifying the YoY growth trends in consumer demand over Apr-Jun 2015 across categories as well as individual brands. The picture that has emerged from our survey shows:

1 Consumer demand has remained as lacklustre as it was in 4QFY15: Demand remains weak due to: (a) poor wealth effect from softening in prices of land/real estate/gold; (b) weak disposable household income levels, given the long period of sustained high inflation and high borrowing interest rates; and (c) no major pick-up in the investment cycle and hence no improvement in either wage rates or new job creation.

2 Silver lining: Unlike the trend in 3QFY15 and 4QFY15, YoY revenue growth rates did not moderate incrementally for any of the sectors during 1QFY16. Moreover, due to a weak base effect, the quarter has seen a slight optical revival in demand growth in the FMCG sector.

3 Competitive intensity remains high, forcing companies to pass on input cost deflationary benefits to the trade channel and consumers amidst high price elasticity of demand: Key examples of this trend include soaps, detergents and paints, which have all resorted to 2-8% price cuts/incremental promotions over the past six months to avoid market share loss to peers.

Expectations of demand revival in 2HFY16: Most channel partners across categories expect 2HFY16 to act as a positive catalyst for a revival in urban consumer demand. This is due to a combination of the following factors:

Hope of kick-start of execution plans (at a corporate level) of public sector infrastructure projects towards which there is a perception that Government has increased expenditure over the past 3-4 months: This should create improved prospects for job creation, business growth, asset value creation and hence expectations of rise in disposable household income levels for urban households.

Festive season of 2015: Channel partners in event-oriented segments of consumption, like paints, kitchenware, and jewellery expect the festive season (more so due to a delayed Diwali and hence longer festive period) to be a positive catalyst for urban demand for these categories.

Rural sector, however, is NOT likely to see a revival in consumption demand before the end of FY16 due to a combination of the following factors:

Construction sector job creation following the expected execution of public sector infrastructure projects will lag by at least six months after the initiation of plans for such execution by the corporate offices of the respective companies.

Asset value creation in smaller cities and rural India will take place only once the connectivity of smaller cities increases following the execution of infrastructure projects.

Benefits of a normal/good monsoon (if it is the case) are likely to be reaped after the harvest season for crops and hence towards the end of 3QFY16 and 4QFY16.

Summary of our sector-specific channel checks FMCG/Staples: Only a slight optical revival expected in 1Q due to weak base effect

Consumer demand for 1QFY16 remained as weak as it was in 4QFY15, with no incremental moderation in the overall pace of QoQ demand growth. Companies have tried to counter the slowing premiumisation trends by offering smaller packs



of premium brands. HUL has been aggressive with both consumer and trade promotions particularly in the soaps and detergents category. Marico is expected to benefit from ‘Project One’ (increasing urban direct reach) and ‘Prime 2’ (distributor order automation) undertaken in urban areas. The cigarettes category continued to be weak, with volumes declining >15% YoY. However, whilst the demand scenario remains weak, we expect an optical increase in the YoY volume growth due to a weak base. As a result, for 1QFY16, we expect average volume growth of 6.5% YoY vs. 4.5%/5.6% for 4QFY15/1QFY15 across our coverage universe. We reiterate that the pace of increase in consumer demand will be gradual and is likely to happen, at the earliest, from 2HFY16 onwards.

Paints: Weakness of 2HFY15 continued into 1QFY16

Our channel checks suggest continued moderation in paints demand during 1QFY16, with volume growth in decorative paints remaining at 3-4% YoY primarily due to weakness in repainting demand from individual home owners. Working capital cycles remain stretched, with higher receivables in the channel from institutional buyers (builders) and higher inventory days of 35-40 days currently vs less than 25 days until September 2014. Berger Paints has increased its distribution efforts and has gained market share in the decorative paints segment during the quarter, whilst Asian Paints has retained its market share. Due to the weakness in consumer sentiment, Asian Paints has matched Berger in terms of dealer margins (passing on the benefits of soft input costs to the trade and consumers). We expect revenue growth of 7-8% YoY for both Asian Paints and Berger Paints in 1QFY16.

Kitchenware: No revival in footfalls; TTK likely to report ~10% revenue growth due to company-specific factors

Continued weakness in consumer sentiment has resulted in no improvement in overall secondary sales growth for the kitchenware segment. However, footfalls at brick-and-mortar stores have revived marginally due to lower price disruption in the e-commerce channel during 1QFY16. We expect revenue growth of 11% for TTK Prestige in 1HFY16 amidst a weak macro. Moreover, with a slew of new product launches in FY16 and expectation of macro demand revival during the festive season, we expect revenue growth for TTK to rise from 10-12% in 1HFY16 to 18-20% in 2HFY16. TTK’s Prestige Smart Kitchens are likely to report SSG of more than 20% YoY in 1QFY16. This channel for TTK benefited from print media adverts focused on promoting the local PSKs, and rise in growth of high value products like hob-tops and hard anodized cookers/cookware.

Footwear: Online disruption moderates; Bata resolved supply chain issues

SSG for footwear retailing companies was flat YoY in 2HFY15 due to disruptive discounting by e-commerce aggregators and, in the case of Bata, company-specific issues affecting the supply chain. Our channel checks suggest that the SSG has revived to 5-8% both for sportswear retailers as well as for Bata in 1QFY16 amidst a weak macro environment. This is mainly due to tie-ups between larger footwear retail brands like Nike/Bata and the e-commerce aggregators to restrict discounts on new launches and fast-moving SKUs. As Bata’s supply chain issues have been resolved, we expect revenue growth of 8% YoY in 1QFY16 and 14% YoY in FY16. Bata’s stock price has declined by more than 30% over the past 4-5 months, and its current valuation of 35x/25x FY16/FY17E EPS does not factor in its strong franchise and near-term operating leverage benefits.

Jewellery: 1Q marred by discontinuation of gold deposits

Our discussions with various jewellery stores (including those of Titan’s Tanishq) indicate: (1) weak demand, (2) sharp fall in footfalls and revenue (due to discontinuation of the monthly gold deposit scheme), and (3) significant reduction in cash transactions (due to curbs on black money). Out of these, the impact of the discontinuation of the gold deposit scheme would be the highest, as the scheme accounted for nearly 25% of Titan’s 1QFY15 jewellery revenues. Consequently, our channel checks indicated that the absence of the scheme, combined with poor



consumer sentiment and reduction in cash transactions, would lead to negative Like-to-Like (LTL) growth of 20-25% for Titan’s jewellery business. Light Electricals: Marginal sequential increase in demand

Our discussions with pan-India channel partners in the light electricals space suggest that demand has increased sequentially and the YoY growth for the light electrical companies is likely to be in single digits, given the high base impact (Havells’ and V-Guard’s revenue grew by 21% YoY and 17% YoY in 1QFY15). Within product categories, consumer-led products such as consumer appliances and water heaters are expected to grow at a higher pace of 7-8% YoY vs 4-5% YoY for cyclical products such as electrical cables and wires, switchgears and lightings. Volume growth for seasonal products such as fans and stabilisers has moderated to 6-7% in 1QFY16 vs 12% in FY15 due to weak summer and early arrival of monsoon. However, market share gain in the non-south market has meant that V-Guard continues to report volume growth of ~10% YoY in stabilisers. We reiterate our BUY stance on V-Guard and Finolex Cables, as these regional franchises are gaining market share in the non-south markets and are fast emerging as pan-India players.

