India Consumer - Enjoying A Slice of Luxury.248.175.146

Consumer
India I Equities
Sector Report
8 October 2012
India Consumer
Enjoying a slice of luxury
Targeting the time-poor and cash-rich, consumer companies are making the most of more pleasure at higher prices strategy. Most companies have raised distribution ~100% and capacities 50% in the past 2-3 years. Also, the rural story is plush with higher NREGA and MSP. Premiumisation is upon us and here to stay.
Overweight Nifty / Sensex: 5676/18709
Moving up the brand curve. We believe the launch of premium products (offering solution to specific problems) by companies and higher ad-spend on them has improved players realizations by at least 200-300bps. Notably, this growth is devoid of price hikes. Importantly, it has helped players raise gross margins and reduce susceptibility to volatile input prices, keeping them afloat amidst competition. Benefits of investments come to fore. Consumer companies have invested aggressively in more than doubling distribution network over past 2-3 years. They have also increased production capacities by more than half and introduced new products and variants, over the past 2-3 years. Yet, balance sheets (net cash) remain radiant. We believe the stage is set for Indian consumer companies to post 16% CAGR over the next three years. Rural juggernaut to continue. We expect the rural story to remain strong with income sources for the populace more diversified than ever, supplemented further by higher MSPs and NREGA allocations. We believe higher penetration into the rural belt will also allow the organised players to eat from the unorganised share of the pie. Top picks. Our large cap top picks are GSK Consumer, Colgate, Emami and Pidilite. Among the mid cap companies, our top picks are Agro Tech Foods, Bajaj Corp., and Zydus Wellness. Out top Sell ideas are Hindustan Unilever, Britannia Industries, and Jyothy Laboratories.
ITC HUL Nestle Asian paints Dabur Colgate Marico GSK CH Emami
Shirish Pardeshi
+9122 6626 6730 [email protected]
Aniruddha Joshi
Gautam Singh
Key Data
Britannia
Pidilite Agro Tech
Rating Current price (`) Target price (`) M.Cap (US$m) Upside (%) Target PE(x) FY14e FY12-14e EPS CAGR (%) FY14e RoE (%) FY14e RoCE (%) FY14e PE (x)
Buy 278 320 40,823 15 30.2 15.1 33.9 43.6 26.2
Sell 560 466 23,262 (17) 26.9 18.1 75.6 89.8 32.4
Buy 4,595 5,220 8,518 14 36.0 18.0 60.8 53.2 31.7
Buy 3,888 4,441 7,170 14 26.0 26.8 39.4 47.7 22.8
Hold 132 130 4,419 (2) 25.0 18.4 36.2 31.5 25.4
Buy 1,250 1,440 3,269 15 29.0 22.9 103.1 114.9 25.2
Hold 202 201 2,385 (0) 23.9 27.0 23.9 26.3 24.2
Buy 2,956 3,425 2,393 16 25.3 26.6 36.0 37.4 21.8
Buy 503 635 1,464 26 25.0 17.8 36.5 33.3 19.8
Sell 493 493 1,132 20.0 20.2 51.1 39.2 20.0
Buy 203 235 1,975 16 25.3 20.4 26.3 31.0 21.7
Buy 411 576 193 40 22.9 29.9 22.1 28.7 16.4
Source : Company, Anand Rathi Research
Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix Anand Rathi Research
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India Equities
8 October 2012
India Consumer Enjoying a slice of luxury
India Consumer
Enjoying a slice of luxury
Investment Summary ........................................................................................3 Moving Up the Brand Curve..............................................................................4 Benefits of Investments Come to Fore..............................................................7 Rural Juggernaut to Continue .........................................................................10 Change in estimates and valuations ...............................................................13 Company Section............................................................................................21 ITC............................................................................................................22 Hindustan Unilever ...................................................................................24 Nestl India ..............................................................................................26 Asian Paints .............................................................................................28 Dabur India...............................................................................................30 Colgate Palmolive India............................................................................32 Marico.......................................................................................................34 Glaxo Smithkline Consumer Healthcare...................................................36 Britannia Industries...................................................................................38 Emami ......................................................................................................40 Pidilite Industries ......................................................................................42 Agro Tech Foods......................................................................................44 Bajaj Corp.................................................................................................46 Jyothy Laboratories ..................................................................................48 Lovable Lingerie .......................................................................................50 VST Industries..........................................................................................52 Zydus Wellness ........................................................................................54 Radico Khaitan .........................................................................................56 Tilaknagar Industries. ...............................................................................58
Anand Rathi Research

8 October 2012
Investment Summary
Consumer companies are expected to continue to trade at premium valuations despite a staggering outperformance of more than 100% to Nifty over the past two years, on the back of: The strategy of taking brands to premium levels, ensuring at least 1020% higher realization and 100-200bps increase in profit margins; growth of modern trade platform (accounting for 8% consumption in India) in the past five years is likely to significantly aid premiumization.
Investments made in FY11 and FY12 to increase production capacities more than 50-100% and expand distribution network ~100% across companies. Continued growth of the rural juggernaut of consumption on the back of ~30% increase in minimum support prices and linkage of wage rates under NREGA to inflation (~10%).
Though the sector is trading at premium of 100% premium to the Nifty PE against average premium of 75% over past 16 years, turbulent economic conditions are expected to retain defensive sectors such as consumer in focus. Free cash flows and earnings predictability are the key reasons for continued investor interest in the consumer sector.
Fig 1 Gross margins of consumer companies
(%) 72
67 62 57 52 47 42 37 32 27 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Fig 2 Distribution network (nos. m) 7 6 5 4 3 2 1 0

Britannia Nestle Colgate GSK CH Emami Marico
+2SD 32 +1SD 27 Avg 22 -1SD 17 -2SD Aug-12 Jul-11
HUL
Colgate
Source: Companies
Marico
Nestle
GSK CH
Source: Companies
Fig 3 Sharp rise in MSP for FY13

4,500 (Minimum Support Price, Rs./Qt) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Nine years CAGR: 6% Last six years CAGR: 19%
Fig 4 Consumer sector: Mean PE and standard deviation

42 37
12 Aug-99 Sep-00 Jun-97 Oct-01 Jan-05 Feb-06 Apr-08 May-09 Nov-02 Dec-03 Mar-07 Jun-10 Jul-98
Arhar
Source: GoI
Moong
Urad
Source: Bloomberg, Companies, Anand Rathi Research

Dabur
8 October 2012
Moving Up the Brand Curve

Growing realisation minus price hikes Premiumization by way of launching products in solution to specific problem to meet the consumer expectations has helped consumer companies to grow realizations 200-300bps without resorting to price hikes. We expect companies with strong premiumization strategy in place to do well, which include Colgate Palmolive India, GSK Consumer Healthcare, and Nestle India. Colgate has launched a strong set of various premium products such as Colgate Sensitive, Colgate Total, Colgate Plax, and Colgate Floss. Also, GSK Consumer has launched products such Horlicks Gold, Horlicks Lite, Womens Horlicks, and Mother Horlicks. Nestle too has introduced various premium products such as Nescafe Gold, Cold coffee, Nestea, Milkmaid celebrations, Maggi Soupperoni, and Fruit Dahi. Focus more on value than volume The strategy helps companies to improve realizations by way of sale of premium products instead of only base products. For instance, base Horlicks 500grams costs `155, whereas Horlicks Gold 500grams costs `200 and Junior Horlicks 500grams `180. The average realization for Horlicks moves upward with increase in sale of Junior Horlicks or Horlicks Gold, helping the company to grow revenues although volume growth remains lower. Colgate has hiked prices at a CAGR of just 3% over FY01-12. However, its average realization has moved up at above 5% during the period, driven by launch of Colgate Total, Sensitive, and Colgate Gel toothpastes.
Fig 5 Examples of premiumization
Company Segment Base product Premium variants introduced
GSK Consumer Nestle Colgate Emami

Source: Companies
Health food drink Horlicks Ready to cook Oral care Cooling hair oil Maggi noodles Colgate dental cream Navratna
Horlicks Gold, Horlicks Lite, Junior Horlicks, Women Horlicks Maggi Dal Atta, Maggi multigrain, Soupperoni, Pasta Colgate Sensodyne, Total, Mouthwash, Floss Navratna extra thanda, Navratna Lite, Navratna cocout cool, Cool tac
Reduced sensitivity to input prices The strategy demands change in revenue mix, with more of high-value products. Since the target is achieving higher gross margin at a lower volume, the sensitivity to input prices automatically lessens. Colgates gross margin has moved upwards from 35% in FY92 to 60% FY12. Volatility in prices of sodium carbonate or packaging material will not impact Colgate as much in FY13 or FY14 as they did in FY92 or FY93. Maricos gross margin has improved from 29% in FY97 to 48% in FY12. The impact of volatility in copra prices (Major raw material: 30% of net sales), has reduced.

8 October 2012
Fig 6 Improving gross margins of consumer companies despite strong revenue growth over past decade
Colgate
(`m) 30,000 25,000 20,000 15,000 10,000 5,000 0 15MFY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (%) 66 60 54 48 42 36 30 (`m) 42,000 36,000 30,000 24,000 18,000 12,000 6,000 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (%) 70 65 60 15,000 48 44 40 CY91 CY92 CY93 CY94 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 55 10,000 5,000 0 CY92 CY93 CY94 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 Revenue Gross margins (RHS) 50 45
Marico
(%) 53 49 45 41 37 33 29 25
Revenue
Gross margins (RHS)
Revenue
Gross margins (RHS)
Nestle
(`m) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 56 (%) 60
GSK-CH
(`m) 30,000 25,000 20,000 52
Revenue
Gross margins (RHS)
Source: Companies
Lower pressure from competition As the new segments entered are distinct, there is little or no competition, enabling companies to enjoy strong pricing power. For instance, GSK Consumer (GSK) has launched Horlicks Lite (Sugarfree Horlicks) and Women Horlicks. There is no competing product in these segments by Bournvita (Cadbury) or Complan (Heinz), leaving GSK free to grow revenues from these segments.
Fig 7 Colgate: Lesser competitive pressure
Segment Colgate's product Other competitive products Colgate's Status
Floss Mouthwash Therapeutic toothpaste Gel toothpastes Family toothpastes Low price toothpastes Toothpowder Toothbrush
Source: Companies
Colgate Floss Colgate Plax Colgate Sensitive, Total Colgate Gel Colgate dental cream, Herbal, Active Salt Cibaca Colgate tooth powder Colgate
Oral B Listerine Pepsodent G, Sensitive Close Up
Market leader Strong No. 2 player Market leader
Strong No. 2 player Pepsodent, Meswak, Market leader Anchor Babool, Amar Market leader Dabur Red toothpowder Oral B, Pepsodent Market leader Market leader

8 October 2012
Modern trade a major platform Modern trade forms 7-8% of consumption in India and, we believe, ~15% of urban area. Various segments such as juices, packaged tea, coffee, atta, premium shaving products, face wash sell largely through modern trade. The medium is bound to be explored even more with the recent allowance of multi-brand FDI.
Fig 8 Usage of modern trade for launch of new products
Company Product Usage of modern trade
Dabur
Uveda Saffola Oats
Launched Uveda range in modern trade, then rolled across genera trade Launched only in modern trade Launched initially in modern trade, then rolled out in general trade Rolled out pan India but post weaker response distribution restricted only to modern trade
Marico
Saffola Arise (Low GI Rice)
GSK Consumer
Source: Companies
Nutribar & Chill Dood
Key segments for premiumization We believe there are various segments such as ready-to-eat, ready-to-cook, undergarments, premium personal care products, products focussed on health segments, amongst others which will see strong premiumization ahead. We believe changing lifestyles, rising number of working women, growing education levels and greater overall awareness due to media penetration will help driving growth of premium products.
Fig 9 Key segments for premiumization
Segment Products Companies
Ready to cook Ready to eat Healthy Food Undergarments Oral care

Source: Companies
Noodles, popcorn, soups Biscuits, Chocolates Health food drink, edible oil, biscuits Lingerie All products
Nestle, Agro Tech, HUL Britannia, Nestle Britannia, Agro Tech, Marico, GSK Consumer Lovable Lingerie, Page Industries Colgate, HUL

8 October 2012
Benefits of Investments Come to Fore

Expanded distribution networks In the past 2-3 years, most consumer companies expanded their distribution networks, in rural areas and smaller towns. Earlier, companies appointed distributors, who then appointed wholesalers. This restricted their reach and involved greater cost of operations. Now, with companies moving to distributor driven models, they are extending their reach catering to more touch points. To expand their distribution networks, consumer companies initiated projects such as E-Choupal (ITC), Project Shakti (HUL) and Project Swadesh (Emami). Emami, GSK Consumer, Nestle, Bajaj Corp., Agro Tech, Jyothy Labs employed more feet on the ground to widen their distribution networks in rural areas as well as in tier II and III towns. They also launched products in formats suitable for rural areas (small SKUs) and crafted advertising aimed at rural consumers. Earlier, products were advertised on national channels, but availability was an issue and ad-spends under-utilised. The expanded distribution networks would fuel sales without investing further in brand-building. Launch of SKUs to drive growth To drive growth, consumer companies invested in developing various stockkeeping units (SKUs). In the past 4-5 years, they came out with low unit packs to enhance trial generation for the product of `1 to `10 and promoted them aggressively. They also developed larger SKUs, which also drove growth. GSK Consumer had no SKU below `60; so consumer trials were limited. It launched products at `20, which helped it grow its revenues since it could now tap new consumers. Similarly, small SKUS of Good Day and cream biscuits helped Britannia drive volumes in these segments. Horlicks in larger pouches and Bajaj Almond drops 500ml in PET bottles have also driven growth.
Fig 11 SKUs to drive growth
Company Product New SKUs
Britannia Marico
Fig 10 Distribution network

(nos. m) 7 6 5 4 3 2 1 0 GSK CH Colgate Emami Nestle Dabur HUL
Source: Companies
Bajaj Corp GSK Consumer Britannia Cadbury
Bajaj Almond drops Horlicks, Boost Good Day Chocolates
500ml in PET bottles, `1 sachet `20 packs, pouches `5 packs `2 packs
Source: Companies, Anand Rathi Research
New products aiding growth The consumer sector also grew through sub-segmentation and new products addressing specific consumer needs (Value-added products) such as Horlicks Gold, Junior Horlicks, Womens Horlicks, drove growth in Horlicks. Colgate Sensitive, Colgate Max white and Colgate Total drove growth in Colgates oral care portfolio. Considerable investments in these new products have driven such growth. Apart from the regular segments (soaps and toothpastes), sub-segments were developed and now constitute 10-50% (by value) of the main segment. Shampoo, which gained through consumer up-trading from Shikakai soaps, is now larger than Shikakai soaps. Shower gels, face washes and hand washes are now ~5-10% of soaps.

8 October 2012
In the oral care category, new sub-segments (flosses and mouthwashes) are growing faster than toothpastes and toothpowders and, in the medium term, would comprise a large part of the oral-care range.
Fig 12 Evolution of premium categories
Segment Earlier products New products
Hair washes Hair styling Oral care Oral care Body wash (bathing)
Shikakai Shampoos Toothpowders Toothpastes Soaps Soaps Soaps
Shampoos Conditioners Toothpastes Flosses, Mouthwashes Face washes Hand washes, Hand sanitizers Shower gels
Source: Companies, Anand Rathi Research
Investment in manufacturing In the past 2-3 years, consumer companies invested aggressively in manufacturing capacities. Nestle, GSK Consumer, Zydus Wellness, Agro Tech Foods, Asian Paints raised capacities by over 50%. As a large part of the capex has been completed, consumer companies would not need to incur capex for the next 3-4 years. Most of the capex has also been in taxefficient zones. This would save excise and taxes. We expect consumer companies to launch new products, variants and SKUs. We also expect significant savings in raw material sourcing and along the entire supply chain. Savings would also arise in distribution and in the lead time for products to reach consumers.
Fig 13 Capex as % of net sales for major companies in FY11 and FY12
(%) 25
20 15 10 5 0 Asian Paints HUL Colgate Agro Tech Foods GSK Consumer Britannia Marico Emami Nestle
FY11
FY12
Source: Companies
Fig 14 Consumer companies, capex location and brands

Company Segment Capex locations
Nestle Agro Tech Foods Colgate GSK Consumer Zydus Wellness

Source: Companies
Maggi, chocolates, milk products Act II and peanut butter Oral-care products Health-food drinks Sugarfree, Ever Yuth
Baddi, Goa Gujarat Gujarat Rajamundry, AP Sikkim
Ad-spend to generate consumer awareness Consumer companies have invested substantially in generating consumer awareness regarding the various products. Nestle instructs consumers how to utilise the Maggi and Nescafe packs. Personal care players advertise in a manner designed to further explain to consumers the ingredients and their
8 October 2012
use (SPF 15 for smoother skin, use of glycerine in winter, removal of transfats from wafers and low glycemic index rice). In modern trade, substantial investment has been made in product promotions. Merchandisers help customers at or outside modern trade outlets, raising consumers awareness about newer products and their utility, and give them the opportunity to try them out. Such investment initiatives generate wider awareness of new products and their advantages. Acquisition and integration In the past 2-3 years, some consumer companies acquired brands and/or companies. Funds invested in such acquisitions as well as on streamlining them is likely to generate returns in coming years. Some benefits of such integration are synergies in merging distribution networks and in raw material sourcing as well as in media buying. Such synergies are likely to play out in the next 2-3 years.
Fig 15 Acquisitions in the recent past by consumer companies
Company Recent acquisitions
Jyothy Labs Marico Dabur

Source: Companies
Henkel Three brands of Reckitt (Paras) Code 10 Hoby Kozmetik, Namaste
Balance sheets remain radiant Despite the huge investments in expanding production capacities and enhancing distribution networks, consumer companies continue to have strong balance sheets. With their higher valuations, some (Marico, Jyothy Labs, Bajaj Corp.) raised money in equity markets and strengthened their balance sheets with free cash-flows. This would be a key growth driver in future.
Fig 16 Return ratios of consumer companies (FY12)
(%) 140
105 70 35 0 Nestle Emami Marico HUL Bajaj Corp Colgate Britannia Agro tech Foods Zydus Wellness Asian Paints GSK Consumer Dabur ITC
RoE
Source: Companies
RoCE

8 October 2012
Rural Juggernaut to Continue

Sharp rise in wages would boost consumption On the implementation of the government's flagship National Rural Employment Guarantee Act (NREGA), wage rates across India have risen sharplyby over 100%. Moreover, the wage rate under the NREGA has been linked to the consumer price index (CPI). In the past four years (FY09-FY12), CPI has risen by an average ~10%. We expect it to increase by 10% in FY13, leading to a further hike in the wage rate. The consumer sector is likely to be buoyed by the rise in wages in rural India.
Fig 17 Sharp rise in wages in major states of India
Bihar UP Tamil Nadu Rajasthan West Bengal Andhra Pradesh Maharashtra Karnataka Haryana 200 Haryana
Fig 18 CPI remains high

14 12 10 8 (%) 6 4 2 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY12
140 Tamil Nadu Rajasthan West Bengal Andhra Pradesh Maharashtra Karnataka Haryana
110
80
Bihar
UP
Bihar UP Tamil Nadu Rajasthan West Bengal Andhra Pradesh Maharashtra Karnataka
170
50 FY06 FY11 NREGA wage rate in major states (`/day) Current wage rate
CPI inflation
Source: GoI
Source: GoI
Sharp rise in minimum support prices boost farm income Government has raised the minimum support price (MSP) for FY13 kharif crops by an average 28%. The MSP of paddy for FY13 has been hiked more than 15% and that for oilseeds and pulses by 30-50%. In the past six years, the government has been prompt in sharply raising the MSP of most agricultural products. MSP of wheat registered an 11% CAGR between FY07 and FY12 versus 6% between FY98 and FY06. Similarly, MSPs of rice (up 11.2%) and pulses (up ~15%) have also risen considerably between FY06 and FY12. MSP generally sets the floor price of a crop; hence higher prices of farm produce raise incomes of rural consumers, especially of agricultural labour.
Fig 19 Sharp rise in MSP for FY13
(Minimum Support Price,%, yoy) 60 50 40 30 20 10 0 Jowar Ragi Groundnut Soyabean Sunflower seed Jute Urad Cotton Moong Sesamum Nigerseed Arhar Bajra Maize Sugarcane Paddy Copra Average Hike:
(%)
Fig 20 CPI continues to be high