Summary of our volume and value growth expectations for 1QFY16 Exhibit 1:

Company 1QFY16E Volume Growth

4QFY15 Volume Growth

1QFY16E Value

Growth

4QFY15 Value

Growth

Will 1QFY16 results be a

catalyst?

P/E FY17

(x) Comments regarding catalysts

GSK Consumer 5% 1% 12% 9% Neutral 34.4 We expect volume growth to increase to ~5% due to a weak base. Consumer demand in this category continues to be weak with no incremental improvement vs 4QFY15.

Nestle -12% 0% -2% 8% Negative 40.3 Following the Maggi noodles fiasco, we are factoring in around 1.5 months of lost sales, resulting in a volume decline of ~12% YoY.

Colgate 6% 5% 11% 11% Neutral 35.8 Our channel checks suggest only a slight improvement in consumer demand vs the last quarter; however, Colgate has lost some share to GSK and Dabur in modern trade.

HUL 6% 6% 9% 8% Neutral 38.7 Volume growth at ~6% YoY is optically higher due to a lower base. Also, we do not expect significant EBITDA margin expansion from lower input costs.

Dabur 8% 8% 10% 10% Neutral 34 Whilst rural demand in April was marginally impacted by the unseasonal showers, timely arrival of monsoons has led to some increase in rural demand in June.

Marico 6% 2% 15% 14% Positive 32.3

Whilst volume growth for Saffola has been impacted by its premium to other edible oils, we expect the launch of the new 500ml SKU to drive volume growth. Moderation in copra prices over Apr-Jun has helped the company increase its promotions in this category.

GCPL 8% 5% 13% 8% Neutral 34 Unseasonal showers in April and timely onset of monsoons have helped drive demand for household insecticides. We expect GCPL's soaps performance to be in line with category growth expectations of 8-9% YoY.

Britannia NA NA 12% 14% Positive 40.9

Benign input costs should drive further expansion in gross margins. Promotional intensity has not increased in this category QoQ and hence the company should be able to retain a significant portion of input cost benefits, resulting in EBITDA margin expansion YoY.

ITC -18% -13% 6% 1% Negative 20.4

Following the >15% price hike in March, cigarette prices have almost doubled over the last three years. Coupled with a weak macro, cigarette demand has shifted to the illegal market and other forms of tobacco. As a result, we expect cigarette volume decline of ~18% YoY for ITC.

TTK Prestige 6% 1% 10% 5% Positive 25.6 Innovation-led new product launches and improvement in PSK through-put lead to stability of growth momentum in the future. E-commerce disruptions have been curbed.

Asian Paints 4% 3% 8% 7% Negative 35.0 Combination of low volume growth rates and punchy valuations are likely to be partially offset by gross margin improvement in the near term.

Berger Paints 4% 4% 8% 8% Negative 32.9 Category slowdown and punchy valuation are likely to outweigh the benefits of marginal market share gains and gross margin expansion. Berger should trade at a ~15% discount to Asian Paints.

Jubilant Foods 5% 4% 27% 25% Neutral 55.6 Sustained SSG improvement 3-4 quarters away and margin declines likely to persist; FY23 store count potential of <2,000. An improvement in SSG is likely to be offset by weak operating margins.

Pidilite 7% 2% 11% 5% Negative 38.0 Gross margin improvement in the near term offset by punchy valuations.

Bajaj (non-E&P) -5% -6% -2% -4% Negative 20.7 SELL ahead of results: Rollout of the ‘theory’ is leading to channel friction and causing market share loss. Consequently, revenue is likely to decline by 2% YoY in non-E&P.

Bata India 4% -5% 8% -1% Positive 25.2 1QFY16 likely to show improved growth momentum with supply chain issues ending in February and with improvements in its E-commerce offerings.

Page Industries 24% 25% 32% 33% Positive 42.6 Contrary to other discretionary consumer companies, Page is indicating sustained growth momentum aided by introduction of new product suite and continuous improvement in the distribution channel.

Havells (standalone)

0% 2% 5% 2% Negative 27.2 SELL ahead of results: Price increase since April coupled with the weak demand environment would result in Havells losing market share. Hence, we have modelled flat volume growth on a YoY basis

VGuard 5% 6% 7% 5% Positive 17.1 BUY ahead of results: Despite the weak demand environment, V-Guard is likely to report the highest revenue growth of 7% given the expansion of the non-south market share and strong demand for stabilisers and inverters.

Source: Ambit Capital research



Investment implications We recommend BUY on ITC for longer-term earnings growth potential and limited downside from current valuation. We recommend BUY on Bata India and TTK Prestige, with 1QFY16 being a positive catalyst for both the stocks due to: (a) improvement in revenue growth trajectory and stability in revenue growth in the future; (b) company-specific issues being resolved in 4QFY15 around supply chain challenges (Bata) and e-commerce disruptions (TTK Prestige) being resolved; and (c) competitive advantages of these companies remaining intact with stable/increasing market shares. We reiterate Bata India as our ‘TOP BUY’. 1 ITC (BUY, TP `384, 22% upside): We expect a revival in ITC’s cigarette

volume CAGR to 1% over FY15-25 due to: (a) Moderation in excise duty hike to 8-9% YoY, (b) Demographic tailwind (as bidi smokers switch to cigarettes and rural youth increasingly take up cigarette smoking instead of bidis). We expect the cigarette business to deliver 12%/13% sales/EBIT CAGR over FY15-25E. ITC’s non-cigarette FMCG portfolio is likely to benefit from high-quality middle and senior management teams focusing on product innovation and leveraging on ITC’s scale and distribution channel dominance. Hence, we forecast 21%/12% revenue CAGR in packaged foods/personal care over FY15-25 and 4x improvement in EBITDA margin from 2.4% in FY15 to 11.3% in FY25. Overall, we expect the non-cigarette FMCG business to deliver sales/EBIT CAGR of 19%/64% over FY15-25. The 1QFY16 results could be a negative catalyst for the share price; however, at CMP of `315/share, our reverse DCF suggests that the share price already factors in: (a) Cigarette volume decline of 6% over FY15-25 and (b) Excise duty hike of ~15% CAGR over FY15-25. Hence, we see limited downside from current levels.

2 Bata India (TOP BUY, TP `1,170, 11% upside): Our channel checks suggest that Bata’s supply chain issues are over and same-store sales growth has averaged at around 5-8% YoY for most stores across India during 1QFY16. Hence, we expect a sales growth revival of at least 8% YoY for Bata from 1QFY16 despite the weak macro demand. Concerns around drag from e-commerce on Bata’s sales momentum in the near term are unjustified based on our primary data checks. No more than 12-13% of Bata’s overall revenues are derived from sportswear, a category that has contributed to over 60% of footwear ecommerce sales in FY15; also, Bata has made significant strides around its ecommerce capability over the past six months. Bata’s stock price has declined by more than 30% over the past 4-5 months, and its current valuation of 34x/25x FY16/FY17E EPS does not factor in its strong franchise (built around retail network size, product portfolio, and retail execution) and near-term operating leverage benefits. We expect 17%/28% revenue/EPS CAGR over FY15-18E alongside ~22% average RoCE; a gradual pickup in sales growth will act as a key near-term catalyst. Our DCF-based TP of `1,170 (11% upside) implies 27x FY17E P/E.