14 12 10 8 6 4 2 0 FY13e FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Rise in MSP in FY13
CPI inflation
Source: GoI
Source: GoI

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8 October 2012
Fig 21 Near three-fold rise in the MSP of rice

1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 (Minimum Support Price, Rs./Qt) Last six years CAGR: 13%
Fig 22 Minimum support prices of pulses

4,500 (Minimum Support Price, Rs./Qt) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Arhar
Source: Goi
Last six years CAGR: 19%
Nine years CAGR: 5%
Nine years CAGR: 6%
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 MSP for Rice (Rs./Quintal)
Source: GoI
Moong
Urad
Fig 23 Rural poverty reducing

60 50 40 (%) 30 20 10 0 1994 2005 2010 50.1 41.8 33.8
Lower poverty levels to support consumption Data from the World Bank show that the poverty headcount ratio at the rural poverty line has come down to 42% of the rural population in 2005 and to 34% in 2010, from a high of 50% in 1994. The lower poverty levels are likely to support higher rural consumption. Since 2005, the government policies have been pro rural development and employment generation leading to improvement in rural wealth. Ahead, wealth to drive consumption Lack of education and investment avenues lead to rural India largely buying gold, silver or land. Prices of gold, silver and land have sharply risen, automatically raising the wealth of rural consumers (believed to have almost doubled in the past 3-4 years). Ahead, this wealth would drive income and consumption. Also, higher gold prices have substantially enhanced the ability of rural consumers to raise debt.
Poverty headcount ratio at rural poverty line (% of rural population)
Source: World Bank
Fig 24 House prices rising

180 170 160 150 141.7 140 130 120 110 100 ( 2008-09Q4=100, All India) 176.9 152.0 157.8 164.1
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12
RBI's housing price Index
Source: RBI
Fig 25 Gold prices continue to rise

(`/10 grams) 35,000 30,000 25,000 20,000 15,000 10,000 Nov-08 Nov-09 Nov-10 Nov-11 Feb-09 Feb-10 Feb-11 Aug-08 Aug-09 Aug-10 Aug-11 Feb-12 May-08 May-09 May-10 May-11 May-12 Aug-12
Feb-12 Mar-12
Fig 26 Silver prices continue to rise

(`/kg)
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 May-08 Nov-08 Feb-09 May-09 Nov-09 Feb-10 May-10 Nov-10 Feb-11 May-11 Nov-11 Feb-12 May-12 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12
Gold Price
Source: Bloomberg Source: Bloomberg
Silver Price

11
8 October 2012
Rise in non-farm job opportunities Rural household incomes have been rising due to the rise in non-farm job opportunities. Dependence on agriculture has slid in the past five years. The National Sample Survey Organization (NSSO) reports that jobs in rural construction rose 88% between FY05 and FY10, while the number of people employed in agriculture fell from 249m to 229m. Other allied businesses account for a larger share of incomes of rural consumers. We believe with rising rural income levels, consumption would trend higher.
Fig 27 Rural sales as percent of net sales
(%) 60 45 30 15 0 Dabur Britannia GSK Consumer HUL Colgate Emami Nestle Marico
Lower penetration in rural areas Product offtake in rural areas is far lower than in urban areas. Most companies derive 75% or more of their revenues from urban areas though the urban population is half that of the rural population. In the medium-tolong term the low consumption base in rural areas and rising rural incomes would be the drivers for consumer companies to push their products there. Also, the widening reach of the mass media (television, internet) would drive aspirations and growth. Organised players in good stead We believe a large portion of the market in rural areas is of the unorganised kind. Small and regional players dominate rural areas only on the basis of lower prices. We expect that, due to higher raw material prices, smaller players would lose their ability to hold selling prices. We also believe they lack brand-building abilities. Moreover, most do not enjoy economies of scale in manufacturing or distribution. Ahead, with the growing reach of the media, consumer companies would gain market share from these unorganised operators. The growth of organised players is expected to come at more than total market growth.
Fig 28 Advantages enjoyed by consumer companies over unorganised players
Particulars Advantage for organised consumer companies
Source: Companies
Brand-building activities Pricing power Use of promotions Distribution network Economies of scale
Source: Anand Rathi Research
Creation of brands through all-India ad-spend through regional media Ability to pass on prices or hold on to prices despite change in raw material prices Use of brands/ products to promote other brands All-India distribution networks Organised players benefit in manufacturing and raw material sourcing
Fig 29 Investment by consumer companies in rural areas

Particulars Companies
Increased focus on rural belt To grow revenue from rural areas, consumer companies have invested aggressively, especially in widening their distribution networks. They have initiated projects such as Shakti (HUL), Swadesh (Emami), Double (Dabur) or Jagruti (Colgate). Consumer companies have also launched products in keeping with the needs of rural consumers, introducing products at `10 and below. Further, they have structured their advertising to target rural consumers (Nestles advertising of Maggi noodles through brand ambassador Amitabh Bacchan focuses on the `5 price).
Small SKUs
Communication aimed at rural consumers Expanded Project Shakti (HUL), distribution networks Project Swadesh (Emami), Project Jagruti (Colgate) Products for rural Emami, Nestle, Dabur consumption
Source: Companies
Nestle, Marico, HUL, Dabur Nestle, HUL, Dabur

12
8 October 2012
Change in estimates and valuations

Fig 30 Change in estimates
Revenues (`m) Old estimates FY13e FY14e Revised estimates FY13e FY14e Change (%) FY13e FY14e Old estimates FY13e FY14e Net profit (`m) Revised estimates FY13e FY14e Change (%) FY13e FY14e Target price (`) Old New Rating Old New
ITC HUL Nestle Asian Paints Dabur Colgate Marico GSKCH Britannia Emami Pidilite Agro Tech Bajaj Corp Jyothy Labs Lovable Ling VST Inds Zydus Wellness Radico Khaitan Tilaknagar
300,293 244,726 86,266 111,097 57,142 31,002 46,416 32,672 67,610 17,211 37,323 9,265 6,790 11,997 1,811 7,520 3,731 13,137 6,288
339,631 297,919 346,743 272,612 269,332 309,163 104,251 86,266 104,251 133,408 115,551 138,635 64,591 62,551 74,019 36,246 32,193 37,575 55,447 49,655 59,338 39,051 32,101 38,373 81,001 20,286 43,969 10,667 8,111 14,666 2,332 7,954 4,335 15,512 7,343 64,932 16,146 37,323 9,265 6,790 11,997 1,712 7,693 3,731 13,484 6,531 77,285 19,029 43,969 10,667 8,111 14,666 2,204 8,452 4,335 15,899 7,787
(0.8) 10.1 4.0 9.5 3.8 7.0 (1.7) (4.0) (6.2) (5.5) 2.3 2.6 3.9
2.1 13.4 3.9 14.6 3.7 7.0 (1.7) (4.6) (6.2) (5.5) 6.3 2.5 6.0
74,622 28,217 11,277 12,132 8,134 6,221 3,900 5,014 2,269 3,040 4,167 613 1,744 684 304 1,272 752 1,086 645
85,744 31,873 13,979 14,842 9,273 7,133 5,030 5,788 2,829 3,748 4,823 797 2,062 1,126 324 1,368 859 1,411 877
71,036 32,644 11,277 12,811 7,817 5,775 4,526 4,761 2,360 3,156 4,167 613 1,744 684 265 1,641 752 916 616
82,927 37,314 13,979 16,383 9,048 6,741 5,387 5,692 2,945 3,843 4,823 797 2,062 1,126 314 1,876 859 1,152 822
(4.8) 15.7 5.6 (3.9) (7.2) 16.1 (5.0) 4.0 3.8 (12.8) 29.0 (15.7) (4.5)
(3.3) 17.1 10.4 (2.4) (5.5) 7.1 (1.7) 4.1 2.5 (3.1) 37.1 (18.4) (6.3)
247 330 5,220 2,785 120 1,242 155 2,980 420 500 213 576 189 130 555 1,236 536 161 74
320 466 5,220 4,441 130 1,440 201 3,425 493 635 235 576 210 130 490 2,260 536 161 74
Buy Buy Sell Sell Buy Buy Sell Buy Hold Hold Buy Buy Hold Hold Buy Buy Sell Buy Buy Buy Buy Sell Buy Sell Buy Sell Buy Buy Buy Buy Sell Buy Buy Buy
Buy Buy Buy Buy
Source: Anand Rathi Research
The consumer sector trades at a 100% premium to the Nifty PEs 16-year average of 75%. It has been richly valued due to its 100% free cash-flows, earnings predictability and higher return ratios (over 25% for most). Considering the prevailing turbulent economic and political conditions as well as the strong growth drivers of consumer companies, we expect the premium valuations to continue.
Fig 31 India consumer relative valuation matrix
RoE Company Rating Price (`) FY14e (%) RoCE FY14e (%) CAGR FY12-14 (%) Revenues EPS PE FY14e (x)
Fig 32 ITC mean PE

30 +2SD 25 +1SD 20 15 10 5 Jan-01 Sep-01 Jun-02 Mar-03 Dec-03 Aug-04 May-05 Feb-06 Nov-06 Aug-07 Apr-08 Jan-09 Oct-09 Jul-10 Mar-11 Dec-11 Sep-12 Mean -1SD -2SD
Source: Bloomberg, Anand Rathi Research
ITC HUL Nestle Asian Paints Dabur Colgate Marico GSKCH Britannia Emami Pidilite Agro Tech Bajaj Corp Jyothy Labs Lovable Lingerie VST Inds Zydus Wellness Radico Khaitan Tilaknagar Inds
Buy Sell Buy Buy Hold Buy Hold Buy Sell Buy Buy Buy Buy Sell Buy Buy Buy Buy Buy
278 560 4,595 3,888 132 1,250 202 2,956 493 503 203 411 187 154 382 1,780 426 118 55
33.9 75.6 60.8 39.4 36.2 103.1 23.9 36.0 51.1 36.5 26.3 22.1 33.4 13.9 16.0 52.5 31.4 13.1 13.2
43.6 89.8 53.2 47.7 31.5 114.9 26.3 37.4 39.2 33.3 31.0 28.7 31.6 15.1 17.0 66.3 33.9 13.3 15.5
15.1 14.9 18.0 22.3 18.5 18.1 21.7 19.5 19.0 17.8 18.6 14.9 19.9 26.9 28.8 11.5 14.6 17.9 19.2
15.1 18.1 18.0 26.8 18.4 22.9 27.0 26.6 20.2 17.8 20.4 29.9 20.5 56.6 20.4 14.7 12.7 23.0 29.4
26.2 32.4 31.7 22.8 25.4 25.2 24.2 21.8 20.0 19.8 21.9 16.3 15.8 22.7 20.4 14.7 19.4 13.6 8.0

13
8 October 2012
Fig 33 Cons. sector - premium to 12M forward Nifty PE

300 270 240
Fig 34 Cons. sector - Mean PE and standard deviation

42 37 +2SD 32 +1SD +1 SD 27 Avg Avg 22 -1SD 17 Nifty -2SD 12 Oct-01 Nov-02 Dec-03 Aug-99 Sep-00 Feb-06 Jun-97 Jul-98 Jan-05 Mar-07 May-09 Jun-10 Jul-11 Aug-12 Apr-08
210 180 150 -1 SD 120 90 Apr-99 Apr-04 Dec-00 Dec-05 Apr-09 Dec-10 Jul-97 Aug-02 Aug-07 Aug-12

14
10
15
20
25
30
35
8 October 2012
10 15 20 25 30 35 40 45 50
15
20
25
30

HUL
Dabur
GSKCH
Fig 35 PE trends: mean PE and standard deviation
Apr-01 Nov-01 Jul-02 Mar-03 Oct-03 Jun-04 Jan-05 Sep-05 May-06 Dec-06 Aug-07 Apr-08 Nov-08 Jul-09 Feb-10 Oct-10 Jun-11 Jan-12 Sep-12 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Jan-11 Nov-11 Sep-12 +1 SD +2 SD -2 SD Mean -1 SD +2SD +2 SD Mean -2 SD +1SD Mean +1SD -2SD -1SD -1 SD
Jul-02 Feb-03 Oct-03 Jun-04 Jan-05 Sep-05 Apr-06 Dec-06 Aug-07 Mar-08 Nov-08 Jul-09 Feb-10 Oct-10 May-11 Jan-12 Sep-12
12
17
22
27
32
37
42
45 40 35 30 25 20 15 10 5 0
50 45 40 35 30 25 20 15 10 5
Nestl India
Colgate Palmolive
Britannia
Apr-01 Nov-01 Jul-02 Mar-03 Oct-03 Jun-04 Jan-05 Sep-05 May-06 Dec-06 Aug-07 Apr-08 Nov-08 Jul-09 Feb-10 Oct-10 Jun-11 Jan-12 Sep-12
Jan-00 Oct-00 Aug-01 May-02 Mar-03 Dec-03 Oct-04 Jul-05 May-06 Feb-07 Dec-07 Sep-08 Jul-09 Apr-10 Feb-11 Nov-11 Sep-12
Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 +2 SD -2 SD
+1SD Mean -1SD -2SD
+2SD 35 30 25 20 15 10 5 0
-2 SD
-1 SD
+1 SD
+2 SD
+1 SD Mean -1 SD 10 0 5 15 20
Mean
25
30
35
12 8
16
20
24
28
32
Asian Paints
Marico
Emami
Apr-02 Nov-02 Jul-03 Feb-04 Sep-04 May-05 Dec-05 Jul-06 Mar-07 Oct-07 May-08 Jan-09 Aug-09 Apr-10 Nov-10 Jun-11 Feb-12 Sep-12
Jul-01 Mar-02 Oct-02 Jun-03 Feb-04 Oct-04 Jun-05 Feb-06 Oct-06 Jun-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 Mean +1SD +2SD -2SD -1SD
Jan-01 Nov-01 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12 Mean -2 SD -1 SD
+1 SD
+2 SD
+1SD Mean
+2SD
-2SD
-1SD
15
20 18 16 14 12 10 8 6 4 2 0 16 24 32 40 0 8
10
20
30
40
50
8 October 2012
-10

Pidilite
VST
Jyothy Labs
Fig 35 (cont.) PE trends: Mean PE and standard deviation
Dec-07 Apr-08 Jul-08 Nov-08 Feb-09 Jun-09 Sep-09 Jan-10 May-10 Aug-10 Dec-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Sep-12 Mean Mean +1SD +2SD -2SD -1SD +1SD +2SD +1SD +2SD Mean -2SD 100 90 80 70 60 50 40 30 20 10 0
Mar-05 Nov-05 Jun-06 Feb-07 Sep-07 May-08 Dec-08 Aug-09 Mar-10 Oct-10 Jun-11 Jan-12 Sep-12 +1SD +2SD Mean -2SD -1SD
Jan-00 Aug-00 Mar-01 Oct-01 Jun-02 Jan-03 Aug-03 Mar-04 Nov-04 Jun-05 Jan-06 Aug-06 Apr-07 Nov-07 Jun-08 Jan-09 Sep-09 Apr-10 Nov-10 Jul-11 Feb-12 Sep-12 -2SD -1SD
Jan-00 Oct-00 Jul-01 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12
-1SD
45 40 35 30 25 20 15 10 5 0
10
20
30
40
50
60
Agro Tech
Zydus Wellness
Radico Khaitan
Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Sep-12 +1SD +2SD Mean -1SD 0 Apr-06 Oct-06 Apr-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 +1SD +2SD Mean -1SD 5 10
Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 -1SD -2SD
+2SD +1SD Mean
24 22 20 18 16 14 12 10 8 6
15
20
25
30
10
15
20
25
30
35
40
45 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 +1SD +2SD Mean -2SD -1SD
Bajaj Corp.
Lovable
Tilaknagar Industries
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12
+1SD Mean
+2SD
-2SD
-1SD
16
8 October 2012
Fig 36 India consumer sector: Financials and valuation matrix

M.Cap Company Price (`) (US$m) FY12 RoE (%) FY13e FY14e FY12 RoCE (%) FY13e FY14e Revenue CAGR FY12-14(%) EPS CAGR FY12-14 (%) FY12 PE (x) FY13e FY14e Div Yield FY14e (%)
ITC HUL Nestle* Asian Paints Dabur Colgate Marico GSKCH* Britannia Emami Pidilite Agro Tech Bajaj Corp Jyothy Labs Lovable Lingerie VST Inds Zydus Wellness Radico Khaitan Tilaknagar Inds
278 560 4,595 3,888 132 1,250 202 2,956 493 503 203 411 187 154 382 1,780 426 118 55
40,823 23,262 8,518 7,170 4,419 3,269 2,385 2,393 1,132 1,464 1,975 193 530 492 123 527 320 301 127
33.3 89.6 91.0 38.7 42.2 113.0 31.8 34.9 53.3 36.3 26.0 19.0 29.8 7.0 14.3 53.9 40.5 8.8 10.2
32.9 82.3 70.5 39.7 39.4 118.0 28.8 37.9 50.8 38.2 27.4 21.2 31.3 10.5 15.5 54.3 34.5 11.6 11.3
33.9 75.6 60.8 39.4 36.2 103.1 23.9 36.0 51.1 36.5 26.3 22.1 33.4 13.9 16.0 52.5 31.4 13.1 13.2
42.3 92.7 88.1 47.1 26.2 131.3 22.7 37.2 22.6 30.5 26.0 23.6 28.0 6.1 14.1 68.2 42.9 10.9 12.6
41.9 86.4 58.1 47.2 26.9 126.5 25.4 38.8 28.6 33.9 29.5 27.0 29.7 11.3 15.3 70.0 36.6 11.7 13.6
43.6 89.8 53.2 47.7 31.5 114.9 26.3 37.4 39.2 33.3 31.0 28.7 31.6 15.1 17.0 66.3 33.9 13.3 15.5
15.1 14.9 18.0 22.3 18.5 18.1 21.7 19.5 19.0 17.8 18.6 14.9 19.9 26.9 28.8 11.5 14.6 17.9 19.2
15.1 18.1 18.0 26.8 18.4 22.9 27.0 26.6 20.2 17.8 20.4 29.9 20.5 56.6 20.4 14.7 12.7 23.0 29.4
34.7 45.2 44.1 36.6 35.7 38.1 39.0 35.0 28.9 27.5 31.8 27.6 23.0 55.7 29.6 19.3 24.6 20.5 13.4
30.6 37.1 39.3 29.1 29.4 29.4 28.8 26.1 25.0 24.1 25.4 20.7 19.3 37.4 24.1 16.7 22.1 17.1 10.7
26.2 32.4 31.7 22.8 25.4 25.2 24.2 21.8 20.0 19.8 21.9 16.3 15.8 22.7 20.4 14.7 19.4 13.6 8.0
2.1 2.0 1.1 1.3 1.3 2.4 0.4 1.7 2.4 1.6 1.2 0.5 3.2 1.0 0.8 4.5 1.4 0.7 1.5
Source: Bloomberg, Companies, Anand Rathi Research
*Year ending Dec
17
8 October 2012
Fig 37 Absolute and relative stock performances