3 TTK Prestige (BUY, TP `4,437, 14% upside): TTK Prestige’s revenue growth is likely to revive to 11%/19%/22% YoY in 1HFY16E/2HFY16E/FY17E (from 7% YoY in FY15), as the external headwinds that affected its revenue growth over FY14 and FY15 are likely to dissipate. In FY16, TTK is set to launch the highest number of new products in existing categories. Moreover, its recent tie-ups with e-commerce aggregators will ensure expansion of TTK’s presence in this channel without inventory de-stocking in the brick-and-mortar channel. Also, the Prestige Smart Kitchen (PSK) franchisee network will become efficient enough to handle new launches and large value SKUs. Improved capacity utilisation (20% increase targeted in FY16) will support EBITDA margin expansion and help deliver 38% EPS CAGR in FY15-18E. Our DCF model generates a TP of `4,437 (14% upside, 29x implied FY17E P/E). We reiterate BUY.



4 Page Industries (BUY, TP ` 16,500, 9% upside): Whilst most consumer discretionary companies reported one of their weakest revenue growth rates for in 2HFY15 in over a decade, Page has maintained consistency with 30% YoY revenue growth. Page continues to build on its competitive strengths around manufacturing, distribution and brand recall through: (a) rapid expansion of the exclusive brand outlet (EBO) network; (b) launch of its e-commerce portal; (c) upcoming launch of kidswear; and (d) ongoing IT investments into streamlining distribution. We forecast revenue/EPS CAGR of 31%/37% in FY15-21E. Page is currently trading at 42x FY17E EPS, a justified 20-25% premium to other high-quality consumer companies, given greater sustainability of its growth momentum.

Relative valuation Exhibit 2:

Relative valuations

CMP Mcap Stance Target

Price Up/

Down

Implied Multiple P/E EV/EBITDA ROCE (%)

Div. Yield

(%)

EPS Growth

Rev growth

(`) (US$ mn) FY16E FY16E FY17E FY16E FY17E FY16E FY17E FY16E

FY15-18E

FY15-18E

HUL 920 31,181 SELL 710 -23% 33.9 43.9 38.7 32.2 28.1 82.0% 76.3% 1.6% 16% 13%

Nestle 6,140 9,236 SELL 5,100 -17% 44.9 54.1 40.3 29.8 22.4 34.3% 41.2% 1.3% 12% 8%

Dabur 282 7,702 SELL 203 -28% 28.9 40.1 34.0 30.1 25.4 28.2% 29.1% 0.9% 17% 14%

Godrej Consumer 1,214 6,468 SELL 785 -35% 25.9 40.0 34.0 24.1 20.6 17.8% 19.1% 0.6% 14% 13%

GSK Consumer 6,171 4,061 SELL 4,855 -21% 31.0 39.4 34.4 35.1 29.8 29.8% 29.7% 0.9% 14% 14%

Colgate 2,060 4,390 SELL 1,515 -26% 30.9 42.1 35.8 28.2 24.0 83.5% 84.7% 1.7% 18% 14%

Marico 448 4,528 SELL 365 -19% 32.0 39.3 32.3 23.6 19.7 32.6% 35.5% 1.0% 23% 15%

ITC 314 39,437 BUY 384 22% 28.5 23.3 20.4 15.2 13.2 31.2% 31.8% 2.4% 13% 13%

Britannia 2,739 5,137 SELL 1,600 -42% 28.2 48.3 40.9 26.1 21.8 46.5% 45.0% 0.9% 18% 15%

Pidilite Inds Ltd 550 4,419 SELL 390 -29% 31.4 44.4 36.4 29.5 24.7 36.1% 37.8% 0.7% 22% 17%

TTK Prestige Ltd 3,880 707 BUY 4,437 14% 40.7 35.5 25.4 22.4 16.7 18.5% 23.0% 0.8% 38% 20%

Jubilant Foodworks 1,863 1,909 SELL 1,000 -46% 40.5 75.4 54.2 33.2 24.4 21.2% 23.9% 0.0% 36% 27%

Berger Paints 195 2,121 SELL 158 -19% 29.7 36.7 29.9 21.7 18.2 20.2% 21.9% 0.8% 29% 16%

Asian Paints 755 11,347 SELL 680 -10% 35.5 39.4 32.9 25.6 21.4 33.8% 34.3% 1.1% 25% 17%

Bata India 1,058 1,065 BUY 1,170 11% 37.8 34.1 24.6 20.9 15.8 18.3% 22.0% 0.7% 28% 17%

Page Inds 15,115 2,640 BUY 16,500 9% 63.2 57.9 42.0 38.1 28.0 50.8% 55.0% 0.8% 40% 32%

V-Guard 912 430 BUY 1,267 39% 34.1 23.8 17.1 14.8 11.2 25.7% 30.0% 0.8% 40.6% 20.6%

Havells (consol.) 305 3,004 SELL 248 -19% 29.2 32.5 24.6 18.3 14.5 18.3% 22.3% 0.8% 64.3% 10.7%

Bajaj Electricals 231 374 SELL 204 -12% 14.4 23.0 19.4 11.7 9.9 14.4% 15.4% 1.1% NA 13.4%

Source: Bloomberg, Ambit Capital research; Note: UR = Under Review, * Data is based on consensus estimates; # Companies have calendar year-ending and hence, data pertains to CY14 and CY15 instead of FY15 and FY16 respectively.



FMCG and staples Consumer demand for 1QFY16 remained as weak as it was in 4QFY15, with no incremental moderation in the overall pace of demand growth QoQ. Companies have tried to counter the slowing premiumisation trends by offering smaller packs of premium brands. HUL has been aggressive with both consumer and trade promotions particularly in the soaps and detergents category. Marico is expected to benefit from ‘Project One’ (increasing urban direct reach) and ‘Prime 2’ (distributor order automation) projects undertaken in urban areas. The cigarettes category continued to be weak, with volumes declining >15% YoY. However, whilst the demand scenario remains weak, we expect an optical increase in YoY volume growth due to a weak base. As a result, for 1QFY16, we expect average volume growth of 6.5% YoY vs 4.5%/5.6% for 4QFY15/1QFY15 across our coverage. Going forward, we reiterate that the pace of increase in consumer demand will be gradual and is likely to happen, at the earliest, from 2HFY16 onwards.

Category-wise trends Soaps and Detergents – Promotional intensity remains high in this category

Input prices (LAB down 20% YoY and PFAD down 26% YoY) remain soft in this category. Companies have maintained high levels of promotional intensity in this category. This includes higher grammage per pack offered in the soaps category and price cuts in detergents to pass on input cost benefits to consumers. HUL has been the most aggressive in this category. It has taken price cuts across all three brands in the detergents category. It has tried to drive premiumisation of users to Surf by offering LUPs and promotional discounts. HUL is offering Thailand trips as incentive to distributors for achieving sales targets in the soaps and detergents category. We expect these initiatives to have driven volume growth for HUL in 1QFY16.