Absolute price performance (%) 1m 3m 6m 12m Relative price performance (%) 1m 3m 6m 12m
BSE FMCG ITC HUL Nestle Asian Paints Dabur India Colgate Palmolive Marico GSKCH Emami Britannia Industries Pidilite Industries Agro Tech Bajaj Corp Jyothy Labs Lovable Lingerie VST Inds Zydus Wellness Radico Khaitan Tilaknagar Inds
Source: Bloomberg
5.5 5.5 3.5 (1.1) 3.5 2.2 1.8 (2.0) 0.1 (1.4) (1.1) 1.3 (5.4) 2.1 (1.2) 16.2 7.0 7.4 0.3 24.5
14.8 9.9 25.6 3.7 4.7 14.7 7.4 9.9 11.2 3.7 (7.8) 20.1 (11.1) 50.3 28.1 8.2 2.8 3.5 1.0 (4.6)
25.2 22.1 40.3 (1.8) 17.0 24.9 10.2 18.9 8.1 22.0 (17.0) 23.3 (6.9) 43.3 89.9 3.8 10.6 9.7 (7.2) (1.8)
44.6 39.5 70.0 9.2 24.3 31.1 26.8 40.4 24.5 23.8 9.2 23.1 9.0 84.7 109.7 (11.6) 41.4 (20.5) (3.0) 69.4
BSE FMCG ITC HUL Nestle Asian Paints Dabur India Colgate Palmolive Marico GSKCH Emami Britannia Industries Pidilite Industries Agro Tech Bajaj Corp Jyothy Labs Lovable Lingerie VST Inds Zydus Wellness Radico Khaitan Tilaknagar Inds
(0.7) (0.8) (2.7) (7.4) (2.7) (4.1) (4.5) (8.3) (6.1) (7.7) (7.4) (5.0) (11.7) (4.1) (7.5) 10.0 0.8 1.2 (6.0) 18.3
8.1 3.1 18.8 (3.0) (2.0) 8.0 0.7 3.1 4.5 (3.1) (14.5) 13.3 (17.9) 43.5 21.4 1.4 (3.9) (3.2) (5.7) (11.4)
18.6 15.5 33.7 (8.4) 10.4 18.2 3.5 12.2 1.5 15.4 (23.7) 16.7 (13.6) 36.7 83.2 (2.8) 3.9 3.0 (13.9) (8.4)
28.4 23.3 53.9 (6.9) 8.2 15.0 10.7 24.3 8.3 7.7 (6.9) 7.0 (7.1) 68.6 93.6 (27.7) 25.3 (36.7) (19.2) 53.3
18
8 October 2012
Fig 38 Price trends: Major raw materials

Sugar
(`/quintal) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Feb-08 Feb-09 Feb-10 Feb-11 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Feb-12 Aug-12 (`/kg) 78 68 58 48 38 28 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
Liquid Paraffin
(`/50kg) 15,500 14,000 12,500 11,000 9,500 8,000 6,500 5,000 Aug-07 Feb-08 Aug-08 Feb-09
Coffee
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Feb-12
Wheat
(`/quintal) 1,600 1,450 1,300 1,150 1,000 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12
(`/50kg) 1,350 1,250 1,150 1,050 950 850 Oct-08 May-08
Soda Ash
(`/100kg) 7,000 6,100 5,200 4,300 3,400 2,500 Oct-09 Apr-09 Sep-10 Sep-11 Aug-12 Aug-07 Aug-08
Copra
Aug-09
Aug-10
Aug-11
LAB
(`/kg) 125 115 105 95 85 75 65 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 65 55 45 Aug-07 Aug-08 (`/kg) 95 85 75
PE (packing material)
(`/10Kg) 650
600 550 500 450 400 350 300 250 200 Jun-08 Jun-09
Palm Oil
Aug-09
Aug-10
Aug-11
Aug-12
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Source: Bloomberg, CMIE, RIL, Companies
Aug-12
Dec-08
Dec-09
Jan-11
Jul-10
Jul-11
Aug-12
Feb-12
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Mar-10
Mar-11
Aug-12
19
8 October 2012

20
8 October 2012
Company Section

21
Consumer
India I Equities
Update
Change in Estimates Target Reco
8 October 2012
ITC
Cigarette volumes high; Buy
Despite higher excise and sales tax (of 18%), we expect ITC to report positive cigarette volumes in FY13. Other FMCG is likely to be EBITDA-positive in FY14. With established distribution network in cigarettes and core brands in Other FMCG, we expect healthy earnings CAGR of 15% over FY12-14. We retain a Buy with target of `320. Cigarettes volumes to turn robust. We expect cigarette volumes to be flat (1% upwards) in FY13 and 4% in FY14. The launch of 64mm cigarettes and little competition at the premium end is expected to help ITC maintain positive volume growth in FY13. Other FMCG EBITDA positive in FY14. The Other FMCG segment is expected to turn EBITDA positive in FY14 from losses of `2bn in FY12. Segments such as biscuits and atta are already profitable with margin of 23%. The reduced need for investments to promote personal-care brands due to market share gain of 5% in three years of launch and sub-segmentation of the Sunfeast brand are helping drive revenues without resorting to aggressive ad-spend. Launch of products not a difficult task. The company has already developed its all-India distribution network of more than 4m outlets and has created stronger brands such as Sunfeast, Fiama, Vivel, etc. Launch of variants on the base of these brands and the structured supply of raw materials from its agri division allows ITC to launch new brands/products at an easier pace than other competitors. Other businesses on track. Other businesses (hotel, paper and agri) are expected to report upturn in margins by 200-300bps. We expect the agri business to benefit by the 10-12% rupee depreciation. Valuation. We value the stock at `320 (earlier `247) at a target PE of 30x FY14e earnings. Positive cigarette volume growth would help drive valuations up. Risks: Rise in input prices and higher competition.
Key financials (YE Mar) FY11 FY12 FY13e FY14e FY15e Key data
Rating: Buy Target Price: `320 Share Price: `278

ITC IN / ITC.BO
52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
Shareholding pattern (%)
`280 / `189 18709 / 5676 US$29.5m `2259bn / US$42m 7,818m

Jun 12 Mar 12 Dec 11
Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public
0.0 0.0 100.0 17.7 34.1 48.2
0.0 0.0 100.0 17.4 34.3 48.3
0.0 0.0 100.0 16.3 34.8 48.9
Estimates revision (%)
FY13e
FY14e
Sales EBITDA EPS Target multiple (x) Relative price performance

280 260 240 220 200 180 Oct-11 Feb-12 Jun-12 Apr-12 Dec-11
(0.8) (6.7) (4.8) -
2.1 (2.4) (3.3) -
ITC
Sensex Aug-12 Oct-12
Source: Bloomberg
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research
222,737 50,179 6.5 18.8 42.9 12.5 30.9 40.7 1.6 (40.7)
261,795 62,581 8.0 23.4 34.7 10.7 33.3 42.3 1.6 (35.1)
297,919 71,036 9.1 13.5 30.6 9.5 32.9 41.9 1.8 (38.0)
346,743 82,927 10.6 16.7 26.2 8.4 33.9 43.6 2.1 (41.7)
403,725 97,084 12.4 17.1 22.4 7.3 34.8 44.7 2.3 (45.9)
Shirish Pardeshi
Aniruddha Joshi
Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research
India Equities
8 October 2012
ITC Cigarette volumes high; Buy
Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY11 FY12 FY13e FY14e FY15e
Fig 2 Balance sheet (`m)

Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adj. FDEPS (`/share) Adj. FDEPS growth (%)
222,737 16.4 148,660 74,077 33.3 502 6,991 7,765 23,655 31.8 50,694 611 50,179 6.5 18.8
261,795 17.5 173,420 88,375 33.8 805 7,455 11,566 28,458 31.0 63,224 755 62,581 8.0 23.4
297,919 13.8 196,552 101,367 34.0 336 9,074 11,863 32,184 31.0 71,636 700 71,036 9.1 13.5
346,743 16.4 227,353 119,390 34.4 336 10,840 12,839 37,526 31.0 83,527 700 82,927 10.6 16.7
403,725 16.4 265,118 138,607 34.3 336 12,088 15,388 43,887 31.0 97,684 700 97,084 12.4 17.1
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, Liquid Net working capital Cash and bank balance Capital deployed Net debt WC days Book value (`/sh)
7,738 156,882 164,621 1,408 1,246 7,980 175,254 105,118 48,678 48,678 (2,811) 24,269 175,254 (63,722) (1.3) 22.3
7,818 186,767 194,586 1,571 2,800 8,658 207,614 124,039 63,000 63,000 (10,726) 31,301 207,614 (82,844) (4.1) 26.0
7,818 7,818 7,818 212,457 243,234 281,367 220,275 251,053 289,186 1,571 1,571 1,571 2,800 2,800 2,800 8,658 8,658 8,658 233,303 264,081 302,214 135,964 148,125 161,037 103,000 128,000 153,000 103,000 128,000 153,000 (12,591) (15,216) (18,363) 6,930 3,172 6,540 233,303 264,081 302,214 (98,472) (119,715) (148,083) (4.2) (4.4) (4.5) 29.3 33.2 38.1
Fig 3 Cash-flow statement (`m)

Fig 4 Ratio analysis @ `278

PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
50,179 6,991 57,170 120 57,627 (14,207) 43,420 (45,010) 9,038 341 2,787 10,577 13,050 23,627
62,581 7,455 70,036 (7,983) 65,004 (24,090) 40,914 (40,618) 7,650 (4) (887) 6,832 23,623 30,455
71,036 9,074 80,110 1,865 81,975 (21,000) 60,975 (45,347) (40,000) (24,371) 31,301 6,930
82,927 10,840 93,766 2,625 96,391 (23,000) 73,391 (52,149) (25,000) (3,757) 6,930 3,172
97,084 12,088 109,172 3,147 112,318 (25,000) 87,318 (58,951) (25,000) 3,368 3,172 6,540
P/E (x) P/B (x) EV/sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Ad-spend to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) Volume growth (%) Realization growth (%)
42.9 12.5 9.3 28.1 30.9 40.7 1.6 68.6 36.4 2.9 17.1 18.8 22.8 (2.8) 18.0
34.7 10.7 8.0 23.8 33.3 42.3 1.6 56.2 36.8 2.7 19.3 23.4 24.2 4.0 7.9
30.6 9.5 7.1 20.7 32.9 41.9 1.8 55.0 36.2 3.0 14.7 13.5 24.0 1.0 11.0
26.2 8.4 6.1 17.6 33.9 43.6 2.1 54.2 35.8 3.0 17.8 16.7 24.1 4.0 5.0
22.4 7.3 5.2 15.2 34.8 44.7 2.3 52.3 35.9 3.0 16.1 17.1 24.2 4.0 5.0
Fig 5 PE band
(`) 300
240 180 120 60 0 Jan-01 Jun-02 Dec-03 May-05 Nov-06 Jan-09 Dec-11 Sep-01 Aug-04 Aug-07 Oct-09 Sep-12 Mar-03 Feb-06 Apr-08 Mar-11 Jul-10 ITC
Fig 6 Indicative revenue break-up (FY12)
30x 25x 19x 14x 9x

FMCG Others 15% FMCG Cigarette 64% Agri Business 9% Paperboards, Paper & Packaging 7% Hotels 3% Others 2%
Source: Company

23
Consumer
India I Equities
Update
8 October 2012
Hindustan Unilever
Happiness short lived; Sell
Hindustan Lever (HUL) is facing the threat of more competition across segments. As most of its categories have penetration levels of more than 80%, we believe the current phase of 7%+ volume growth would be short lived. We also expect the company's ad-spend to move up 100-200bps due to re-entry into all segments. Hence, we retain Sell with target price of `466.
Key data
Rating: Sell Target Price: `466 Share Price: `560

HUVR IN / HLL.BO
`554 / `319 18709 / 5676 US$25.1m `1,210bn / US$23bn 2162m

Oct-11
Feb-12
Jun-12
Source: Bloomberg Key financials (YE Mar) FY11 FY12 FY13e FY14e FY15e
196,910 21,336 9.9 2.8 56.7 48.3 86.7 86.6 1.2 (118.2)
234,363 26,770 12.4 25.3 45.2 34.9 89.6 92.7 1.3 (92.9)
269,332 32,644 15.1 21.9 37.1 27.1 82.3 86.4 1.6 (98.4)
309,163 37,314 17.3 14.3 32.4 22.4 75.6 89.8 2.0 (102.8)
353,925 41,315 19.1 10.7 29.3 19.4 70.9 85.9 2.3 (107.5)
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Dec-11
Oct-12
Apr-12
Cut-throat competition. Global players such as P&G and LOreal are getting aggressive in India and have indicated to target small towns, villages by launching price point products such as `5 or `10. Domestic player ITC is also aggressive and has gained market share of more than 5% in soaps, shampoos and skin care over the past two years. Growth phase short lived. Owing to high penetration levels of most of its products (soaps, detergents, dish-washes, tea and coffee), we believe current volume growth phase of more than 7% may not last for more than 1-2 years. Ad spending to rise. New product launches and aggression in smaller segments such as face washes, noodles, liquid blue, hair oil, spreads will drive ad-spend up 100-200bps. Another 5-10% rise is likely since the company is changing communication for a few brands. Change in consumer perception. HUL continues to confuse consumers with communications regarding brands. It recently introduced Rin liquid blue, whereas other Rin detergent ads convey that liquid blue is not required if consumers use Rin powder. It has also launched Souppy Noodles, which failed to win any consumer traction. It previously created confusion with products such as Pepsodent toothpaste and Liril soap relaunching them on gel and family soap platform, respectively. Valuation. Our DCF-based valuation puts HUL at `466 (earlier `330) at target PE of 27x FY14e earnings. Risks: Lower input prices, competition.
52.5 0.0 47.5 20.1 9.9 17.5
52.5 0.0 47.5 19.4 10.3 17.8
52.5 0.0 47.5 18.7 11.4 17.4
FY13e
FY14e

600 550 500 450 400 350 300
10.1 28.8 15.7 -
13.4 31.1 17.1 -
HUVR
Sensex
8 October 2012
Hindustan Unilever Happiness short lived; Sell


196,910 12.0 173,139 23,771 12.1 10 2,293 5,893 5,919 21.6 21,442 1,624 106 22,961 9.9 2.8
234,363 18.9 199,528 34,836 14.9 17 2,335 2,596 8,215 23.4 26,865 1,137 95 27,907 12.4 25.3
269,332 14.9 227,090 42,241 15.7 606 2,566 4,589 10,915 25.0 32,744 100 32,644 15.1 21.9
309,163 14.8 260,476 48,687 15.7 131 2,923 4,926 13,145 26.0 37,414 100 37,314 17.3 14.3
353,925 14.5 299,779 54,146 15.3 56 3,213 5,854 15,318 27.0 41,415 100 41,315 19.1 10.7
2,160 24,934 27,094 146 27 (2,070) 25,196 25,231 11,885 11,885 (29,793) 17,873 25,196 (31,801) (15.1) 11.6
2,162 34,649 36,811 183 10,060 (2,099) 44,954 24,905 27,030 27,030 (26,945) 19,964 44,954 (39,034) (11.5) 16.1
2,162 44,533 46,694 283 2,060 (2,099) 46,938 27,339 35,030 35,030 (31,135) 15,704 46,938 (50,773) (11.6) 20.6
2,162 54,028 56,190 383 560 (2,099) 55,033 29,416 43,030 43,030 (35,431) 18,019 55,033 (62,588) (11.5) 25.0
2,162 62,466 64,628 483 560 (2,099) 63,571 31,204 51,030 51,030 (40,408) 21,747 63,571 (74,316) (11.4) 28.9


22,961 2,293 25,253 (1,521) 20,688 (3,106) 17,582 (16,619) (6,219) (82) 848 2,239 (2,251) 20,124 17,873
27,907 2,335 30,242 (7,545) 22,571 (2,734) 19,837 (8,762) 336 (5,794) 1,307 6,925 2,505 9,430
32,644 2,566 35,210 4,190 39,500 (5,000) 34,500 (22,761) (8,000) (8,000) (4,260) 19,964 15,704
37,314 2,923 40,237 4,297 44,633 (5,000) 39,633 (27,819) (1,500) (8,000) 2,315 15,704 18,019
41,315 3,213 44,527 4,977 49,604 (5,000) 44,604 (32,876) (8,000) 3,728 18,019 21,747
56.7 48.3 6.0 49.5 86.7 86.6 1.2 65.8 51.3 14.2 (7.7) 2.8 10.9 -
45.2 34.9 5.0 33.8 89.6 92.7 1.3 60.6 53.3 11.5 46.5 25.3 11.5 -
37.1 27.1 4.4 27.9 82.3 86.4 1.6 59.6 52.0 12.0 21.3 21.9 12.2 -
32.4 22.4 3.8 24.2 75.6 89.8 2.0 63.7 52.0 12.0 15.3 14.3 12.1 -
29.3 19.4 3.3 21.8 70.9 85.9 2.3 68.0 52.4 12.0 11.2 10.7 11.7 -
Fig 5 PE band
( `) 900 50x 750 41x 600 33x 450 300 150 0 Mar-04 Oct-06 May-03 Feb-10 Jan-00 Jan-05 Jun-08 Nov-00 Dec-05 Jan-11 Apr-09 Nov-11 Sep-01 Jul-02 Aug-07 Sep-12 HUVR 25x 17x
Fig 6 Indicative revenue breakdown (FY12)
Canned & processed food 3% Tea & garden tea 11% Others 12%
Branded staple foods Ice cream 2% 1%
Personal products 30%
Soaps 20%
Detergents 21%

25
Consumer
India I Equities
Update
8 October 2012
Nestl India
Leader of the pack; Buy
In the past 2-3 years, Nestl India (Nestl) has invested aggressively in enhancing production 100% and doubling distribution. With most capex over and thinning competition in noodles, we expect EPS to post 23% CAGR over CY11-14. We retain a Buy, with a price target of `5,220.
Key data
Rating: Buy Target Price: `5,220 Share Price: `4,595

NEST IN / NEST.BO
Brand-building initiatives ready for take off. With a large part of Nestls capex already over, its capacities across categories have grown more than 100%, except in beverages. It is, thus, set to regularly launch products and variants. Also, it is now free to resume ad-spend and brand building activities for most of its products. Margins to improve backed by premiumisation. Nestl has launched various products at 25-100% premium to the base product prices. This has helped it improve realizations and raise margins 70bps in FY12. We expect margin to move up a further 100bps by FY14. Distribution capacities doubled. In the past 3-4 years, the number of company retail stores has doubled to ~4m. We also see strong growth in rural sales, 20% of net sales. This, together with higher production capacities, complete revival and new launches in chocolate and confectionery segment, and constant brand-building activity (4.5% of net sales), would aid stronger growth rates ahead. Competition easing in noodles. Limited success of HULs Knorr, Capital Foods Smith & Jones and Pantaloons Tasty Treat has taken competitive pressure off Nestl. Also, we expect GSK-CH to be focused on Foodles as healthy noodles and not compete head-on with Maggie; most competitors are not in the regular noodles segment such as Maggi Masala. Maggi is expected to retain market shares of 90%+. Valuation. We value the stock at `5,220 at a target PE of 36x CY13e earnings. Our target PE is the mean PE plus two standard deviations. Risks: Higher raw material prices and delayed product launches.
CY10 CY11 CY12e CY13e CY14e
`5,024 / `3,930 18709 / 5676 US$2.9m `443bn / US$8.5bn 96m

62.8 0.0 37.2 10.9 7.8 18.5
62.8 0.0 37.2 11.0 7.8 18.4
62.8 0.0 37.2 10.9 8.0 18.3
FY13e
FY14e
Sales EBITDA EPS Target multiple (x)
Relative price performance

5,100 4,800 4,500 4,200 3,900 Oct-11 Jun-12 Aug-12 Dec-11 Feb-12 Oct-12 Apr-12 Sensex NEST
Source: Bloomberg
Key financials (YE Dec)
62,547 8,315 86.2 21.4 53.3 49.9 110.7 149.4 1.1 (45.7)
74,908 10,038 104.1 20.7 44.1 33.6 91.0 88.1 1.1 46.2
86,266 11,277 117.0 12.3 39.3 23.6 70.5 58.1 1.1 55.7
104,251 13,979 145.0 24.0 31.7 16.3 60.8 53.2 1.1 2.3
126,229 18,310 189.9 31.0 24.2 11.1 54.7 52.2 1.1 (36.6)
Shirish Pardeshi
Aniruddha Joshi
India Equities
8 October 2012
Nestl India Leader of the pack; Buy

Year-end: Dec CY10 CY11 CY12e CY13e CY14e

62,547 21.9 50,051 12,497 20.0 11 1,278 427 3,319 28.5 8,315 (129) 8,187 86.2 21.4
74,908 19.8 59,381 15,528 20.7 51 1,533 509 4,414 30.5 10,038 (423) 9,615 104.1 20.7
86,266 15.2 67,775 18,491 21.4 468 2,407 494 4,833 30.0 11,277 11,277 117.0 12.3
104,251 20.8 81,288 22,963 22.0 548 3,433 988 5,991 30.0 13,979 13,979 145.0 24.0
126,229 21.1 97,842 28,387 22.5 548 3,733 2,051 7,847 30.0 18,310 18,310 189.9 31.0
964 7,590 8,554 333 8,887 13,616 1,507 1,507 (8,789) 2,553 8,887 (3,727) (14.1) 92.2
964 11,775 12,740 9,709 435 22,883 29,944 1,344 1,344 (10,676) 2,272 22,883 6,528 (14.3) 136.6
964 17,412 18,376 13,709 435 32,520 42,537 2,344 2,344 (13,249) 888 32,520 10,912 (15.4) 195.1
964 25,751 26,715 13,709 435 40,858 44,104 12,344 12,344 (16,341) 751 40,858 1,049 (15.7) 281.6
964 38,420 39,385 13,709 435 53,528 45,372 20,344 20,344 (20,142) 7,955 53,528 (14,155) (16.0) 413.0

Fig 4 Ratio analysis @ `4,595

8,315 1,278 9,593 756 10,357 (4,456) 5,902 (5,430) 471 3,588 4,060
10,038 1,533 11,572 (163) 11,863 (15,552) (3,689) (5,407) 8,652 (444) 4,060 3,616
11,277 2,407 13,684 2,572 16,256 (15,000) 1,256 (5,640) 4,000 (1,000) (1,384) 2,272 888
13,979 3,433 17,411 3,092 20,504 (5,000) 15,504 (5,640) (10,000) (137) 888 751
18,310 3,733 22,043 3,801 25,844 (5,000) 20,844 (5,640) (8,000) 7,204 751 7,955
53.3 49.9 7.2 35.9 110.7 149.4 1.1 56.2 48.9 4.8 20.8 21.4 13.3 -
44.1 33.6 6.0 28.9 91.0 88.1 1.1 46.6 47.9 4.4 24.3 20.7 13.4 -
39.3 23.6 5.2 24.3 70.5 58.1 1.1 42.7 47.1 4.5 19.1 12.3 13.1 -
31.7 16.3 4.3 19.6 60.8 53.2 1.1 34.5 46.2 4.8 24.2 24.0 13.4 -
24.2 11.1 3.6 15.8 54.7 52.2 1.1 26.3 45.8 4.8 23.6 31.0 14.5 -
Fig 5 PE band
(`) 5,600 4,800 30x 4,000 24x 3,200 18x 2,400 1,600 800 0 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Jan-03 Aug-03 Mar-04 Oct-04 Jun-05 Jan-06 Aug-06 Mar-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Nov-10 Jun-11 Jan-12 Aug-12 12x Nestle

Chocolate & confectionery 14%
36x
Milk Production & Nutritional Products 44% Prepared dishes & Cooking aids 28%
Beverages 14%

27
Consumer
India I Equities
Update
8 October 2012
Asian Paints
Long-term bet; Buy
With fall in crude oil prices and rupee appreciation, Asian Paints will be able to improve profitability margins (100bps over FY12-14) as well as drive volume growth (16% CAGR over FY12-14). This, coupled with the companys strong distribution network, will continue to drive long-term growth for the company. We upgrade the stock to Buy from Sell with revised target price of `4,441.
Key data

APNT IN / APNT.BO
`4,170 / `2,551 18709 / 5676 US$6.3m `373bn / US$7bn 96m

Falling raw material prices. Asian Paints 80% of raw materials are crude-oil-linked. Recent fall in crude oil prices by more than 10% as well as rupee appreciation of 8% will help reduce costs. The companys pricing power will allow to raise prices 5-6%, while maintaining volume growth. We expect EBITDA margin to rise 100bps over FY12-14e. Fall in inflation to drive demand. As per our chief economist, inflation is expected to fall sharply from Jan 2013. We expect fall in inflationary pressure as well as positive economic outlook to drive growth for paints. We see healthy volume CAGR of 16% over FY12-14e. Strong distribution network. The company has a strong all-India distribution network with coverage of 36,000 outlets out of 40,000 paint shops in India. Also, it has tinting machines in 30,000 outlets. We expect its vast range to help arrest down-trading and push products. Long-term opportunity intact. The sector is growing a strong 15% since the past two decades. Lower per-capita consumption (1/10 of global consumption) and the large unorganised market (40% of total market) allow for the healthy growth of manufacturers such as Asian Paints. In the next decade, we expect healthy volume growth. Valuation. We value the stock at `4,441 (earlier `2,785), at a target PE of 26x FY14e earnings. The stock quotes at the mean plus two standard deviations. Risks: Increase in crude oil prices.
FY11 FY12 FY13e FY14e FY15e
52.8 0.0 47.2 18.1 8.7 20.4
52.8 0.0 47.2 17.9 8.8 20.5
52.8 0.0 47.2 17.9 8.6 20.7
FY13e
FY14e

4,300 APNT 3,700 3,100 2,500 Oct-11 Feb-12 Jun-12
6.1 8.8 5.6 -
8.1 14.2 10.4 -
Sensex Aug-12 Dec-11 Oct-12 Apr-12
Source: Bloomberg Key financials (YE Mar)
77,062 8,432 87.9 9.2 44.2 16.4 41.8 51.0 0.8 (31.3)
96,322 10,183 106.2 20.8 36.6 13.1 38.7 47.1 1.0 (2.1)
117,835 12,811 133.6 25.8 29.1 10.3 39.7 47.2 1.2 (21.2)
144,157 16,383 170.8 27.9 22.8 7.9 39.4 47.7 1.3 (37.5)
174,961 20,848 217.4 27.3 17.9 6.1 38.4 46.8 1.4 (51.4)
Shirish Pardeshi
Aniruddha Joshi
India Equities
8 October 2012
Asian Paints Long-term bet; Buy


77,062 15.3 63,933 13,130 17.0 222 1,131 826 3,789 30.1 8,814 381 8,432 87.9 9.2
96,322 25.0 80,939 15,384 16.0 410 1,211 1,074 4,335 29.2 10,502 (296) 319 9,887 106.2 20.8
117,835 22.3 98,399 19,436 16.5 428 1,545 1,276 5,528 29.5 13,211 400 12,811 133.6 25.8
144,157 22.3 119,704 24,453 17.0 428 1,925 1,948 7,214 30.0 16,833 450 16,383 170.8 27.9
174,961 21.4 144,806 30,155 17.2 428 2,120 2,890 9,149 30.0 21,348 500 20,848 217.4 27.3
Share capital Reserves & surplus Net worth Debt Minority Interest Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, Liquid Net working capital Cash and bank balance Capital deployed Net debt WC days Book value (`/sh)
959 20,915 21,874 2,347 1,099 852 26,172 13,532 9,220 2,088 1,332 26,172 (9,453) 2.7 237
959 26,526 27,485 4,277 1,367 928 34,057 19,176 4,187 4,450 6,243 34,057 (9,063) 4.6 296
959 34,287 35,246 4,277 1,367 928 41,818 20,881 10,187 3,433 7,317 41,818 (16,137) 2.9 377
959 45,059 46,018 4,277 1,367 928 52,590 22,206 16,187 2,959 11,238 52,590 (26,058) 2.1 489
959 59,735 60,694 4,277 1,367 928 67,266 23,335 22,187 2,405 19,338 67,266 (40,159) 1.4 642


8,432 1,131 9,564 (1,767) 7,855 (1,503) 6,351 (3,168) 56 (3,110) 12 141 6,375 6,515
9,887 1,211 11,099 (2,795) 8,346 (6,675) 1,671 (3,831) 970 1,067 103 (19) 6,262 6,243
12,811 1,545 14,356 1,017 15,374 (3,250) 12,124 (5,050) (6,000) 1,074 6,243 7,317
16,383 1,925 18,309 474 18,782 (3,250) 15,532 (5,611) (6,000) 3,921 7,317 11,238
20,848 2,120 22,969 554 23,523 (3,250) 20,273 (6,172) (6,000) 8,101 11,238 19,338
44.2 16.4 4.8 28.4 41.8 51.0 0.8 36.4 58.1 4.4 7.0 9.2 11.4 16.8 7.9
36.6 13.1 3.9 24.2 38.7 47.1 1.0 37.7 60.0 4.3 17.2 20.8 10.9 16.0 6.3
29.1 10.3 3.2 19.2 39.7 47.2 1.2 33.7 59.4 4.3 26.3 25.8 11.2 16.0 6.0
22.8 7.9 2.6 15.2 39.4 47.7 1.3 29.3 59.1 4.3 25.8 27.9 11.7 16.0 6.0
17.9 6.1 2.1 12.3 38.4 46.8 1.4 25.3 58.9 4.3 23.3 27.3 12.2 16.0 5.0
Fig 5 PE band
(`) 4,500
29x 3,600 2,700 1,800 900 0 Nov-01 Mar-05 Nov-06 Mar-10 Jan-01 Jan-06 Sep-02 May-04 Sep-07 May-09 Nov-11 Jan-11 Jul-03 Jul-08 Sep-12 APNT 9x 25x 20x 15x

Chemicals 2% Distemper 29% International 17%
Industrial paints 6%
Emulsions 23% Enamels 23%

29
Consumer
India I Equities
Update
8 October 2012
Dabur India
Facing headwinds; Hold
Most of Dabur Indias (Dabur) brands are in the sunset stage. With the lack of a clear sub-segmentation strategy, we believe growth rates would be in low double digits. Weaker response to newer products and loss of market share in oral care and shampoos would hit growth ahead. We reiterate a Hold, with a price target of `130.
Key data
Rating: Hold Target Price: `130 Share Price: `132

DABUR IN / DABU.BO
Weak response to launches hit growth. Most of the companys launches have failed to take off. The launch of products in personal care, shampoos, Almond Drops hair oil, fruit drinks, health-food drinks have seen weaker consumer response. Successful new products account for 1520% of revenue growth for consumer companies, but Dabur will see lower growth rates due to limited success of its new launches. Market share loss in major segments. The company has lost market share by 100bps each over the past two years in two major segments, oral care and shampoo. Weaker response to variants and products of Dabur as well as aggressive pricing by competitors such as P&G and ITC (20% free grammage and price cuts of 5-10%) have led to market-share loss. No strategy for sub-segmentation. Lack of clear sub-segmentation strategy is not allowing Dabur to retain consumers. Most of its brands are focused on the ayurved/ herbal concept. Though the company enjoys strong recall in this niche segment, it has not been able to create a platform of products for consumers to up- or down-trade. Most segments sunset categories. Most of Daburs focus areas (toothpowders, Chyawanprash, Hajmola, Amla hair oil) are in the sunset stage with growth rates less than 10%. We believe that weaker growth prospects and the already deep penetration of more than 80% would result in lower growth ahead. Valuation. Our valuation puts the stock at `130 (earlier `120) at a target PE of 25x FY14e earnings. Risks: Higher raw material prices.
`135 / `92 18709 / 5676 US$2.9m `229bn / US$4.4m 1,742m

68.7 0.0 31.3 17.7 6.7 6.9
68.7 0.0 31.3 18.4 6.4 6.5
68.7 0.0 31.3 19.2 5.7 6.4
FY13e
FY14e

140 130 120 110 100 90 Oct-11 Feb-12 Jun-12 Apr-12 Dec-11
9.5 (6.3) (3.9) -
14.6 0.4 (2.4) -
Dabur
Sensex
Source: Bloomberg
Key financials (YE Mar)
40,691 5,686 3.3 13.2 40.4 17.6 50.5 38.6 0.9 27.1
52,721 6,449 3.7 13.3 35.7 13.2 42.2 26.2 1.0 51.2
62,551 7,817 4.5 21.2 29.4 10.3 39.4 26.9 1.1 28.2
74,019 9,048 5.2 15.7 25.4 8.3 36.2 31.5 1.3 9.4
87,816 10,790 6.2 19.3 21.3 6.7 34.7 35.9 1.5 (6.7)
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Oct-12
8 October 2012
Dabur India Facing headwinds; Hold


40,691 20.1 33,145 7,547 18.5 303 816 652 1,390 20 5,689 3.2 5,686 3.3 13.2
52,721 29.6 44,038 8,683 16.5 538 1,032 792 1,464 19 6,441 (7.8) 6,449 3.7 13.3
62,551 18.6 52,410 10,141 16.2 573 945 1,148 1,954 20 7,817 7,817 4.5 21.2
74,019 18.3 62,099 11,920 16.1 373 1,119 881 2,262 20 9,048 9,048 5.2 15.7
87,816 18.6 73,701 14,115 16.1 183 1,300 855 2,697 20 10,790 10,790 6.2 19.3
1,741 12,170 13,911 41 10,510 (821) 23,641 15,417 4,274 4,274 1,225 2,724 23,641 2,691 3.0 7.5
1,742 15,427 17,169 33 17,319 274 34,795 16,680 9,871 9,871 3,760 4,484 34,795 3,238 7.1 10.0
1,742 20,213 21,955 33 11,319 274 33,581 18,235 9,871 9,871 4,333 1,142 33,581 580 6.9 12.8
1,742 25,724 27,466 33 7,319 274 35,092 19,866 9,871 9,871 4,534 821 35,092 (3,099) 6.1 15.9
1,742 32,472 34,215 33 1,819 274 36,340 21,566 9,871 9,871 4,663 241 36,340 (8,019) 5.3 19.8


5,686 816 6,516 (1,346) 5,170 (9,313) (4,090) (2,277) 1 8,705 (1,538) 801 1,923 2,724
6,449 1,032 6,931 (761) 6,170 (2,327) 3,928 (2,425) 1 726 (550) 1,680 2,805 4,484
7,817 945 8,762 (574) 8,189 (2,500) 5,689 (3,031) (6,000) (3,342) 4,484 1,142
9,048 1,119 10,167 (201) 9,966 (2,750) 7,216 (3,536) (4,000) (321) 1,142 821
10,790 1,300 12,090 (128) 11,962 (3,000) 8,962 (4,042) (5,500) (580) 821 241
40.4 17.6 5.9 31.6 50.5 38.6 0.9 0.4 46.8 13.1 19.8 13.2 14.0 -
35.7 13.2 4.5 27.5 42.2 26.2 1.0 0.4 50.9 12.5 15.1 13.3 12.2 -
29.4 10.3 3.8 23.6 39.4 26.9 1.1 0.3 51.2 12.5 16.8 21.2 12.5 -
25.4 8.3 3.2 20.0 36.2 31.5 1.3 0.3 51.3 12.5 17.5 15.7 12.2 -
21.3 6.7 2.7 16.9 34.7 35.9 1.5 0.3 51.4 12.5 18.4 19.3 12.3 -
Fig 5 PE band
(`) 200

Ethical CHD 3% OTC health 4% Home care 4% Foods 9% IBD 19% Personal care 27%
40x 32x 24x
Others 1% Health care 33%
150
100 16x 50 Dabur 0 Apr-02 May-03 Apr-08 May-09 Oct-02 Mar-07 Jun-04 Jan-05 Jul-05 Feb-06 Jun-10 Jan-11 Jul-11 Nov-03 Nov-08 Dec-09 Aug-06 Sep-07 Feb-12 Sep-12 8x
Source: Company

31
Consumer
India I Equities
Update
8 October 2012
Colgate Palmolive India

Regaining lost glory; Buy
We foresee strong earnings growth for Colgate Palmolive India (Colgate), driven by market-share gains of 100-300bps in various subsegments, growing premiumisation and easing competition. We retain a Buy on the stock with a price target of `1,440 (earlier `1,242).
Key data

ATFL IN / AGRO.BO
Gaining market share across segments. Over two years, Colgate has gained market share in toothpastes and toothbrushes by 100-300bps. It has also gained market share in mouthwashes by 200-300bps in FY12 and has maintained leadership in toothpowders with a market share of ~37%. Growing premiumisation. Owing to the strong push for premium products such as those in the sensitive and mouthwash segments as well as in premium toothbrushes, realizations are improving 200-300bps. One consumer moving from Cibaca toothpaste to Colgate Total drives revenues 6x for same consumption in volumes. Less competitive pressures. Competition in oral care has lessened. Launches of HUL and Dabur have not been so impactful to take away market share; P&G, too, has not yet launched oral care products in India. Colgate has, thus, been able to retain market leadership across segments and is a strong No. 2 in gel toothpastes and mouthwashes. Expect margins to improve. We expect Colgates profit margins to expand 60bps in FY14 over FY12 due to the growing premiumisation and lower ad-spending (less 100bps). We also expect higher realizations post price hike of 5% in FY12, after a long gap of five years, and stable raw material prices to also aid margin expansion. Valuation. Our valuation puts the stock at `1,440 (earlier `1,242) at a target PE of 29x FY14e earnings. Lesser competition as well as Colgates market-share gains would hold valuations at premium levels, we believe. Risks: Higher raw material prices and keener competition.
`1264 / `932 18709 / 5676 US$1.6m `170bn / US$3.2bn 136m

51.0 0.0 49.0 20.9 6.0 22.1
51.0 0.0 49.0 20.2 6.6 22.2
51.0 0.0 49.0 19.7 7.3 22.0
FY13e
FY14e

1,300 1,200 1,100 1,000 900 Oct-11 Feb-12 Jun-12 CLGT
3.8 (1.8) (7.2) -
3.7 (1.0) (5.5) -
Sensex
22,206 4,026 29.6 (7.3) 42.2 46.3 118.4 121.7 1.8 (120.3)
26,932 4,465 32.8 10.9 38.1 40.2 113.0 131.3 2.0 (77.0)
32,193 5,775 42.5 29.4 29.4 30.6 118.0 126.5 2.2 (110.1)
37,575 6,741 49.6 16.7 25.2 22.6 103.1 114.9 2.4 (120.7)
43,861 7,850 57.7 16.5 21.7 16.3 87.4 99.6 2.5 (124.6)
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Dec-11
Oct-12
Apr-12
8 October 2012
Colgate Palmolive India Regaining lost glory; Buy


22,206 13.2 17,699 4,507 20.3 33 342 1,068 1,174 22.6 4,026 4,026 29.6 (7.3)
26,932 21.3 21,147 5,785 21.5 15 393 507 1,419 24.1 4,465 4,465 32.8 10.9
32,193 19.5 25,216 6,977 21.7 10 400 1,238 2,029 26.0 5,775 5,775 42.5 29.4
37,575 16.7 29,269 8,306 22.1 11 444 1,511 2,621 28.0 6,741 6,741 49.6 16.7
43,861 16.7 34,147 9,715 22.1 12 468 1,822 3,206 29.0 7,850 7,850 57.7 16.5
136 3,705 3,841 1 (168) 3,673 2,673 387 387 (3,417) 4,029 3,673 136.0 (15.4) 27.0
136 4,218 4,354 308 (121) 4,541 3,238 471 471 (2,266) 3,098 4,541 136.0 (8.4) 31.1
136 5,538 5,674 308 (121) 5,861 3,213 3,471 3,471 (3,772) 2,949 5,861 136.0 (11.7) 40.8
136 7,505 7,641 308 (121) 7,829 3,169 5,971 5,971 (4,728) 3,416 7,829 136.0 (12.6) 55.3
136 10,423 10,559 308 (121) 10,746 3,101 8,471 8,471 (5,673) 4,847 10,746 136.0 (12.9) 76.8