Stock impact: Positive for HUL

Oral care – GSK and Dabur gaining share through aggressive promotions

Our channel checks suggest that GSK’s Sensodyne and Dabur’s Red have been aggressive with consumer promotions particularly in modern trade. As a result, Colgate is believed to have lost some market share in modern trade in Apr-May 2015. GSK has increased not only its numerical distribution (increase in the number of outlets) but also its weighted distribution in the last quarter. HUL’s Close Up and Pepsodent continue to be laggards in this category. In the last few weeks of June, Colgate faced issues at its new toothbrush production facility which could lead to supply issues in 2QFY16.

Stock impact: Negative for Colgate and HUL; Positive for GSK and Dabur

Biscuits – Britannia continues to lead in the category

Our channel checks suggest that volume growth in the biscuits category for 1Q should be ~6-7% YoY, with value growth of 11-12% YoY (same as 4QFY15). Britannia continues to grow ahead of the market driven by strong sales growth in Good Day, Nutri Choice and Marie. Parle’s re-launch of cream biscuits under the Magix brand name has received a positive response. Whilst Britannia’s NutriChoice Heavens have not seen significant repeat orders after the initial launch, the launch of Good Day Choco Chunkies has been a success.

Britannia cuts costs – Distributor margin reduced: Britannia previously offered 5% distributor margin with added incentive of 0.5%. Over the last quarter, the company has reduced distributor margin to 4.75% and maintained incentives at

“Project One and Prime 2 should drive urban sales growth.” – Marico’s distributor based out of Mumbai

“We are getting Thailand trips on completing sales target for Wheel and Breeze.” – HUL distributor based out of Uttar Pradesh

“Colgate is losing market share in modern trade to GSK and Dabur.” – Colgate distributor based out of a metro

“Recent launches in the premium segment are growing only at a modest pace.” – Parle distributor based out of Maharashtra



0.5%. Distributors will now be given points based on criteria such as sales target achieved, number of lines sold, salesman attendance, and use of handheld devices by the salesman. Based on the number of points scored, the incentive pay will be decided for distributors.

Focus on new store addition: Over the last six months, Britannia has been focusing more on new store addition. Increase in direct distribution has resulted in wider product range being sold and increased market share for Britannia in stores that were previously serviced through wholesalers.

Driving throughput at existing stores: Whilst Britannia had used the split salesman approach for the last 12-15 months, this was limited to only the high-yielding beats of the distributor. The company has now forced distributors to deploy the split salesman approach on all its beats instead of focusing on only the high-yielding ones.

Stock impact: Positive for Britannia

Packaged food and beverages – Maggi recall has affected sales of the instant noodles category

The recent Maggi noodle controversy has led to a cut back in consumer demand for the entire instant noodles category. Retailers are asking distributors to take back their stock due to lack of demand.

In the MFD category, Horlicks’ base variant and highest-selling variant continue to see slowing sales, as consumers aren’t readily increasing consumption. GSK has been driving volume growth by increasing penetration of GSK’s value-added variants.

Stock impact: Negative for Nestle; Neutral for GSK

Hair oil and edible oil – No incremental promotional intensity

Due to the sharp price hikes taken by Marico during the last 12 months, consumers have down-traded from larger 500ml SKUs to smaller bottles. However, Parachute coconut oil’s volumes have not dropped. The company has continued to offer discounts/extra volumes instead of taking MRP cuts to drive volumes in this category. In the VAHO category, Marico’s new prototype ‘Parachute Aromatherapy’ has seen limited success. The company launched ‘Parachute Aloe Vera’ in the latter half of the quarter. In the edible oils category, promotional intensity remains high, as all the participants are offering higher volumes or price-discounts. In edible oils, Saffola has maintained its pricing and has instead launched a 500ml SKU to drive consumer trials. Marico is expected to benefit from ‘Project One’ (increasing urban direct reach) and ‘Prime 2’ (distributor order automation) projects undertaken in urban areas.

Stock impact: Positive for Marico

Cigarettes – expect another weak quarter with volume decline >15% YoY

Following the 15% excise duty hike in the last budget, ITC also took a 15% hike on its cigarettes. As a result, the trade stocked up on the lower-priced inventory during March 2015. The sharp price hikes over the last three years have resulted in a shift in smokers from branded to illegal cigarettes. This shift in consumption coupled with high inventory levels in the channel led to lower sales in 1QFY16. ITC’s cigarette volumes are likely to have declined by 15-17% YoY in 1QFY16. The RSFT segment is likely to have seen the maximum decline of ~25% YoY. Sales growth for 64mm cigarettes has also slowed down to mid-single-digits from high teens in the previous quarter.

Stock impact: Negative for ITC

“Retailers are asking us to take back our (Yippee) stock as well.”

– ITC distributor in the northern region



Gross margins to expand due to lower raw material prices: During the quarter, crude oil prices were down ~40% YoY. Prices of key raw materials such as Palm Fatty Acid Distillate (PFAD, down 26% YoY) used in soap manufacturing, Linear Alkyl Benzene (LAB, down 20% YoY) used in synthetic detergents and High Density Polyethylene (HDPE, down 10% YoY) used in plastic packaging material and Light Liquid Paraffin (LLP, down 30% YoY) also corrected during the quarter. Companies reaped the benefits of lower input prices in 2HFY15. Companies would continue to benefit from lower input costs during this quarter as well. We expect gross margins to be ~190bps higher YoY in 1QFY16.

Higher gross margin to be partially offset by higher A&P spends in 1QFY16: Apart from Soaps and Detergents, no other category has seen an incremental increase in promotional intensity vs 4QFY15. As a result, we expect companies to only partially offset their gains at gross margin with higher A&P spends. As a result, we expect A&P spends to increase by 58bps YoY, only partially offsetting the gains at the gross margin level.

EBITDA margins are likely to increase by 116bps YoY, as gains at the gross margin level are likely to be partially invested into higher A&P spends. We expect average PAT growth of ~15% YoY, ahead of sales growth of ~12% YoY for 1QFY16.

Volume growth in 1Q likely to be higher than 4QFY15 due to lower base Exhibit 3:

Company 1QFY16E 4QFY15 1QFY15

Colgate 6.0% 5.0% 5.0%

Dabur 8.0% 8.1% 8.8%

GCPL 7.8% 4.9% 5.8%

GSK Consumer 5.0% 1.0% 3.0%

HUL 6.0% 6.0% 5.0%

Marico 6.0% 2.0% 6.0%

Nestle -12.0% 0.0% 1.0%

ITC -18.0% -13.0% -2.5%

Average (ex-ITC, Nestle) 6.5% 4.5% 5.6%

Source: Company, Ambit Capital research

Gains at the GM level to be only partially invested into higher A&P spends Exhibit 4:

Company Revenue growth (%) YoY Change in

A&P spends as % of sales bps

YoY Change in Gross Margin bps

YoY Change in EBITDA Margin bps 1QFY16E 4QFY15 1QFY15

Britannia 12.0% 13.9% 15.2% 75 250 190

Colgate 11.0% 10.9% 11.3% - 150 120

Dabur 9.8% 9.6% 12.8% 60 140 75

GCPL 13.4% 8.3% 9.5% 50 200 85

GSK Consumer 12.4% 8.5% 8.5% 75 200 125

HUL 8.5% 7.9% 13.2% 75 150 65

Marico 14.5% 14.4% 25.3% 70 140 50

Nestle -2.2% 8.4% 9.3% NA 380 230

ITC 5.5% 0.6% 24.8% NA 100 100

Average (ex-ITC, Nestle) 11.7% 10.5% 13.7% 58 190 116

Source: Company, Ambit Capital research

Gross margin expansion likely due to softening of raw material prices YoY

Benefits from higher gross margin are likely to be only partially invested into higher A&P spends

Consequently, we expect EBITDA margin expansion of 116bps YoY



Paints Our channel checks suggest continued moderation in paints demand during 1QFY16, with volume growth in decorative paints remaining at 3-4% YoY primarily due to weakness in repainting demand from individual home owners. Working capital cycles remain stretched, with higher receivables in the channel from institutional buyers (builders) and higher inventory days of 35-40 days currently vs less than 25 days until September 2014. Berger Paints has increased its distribution efforts and has gained market share in the decorative paints segment especially from Kansai/ Akzo during the quarter, whilst Asian Paints has retained its market share. Due to the weakness in consumer sentiment, Asian Paints has matched Berger in terms of dealer margins (passing on the benefits of soft input costs to the trade and consumers). We expect revenue growth of 4-5% YoY for both Asian Paints and Berger Paints in 1QFY16.

Macro demand – Status quo: Volume growth has remained in the low-mid single digits over the last three months as well, similar to the levels achieved from the October 2014 to March 2015 quarters. Due to sluggish demand, inventory days for dealers have increased from ~25 days until September 2014 to 35-40 days currently. This incremental weakness in demand is possibly due to: (a) black money being sucked out of the economy, thereby affecting the demand for re-painting of individual home buyers (who are mainly business families) and/or (b) weakness in consumer sentiment, leading elongation of repainting cycles. The weakness in demand have been further accentuated for Asian Paints by supply chain interruptions arising out of: (a) Strike in one of the factories that manufactures oil-based paints and (b) teething problems from the introduction of the ‘Mother Depot’ system in the supply chain, replacing regional distribution centres. The channel expects the company-specific issues for Asian Paints to be resolved in the next 3-4 months and hence at least a partial revival in sales after that.

Margin expansion (or lack of it): With no price hikes announced since 1QFY15 and the 2-4% price cut implemented in Feb-Mar 2015, revenue growth for the paints sector will not see a material contribution from an increase in realisation rates. This trend, we believe, is likely to continue, as paint companies continued to pass on the benefits of softening in input costs to customers and the trade channel.

Revenue growth profile of Asian Paints and Berger Paints Exhibit 5:

Source: Company, Ambit capital research

Competitive intensity: Asian Paints continues to build on its moats around supply chain efficiency, and the latest initiatives around the ‘Mother Depot concept’ would reduce delivery time even further. However, due to the weakness in consumer sentiment, the company has increased its leniency by increasing its dealer margins, ensuring that the dealer margins are in line with those offered by Berger. Berger Paints has, over the last 12 months, established itself as a clear #2

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Asian Paints Berger



in the paints sector, with improvements in its supply chain and rapid expansion of the dealer network through increased aggression of its sales team. This has led to Berger Paints matching the delivery schedules of Asian Paints in certain regions and hence consistently gaining market share from Akzo and Kansai over the past five years.

Waterproofing segment - The joker in the pack: The water proofing segment has traditionally been Pidilite’s territory, with strong brands like Dr Fixit, M-Seal, and ‘Raincoat’ exterior paints and with over 100 products. Asian Paints (8 products currently) entered into the water proofing segment meaningfully 18 months ago and has been aggressively pushing its water proofing range at the paint dealers and with cement dealers as well. Asian Paints has been offering quality products at a ~35% discount to the water-proofing range of Pidilite. Asian Paints has communicated a revenue target of ~`15bn by FY17 to its dealers (with no meaningful contribution to revenues currently).

Expectations of a demand revival: Most channel partners expect a revival in the paints sector’s volume growth in 3QFY16 due to a combination of: (a) longer festive seasons, with Diwali being in mid-November in 2015 vs late October in 2015, which will give an extra 2-3 weeks of festivities-related paint demand in the year; and (b) a good monsoon in a year, which has historically had a positive impact on paint demand for smaller cities/rural areas (15% of Asian Paints’ overall revenues).

Sector/Investment thesis

We expect Berger Paints to report volume growth of ~4% driven by market share gains from Akzo Nobel and Kansai Nerolac during the quarter. Asian Paints, we believe, will report unchanged market share and hence expand volumes at ~4% YoY during the quarter. However, over the longer term, we expect Berger to lag behind Asian Paints in premiumisation of its product mix over the next few years primarily due to better scale economies around marketing and a best-in-class supply chain. This justifies a premium rating for Asian Paints over Berger on P/E multiples. We, however, view both stocks as richly valued currently and reiterate our SELL stance on Asian Paints (10% downside from CMP) and Berger (19% downside).



Kitchenware Continued weakness in consumer sentiment has resulted in no improvement in overall secondary sales growth for the kitchenware segment. However, footfalls at brick-and-mortar stores have revived marginally due to lower price disruption in the e-commerce channel during 1QFY16. We expect revenue growth of 11% for TTK Prestige in 1HFY16 amidst a weak macro. Moreover, with a slew of new product launches in FY16 and expectation of macro demand revival during the festive season, we expect TTK’s revenue growth to rise from 10-12% in 1HFY16 to 18-20% in 2HFY16. TTK’s Prestige Smart Kitchens are likely to report over 20% YoY SSG in 1QFY16. This channel benefited from print media adverts focused on promoting the local PSKs, and rise in growth of high value products like hob-tops and hard-anodized cookers/cookware.

Retail footfalls remain weak with TTK retaining/gaining market share

Our discussions with the channel suggest that retail footfalls have remained weak in the sector. Only a marginal revival was visible in areas which were adversely affected by e-commerce price disruption over Oct’14-Jan’15, as the disruption has now reduced significantly for larger brands like Prestige. This has happened mainly because larger brands like TTK have entered into agreements with ecommerce aggregators in 4QFY15 to curtail disruptive discounting (see the exhibit below).

Snapshot of TTK’s ‘Store in Store’ on ‘Snapdeal’ (ecommerce aggregator) Exhibit 6:

Source: Ambit Capital research, Snap-deal website

Channel feedback unanimously suggests that the market share for TTK Prestige has either been maintained or increased during the quarter across all geographies. TTK has gained market share from Hawkins in the pressure cooker and cookware segment in the non-south geographies due to: (a) TTK’s aggressive approach towards distribution expansion, (b) TTK following the distributor channel as compared to the whole-seller channel adopted by Hawkins, allowing TTK greater price and inventory control in the channel, and (c) TTK’s ability to continue to refresh its product offering by introducing new product and revamping old products with improved features.