4,026 342 4,442 (322) 4,120 (411) 3,711 (3,168) (45) (18) 479 3,477 3,956
4,465 393 5,382 (940) 4,442 (1,022) 3,426 (3,965) 485 (55) 1,611 1,557
5,775 400 6,175 1,506 7,681 (375) 7,306 (4,455) (3,000) (149) 3,098 2,949
6,741 444 7,185 956 8,140 (400) 7,740 (4,773) (2,500) 467 2,949 3,416
7,850 468 8,318 945 9,263 (400) 8,863 (4,932) (2,500) 1,431 3,416 4,847
42.2 46.3 7.5 37.0 118.4 121.7 1.8 74.3 39.3 15.7 3.2 (7.3) 18.1 -
38.1 40.2 6.2 28.8 113.0 131.3 2.0 76.1 39.0 15.3 28.4 10.9 16.6 -
29.4 30.6 5.2 23.9 118.0 126.5 2.2 65.9 38.7 15.3 20.6 29.4 17.9 -
25.2 22.6 4.4 20.1 103.1 114.9 2.4 60.5 38.2 15.3 19.1 16.7 17.9 -
21.7 16.3 3.8 17.2 87.4 99.6 2.5 53.7 38.3 15.3 17.0 16.5 17.9 -
Fig 5 PE band
( `) 2,400 2,000 40x 1,600 30x 1,200 800 400 Colgate 0 Mar-03 Oct-04 Jul-05 Sep-08 Jul-09 Aug-01 May-02 May-06 Sep-12 Jan-00 Feb-07 Dec-03 Dec-07 Feb-11 Oct-00 Apr-10 Nov-11 20x 10x

Personal care Products 5%
50x
Toothbrush 10% Toothpaste Premium 10% Toothpaste - Low End 14%
ToothpasteFamily 45%
Toothpowder 16%

33
Consumer
India I Equities
Update
8 October 2012
Marico
Lower raw material prices, expensive acquisitions; Hold
Though raw material prices are falling, more investments are likely in brand-building. Further, a weaker response to launches and expensive acquisition of the Paras brands would impact Maricos earnings growth ahead. We retain a Hold at target of `201.
Key data
Rating: Hold Target Price: `201 Share Price: `202

MRCO IN / MRCO.BO
Lower raw material prices. The companys major raw material, copra, has fallen ~40% from its peak in 3QFY12. The drop allows for margin expansion without Marico needing to resort to price hikes. It plans to cut prices selectively to further retain loyalty and attract new consumers in the coconut oil category. Weaker response to launches. All Maricos launches (Nihar cooling oil, Parachute cooling oil, Saffola Arise) have seen weaker consumer offtake. The company is now betting aggressively on growing its skin-care range under Parachute creating portfolio strategy. Expensive acquisition of Paras products. Marico has acquired three major products from Reckitt at ~5x sales. As it had raised funds for the acquisition as well as debt, we see limited upside from these acquisitions. Assuming a 20% profit margin on sales of `1.5bn of these products, the return on the investment works out to less than 5%. Strong investments behind brands in FY13. The company is investing strongly behind all its brands. As it has savings from lower raw material prices and wants to launch products, it is aggressively increasing adspend. We believe that in FY13 the savings in raw materials may not flow down to profitability. Valuation. Our valuation puts the stock at `201 (earlier `155) at a target PE of 24x FY14e earnings. Risks: Sharp drop in copra prices and betterthan-expected performance of the skin-care range of Parachute.
`209 / `134 18709 / 5676 US$1.3m `130bn / US$2.5bn 644m

59.8 0.0 40.2 25.7 7.0 7.5
62.7 0.0 37.3 25.6 4.5 7.2
62.8 0.0 37.2 25.8 4.9 6.5
FY13e
FY14e

210
7.0 14.0 16.1 -
7.0 7.7 7.1 -
MRCO 190 170 150 130 Oct-11 Feb-12 Jun-12 Aug-12 Dec-11 Oct-12 Apr-12 Sensex
31,167 2,450 4.0 (5.5) 50.7 14.0 33.2 25.4 0.3 55.5
40,083 3,189 5.2 30.0 39.0 11.1 31.8 22.7 0.3 36.1
49,655 4,526 7.0 35.5 28.8 6.5 28.8 25.4 0.4 18.5
59,338 5,387 8.4 19.0 24.2 5.2 23.9 26.3 0.4 1.0
70,959 6,905 10.7 28.2 18.8 4.2 24.7 29.0 0.5 (15.0)
Shirish Pardeshi
Aniruddha Joshi
India Equities
8 October 2012
Marico Lower raw material prices, expensive acquisitions; Hold


31,167 18.0 27,070 4,098 13.1 393 633 279 850 25.4 2,500 414 50 2,864 4.0 (5.5)
40,083 28.6 35,239 4,844 12.1 424 725 326 783 19.5 3,238 (18) 50 3,171 5.2 30.0
49,655 23.9 43,150 6,505 13.1 409 859 422 1,132 20.0 4,526 4,526 7.0 35.5
59,338 19.5 51,594 7,744 13.1 182 1,012 269 1,432 21.0 5,387 5,387 8.4 19.0
70,959 19.6 61,308 9,652 13.6 68 1,156 426 1,948 22.0 6,905 6,905 10.7 28.2
614 8,540 9,155 219 7,718 (301) 16,791 8,873 890 890 4,897 2,131 16,791 4,397 15.7 14.4
615 10,815 11,430 249 8,048 (223) 19,504 8,973 5,435 5,435 3,508 1,588 19,504 802 8.8 18.2
644 19,751 20,396 249 4,548 (223) 24,969 16,914 3,435 3,435 4,211 410 24,969 480 8.5 31.3
644 24,503 25,147 249 1,048 (223) 26,221 17,501 3,435 3,435 4,890 395 26,221 (3,005) 8.2 38.7
644 30,661 31,305 249 1,048 (223) 32,379 17,945 7,935 7,935 5,695 804 32,379 (7,913) 8.0 48.2


3,213 633 3,846 (1,117) 2,729 (4,042) (1,313) (475) 286 3,281 (59) (90) 997 1,112 2,109
3,589 725 4,314 262 4,576 (1,441) 3,135 (470) 31 (283) (2,157) (469) 1,343 875
5,386 859 6,245 (703) 5,542 (8,800) (3,258) (561) 5,000 (3,500) 2,000 (1,178) 1,588 410
6,399 1,012 7,412 (679) 6,732 (1,600) 5,132 (635) (3,500) (15) 410 395
8,062 1,156 9,218 (805) 8,413 (1,600) 6,813 (747) (4,500) 409 395 804
50.7 14.0 4.1 31.3 33.2 25.4 0.3 16.6 53.5 11.1 9.2 (5.5) 8.0 9.7 3.2
39.0 11.1 3.2 26.5 31.8 22.7 0.3 13.5 52.4 11.2 18.2 30.0 8.1 4.1 9.0
28.8 6.5 2.7 20.7 28.8 25.4 0.4 10.7 51.3 11.5 34.3 35.5 9.1 14.3 3.6
24.2 5.2 2.3 17.4 23.9 26.3 0.4 10.2 51.3 11.5 19.0 19.0 9.1 14.3 3.6
18.8 4.2 1.9 13.9 24.7 29.0 0.5 9.3 50.8 11.5 24.6 28.2 9.7 14.3 3.6
Fig 5 PE band
(`) 250 30x 200 23x 150 16x 100 10x Marico 50 4x 0 Jan-12 May-09 May-11 Sep-08 Sep-10 Sep-12 Jun-03 Jun-05 Jun-07 Mar-02 Feb-04 Feb-06 Jan-08 Jan-10 Jul-01 Oct-02 Oct-04 Oct-06
Nihar coconut 3% Kaya skin 7% Other 10%
Nihar perfume 3%
Parachute coconut 35%
Parachute Perfume 13% Exports 14%

Saffola 15%

35
Consumer
India I Equities
Update
8 October 2012
Glaxo Smithkline Consumer Healthcare

In the pink of health; Buy
The health-food drinks category continues to grow robustly. This, together with lower ad-spends, will enable Glaxo Smithkline Consumer Healthcare (GSK-CH) to post healthy profit margins in coming quarters. The focus on differentiated launches as well as on small SKUs would drive penetration ahead. We retain a Buy with a target of `3,425.
Key data

SKB IN / GLXO.BO
`3,114 / `2,179 18709 / 5676 US$1.4m `124bn / US$2.4bn 42m

HFD business to grow at a healthy rate. The company sees healthy growth in its health-food drinks (HFD) business. We believe it would maintain ~10% volume growth as well as price hikes of 7-8% in the next 2-3 years. Ahead, growth in value-added products (Junior Horlicks, Mothers Horlicks, Horlicks Gold) would also drive growth. With lower ad-spend, margins to expand. GSK-CH had launched various products last year. As some of them have been withdrawn, we expect adspend-to-sales to come down 100-200bps in CY12 and CY13, causing margin expansion. Focus on differentiated launches. The company continues to launch products such as oats and biscuit variants. We believe the steady flow of launches of scientific products with nutritional base would reduce dependence on the HFD category and leverage the Horlicks brand equity. Small SKUs to drive penetration. At present, small SKUs make up only 2-3% of overall consumption. As the company is investing in expanding its rural distribution network and gaining more consumers, we expect small SKUs to be crucial to growth. Valuation. Our valuation puts the stock at `3,425 (earlier `2,980), at a target PE of 25x CY13e earnings. The lower penetration of health-fooddrink products offers sizeable growth opportunities for the medium to long term. Risks: Higher raw material prices and increase in competition.
CY10 CY11 CY12e CY13e CY14e
43.2 0.0 56.8 13.3 18.4 25.1
43.2 0.0 56.8 15.5 16.5 24.8
43.2 0.0 56.8 15.1 16.8 24.9
FY13e
FY14e

3,200 3,000 2,800 2,600 2,400 2,200 Oct-11 Feb-12 Jun-12 Apr-12 Dec-11
(1.7) (8.8) (5.0) -
(1.7) (7.2) (1.7) -
SKB
Sensex
Source: Bloomberg Key financials (YE Dec)
23,061 2,999 71.3 28.8 41.5 13.3 32.8 36.9 1.7 (104.6)
26,855 3,552 84.5 18.5 35.0 11.3 34.9 37.2 1.2 (97.8)
32,101 4,761 113.2 34.0 26.1 8.8 37.9 38.8 1.5 (85.9)
38,373 5,692 135.4 19.6 21.8 7.1 36.0 37.4 1.7 (87.5)
45,870 6,961 165.5 22.3 17.9 5.6 35.1 37.5 1.9 (89.5)
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Oct-12
8 October 2012
Glaxo SmithKline Consumer Healthcare In the pink of health; Buy


23,061 20.0 19,294 3,767 16.3 26 397 1,174 1,520 33.6 2,999 2,999 71.3 28.8
26,855 16.5 22,606 4,250 15.8 35 460 1,648 1,851 34.3 3,552 3,552 84.5 18.5
32,101 19.5 26,661 5,440 16.9 50 571 2,183 2,241 32.0 4,761 4,761 113.2 34.0
38,373 19.5 31,793 6,580 17.1 50 665 2,506 2,679 32.0 5,692 5,692 135.4 19.6
45,870 19.5 37,684 8,186 17.8 51 762 2,865 3,276 32.0 6,961 6,961 165.5 22.3
421 9,180 9,600 (267) 9,333 3,106 0 (3,534) 9,761 9,333 (10,028) (15.3) 221.9
421 11,021 11,442 (399) 11,043 3,718 (3,471) 10,797 11,043 (11,195) (12.9) 262.6
421 14,060 14,481 (399) 14,082 4,547 9,000 (2,568) 3,103 14,082 (12,502) (8.0) 334.8
421 17,539 17,959 (399) 17,560 5,382 14,000 (3,185) 1,363 17,560 (15,762) (8.3) 417.5
421 22,040 22,460 (399) 22,061 6,120 19,000 (3,807) 748 22,061 (20,147) (8.3) 524.6


2,999 397 3,140 390 3,530 (1,086) 2,444 (881) 1,563 8,198 9,761
3,552 460 3,987 447 4,434 (952) 3,482 (2,446) 1,036 9,761 10,797
4,761 571 5,332 (903) 4,429 (1,400) 3,029 (1,722) (9,000) (7,693) 10,797 3,103
5,692 665 6,357 617 6,974 (1,500) 5,474 (2,214) (5,000) (1,740) 3,103 1,363
6,961 762 7,724 622 8,346 (1,500) 6,846 (2,460) (5,000) (614) 1,363 748
41.5 13.3 4.9 30.1 32.8 36.9 1.7 70.1 37.5 16.1 21.2 28.8 13.0 13.3 4.8
35.0 11.3 4.2 26.7 34.9 37.2 1.2 41.4 38.1 16.3 12.8 18.5 13.2 9.0 6.7
26.1 8.8 3.5 20.9 37.9 38.8 1.5 39.7 38.6 15.5 28.0 34.0 14.8 14.0 5.0
21.8 7.1 3.0 17.3 36.0 37.4 1.7 36.9 38.5 15.5 20.9 19.6 14.8 14.0 5.0
17.9 5.6 2.5 13.9 35.1 37.5 1.9 33.2 37.8 15.5 24.4 22.3 15.2 14.0 5.0
Fig 5 PE band
( `) 3,600 26x 3,000 2,400 1,800 1,200 600 0 Jun-04 Jan-05 Jun-11 May-06 Nov-01 Sep-05 Dec-06 Aug-07 Nov-08 Jan-12 Jul-02 Oct-03 Jul-09 Oct-10 Sep-12 Mar-03 Feb-10 Apr-01 Apr-08 GSK-CH 18x 14x 9x 22x
Maltova & Viva 5% Biscuits 6% Boost 19%
Others 1%
Horlicks 69%
Source: Company

37
Consumer
India I Equities
Update
8 October 2012
Britannia Industries
Limited scope for differentiation; Sell
We expect Britannia Industries (Britannia) to undergo a slow growth phase over the next two years due to steep prices of food and rising competition. As MNCs are already actively launching products and variants, we do not see enough growth drivers for the company. We retain a Sell with target price of `493.
Key data

BRIT IN / BRIT.BO
`600 / `434 18709 / 5676 US$0.9m `59bn / US$1.1bn 119m

Higher food inflation. A weak monsoon and high global food inflation of 10%, we believe, would keep Britannias profitability under stress. We expect the higher food inflation to compel it to hike prices aggressively by more than 7%, impacting volume growth that is already at ~just 5-6%. Keener competition. Competitive pressures in biscuits have built up to a very high level. Competition arises from Unbic, United Biscuits (Macvities), Cadbury (Oreo) and Pepsi (Aliva). Domestic manufacturers Parle, Surya Agro, and ITC are also aggressive in launches. All these are expected to erode Britannias profitability margins by 5.5%. Brand building pressure. In the past 3-4 years, the company has reduced its brand-building activities 100bps. We believe, in a category where competition is intensifying rapidly, Britannia would be compelled to invest more 200-300bps in ad-spend to protect its brands. It also needs to invest in expanding staff cost, as its sales is the lowest in industry at 3.6% as at FY12. Britannia will also be paying the Wadia group 0.35% of net sales for services as well as the use of Wadia brand. Sub-segmentation woes. The biscuit segment is awash with product launches and new variants/SKUs. We fear Britannias launches, innovations and renovations going unnoticed amidst this maze. Valuation. Our valuation puts the stock at `493 (earlier `420), at a target PE of 20x FY14e earnings. We believe the potential to hike prices and expand margins is limited for Britannia. With lower margins and return ratios, we expect valuation multiples to be lower than past averages. Risks: Lower raw material prices and successful price hikes ahead.
51.0 0.0 49.0 15.1 14.9 19.0
51.0 0.0 49.0 13.6 16.3 19.1
51.0 0.0 49.0 12.6 17.3 19.1
FY13e
FY14e

600 560 520 480 440 400 Oct-11 Feb-12 Jun-12 Dec-11 Sensex BRIT
(4.0) (1.0) 4.0 -
(4.6) (0.6) 4.1 -
Source: Bloomberg
46,052 1,379 11.5 3.7 42.7 17.7 44.2 18.4 1.3 46.9
54,608 2,039 17.1 47.9 28.9 14.1 53.3 22.6 1.7 114.2
64,932 2,360 19.8 15.7 25.0 11.5 50.8 28.6 2.0 77.5
77,285 2,945 24.7 24.8 20.0 9.2 51.1 39.2 2.4 48.2
91,936 3,671 30.7 24.7 16.0 7.1 50.1 47.3 2.6 20.5
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Oct-12
Apr-12
8 October 2012
Britannia Industries Limited scope for differentiation; Sell


46,052 22.1 43,689 2,363 5.1 478 628 649 529 27.7 1,377 (35) (0.7) 1,343 11.5 3.7
54,608 18.6 51,593 3,015 5.5 416 618 779 719 26.0 2,041 (44) 1.0 1,996 17.1 47.9
64,932 18.9 61,155 3,777 5.8 505 739 700 873 27.0 2,360 2,360 19.8 15.7
77,285 19.0 72,630 4,655 6.0 333 855 623 1,145 28.0 2,945 2,945 24.7 24.8
91,936 19.0 86,249 5,687 6.2 227 952 662 1,499 29.0 3,671 3,671 30.7 24.7
239 3,021 3,260 21 6,188 57 9,527 5,183 3,885 3,885 (310) 769 9,527 1,592 (0.7) 27.8
239 3,853 4,092 22 7,477 76 11,667 6,412 2,126 2,126 307 613 11,667 4,815 0.6 34.9
239 4,815 5,054 22 4,416 76 9,568 6,923 126 126 (26) 336 9,568 4,031 (0.0) 43.0
239 6,083 6,322 22 3,416 76 9,836 7,568 126 126 (297) 230 9,836 3,137 (0.4) 53.6
239 7,937 8,176 22 1,916 76 10,190 8,366 126 126 (628) 117 10,190 1,749 (0.7) 69.1


1,343 628 1,941 594 2,535 (720) 1,815 (696) (384) (634) 102 373 475
1,996 618 2,519 (179) 2,340 (2,431) (91) (901) (371) 1,492 129 391 520
2,360 739 3,099 332 3,432 (1,250) 2,182 (1,398) (3,061) 2,000 (277) 613 336
2,945 855 3,800 271 4,071 (1,500) 2,571 (1,677) (1,000) (106) 336 230
3,671 952 4,623 331 4,954 (1,750) 3,204 (1,817) (1,500) (113) 230 117
42.7 17.7 1.4 26.9 44.2 18.4 1.3 56.3 65.7 7.3 41.8 3.7 3.0 16.0 6.1
28.9 14.1 1.2 21.1 53.3 22.6 1.7 49.8 64.7 7.7 27.6 47.9 3.7 12.0 3.9
25.0 11.5 1.0 16.9 50.8 28.6 2.0 50.6 64.4 7.8 25.3 15.7 3.6 14.0 4.0
20.0 9.2 0.8 13.7 51.1 39.2 2.4 48.7 64.0 8.0 23.2 24.8 3.8 14.0 4.0
16.0 7.1 0.7 11.2 50.1 47.3 2.6 42.3 63.6 8.3 22.2 24.7 4.0 14.0 4.0
Fig 5 PE band
(`) 1,050
42x 900 750 600 450 17x 300 Britannia 150 0 Nov-01 Dec-06 May-06 Nov-08 Sep-05 Aug-07 Feb-10 Apr-01 Mar-03 Jun-04 Jan-05 Apr-08 Jul-02 Jul-09 Jun-11 Jan-12 Sep-12 Oct-03 Oct-10 9x 33x

Nutrichoice 3% Tiger 30%
Bread 9%
Cake 4%
25x
Marie 11%
Others 18%
Good Day 25%

39
Consumer
India I Equities
Update
8 October 2012
Emami
All-round growth; Buy
We retain our Buy on Emami as we see all its power brands doing well and holding on to their leading positions. Ahead, the healthy flow of launches and its stable Canteen Stores Department (CSD) and international businesses would drive growth. We retain our Buy, with a price target of `635 (earlier `500).
Key data

HMN IN / EMAM.BO
Power brands strong. All the companys power brands (Navratna, Boroplus, Fair and Handsome, Zandu) continue to do well and are expected to report CAGR of more than 15% over FY12-15. Extensions of the power brands are also doing well and have established themselves, gaining separate identities. Healthy flow of launches. The flow of launches and variants is healthy. The company sees strong growth for products such as its Zandu ethical ayurvedic range. It expects further launches in personal care and is focused mainly on hair care and baby care. Temporary issues in CSD, international business. The CSD business, bogged down in FY12 and 1QFY13, is expected to be back on track from 2HFY13. As the inventory-correction phases would be over by Oct12, we expect orders from CSD to resume. The international business also continues to suffer due to political instability in African countries. However, we expect these businesses to return to normal in 1-2 quarters. Margins to improve. With fall in prices of mentha oil and an increase in sales of premium products, we expect margins to improve. Also, there has been no major hike in media rates, which will push margins higher despite slight increase in brand-building expense. Valuation. We value the stock at `635 (earlier `500) at a target PE of 25x FY14e earnings. Owing to less competitive pressure as well as market-share gains, we expect valuations to continue at premium levels. Risks: Higher raw material prices and keener competition.
`558 / `321 18709 / 5676 US$0.6m `76bn / US$1.5bn 151m

72.7 0.0 27.3 14.7 4.0 8.6
72.7 0.0 27.3 14.8 3.5 9.0
72.7 0.0 27.3 15.8 2.8 8.7
FY13e
FY14e

550 500 450 400 350 300 Oct-11 Feb-12 Jun-12 HMN
(6.2) 2.0 3.8 -
(6.2) 2.0 2.5 -
Sensex
12,024 2,169 14.3 19.3 35.1 10.8 34.2 26.2 0.7 1.8
13,704 2,768 18.3 27.6 27.5 10.6 36.3 30.5 1.6 (25.3)
16,146 3,156 20.9 14.0 24.1 8.2 38.2 33.9 1.2 (37.9)
19,029 3,843 25.4 21.8 19.8 6.5 36.5 33.3 1.6 (46.7)
22,241 4,645 30.7 20.9 16.4 5.2 35.3 32.7 2.0 (53.2)
Shirish Pardeshi
Aniruddha Joshi
India Equities
Aug-12
Dec-11
Oct-12
Apr-12
8 October 2012
Emami All-round growth; Buy


12,024 15.8 9,490 2,534 21.1 152 140 331 404 15.7 2,169 118 (0) 2,287 14.3 19.3
13,704 14.0 10,737 2,968 21.7 152 188 541 401 12.7 2,768 (179) (0) 2,588 18.3 27.6
16,146 17.8 12,590 3,556 22.0 134 190 524 601 16.0 3,156 3,156 20.9 14.0
19,029 17.9 14,759 4,270 22.4 134 206 645 732 16.0 3,843 3,843 25.4 21.8
22,241 16.9 17,168 5,073 22.8 134 225 816 885 16.0 4,645 4,645 30.7 20.9
151 6,747 6,899 1 2,294 137 9,330 4,909 74 74 2,242 2,105 9,330 252 18.6 46.5
151 6,915 7,066 1 1,673 145 8,885 4,803 1,125 1,125 197 2,759 8,885 (2,067) 1.4 47.7
151 9,008 9,160 1 1,673 145 10,979 5,363 4,625 4,625 21 969 10,979 (3,777) 0.1 61.5
151 11,436 11,587 1 1,673 145 13,406 6,007 7,125 7,125 (146) 420 13,406 (5,727) (0.8) 77.5
151 14,310 14,462 1 1,673 145 16,281 6,782 9,125 9,125 (332) 706 16,281 (8,013) (1.5) 96.5


2,169 140 2,427 (1,236) 1,301 (493) 809 (531) (311) 572 (122) 491 1,614 2,105
2,768 188 2,776 700 3,957 (1,156) 2,801 (615) (683) (699) (174) 654 2,105 2,759
3,156 190 3,346 176 3,522 (750) 2,772 (1,062) (3,500) (1,790) 2,759 969
3,843 206 4,050 167 4,217 (850) 3,367 (1,416) (2,500) (549) 969 420
4,645 225 4,870 186 5,056 (1,000) 4,056 (1,770) (2,000) 286 420 706
35.1 10.8 6.2 29.3 34.2 26.2 0.7 24.4 43.5 19.2 2.7 19.3 18.0 -
27.5 10.6 5.4 25.0 36.3 30.5 1.6 43.7 45.7 16.7 17.1 27.6 20.2 -
24.1 8.2 4.6 20.9 38.2 33.9 1.2 28.8 45.3 16.7 19.8 14.0 19.5 -
19.8 6.5 3.9 17.4 36.5 33.3 1.6 31.5 45.0 16.7 20.1 21.8 20.2 -
16.4 5.2 3.3 14.6 35.3 32.7 2.0 32.6 44.6 16.7 18.8 20.9 20.9 -
Fig 5 PE band
( `) 700 600 24x 500 400 300 200 100 0 Jan-09 May-05 Nov-02 Sep-04 Dec-05 Aug-09 Nov-10 Jun-11 Jul-03 Jul-06 Oct-07 May-08 Sep-12 Feb-04 Mar-07 Feb-12 Apr-02 Apr-10 Emami 10x 17x

Prickly heat powder 2% Mentho plus balm 5% Fair & Handsome 8% Other products 12% Fast Relief 2% Chyawanprash 1% Navratna oil 25%
30x
Zandu 18% Exports 13% Boroplus antiseptic cream 14%
3x
Source: Company

41
Consumer
India I Equities
Update
8 October 2012
Pidilite Industries
Taking the road less travelled; Buy
Considering Pidilite Industries (Pidilite) strategy of entering less competitive segments and creating brands in commodity segments, we believe it has strong growth potential (15% p.a.). Further, owing to its strong sub-segmentation strategy, we expect smoother price hikes (57% each year) and lesser competitive pressure. We also expect the issue regarding its synthetic elastomer project (Capex of `3bn) to be resolved in FY13 and retain our Buy, with a price target of `235 (earlier `213).
Key data

PIDI IN / PIDI.BO
`212 / `134 18709 / 5676 US$1.1m `102bn / US$1.9bn 508m

Strategy of entering less competitive segments. Pidilite enters segments growing in excess of 15% per annum and therefore faces lesser competition. It has been able to retain market shares in excess of 80% in most of categories. It has launched successful products and brands in segments such as adhesives, sealants and construction chemicals. Ability to create brands in commodity segments. Adhesives and sealants are commodities globally. Due to strategic advertising and training to intermidateries such as carpenters, plumbers, Pidilite has created brands in such commodity segments which allows Pidilite to enjoy pricing premium of ~10-15% over competing products such as Camlin, Joker glu. Sub-segmentation strategy in place. The company has a subsegmentation strategy for its Fevicol and Dr. Fixit brands with products ranging from `5-500. It has launched Fevistik, Fevibond, Fevikwik and Fevicryl under the Fevicol brand and products and SKUs of Dr. Fixit. Synthetic elastomer project issue to get clean chit. This project, wherein the company has spent `3.5bn as capex deadlock, is expected to get a clean chit in FY13. We believe management would clarify the position regarding it after the recommendation of the internal committee. Valuation. Our valuation puts the stock at `235 (earlier `213) at a target PE of 25x FY14e earnings. Risks: Higher raw material prices and delay in resolving the synthetic elastomer project issue.
70.8 0.0 29.2 12.9 4.9 11.4
70.8 0.0 29.2 12.4 5.8 11.0
70.8 0.0 29.2 12.4 6.3 10.5
FY13e
FY14e

230 210 190 170 150 130 Dec-11 Feb-12 Apr-12 Jun-12 Oct-11 Sensex
PIDI Aug-12 Oct-12
Source: Bloomberg
26,439 3,100 6.1 13.7 32.8 9.0 30.4 27.5 0.9 5.5
31,266 3,244 6.4 4.3 31.5 7.4 26.0 26.0 0.9 2.2
37,323 4,167 8.0 25.3 25.1 6.3 27.4 29.5 1.0 (13.5)
43,969 4,823 9.3 15.8 21.7 5.2 26.3 31.0 1.2 (23.3)
51,799 5,786 11.1 19.9 18.1 4.3 26.2 31.6 1.4 (31.2)
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Pidilite Industries Taking the road less travelled; Buy


26,439 20.6 21,931 4,508 17.0 314 595 432 947 23.5 3,084 (0) 3,100 6.1 13.7
31,266 17.9 26,429 4,836 15.5 307 637 435 1,100 25.4 3,226 3 3,244 6.4 4.3
37,323 16.4 31,146 6,177 16.5 152 790 397 1,464 26.0 4,167 4,167 8.0 25.3
43,969 17.8 36,613 7,355 16.7 201 972 425 1,784 27.0 4,823 4,823 9.3 15.8
51,799 17.8 43,043 8,756 16.9 201 1,063 543 2,250 28.0 5,786 5,786 11.1 19.9
506 10,341 10,847 2 3,356 420 14,625 9,138 1,705 1,705 2,743 1,039 14,625 1,032 10.4 22.3
508 12,754 13,261 5 3,936 468 17,671 10,115 1,251 1,251 3,573 2,732 17,671 422 11.4 27.0
521 15,653 16,173 5 2,231 468 18,877 10,525 4,251 4,251 3,534 568 18,877 (2,120) 9.5 32.0
521 19,027 19,547 5 2,231 468 22,251 11,053 6,851 6,851 3,966 382 22,251 (4,534) 9.0 38.4
521 23,152 23,672 5 2,231 468 26,376 11,789 9,851 9,851 4,475 261 26,376 (7,413) 8.6 46.4


3,100 595 3,986 (1,011) 2,975 (1,287) 1,688 (885) (1,321) 904 386 444 830
3,244 637 4,304 716 5,019 (1,554) 3,466 (1,030) (1,626) (875) (66) 834 769
4,167 790 4,957 39 4,996 (1,200) 3,796 (1,268) 13 (1,706) (3,000) (2,164) 2,732 568
4,823 972 5,796 (432) 5,364 (1,500) 3,864 (1,449) (2,600) (185) 568 382
5,786 1,063 6,849 (509) 6,340 (1,800) 4,540 (1,661) (3,000) (121) 382 261
32.8 9.0 3.9 22.6 30.4 27.5 0.9 28.6 53.1 3.7 19.6 13.7 11.7 -
31.5 7.4 3.3 21.2 26.0 26.0 0.9 29.7 55.7 3.4 7.3 4.3 10.3 -
25.1 6.3 2.8 17.0 27.4 29.5 1.0 26.2 54.6 3.4 27.7 25.3 11.2 -
21.7 5.2 2.4 14.3 26.3 31.0 1.2 25.9 54.4 3.4 19.1 15.8 11.0 -
18.1 4.3 2.0 12.0 26.2 31.6 1.4 24.7 54.2 3.4 19.0 19.9 11.2 -
Fig 5 PE band
( `) 1,000
42x 800 ZYWL 600 23x 400 14x 200 4x 0 Nov-05 Jun-06 May-08 Dec-08 Jun-11 Sep-07 Aug-09 Jan-12 Oct-10 Sep-12 Mar-05 Feb-07 Mar-10 33x
EverYuth 25% Sugar Free 40%
Nutralite 35%
Source: Company

43
Consumer
India I Equities
Update
8 October 2012
Agro Tech Foods

Brand power; Buy
Agro Tech Foods (Agro Tech) Act II popcorn continues to grow healthily at ~20% and its peanut butter factory is slated to start production from 3QFY13. With this, the share of high-margin branded products in overall revenues is bound to rise, pushing margins to 10% in FY14 from 7.4% in FY12. We retain our Buy rating and target of `576.
Key data

ATFL IN / AGRO.BO
Oct-11
Feb-12
Jun-12
7,187 194 8.0 (22.9) 51.7 5.7 12.0 14.1 0.4 (25.7)
7,021 363 14.9 87.2 27.6 4.8 19.0 23.6 0.4 (36.2)
8,058 484 19.9 33.5 20.7 4.0 21.2 27.0 0.5 (22.6)
9,265 613 25.1 26.5 16.3 3.3 22.1 28.7 0.5 (19.5)
10,667 797 32.7 30.1 12.6 2.7 23.4 30.1 0.6 (13.5)
Aniruddha Joshi
Shirish Pardeshi
India Equities
Aug-12
Dec-11
Oct-12
Apr-12
Act II volumes strong. Contrary to the market view of Act II slowdown, the product is growing a strong 15-20%. SKU launches and entry into the ready-to-eat sub-segment fuelled the growth. The company said it has sufficient corn inventory for FY13 and is in advanced discussions with government for approval to import corn. Sundrop range steady. Sundrop Heart continues to grow in low teens. However, the launch of Sundrop peanut butter as well as cooking-oil sprays point to increased investment in the brand. This will aid growth in the edible oil category that accounts for 63% of the companys revenues. Crystal dilutes growth. Crystal, a low-value-added edible oil (15% of net sales), has weaker pricing power. Its volumes and revenues were down 10% and 6%, respectively, in 1QFY13. The company has, hence, decided to protect its profitability rather than volumes. Profitability to expand. With the rising proportion of brand-named food products, we expect profit margin to improve. The greater proportions of Act II peanut butter and Sundrop edible oil are expected to drive the margin to 11.1% by FY15 (from 7.4% in FY12). Peanut-butter on track. The peanut butter factory, expected to commence production from 3QFY12, will roll out new SKUs and variants. The companys venture into this sub segment, where there is little competition, is likely to aid margin expansion. Valuation. Our DCF-based valuation puts the stock at `576, at a target PE of 24x FY14e earnings. Risk: Higher raw material prices.
`517 / `340 18709 / 5676 US$0.2m `10bn / US$193m 24m

51.8 0.0 48.2 2.8 7.9 37.5
51.8 0.0 48.2 2.9 8.5 36.8
51.8 0.0 48.2 2.5 8.5 37.2
FY13e
FY14e

550 500 450 400 350 300 ATFL
Sensex
8 October 2012
Agro Tech Foods Brand power; Buy


7,187 10.6 6,912 275 3.8 1 46 69 103 35 194 124 318 8.0 (22.9)
7,021 (2.3) 6,505 517 7.4 1 57 49 145 29 363 363 14.9 87.2
8,058 14.8 7,324 734 9.1 1 94 43 198 29 484 484 19.9 33.5
9,265 15.0 8,331 934 10.1 1 112 54 263 30 613 613 25.1 26.5
10,667 15.1 9,484 1,183 11.1 1 131 88 342 30 797 797 32.7 30.1
244 1,532 1,776 (32) 1,744 681 144 144 472 448 1,744 (592) 6.6 71.6
244 1,846 2,089 94 (24) 2,160 874 431 431 444 410 2,160 (747) 6.3 84.8
244 2,273 2,516 94 (24) 2,587 1,031 831 831 500 225 2,587 (963) 6.2 102.3
244 2,821 3,065 94 (24) 3,136 1,168 1,131 1,131 581 255 3,136 (1,292) 6.3 124.8
244 3,547 3,791 94 (24) 3,862 1,287 1,731 1,731 673 170 3,862 (1,808) 6.3 154.6


318 46 185 (541) (356) (45) (401) (42) (443) 890 448
363 57 425 (126) 299 (288) 11 (49) (38) 448 410
484 94 578 (55) 522 (250) 272 (57) (400) (185) 410 225
613 112 725 (82) 643 (250) 393 (64) (300) 29 225 255
797 131 928 (91) 837 (250) 587 (71) (600) (84) 255 170
51.7 5.7 1.3 33.7 12.0 14.1 0.4 22.0 73.3 6.5 7.0 (22.9) 2.7 -
27.6 4.8 1.3 17.9 19.0 23.6 0.4 11.8 70.6 4.7 87.9 87.2 5.2 -
20.7 4.0 1.2 12.6 21.2 27.0 0.5 10.1 67.5 6.0 42.1 33.5 6.0 -
16.3 3.3 1.0 9.9 22.1 28.7 0.5 9.0 66.0 6.5 27.3 26.5 6.6 -
12.6 2.7 0.9 7.8 23.4 30.1 0.6 7.6 64.5 7.0 26.7 30.1 7.5 -
Fig 5 PE band
( `)

Sundrop Extensions 3%
1,000 40x 800 30x 600 22x 400 14x 200 ATFL 0 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 6x
Act II 14%
Refined Edible Oil 83%


45
Consumer
India I Equities
Update
8 October 2012
Bajaj Corp.
Market-share gains continue; Buy
New SKUs and an expanded distribution network have created a stronger platform for launches. Bajaj Almond Drops and Kailash Parbat hair oil gained market share of 100bps in FY12. Management is confident of maintaining margins as it had hiked prices 8.5% to pass on raw material costs. We retain a Buy, with a target of `235.
Key data

BJCOR IN / BACO.BO
`195 / `95 18709 / 5676 US$0.7m `28bn / US$536m 148m
Market-share gains in Almond Drops. Bajaj Corp.s Almond Drops has continued to gain. For the seventh year running, it upped its market share, gaining 100bps in FY12 (over FY11), taking its share to 54%. It aims to hit a 65% market share by end-FY16. Kailash Parbat also doing well. The Kailash Parbat brand also continued to gain, and now commands a 2.1% market share since its Mar11 launch. The company plans to focus on its sandalwood USP and to rope in celebrities to fortify the brand equity. Price hikes to pass on higher raw material prices. Though crude oil prices have recently fallen 7-8%, the steep (10-12%) rupee depreciation has held liquid paraffin (a crude-oil derivative) prices high. To pass on rising raw-material prices, the company had hiked prices 8.5%. With this, management is confident of maintaining margins at 25%. Expansion of distribution network. The company is aggressively looking at expanding its distribution network. In the past three years, it has already doubled it. We believe launch of new SKUs (such as `1 sachets) and 500ml PET bottles would attract consumers as well as premium sales outlets. The expanded distribution network would be a platform for the launch of such products. Valuation. We value the stock at `235 (earlier `189), at a target PE of 20x FY14e earnings. Our target PE is at the mean PE of 13x since listing plus two standard deviation. Risks: Keener competition and weaker response to launches.
Sep 12 Jun 12 Mar 12
84.8 0.0 15.2 9.5 0.5 5.2
84.8 0.0 15.2 9.3 0.5 5.4

FY13e
84.8 0.0 15.2 9.2 0.3 5.7

FY14e

190 170 150 130 110 90 Oct-11 Jun-12 Aug-12 Dec-11 Feb-12 Oct-12 Apr-12 Sensex BJCOR
Source: Bloomberg
Key financials (YE: Mar)
3,587 991 6.7 0.0 27.8 7.3 49.3 52.9 1.2 (109.3)
4,722 1,201 8.1 21.2 23.0 6.4 29.8 28.0 2.4 (79.2)
5,684 1,433 9.7 19.3 19.3 5.7 31.3 29.7 3.0 (97.9)
6,790 1,744 11.8 21.7 15.8 4.9 33.4 31.6 3.7 (98.7)
8,111 2,062 14.0 18.2 13.4 4.3 34.3 32.7 4.3 (100.0)
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Bajaj Corp Market-share gains continue; Buy