Our channel checks suggest that new product launches over the last 6 months have received a good response from the customers, particularly in hob-tops and the Signature series of value-added hard-anodized cookware. On the back of such higher-value products and also on the back of some focused print-media-related promotional activity by TTK Prestige, footfalls have improved significantly for TTK’s franchisee stores. Moreover, our channel checks suggest that a long pipeline of new product launches are likely to be launched over the next 3-6 months.



Revival expected only 2HFY16 onwards: At a company-specific level, new (differentiated) product launches and improvements in supply chain and IT platforms will be the near-term catalysts for an uptick in the revenue growth momentum for TTK Prestige in 2QFY16. However, we believe that the widespread slowdown in discretionary demand will continue to be a drag on revenue growth rates, with a meaningful revival in macro demand expected only from 2HFY16 onwards.

Investment thesis

TTK Prestige’s revenue growth is likely to revive to 11%/19%/22% YoY in 1HFY16E/2HFY16E/FY17E (from 7% YoY in FY15), as the external headwinds that affected its revenue growth over FY14 and FY15 are likely to dissipate. In FY16, TTK is set to launch the highest number of new products in existing categories. Moreover, its recent tie-ups with e-commerce aggregators will ensure expansion of TTK’s presence in this channel without inventory de-stocking in the brick-and-mortar channel. Also, the Prestige Smart Kitchen (PSK) franchisee network will become efficient enough to handle new launches and large value SKUs. Improved capacity utilisation (20% increase targeted in FY16) will support EBITDA margin expansion and help deliver 38% EPS CAGR in FY15-18E. Our DCF model generates a TP of `4,437 (14% upside, 29x implied FY17E P/E). We reiterate BUY.



Footwear retail SSG for footwear retailing companies was flat YoY in 2HFY15 due to disruptive discounting by e-commerce aggregators and, in the case of Bata, company-specific issues affecting the supply chain. Our channel checks suggest that SSGs have revived to 5-8% both for sportswear retailers as well as for Bata in 1QFY16 amidst a weak macro environment. This is mainly due to tie-ups between larger footwear retail brands like Nike/Bata and e-commerce aggregators to restrict discounts on new launches and fast-moving SKUs. As Bata’s supply chain issues have been resolved, we expect revenue growth of 8% YoY in 1QFY16 and 14% YoY in FY16. Bata’s stock price has declined by more than 30% over the past 4-5 months, and its current valuation of 34x/25x FY16E/FY17E EPS does not factor in its strong franchise and near-term operating leverage benefits.

Macro improvement expected in 2HFY16

The footwear retail industry continued to be adversely affected in 1QFY16 by the weakness in consumer sentiment manifesting in lower footfalls at the stores. Bata has overcome its supply chain hurdles and our channel checks indicate that revenue growth at the store level has revived to ~5% YoY amidst a weak macro. Our discussions with a leading sportswear retailer indicate that store-level SSGs have improved to 6-7% in 1QFY16 vs flat SSG in 3Q and 4QFY15. Given the lower base in 2HFY15 and with hopes for the resumption in consumer sentiment in the festive season, we expect improvement in revenue growth for this sector from 2HFY16 onwards.

Reduced disruption from e-commerce price discounting

Disruptive discounting by e-commerce aggregators in 2HFY15 impacted sportswear companies in particular, as they had to pass on higher discounts to attract customers. However, the discounts on brands have reduced meaningfully especially on newly launches and fast-moving SKUs through tie-ups between larger brands and the e-commerce websites over the past six months. Bata has implemented various strategies to leverage on the tailwinds offered by increasing e-commerce penetration including: (a) setting up of its own website led by a separate team of experts, (b) launch of store-in-store on Amazon, and (c) the mobile app launched recently (in May) with an ‘M-Wallet’ feature. All these changes have helped revive same-store sales growth rates for footwear retailers closer to the levels which existed until September 2014.

Bata’s SAP issue is behind us

The unsuccessful implementation of its new SAP software (click here for detailed note) impacted the supply chain and thus impacted Bata’s revenues in 3Q and 4QFY15. During this period, inventory at the stores reduced by 30-40%, resulting in lower conversion of footfalls into sales. Our channel checks suggest that post the resolution of the supply chain issues in February, the inventory levels at the stores are back to normal, and as a result, revenue growth at the store level (SSG) has revived to ~5-8% YoY during April’15- June’15.

Ground-level initiatives for Bata to improve brand image and store efficiency

Over the last six months, the company has initiated several measures at the ground level to: (a) improve its customer connect and (b) increase store-level efficiency. These initiatives include:

Introduction of a loyalty programme with a dedicated team of employees at Bata to implement it: Our channel checks suggest that this is gaining traction by creating a ‘pull-based’ demand and thereby increasing the frequency of purchase and by helping increase revenue throughput by targeted advertising.

http://reports.ambitcapital.com/reports/Ambit_BataIndia_ChangeinStance_30Apr2015.pdf



Generation of a store-level MIS due to the new SAP software, which enables the store managers to manage inventory levels better.

Substantial increase in the frequency of visits by the new MD of Retail for Bata, Mr Nitesh Kumar, in an effort to try and improve the retail shopping experience for customers.

Investment thesis

Bata’s stock price has declined by more than 30% over the past 4-5 months, and its current valuation of 34x/25x FY16E/FY17E EPS does not factor in its strong franchise (built around retail network size, product portfolio, and retail execution) and near-term operating leverage benefits. IT-related supply chain issues have been resolved, and our channel checks suggest a sales growth revival to 5-8% YoY from 1QFY16 despite weak macro demand. We expect 17%/29% revenue/EPS CAGR over FY15-18E alongside ~25% average RoCE; a gradual increase in sales growth will act as a key near-term catalyst. Delayed initiatives around concept stores and higher advert spends will be executed over the next 12-18 months. Our DCF-based TP of `1,170 implies 38x/27x FY16/FY17E P/E, 11% upside. We reiterate BUY.



Jewellery Our discussions with various jewellery stores (including those of Titan’s Tanishq) indicate: (1) weak demand, (2) sharp fall in footfalls and revenues due to discontinuation of the monthly gold deposit scheme, and (3) significant reduction in cash transactions due to curbs on black money. Out of these, the impact of the discontinuation of the gold deposit scheme would be highest, as the scheme accounted for nearly 25% of Titan’s 1QFY15 jewellery revenues. Consequently, our channel checks indicated that the absence of the scheme, combined with poor consumer sentiment and reduction in cash transactions have led to negative Like-to-Like (LTL) growth of 20-25% for Titan’s jewellery business.

Trends Weakening consumer sentiment and declining footfalls

On a pan-India basis, footfalls declined in this quarter due to weakening consumer sentiment as well as decrease in Government spending. Our channel checks suggest that the conversion rate has declined YoY and channel partners expect the situation to improve as we move towards the festive season. Furthermore, stores of listed players such as Titan (Tanishq stores) as well as unlisted players like Jaipur Gems claim to have seen a ~15% decline in footfalls. Akshaya Tritiya sales, which have been traditionally known to generate large volumes, have been subdued in the quarter gone by.

Impact of discontinuance of Gold Deposit Scheme

The provisions of the new Companies Act came into effect in FY15, and jewellers were forced to withdraw the scheme and refund/book early redemptions on the monies collected. Leading jewellery chains such as Tanishq stopped accepting fresh deposits from early 1QFY15 (deposits typically are redeemed for jewellery at the end of 12 months, resulting in booking revenue). Therefore, the outlets of these chains have seen a drop in revenues of 20% due to discontinuation of these schemes.

Our channel checks suggested that ~80% of the decline in volumes was due to the discontinuance of the gold deposit schemes. Large players like Tanishq, P N Gadgil and P C Jewellers have all been impacted due to the discontinuance of the gold deposit scheme.

Investment demand (coins and bars) continues to be subdued

Demand for coins and bars continues to be subdued, as investment demand continues to be slack on the back of: (a) lack of price appreciation and b) expectation of eventual reduction in customs duty (currently 10%, which was 2% until 4QFY13) especially given the intention to implement the domestic gold monetisation scheme.

“LTL growth of the Tanishq format for the quarter has been in the range of negative 20-25%.” – Consensus feedback across various stores

“Our footfalls have almost halved. This is a bad period for us, but I think as we move towards Dussehra, sales will begin to pick up.”

– A private jeweller based out of Jaipur

According to FICCI, the jewellery sector faced redemptions of ~`200bn as a result of the closure of gold deposit schemes



Demand for gold bars and coins has been declining… Exhibit 7:

Source: World Gold Council, Ambit Capital research

Black money crackdown - Reduction in cash purchases

The channel partners and unlisted jewellers both stated that there has been a rapid reduction in cash transactions during 1QFY16. Cash transactions would earlier account for ~70% of all transactions. This number has now reduced to ~50%. Many stores attributed this to the measures taken by the Government to curb black money.

Studded jewellery share could increase

This quarter, there has been an increase in advertisements and promotions especially with respect to studded jewellery. Usually the promotions are run only in 2Q and 4Q.

Increasing share of studded jewellery Exhibit 8:

Source: Ambit Capital research

Gold prices (INR) have remained flat since FY14, inspite of elevated Exhibit 9:prices due to increase in Customs Duty rates

Source: Bloomberg, Ambit Capital Research

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“Tanishq has always insisted on clean accounting and transactions, but some of the smaller players will be impacted greatly due to the black money measures.” – A Tanishq store operator based out of Delhi



Competition from south-India-based jewellers seen in select pockets

According to the existing players in Kolkata and Ranchi (east India), Kalyan Jewellers and Malabar Gold (both South India based) are gaining popularity and have impacted the turnover of existing players in these locations. Barring these locations, existing and established jewellery stores have not seen any significant impact from the entry of these players.

Making charges have traditionally been an element of cost, on which consumers always look for a bargain. By cutting making charges in 1QFY16, the big players such as Titan are looking to attract customers.

“We will move to a bigger store as because of a new Kalyan store that opened nearby. We saw a 25% decline in footfall when they opened up.” – Owner of a Tanishq store in Kolkata



Light Electricals Our discussions with channel partners suggest demand has increased sequentially; however, the YoY growth for the light electrical companies is likely to be in single digits, given the high base impact (Havells’ and V-Guard’s revenue grew by 21% YoY and 17% YoY in 1QFY15). Within product categories, consumer-led products such as consumer appliances and water heaters are expected to grow at a higher pace of 7-8% YoY vs 4-5% YoY for the cyclical products such as electrical cables and wires, switchgears and lightings. Volume growth for seasonal products such as fans and stabilisers has moderated to 6-7% in 1QFY16 vs 12% in FY15 due to weak summer and early arrival of monsoon. However, market share gain in the non-south market has meant that V-Guard continues to report volume growth of ~10% YoY in stabilisers. We reiterate our BUY stance on V-Guard and Finolex Cables, as these regional franchises are gaining market share in the non-south markets and are fast emerging as pan-India players.

Volume growth – Sequentially better quarter: Our discussions with the channel partners suggest that there is a marginal increase in demand in 1QFY16 on a sequential basis. The increase is led by slight improvement in B2B (project-led) demand from the construction sector. However, B2C (consumer-led) demand remains weak given the prevailing rural slowdown. B2C demand in urban areas remains moderate.

Whilst demand has increased sequentially, the YoY growth for the light electrical companies is likely to be in single digits given the high base impact (Havells’ and V-Guard’s revenue grew by 21% YoY and 17% YoY in 1QFY15). Within product categories, consumer-led products such as consumer appliances and water heaters are expected to grow at a higher pace of 7-8% YoY vs 4-5% YoY for the cyclical products such as electrical cables and wires, switchgears and lightings. Volume growth of seasonal products such as fans and stabilisers has moderated to 6-7% in 1QFY16 vs 12% in FY15 due to weak summer and early arrival of monsoon. However, market share gain in the non-south market has meant V-Guard continues to see a volume growth of ~10% YoY in stabilisers.

Snapshot of the growth across light electrical products Exhibit 10:

Product Volume growth rate YoY (%) Value growth rate YoY (%) Market share in 1QFY16

1QFY16E 4QFY15 FY15 1QFY16E 4QFY15 FY15 Gainer Loser

Cyclical products - Cables and wires 5% 5% 4% -1% -2% 5% V-Guard, Finolex Havells, Polycab

- Switchgears 4% -6% 18% 5% -5% 14% No major change

- Lighting 4% -6% 3% 4% -6% 3% Syska Bajaj, Havells

Consumer products - Consumer appliances 8% 10% 13% 12% 14% 17% Crompton Bajaj

- Water heater 7% 10% 13% 12% 14% 17% V-Guard AO Smith

Seasonal products - Fans 6% 7% 12% 10% 12% 15% Crompton, Orient Bajaj, Havells

- Stabiliser 7% 12% 14% 12% 16% 18% V-Guard Unorganised players

Source: Ambit Capital research; Note: We have estimated industry growth rate across the products for 1QFY16, 4QFY15 and FY15 based anecdote data

Whilst dealers were confident of a recovery in the demand environment in 4QFY16 given the slight uptick in B2B demand, they do not expect a material increase in demand over the next 4-6 months given the severe liquidity challenges and sluggish consumer sentiment.

“Easing of liquidity constraint post the interest rate cuts has led to a slight pick-up in the execution of the real estate projects and marginal pick-up in the B2B-led demand.”