3,587 8.7 2,506 1,081 30.1 18 178 250 20.1 991 (150) 841 6.7 0.0
4,722 31.7 3,568 1,154 24.4 1 26 385 311 20.6 1,201 1,201 8.1 21.2
5,683 20.3 4,285 1,398 24.6 0 38 453 381 21.0 1,433 1,433 9.7 19.3
6,789 19.5 5,085 1,704 25.1 0 51 555 464 21.0 1,744 1,744 11.8 21.7
8,111 19.5 6,075 2,036 25.1 0 65 639 548 21.0 2,062 2,062 14.0 18.2
148 3,616 3,763 (0) 3,763 220 3,301 3,301 (571) 813 3,763 (4,114) (15.9) 25.5
148 4,131 4,278 4 10 4,292 819 3,135 3,135 64 275 4,292 (3,405) 1.4 29.1
148 4,708 4,856 4 10 4,870 962 4,535 4,535 (868) 241 4,870 (4,772) (15.3) 33.0
148 5,426 5,573 4 10 5,587 1,111 5,235 5,235 (1,045) 287 5,587 (5,517) (15.4) 37.9
148 6,290 6,438 4 10 6,452 1,246 6,135 6,135 (1,257) 327 6,452 (6,458) (15.5) 43.7


841 18 992 140 1,132 (62) 1,070 2,802 (3,227) 646 168 813
1,201 26 1,227 (635) 592 (626) (33) (676) 4 166 (539) 813 275
1,433 38 1,470 932 2,402 (180) 2,222 (856) (1,400) (33) 275 241
1,744 51 1,795 177 1,972 (200) 1,772 (1,027) (700) 45 241 287
2,062 65 2,127 211 2,338 (200) 2,138 (1,198) (900) 40 287 327
27.8 7.3 6.7 22.4 49.3 52.9 1.2 28.3 43.7 20.4 10.9 0.0 25.4 16.4 (4.7)
23.0 6.4 5.1 21.0 29.8 28.0 2.4 49.1 46.6 22.5 6.8 21.2 27.6 20.7 9.4
19.3 5.7 4.3 17.3 31.3 29.7 3.0 51.5 46.5 22.4 21.1 19.3 25.4 16.0 4.0
15.8 4.9 3.6 14.2 33.4 31.6 3.7 50.7 46.0 22.4 21.9 21.7 25.2 15.0 4.0
13.4 4.3 3.0 11.9 34.3 32.7 4.3 50.1 46.0 22.4 19.5 18.2 25.7 15.0 4.0
Fig 5 PE band
( `) 250 210 170 130 90 50 Aug-10 Aug-11 Sep-11 Mar-12 Jun-11 Jan-12 Oct-10 Jul-12 May-12 Sep-12 Feb-11 Dec-10 Apr-11 Nov-11

Amla Shikakai 2% Brahmi Amla 5% Others 1%
23x
19x
15x 12x 9x
Bajaj corp
Bajaj Almond Drops 92%

Source: Company

47
Consumer
India I Equities
Update
8 October 2012
Jyothy Laboratories
Business reboot to mar FY13 prospects; Sell
Though we are enthusiastic about Jyothy Laboratories (Jyothy) strategy of creating a long-term business model, its FY13 earnings are likely to be volatile. This is because three key events scheduled for FY13 have now been postponed to FY14: 1) land sale; 2) benefits from the distribution restructuring in FY12; and 3) turnaround in the mosquito-repellent business. Hence, we retain Sell, with a price target of `130.
Key data

JYL IN / JYL.BO
`184 / `62 18709 / 5673 US$0.8m `25bn / US$478m 161m

FY13 to be the year of consolidation. The company plans to change its entire distribution structure and categorise all its brands. It plans to launch variants and re-launch most brands. It has also divided brands into those focused on and those less-focused-on. We expect the changes in its entire business structure to lead to volatile results in FY13. Change in distribution structure. In line with other FMCG companies, Jyothy now plans to redesign its sales structure and drive sales through zonal sales managers. It will service its distributors using 28 C&F agents network and dismantle its own 67 depots. It will also start selling products on cash and will do away with the two-week-credit system. It has cut distributor margins (from 8% to 6%) and reduced retailer margins by 200bps. Land sale unlikely in near term. The company was looking to sell its Karaikal and Ambatur and its vacant office at MIDC (Andheri, Mumbai) for ~`2bn total and repay part of its debt. However, it has now decided to wait until its merger with Henkel, likely in FY14. Mosquito-repellent business in investment mode. The company plans to re-launch its Maxo brand and subsequently introduce variants and products under it. More investment in mosquito repellents would result in lower profitability in FY13. Valuation. We value the stock at `130 at a target PE of 22x FY14e earnings. Risk: Lower raw material prices.
65.3 0.0 34.7 14.0 12.3 8.4

FY13e
65.3 0.0 34.7 12.7 13.8 8.2

FY14e
65.2 0.0 34.8 12.5 14.4 7.9

FY15e
Sales EBITDA EPS Target Multiple (x) Relative price performance

180 150 120 90
JYL
Sensex 60 Oct-11 Feb-12 Jun-12 Aug-12 Dec-11 Oct-12 Apr-12
Source: Bloomberg
6,195 688 4.3 (11.1) 36.1 3.8 13.1 10.4 1.6 (41.7)
9,106 446 2.8 (35.2) 55.7 4.0 7.0 6.1 0.8 81.6
11,997 684 4.1 49.0 37.4 3.8 10.5 11.3 1.0 59.9
14,666 1,126 6.8 64.5 22.7 2.7 13.9 15.1 1.0 11.0
17,962 1,673 10.1 48.6 15.3 2.4 16.5 18.9 1.3 (5.3)
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Jyothy Laboratories Business reboot to mar FY13 prospects; Sell


6,195 3.9 5,471 724 11.7 20 130 238 154 19 688 (30) 688 4.3 (11.1)
9,106 47.0 8,269 837 9.2 238 247 231 199 34 446 (62) 446 2.8 (35.2)
11,997 31.7 10,356 1,641 13.7 560 337 111 171 20 684 684 4.1 49.0
14,666 22.2 12,623 2,043 13.9 318 390 72 281 20 1,126 2,000 3,126 6.8 64.5
17,962 22.5 15,361 2,601 14.5 160 410 86 445 21 1,673 1,673 10.1 48.6
Share capital Reserves & surplus Net worth Total debt Minority interest Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, Liquid Net working capital Cash and bank balance Capital deployed Net debt WC days Book value (`/sh)
81 6,230 6,311 691 5 216 7,222 2,607 607 607 1,199 2,809 7,222 (2,510) 19.3 40
81 6,044 6,124 5,726 67 161 12,078 10,366 571 571 479 662 12,078 4,654 5.3 39
83 6,439 6,522 4,226 161 10,909 10,289 571 571 (175) 224 10,909 3,592 (1.5) 40
83 9,275 9,358 1,426 161 10,946 10,249 571 571 (258) 383 10,946 632 (1.8) 57
83 10,563 10,646 1,426 161 12,233 10,215 571 571 (548) 1,995 12,233 (979) (3.1) 65


688 130 596 (583) 13 (348) (335) (338) 2,805 (2,172) (40) 303 262
446 247 183 584 767 (3,535) (2,769) (469) 5,244 (2,779) (773) 1,212 439
684 337 1,021 654 1,676 (325) 1,351 (289) (1,500) (438) 662 224
3,126 390 3,515 83 3,598 (350) 3,248 (289) (2,800) 160 224 383
1,673 410 2,082 290 2,372 (375) 1,997 (385) 1,612 383 1,995
36.1 3.8 4.8 41.4 13.1 10.4 1.6 58.6 51.7 9.0 (21.1) (11.1) 10.6
55.7 4.0 3.3 35.8 7.0 6.1 0.8 45.2 55.2 7.6 15.6 (35.2) 4.2
37.4 3.8 2.6 18.8 10.5 11.3 1.0 36.4 51.8 8.0 96.1 49.0 5.7
22.7 2.7 2.1 15.1 13.9 15.1 1.0 22.1 51.6 8.0 24.5 64.5 7.7
15.3 2.4 1.7 11.9 16.5 18.9 1.3 19.9 51.0 8.0 27.3 48.6 9.3
Fig 5 PE band
(`) 200
35x
Other products 16%
160 27x 120 20x 80 12x 40 5x
Surface cleaning 23%
Fabric care 47%
0 Jul-08 Jun-09 Dec-07 Nov-08 Sep-09 Feb-09 Jan-10 May-10 Aug-10 Dec-10 Jul-11 Mar-11 Oct-11 Feb-12 May-12 Sep-12 Apr-08
Mosquito repellents 14%

49
Consumer
India I Equities
Update
8 October 2012
Lovable Lingerie
Strong volumes; Buy
Lovable Lingerie (Lovable) is focused on driving volumes. It has benefited from the 30% fall in cotton prices, which it is using to lower selling prices by 10% for some styles and increase brand-building. We expect the benefit of its ad-campaigns and distribution restructuring to be seen from FY13. We retain a Buy, with price target of `490.
Key data

LLL IN / LOVA.BO
Oct-11
Feb-12
Jun-12
1,040 141 8.4 (3.3) 45.4 4.5 16.8 21.6 0.4 (75.5)
1,329 217 12.9 53.7 29.6 4.0 14.3 14.1 0.5 (59.3)
1,712 265 15.8 22.4 24.1 3.5 15.5 15.3 0.6 (50.3)
2,204 314 18.7 18.4 20.4 3.1 16.0 17.0 0.8 (41.0)
2,837 377 22.5 20.3 17.0 2.7 16.7 18.9 1.0 (33.6)
Aniruddha Joshi
Shirish Pardeshi
India Equities
Aug-12
Dec-11
Oct-12
Apr-12
Volume growth strong. Lovable has been proactive in creating a new range of innerwear at lower prices (10% lower than regular range). This has helped arrest down-trading in lingerie after the slowdown in the economy. We expect volumes to grow at CAGR of 25% over FY12-14e. Lower raw material prices allow for price drops. Prices of the major raw material (cotton) are down ~30% yoy. This allows Lovable to maintain its profit margin of 17% despite lower realizations. With these savings, it has increased brand-building measures by 300bps in FY12. Benefits of ad-campaign to be seen ahead. We believe the benefits of ad-campaigns conducted for the Lovable and Daisy Dee brands would be seen in coming quarters. Lower prices, new ranges, national rollout of Daisy Dee and higher ad-spend would help expand market shares from the current level of 28%. Distribution re-structuring to be complete in FY13. The company has changed the entire distribution network of the Lovable brand from direct retail to distributor-based model. This has increased oulets from 2,000 to 2,500. The Daisy Dee brand has been nationally launched (earlier it was only in South India) with distribution network moving from 7,500 outlets to 9,000 outlets. Valuation. We value the stock at `490 (earlier `555) at a target PE of 26x FY14e earnings. Risks: Higher raw material prices and increase in competitive pressures.
`531 / `278 18709 / 5676 US$1.5m `6.4bn / US$123bn 17m

67.0 0.0 33.0 10.5 3.4 19.1
67.0 0.0 33.0 11.8 2.3 18.9
67.0 0.0 33.0 10.3 3.9 18.8
FY13e
FY14e

540 495 450 405 360 315 270 LLL Sensex
(5.5) (21.6) (12.8) -
(5.1) (11.4) (3.2) -
8 October 2012
Lovable Lingerie Strong volumes; Buy


1,040 19.6 845 195 18.8 5 14 9 44 23.9 141 141 8.4 (3.3)
1,329 27.8 1,099 231 17.4 6 15 67 61 21.9 217 217 12.9 53.7
1,712 28.8 1,417 295 17.2 5 27 85 84 24.0 265 265 15.8 22.4
2,204 28.8 1,819 384 17.4 5 43 87 110 26.0 314 314 18.7 18.4
2,837 28.8 2,342 495 17.4 5 60 80 133 26.0 377 377 22.5 20.3
168 1,244 1,412 9 1,422 129 931 931 218 143 1,422 (1,065) 21.0 84.9
168 1,422 1,590 45 10 1,646 234 1,018 1,018 323 33 1,646 (994) 24.3 95.5
168 1,648 1,816 45 10 1,871 471 918 918 380 103 1,871 (965) 22.2 109.0
168 1,917 2,085 45 10 2,141 703 918 918 477 43 2,141 (905) 21.6 125.1
168 2,236 2,404 45 10 2,460 943 868 868 602 47 2,460 (858) 21.2 144.1


141 14 143 (146) (3) 15 (18) 9 1,057 (3) 911 116 26 142
217 15 186 (132) 53 158 (105) 29 34 14 (113) 142 29
265 27 292 (57) 235 225 10 39 (100) 70 33 103
314 43 356 (97) 259 275 (16) 44 (60) 103 43
377 60 437 (125) 312 300 12 59 (50) 3 43 47
45.4 4.5 5.2 27.9 16.8 21.6 0.4 17.8 44.2 3.1 20.9 (3.3) 13.5 22.3 (2.1)
29.6 4.0 4.1 23.6 14.3 14.1 0.5 15.5 40.3 2.1 18.2 53.7 16.3 32.0 2.6
24.1 3.5 3.2 18.5 15.5 15.3 0.6 14.2 40.5 2.1 27.7 22.4 15.5 25.0 3.0
20.4 3.1 2.5 14.2 16.0 17.0 0.8 16.0 40.2 2.1 30.4 18.4 14.2 25.0 3.0
17.0 2.7 1.9 11.0 16.7 18.9 1.0 17.8 40.2 2.1 28.7 20.3 13.3 25.0 3.0
Fig 5 PE band
( `) 800
45x 39x
650
32x 500 25x 350 18x 200 Mar-11 Jun-11 Apr-11 Aug-11 Sep-11 Oct-11 Jan-12 Feb-12 May-11 Nov-11 Dec-11 Dec-11 Mar-12 Jun-12 Jul-11 Apr-12 Aug-12 May-12 Sep-12 Jul-12
Daisy Dee 42% Lovable 58%

51
Consumer
India I Equities
Update
8 October 2012
VST Industries
Cigarette well-lit; Buy
We believe VST Industries (VST) would report ~1% volume growth in FY13 contrary to market expectations of a drop in volumes. We expectless competition at the entry level of `2 cigarette and launch of 64mm cigarettes at `1.5 - to arrest any drop in volumes and down-trading. We upgrade VST from a Sell to a Buy with target price of `2,260.
Key data

VST IN / VST.BO
`2,025 / `1,025 18709 / 5676 US$0.4m `27bn / US$529m 15m

Steady volumes in FY13 despite higher taxes. On the ~18% increase in excise duty as well as 100-200bps rise in VAT rates, VST hiked prices ~15% to pass on the higher costs. However, as there are hardly any brands available at its price points of `2.0 and `2.5, we expect no loss of market share. We expect 1-2% volume growth in FY13. We expect VST to benefit from beedi uptrading to entry point cigarette. Launch of new cigarettes at `1.5 to drive volumes. VST has introduced a cigarette at `1.5, taking advantage of the new cigarette slab of 64mm. The cigarette attracts far lower excise duty and enjoys similar profit as those of 69mm. We expect the entry price point to help arrest any down-trading in cigarettes. Raw material and other costs lower. Though excise and VAT rates have risen 18%, most other costs are still low. Tobacco prices are trending stable , and it helps the company not to resort to price hikes in order to maintain profitability. Strong dividend play. The companys business model does not require huge capital expenditure and current capacity utilization of ~55% requires little capex ahead. As the working capital cycle is negative, the company pays a ~75% of its free cash as dividend. Valuation. We value the stock at `2,260 (earlier `1,236) at a target PE of 19x FY14e earnings. The present dividend yield of 5% and cash per share of `110 on the FY12 balance sheet also supports the valuations. Risks: Weaker growth in cigarettes.
32.2 0.0 67.8 3.9 14.9 49.0
32.2 0.0 67.8 2.9 15.5 49.4
32.2 0.0 67.8 2.8 15.5 49.5
FY13e
FY14e

2,000 1,800 1,600 1,400 1,200 1,000 Oct-11 Feb-12 Jun-12 Apr-12 Dec-11 VST
2.3 33.9 29.0 -
6.3 40.0 37.1 -
Sensex
Source: Bloomberg
5,784 963 62.4 36.0 28.5 11.0 39.8 46.8 2.5 (79.8)
6,801 1,425 92.3 48.0 19.3 9.9 53.9 68.2 3.7 (85.2)
7,693 1,641 106.3 15.2 16.7 8.4 54.3 70.0 3.9 (102.2)
8,452 1,876 121.5 14.3 14.7 7.1 52.5 66.3 4.5 (109.5)
9,274 2,096 135.7 11.7 13.1 6.0 49.7 61.7 5.1 (114.1)
Aniruddha Joshi
Shirish Pardeshi
India Equities
Aug-12
Oct-12
8 October 2012
VST Industries Cigarette well-lit; Buy


5,784 22.5 4,420 1,364 23.6 0 231 232 402 29.5 963 (13) 950.1 62.4 36.0
6,801 17.6 4,747 2,055 30.2 248 300 681 32.4 1,425 1,425.1 92.3 48.0
7,693 13.1 5,289 2,404 31.2 282 291 772 32.0 1,641 1,641.1 106.3 15.2
8,452 9.9 5,771 2,681 31.7 309 387 883 32.0 1,876 1,876.1 121.5 14.3
9,274 9.7 6,334 2,940 31.7 337 479 986 32.0 2,096 2,095.9 135.7 11.7
154 2,490 2,644 (139) 2,506 1,593 1,710 1,710 (1,087) 290 2,506 (2,138) (18.8) 162.3
154 2,748 2,902 5 (115) 2,792 1,635 2,301 2,301 (1,505) 360 2,792 (2,772) (22.1) 180.5
154 3,224 3,379 5 (115) 3,268 1,679 2,801 2,801 (2,033) 821 3,268 (3,733) (26.4) 211.3
154 3,847 4,001 5 (115) 3,891 1,720 3,301 3,301 (2,370) 1,239 3,891 (4,651) (28.0) 251.6
154 4,509 4,664 5 (115) 4,553 1,733 3,801 3,801 (2,657) 1,676 4,553 (5,588) (28.7) 294.6


5,784 231 1,093 (171) 922 (426) 496 (540) 270 0 226 64 290
6,801 248 1,534 90 1,624 (292) 1,333 (808) (455) 70 290 360
7,693 282 1,923 528 2,451 (325) 2,126 (1,164) (500) 461 360 821
8,452 309 2,185 337 2,522 (350) 2,172 (1,254) (500) 418 821 1,239
9,274 337 2,433 287 2,720 (350) 2,370 (1,433) (500) 437 1,239 1,676
28.5 11.0 4.3 18.4 39.8 46.8 2.5 72.2 49.3 3.5 65.2 36.0 16.6 8.7 18.0
19.3 9.9 3.7 12.2 53.9 68.2 3.7 70.4 45.3 2.5 50.6 48.0 21.0 12.0 4.0
16.7 8.4 3.3 10.4 54.3 70.0 3.9 65.9 44.3 2.5 17.0 15.2 21.3 5.0 12.0
14.7 7.1 3.0 9.4 52.5 66.3 4.5 65.8 43.8 2.5 11.5 14.3 22.2 5.0 2.0
13.1 6.0 2.7 8.5 49.7 61.7 5.1 66.3 43.8 2.5 9.7 11.7 22.6 5.0 2.0
Fig 5 PE band
(`) 2,100 1,800 1,500 1,200 900 600 300 0 Jan-00 Aug-00 Mar-01 Oct-01 Jun-02 Jan-03 Aug-03 Mar-04 Nov-04 Jun-05 Jan-06 Aug-06 Apr-07 Nov-07 Jun-08 Jan-09 Sep-09 Apr-10 Nov-10 Jul-11 Feb-12 Sep-12 12x 8x 5x 2x VST 15x
Unmanufactured Tobacco 12%
Cigarettes 88%