- A Delhi-based large distributor



Crompton Greaves becomes aggressive: Channel partners are expecting an improvement in the market share of Crompton in consumer appliances over the next one year given its recent tie-up with a Spanish player ‘SOGO’ for marketing of appliances in India. Moreover, Crompton under the under the new management (new MD from P&G and CEO from Racold) has become aggressive in the market, with rising focus on advertisements and new product launches. It has already gained market share from Havells and Bajaj in fans in 1QFY16. Bajaj continues to lose market share across the categories due to the rollout of the new marketing strategy (Theory of constraints). In lighting, Syska is gaining market share from Havells thanks to strong brand promotion and strong range of LED products. V-Guard is gaining market share in housing wires from Havells and Polycab. Spherehot’s comeback needs to be closely watched as it has become aggressive in water heaters and appliances post the recent funding from private equity investors/financial institutions and hiring of Bajaj’s former consumer business head as a strategy consultant. No major changes in pricing: Our channel checks suggest that apart from Havells which has increased prices by 4-5% since April, no one else in the industry has increased prices. However, given that there were price hikes taken by several players during the 4QFY15, we expect the average realisations across product categories (except cable and wires) to increase on a YoY basis and this should result in gross margin expansion given soft commodity prices. Higher promotional spends to impact margins: Most of the companies have engaged into higher promotional spends during the quarter given the weak B2C demand. There were several schemes on offer during the quarter such as Bajaj giving an LED bulb free with a water heater. Consequently, we expect EBITDA margin to be either flat or marginally down on a YoY basis. The weak demand environment has led light electrical companies to throttle back on promotional activities. On advertisement, we do not expect a significant increase; apart from Finolex Cables (spent on Finoswitches) and V-Guard (spent on stabiliser which is a summer product), there were no major ad campaigns during the quarter. Even Havells which was the highest ad spender in FY15 at `1.6bn (3.0% of revenue) did not participate in any major advertising campaign or promotional scheme. Investment implication: We like regional players such as V-Guard that are becoming pan-India franchises with higher PAT growth (49% PAT CAGR over FY15-17E vs 11% for Havells standalone). We prefer V-Guard over Havells, given: (a) V-Guard’s higher potential to sweat the brand (regional going pan-India), higher aggression led by combination of recruitment of senior talent from the industry and increasing investment in branding through rising ad spends (25% CAGR vs 21% CAGR for Havells over FY11-15); and (b) undeserving valuation discount of 37% relative to Havells’ standalone despite FY15-17E EPS CAGR of 49% vs Havells’ 11% and FY17E RoE of 31% vs Havells’ 21%. We reiterate our BUY on V-Guard with TP of `1,289/share (implied FY17E P/E of 24x and 43% upside), SELL on Havells with TP of `257/share (implied FY17E standalone P/E of 24x and 10% downside) and SELL on Bajaj with TP of `208/share (implied FY17E non-E&P P/E of 21x and 26% downside).

“Crompton is poised for market share gains from Havells over the next 12 months as the new management is leveraging on Crompton’s strong brand re-call to launch new product categories.”

- A large Mumbai-based distributor dealing with Havells and Crompton

Apart from Havells, no major player has taken price hikes

We prefer regional players such as V-Guard over pan-India players such as Havells and Bajaj



Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Abhishek Ranganathan, CFA Midcaps (022) 30433085 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Bagul Consumer (022) 30433264 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Prashant Mittal, CFA Derivatives (022) 30433218 [email protected]

Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Sandeep Gupta Media / Midcaps (022) 30433211 [email protected]

Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]

Utsav Mehta, CFA Technology (022) 30433209 [email protected]

Vaibhav Saboo E&C / Infra / Cement / Industrials (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction



Hindustan Unilever Ltd (HUVR IN, SELL)

Source: Bloomberg, Ambit Capital research

Asian Paints Ltd (APNT IN, SELL)


Nestle India Ltd (NEST IN, SELL)


Dabur India Ltd (DABUR IN, SELL)


Godrej Consumer Products Ltd (GCPL IN, SELL)


Colgate Palmolive (India) (CLGT IN, SELL)


0

200

400

600

800

1,000

1,200

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

HINDUSTAN UNILEVER LTD

0

200

400

600

800

1,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

ASIAN PAINTS LTD

01,0002,0003,0004,0005,0006,0007,0008,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

NESTLE INDIA LTD

0

50

100

150

200

250

300

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

DABUR INDIA LTD

0200

400600800

1,000

1,2001,400

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

GODREJ CONSUMER PRODUCTS LTD

0

500

1,000

1,500

2,000

2,500

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

COLGATE PALMOLIVE (INDIA)



Glaxosmithkline Consumer (SKB IN, SELL)


Pidilite Industries Ltd (PIDI IN, SELL)


Marico Ltd (MRCO IN, SELL)


Britannia Industries Ltd (BRIT IN, SELL)


Berger Paints India Ltd (BRGR IN, SELL)


Page Industries Ltd (PAG IN, BUY)


01,0002,0003,000

4,0005,0006,000

7,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

GLAXOSMITHKLINE CONSUMER HEA

0100200300

400500600

700

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

PIDILITE INDUSTRIES LTD

0

100

200

300

400

500

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

MARICO LTD

0

500

1,000

1,500

2,000

2,500

3,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

BRITANNIA INDUSTRIES LTD

0

50

100

150

200

250

300

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

BERGER PAINTS INDIA LTD

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

PAGE INDUSTRIES LTD



Jubilant Foodworks Ltd (JUBI IN, SELL)


Bata india ltd (BATA IN, BUY)


TTK Prestige Ltd (TTKPT IN, BUY)


Havells India Ltd (HAVL IN, SELL)


V-Guard Industries Ltd (VGRD IN, BUY)


Bajaj Electricals Ltd (BJE IN, SELL)


0

500

1,000

1,500

2,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

JUBILANT FOODWORKS LTD

0200400600800

1,0001,2001,4001,600

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

BATA INDIA LTD

0

1,000

2,000

3,000

4,000

5,000

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

TTK PRESTIGE LTD

050

100150

200250300350

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

HAVELLS INDIA LTD

0

200400600800

1,0001,2001,400

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

V-GUARD INDUSTRIES LTD

050

100150200250300350400

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

BAJAJ ELECTRICALS LTD


July 06, 2015 Ambit Capital Pvt. Ltd. Page 26

Titan Co Ltd (TTAN IN, NOT RATED)


0

100

200

300

400

500

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

Jan-

15

Apr

-15

TITAN CO LTD


July 06, 2015 Ambit Capital Pvt. Ltd. Page 27

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.

Additional information on recommended securities is available on request.

Disclaimer

1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI

2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.

3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report.

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5. This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report such should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment.

6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.

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8. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capital’s services.

9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same.

Additional Disclaimer for U.S. Persons

10. The research report is solely a product of AMBIT Capital 11. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report 12. Any subsequent transactions in securities discussed in the research reports should be effected through Enclave Capital LLC. (“Enclave”). 13. Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. 14. The research analyst(s) preparing the email / Research Report/ attachment is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that

therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

15. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company”). This report is distributed in the U.S.by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19 West 44th Street, suite 1700, New York, NY 10036).

16. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities. 17. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information

contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Additional Disclaimer for Canadian Persons

18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities. 19. AMBIT Capital's head office or principal place of business is located in India. 20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K

1N2 Canada. 23. Name and address of AMBIT Capital's agent for service of process in the Province of Montréal is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

Disclosure 24. Ambit and/or its associates have financial interest in Colgate-Palmolive, Pidilite and Jubilant Foodworks.

Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2015 AMBIT Capital Private Limited. All rights reserved.

Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor. 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100 CIN: U74140MH1997PTC107598 www.ambitcapital.com

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