53
Consumer
India I Equities
Update
8 October 2012
Zydus Wellness
Out of the woods; Buy
Zydus Wellness (Zydus) revenue growth rates, we believe, would be on track in FY13 due to rising general health awareness in society, its differentiated product launches and lower competition. Concerted brand-building measures would drive growth rates. We retain our Buy rating and price target of `536.
Key data

ZYWL IN / ZYWL.BO
`609 / `320 18709 / 5676 US$0.5m `17bn / US$320m 39m

Upswing in net sales. The companys aggressive brand-building has finally borne fruits. The company is now enjoying strong consumer offtake in Sugarfree, Nutralite and EverYuth. Gross revenues are up 13.4% in the past two quarters. Sugarfree going steady. Sugarfree, which accounts for ~40% of revenues and 50% of EBITDA, has consolidated its market leadership by upping its market share from 89% to 91%. Its sub-segmentation strategy and strong brand building has helped it maintain market leadership. Strategy of differentiated launches. The company is launching differentiated products such Mens face wash, herbal hand sanitizers and a health-food drink for consumers above the age of 30. The launch of niche products in less competitive markets would drive profitable growth. Strong investments in brands. Zydus is investing strongly across brands. It has a gross margin of over 65%, which allows brand-building expenditure of more than 20%. We believe its ad-spend is under-utilized as distribution network is restricted to ~1m outlets. Valuation.We value the stock at `536, at a target PE of 24x FY14e earnings. Products such as Sugarfree and Nutralite have strong growth potential due to rising health awareness in the society, in general. Risks: Higher raw material prices and increase in competition.
72.5 0.0 27.5 1.7 13.7 12.1
72.5 0.0 27.5 1.7 13.7 12.1
72.5 0.0 27.5 1.7 13.7 12.1
FY13e
FY14e

650 600 550 500 450 400 350 300 Dec-11 Oct-11 Sensex
ZYWL Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
3,354 595 15.2 25.3 28.0 11.6 48.8 67.2 0.9 (88.2)
3,302 677 17.3 13.8 24.6 8.7 40.5 42.9 1.2 (67.9)
3,731 752 19.2 11.1 22.1 6.8 34.5 36.6 1.4 (72.7)
4,335 859 22.0 14.2 19.4 5.5 31.4 33.9 1.4 (75.8)
5,042 1,021 26.1 18.8 16.3 4.4 30.0 31.9 1.6 (79.8)
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Zydus Wellness Out of the woods; Buy


3,354 25.4 2,521 833 24.8 0 15 82 305 34 595 595 15.2 25.3
3,302 (1.6) 2,542 760 23.0 2 39 103 137 17 686 9.1 677 17.3 13.8
3,731 13.0 2,880 852 22.8 2 47 168 204 21 767 15.0 752 19.2 11.1
4,335 16.2 3,338 997 23.0 3 56 175 234 21 879 20.0 859 22.0 14.2
5,042 16.3 3,871 1,170 23.2 4 66 219 277 21 1,042 21.0 1,021 26.1 18.8
391 1,028 1,419 11 1,430 535 397 397 (367) 865 1,430 (1,262) (10.9) 36.6
391 1,478 1,869 9 6 45 1,929 961 36 36 (383) 1,315 1,929 (1,345) (11.6) 49.0
391 2,003 2,394 24 6 45 2,470 1,094 1,536 1,536 (464) 303 2,470 (1,834) (12.4) 62.4
391 2,590 2,981 44 6 45 3,077 1,238 2,236 2,236 (543) 146 3,077 (2,376) (12.5) 77.5
391 3,339 3,730 65 6 45 3,846 1,371 2,936 2,936 (645) 183 3,846 (3,114) (12.8) 96.6


595 15 597 (73) 524 (170) 354 (136) (397) (180) 1,005 825
677 39 736 (58) 678 (83) 595 (181) 1 415 898 1,313
752 47 814 81 895 (180) 715 (227) (1,500) (1,012) 1,315 303
859 56 935 79 1,014 (200) 814 (272) (700) (158) 303 146
1,021 66 1,108 101 1,210 (200) 1,010 (272) (700) 38 146 183
28.0 11.6 4.6 18.4 48.8 67.2 0.9 26.3 35.8 27.5 25.1 25.3 17.7 -
24.6 8.7 4.6 20.2 40.5 42.9 1.2 28.9 35.3 20.3 (8.8) 13.8 20.8 -
22.1 6.8 4.1 18.0 34.5 36.6 1.4 31.2 35.6 20.3 12.1 11.1 20.6 -
19.4 5.5 3.5 15.4 31.4 33.9 1.4 27.3 35.4 20.3 17.1 14.2 20.3 -
16.3 4.4 3.0 13.1 30.0 31.9 1.6 26.8 35.2 20.3 17.4 18.8 20.7 -
Fig 5 PE band
( `) 1,000
42x 800 ZYWL 600 23x 400 14x 200 4x 0 Nov-05 Jun-06 May-08 Dec-08 Jun-11 Sep-07 Aug-09 Jan-12 Oct-10 Sep-12 Mar-05 Feb-07 Mar-10 33x
EverYuth 25% Sugar Free 40%
Nutralite 35%
Source: Company

55
Consumer
India I Equities
Update
8 October 2012 25
Radico Khaitan
Orchestrating successful product launches; Buy
Radico Khaitan (Radico) has the second-largest distribution network in India and has made inroads into the militarys Canteen Stores Department (CSD) to create and support its products. Its earnings have been driven by its ability to launch products/brands with a strong premiumisation strategy. We estimate EPS CAGR of 23% over FY12-14. We retain our Buy rating and price target of `161.
Key data

RDCK IN / RADC.BO
`135 / `92 18709 / 5676 US$0.9m `16bn / US$298m 133m
Effective branding capability. Innovative packaging, celebrity endorsements and an effective communication strategy have helped Radico launch and build premium brands in the liquor industry (growing at 15% since past decade). However, despite these spends, it maintains margin of ~14% which is comparable to other liquor players in India. The erstwhile country liquor company has launched successful brands such as 8PM, Old Admiral, and Contessa. Strong distribution network. After United Spirits, Radico has the second-largest distribution network in India. It sells through ~35,000 retail outlets that cater to ~80% of Indias liquor-consuming areas. It has also made inroads into CSD which accounts for 15% of liquor consumption. This poses a strong entry barrier to potential competition. Impressive brandwagon. Strong range of brands taps consumers across income levels which is not the case with peers such as Globus Spirits or Tilaknager Industries. Presence in country liquor (25% of sales) and all types of liquor, except for beer and wine, provides growth platform. Valuation. We value the stock at a price target of `161, a target PE of 19x FY14e earnings. Our target PE is at a 40% discount to the past average PE of 33x. In the past three years, the stock has traded at an average PE of 20x. Risk. Higher prices of molasses.
Jun12 Mar 12 Dec11
40.4 43.6 59.6 25.6 10.2 23.8
40.4 45.5 59.6 25.4 10.7 23.5

FY13e
40.4 45.4 59.6 24.4 14.0 21.2

FY14e
2.6 (9.3) (15.7) -
2.5 (12.8) (18.3) -

150 140 130 120 110 100 Dec-11 Feb-12 Apr-12 Oct-11 RDCK Jun-12 Aug-12 Oct-12 Sensex
9,464 773 5.8 85.1 20.2 2.2 10.3 11.3 0.6 58.6
11,439 762 5.7 (1.5) 20.5 2.1 8.8 10.9 0.7 72.8
13,484 916 6.9 20.2 17.1 1.9 11.6 11.7 0.7 67.0
15,899 1,152 8.7 25.8 13.6 1.7 13.1 13.3 0.7 60.5
18,752 1,432 10.8 24.3 10.9 1.5 14.4 14.8 0.8 52.3
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Radico Khaitan Orchestrating successful product launches; Buy

Year-end: Mar FY11 FY12e FY13e FY14e FY15e

Net revenues Revenue growth (%) - Op. expenses EBITDA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported cons. PAT +/- Extraordinary items +/- Minority interest Adjusted cons. PAT FDEPS (`/share) Adj. FDEPS growth (%)
9,464 18.5 7,905 1,559 16.5 359 271 111 267 25.6 694 (79) 773 5.8 85.1
11,439 20.9 9,709 1,730 15.1 621 328 214 233 23.4 637 (125) 762 5.7 (1.5)
13,484 17.9 11,437 2,047 15.2 690 382 245 305 25.0 916 916 6.9 20.2
15,899 17.9 13,461 2,438 15.3 695 431 245 405 26.0 1,152 1,152 8.7 25.8
18,752 17.9 15,852 2,901 15.5 695 482 238 530 27.0 1,432 1,432 10.8 24.3
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, Liquid Net working capital Cash and bank balance Capital deployed Net debt WC (%) Book value (`/sh)
265 6,249 6,514 4,912 498 11,923 4,904 709 709 6,217 94 11,923 4,607 65.7 52.9
265 6,687 6,953 6,219 563 13,735 5,071 2,243 2,243 6,211 210 13,735 4,329 54.3 56.7
265 7,480 7,746 6,319 563 14,628 5,589 2,243 2,243 6,585 211 14,628 4,428 48.8 62.7
265 8,502 8,767 6,319 563 15,649 6,107 2,243 2,243 7,163 136 15,649 4,504 45.1 70.4
265 9,780 10,045 6,319 563 16,928 6,626 2,243 2,243 7,828 231 16,928 4,408 41.7 80.0


Consolidated PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
694 271 1,125 (1,007) 118 (540) (421) (92) 60 450 (246) 11 (238) 332 94
637 328 1,171 (152) 1,019 (873) 146 (108) 9 689 (614) 121 89 210
916 382 1,298 (374) 924 (900) 24 (123) 100 1 210 211
1,152 431 1,583 (578) 1,005 (950) 55 (131) (75) 211 136
1,432 482 1,914 (665) 1,249 (1,000) 249 (154) 95 136 231
P/E (x) P/B (x) EV/sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Admin exps to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) Volume growth (%) Realization growth (%)
20.2 2.2 2.2 13.5 10.3 11.3 0.6 12.0 47.5 22.5 16.9 85.1 8.2 -
20.5 2.1 1.8 12.2 8.8 10.9 0.7 13.9 47.7 23.5 11.0 (1.5) 6.7 -
17.1 1.9 1.6 10.3 11.6 11.7 0.7 11.6 47.7 23.5 18.3 20.2 6.8 -
13.6 1.7 1.3 8.7 13.1 13.3 0.7 9.8 47.5 23.5 19.1 25.8 7.2 -
10.9 1.5 1.1 7.3 14.4 14.8 0.8 9.3 47.4 23.5 19.0 24.3 7.6 -
Fig 5 Valuation chart (PE band)

( `) 300
36x 250 30x 200 150 100 50 0 Sep-06 Feb-07 Apr-06 Oct-08 Sep-09 Dec-07 Feb-10 Jul-07 Apr-09 Oct-11 May-08 May-11 Sep-12 Jul-10 Dec-10 Mar-12 24x 18x 12x
Pet bottles 3% Grain spirit 4% Silent spirits 6% Subsidiary sales 8%
Others 3%
Rectified spirits 2%
IMFL 50%
Country liquor 24%
Source: Company

57
Consumer
India I Equities
Update
8 October 2012
Tilaknagar Industries
South siren; Buy
Well-established in the militarys Canteen Stores Department (CSD) and in the southern states where distribution is government-controlled, Tilaknagar Industries (Tilaknagar) has strong profit margins. It plans to leverage its strong position in the South to expand nationwide. We expect 29% earnings CAGR over FY12-14 and retain our Buy, and a price target of `74.
Key data

TLNGR IN / TILK.BO
Shareholding pattern (%) Jun 12
`64 / `28 18709 / 5676 US$0.4m `6bn / US$115m 120m

Mar12 Dec 11
The brandy focus. Tilaknagar is focused on growing brandy in South India, and currently holds market shares between 40% and 97% across southern states. It has a strong sub-segmenting strategy in its major brand, Mansion House, which pulls in consumers across price points. Nationwide expansion. ~80% of the companys revenues are currently concentrated in South. It is, however, now trying to expand pan India by way of aggressive brand launches, leased unit set up and tie-ups. Further, its acquisition of infrastructure-consulting firms is expected to drive internal expansion capabilities. Cost cutting in process. The company has initiated cost-cutting steps such as recycling 40% of bottles (to rise to 60% in three years). Also, distribution costs and media spend are lower in the South since a large part of distribution is state-government-controlled and Tilaknagars brands are well entrenched. Valuation. Our price target of `74 is based on a target PE of 13x FY14e earnings. Our target PE is at +1 standard deviation to the mean PE. Due to Tilaknagars aggressive investment in products and newer areas and improved outlook for the medium term, we assign a higher target multiple to the stock. Risk. Higher molasses prices.
56.6 50.1 43.4 12.1 6.1 25.2
56.4 34.1 43.6 13.0 5.8 24.8
56.3 0.0 43.7 13.2 5.8 24.7
FY13e
FY14e
3.9 10.7 (4.5) -
6.0 13.3 (6.2) -

65 55 45 35 Sensex 25 Dec-11 Jun-12 Aug-12 Feb-12 Apr-12 Oct-11 Oct-12 TLNGR
4,623 396 3.4 (4.6) 16.0 1.5 12.4 13.2 1.5 97.7
5,478 472 4.1 19.2 13.4 1.3 10.2 12.6 1.5 98.3
6,531 616 5.1 25.4 10.7 1.1 11.3 13.6 1.5 77.6
7,787 822 6.9 33.5 8.0 1.0 13.2 15.5 1.5 68.0
9,288 1,077 9.0 31.0 6.1 0.9 15.3 17.7 1.8 57.1
Aniruddha Joshi
Shirish Pardeshi
India Equities
8 October 2012
Tilaknagar Industries South siren; Buy


Net revenues Revenue growth (%) - Op. expenses EBITDA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported cons. PAT +/- Extraordinary items +/- Minority interest Adjusted cons. PAT FDEPS (`/share) Adj. FDEPS growth (%)
4,623 21.4 3,487 1,136 24.6 388 131 26 248 38.5 396 396 3.4 (4.6)
5,478 18.5 4,071 1,407 25.7 562 223 78 228 32.6 472 0 472 4.1 19.2
6,531 19.2 4,862 1,668 25.5 544 250 32 290 32.0 616 616 5.1 25.4
7,787 19.2 5,802 1,986 25.5 517 288 29 387 32.0 822 822 6.9 33.5
9,288 19.3 6,923 2,365 25.5 500 307 27 507 32.0 1,077 1,077 9.0 31.0
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, Liquid Net working capital Cash and bank balance Capital deployed Net debt WC (%) Book value (`/sh)
1,250 2,811 4,061 4,333 199 8,593 4,714 3 3 3,710 166 8,593 4,363 80.2 37.0
1,202 3,549 4,751 0 5,147 281 10,178 5,403 66 66 4,511 198 10,178 5,163 82.4 43.7
1,250 4,358 5,608 0 4,747 281 10,635 5,503 66 66 4,894 172 10,635 4,790 74.9 49.1
1,250 5,069 6,319 0 4,647 281 11,246 5,615 66 66 5,408 157 11,246 4,705 69.4 55.0
1,250 6,008 7,258 0 4,447 281 11,985 5,758 66 66 6,023 138 11,985 4,524 64.9 62.8


Consolidated PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
396 131 62 (108) (46) (107) (153) (11) 172 (17) (1) (10) 27 17
472 223 800 (568) 233 (1,127) (894) (112) 333 884 (162) 49 86 134
616 250 866 (383) 483 (350) 133 (111) 352 (400) (26) 198 172
822 288 1,110 (514) 597 (400) 197 (111) (100) (15) 172 157
1,078 307 1,385 (615) 770 (450) 320 (139) (200) (19) 157 138
P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Admin exps to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) Volume growth (%) Realization growth (%)
16.0 1.5 2.4 9.9 12.4 13.2 1.5 23.3 34.7 24.5 41.9 (4.6) 8.6 -
13.4 1.3 2.1 8.0 10.2 12.6 1.5 19.6 35.8 24.3 23.9 19.2 8.6 -
10.7 1.1 1.8 7.0 11.3 13.6 1.5 15.6 35.9 24.4 18.5 25.4 9.4 -
8.0 1.0 1.5 5.9 13.2 15.5 1.5 11.7 35.9 24.4 19.0 33.5 10.6 -
6.1 0.9 1.3 5.0 15.3 17.7 1.8 11.1 36.0 24.4 19.1 31.0 11.6 -
Fig 5 Valuation chart (PE band)

( `) 160
Fig 6 Revenue breakdown (FY12)
26x 21x 16x
120
IMFL - own unit, 11%
Industrial alcohol, 3%
80 10x 40 4x 0 Oct-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Apr-06 Apr-07
Subsidiary sales, 37% IMFL lease units, 24%
Tie up units, 25%
Source: Company

59
Appendix
Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >15% >25% Hold 5-15% 5-25% Sell <5% <5%
Anand Rathi Research Ratings Distribution (as of 15 Sep 2012) Buy Anand Rathi Research stock coverage (128) 74% % who are investment banking clients 5%
Hold 13% 6%
Sell 13% 0%
Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned. Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as Related Investments). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest. Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report. 2012 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited. Additional information on recommended securities/instruments is available on request.

India Consumer - Enjoying A Slice of Luxury.248.175.146

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Consumer

Overweight Nifty / Sensex: 5676/18709

Pidilite Agro Tech

Buy 278 320 40,823 15 30.2 15.1 33.9 43.6 26.2

Buy 4,595 5,220 8,518 14 36.0 18.0 60.8 53.2 31.7

Buy 3,888 4,441 7,170 14 26.0 26.8 39.4 47.7 22.8

Buy 1,250 1,440 3,269 15 29.0 22.9 103.1 114.9 25.2

Buy 2,956 3,425 2,393 16 25.3 26.6 36.0 37.4 21.8

Buy 503 635 1,464 26 25.0 17.8 36.5 33.3 19.8

Sell 493 493 1,132 20.0 20.2 51.1 39.2 20.0

Buy 203 235 1,975 16 25.3 20.4 26.3 31.0 21.7

Buy 411 576 193 40 22.9 29.9 22.1 28.7 16.4

Source : Company, Anand Rathi Research

India Consumer Enjoying a slice of luxury

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Fig 2 Distribution network (nos. m) 7 6 5 4 3 2 1 0

Fig 3 Sharp rise in MSP for FY13

Fig 4 Consumer sector: Mean PE and standard deviation

Source: Bloomberg, Companies, Anand Rathi Research

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Moving Up the Brand Curve

GSK Consumer Nestle Colgate Emami

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Gross margins (RHS)

Gross margins (RHS)

Gross margins (RHS)

Oral B Listerine Pepsodent G, Sensitive Close Up

Market leader Strong No. 2 player Market leader

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Uveda Saffola Oats

Saffola Arise (Low GI Rice)

Nutribar & Chill Dood

Ready to cook Ready to eat Healthy Food Undergarments Oral care

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Benefits of Investments Come to Fore

Fig 10 Distribution network

Bajaj Corp GSK Consumer Britannia Cadbury

Bajaj Almond drops Horlicks, Boost Good Day Chocolates

500ml in PET bottles, `1 sachet `20 packs, pouches `5 packs `2 packs

Source: Companies, Anand Rathi Research

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Shikakai Shampoos Toothpowders Toothpastes Soaps Soaps Soaps

Source: Companies, Anand Rathi Research

Fig 14 Consumer companies, capex location and brands

Nestle Agro Tech Foods Colgate GSK Consumer Zydus Wellness

Baddi, Goa Gujarat Gujarat Rajamundry, AP Sikkim

India Consumer Enjoying a slice of luxury

Jyothy Labs Marico Dabur

Henkel Three brands of Reckitt (Paras) Code 10 Hoby Kozmetik, Namaste

Anand Rathi Research

India Consumer Enjoying a slice of luxury

Rural Juggernaut to Continue

Fig 18 CPI remains high