2013-10-17 - Initiation - Positioning For Rising Rural Consumption OW I...

Equity Research
17 October 2013

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PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE
243.
India Consumer
Positioning for rising rural consumption;
Overweight on ITC and Dabur
We initiate coverage on the Indian Consumer sector with ITC and Dabur as our top
OW picks. ITCs Cigarettes business is likely to sustain long term positive volume
growth, as we believe the peak inflection point for per capita consumption could be
~15 years away. Near-term, we view FY14 as a year of acclimatisation for ITC and
expect a rebound in cigarette volumes post two years of high-teens price hikes. In
the Indian FMCG market, we believe long-term positive consumption trends are
balanced by near-term concerns. However, pockets of strong growth exist in the
rural and exports market, with Dabur our preferred pick on this theme. In this
report we also initiate coverage on GCPL at EW and on HUL and Nestle India at UW.
ITC (OW; PT Rs409): Global consumption evolution points to positive volume outlook:
Contrary to studies (WHO) estimating cigarette PED as -0.4, we estimate ITC posted
volume CAGR of 3.3%, despite price CAGR of 9.7% over FY03-FY13. Analysis of global
trends points to an explanation, where cigarette consumption/capita peaks at ~US$20k
GDP (PPP)/capita, and assuming a 12% Nominal GDP CAGR then India could hit this
peak around 2027. Near-term, FY14 is likely to be a year of acclimatisation after two years
of consecutive high-teens price hikes and volumes could rebound. Improving profitability
in ITCs FMCG Others segment should further help OPM expansion (120bps by FY16E),
and we forecast revenue/EPS CAGR of 18%/20% over FY13-FY16E.
Dabur (OW; PT Rs199) best play on rural growth: Rural India spend is growing at 400-
500bps higher than urban spend, as urban consumers downtrade from premium
products. We believe Dabur, with 48% of its domestic FY13 revenues from the rural
market, offers the best exposure to this growth, while firms like HUL and Nestle India face
bleaker volume prospects in the near-term. Our longer term growth outlook for the India
consumer sector is still positive, and while staples deceleration is seen in most economies
at a per capita GDP of US$5,500, we believe this is still 10 years away for India (link).
Parent company a better way to play EM theme vs HUL (UW; PT Rs521)? For global
emerging market (EM) consumption exposure, Unilever (OW; PT GBp2,900) trading at
16.5x CY14E EPS may be a cheaper way to play the theme versus HUL on 35x FY15E.
De-rating possible for valuation leaders; prefer alpha over beta: Our India consumer
coverage trades at a 1-yr fwd P/E of 29.6x, a ~26% premium over the 15-yr average. The
expanded premium (95% vs Sensex) is a function of defensive shift, which may not be
sustained with the receding volume growth outlook. With HUL and Nestle India (UWs)
looking expensive at 35x and 36x P/E FY15E respectively, we see stock selection as key.
Risks: 1) OPM pressure due to adverse commodity price movements; 2) liquidity shift
from defensive sectors; 3) monsoon season/government support driving rural growth.

INDUSTRY UPDATE

Asia ex-Japan Cosmetics and HPC
NEUTRAL
from N/A

Asia ex-Japan Staples
NEUTRAL
Unchanged

For a full list of our ratings, price target and
earnings changes in this report, please see
table on page 2.

Balaji Prasad, M.D.
+91 22 6719 6295
balaji.prasad@barclays.com
BSIPL, Mumbai

Rohit Goel
+91 22 6719 6029
rohit.goel@barclays.com
BSIPL, Mumbai

Vineet Sharma, CFA
+852 2903 4609
v.sharma@barclays.com
Barclays Bank, Hong Kong

European Staples
Simon Hales
+44 (0)20 3555 2107
simon.hales@barclays.com
Barclays, London

Liam Rowley
+44 (0)20 3134 3200
liam.rowley@barclays.com
Barclays, London

Iain Simpson
+44 (0)20 3555 3598
iain.simpson@barclays.com
Barclays, London

Barclays | India Consumer
17 October 2013 2
Summary of our Ratings, Price Targets and Earnings Estimates in this Report
Company Rating Price Target EPS FY1 (E) EPS FY2 (E)
Old New Date Price Old New %Chg Old New %Chg Old New %Chg
Asia ex-Japan Cosmetics and HPC NR Neu
Dabur India Ltd. (DABUR IN / DABU.NS) N/A OW 14-Oct-2013 169.30 N/A 199.00 - N/A 5.16 - N/A 6.62 -
Godrej Consumer Products Ltd. (GCPL IN / GOCP.NS) N/A EW 14-Oct-2013 826.50 N/A 901.00 - N/A 25.00 - N/A 32.18 -
Hindustan Unilever Ltd. (HUVR IN / HLL.NS) N/A UW 14-Oct-2013 598.05 N/A 521.00 - N/A 16.35 - N/A 17.35 -
Asia ex-Japan Staples Neu Neu
ITC Ltd. (ITC IN / ITC.NS) N/A OW 14-Oct-2013 339.50 N/A 409.00 - N/A 10.81 - N/A 13.07 -
Nestle India Ltd. (NEST IN / NEST.NS) N/A UW 14-Oct-2013 5095.30 N/A 4224.00 - N/A 122.73 - N/A 140.79 -
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.

Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended

Industry View: Pos: Positive; Neu: Neutral; Neg: Negative

17 October 2013 3
KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENT THESIS
FIGURE 1
Five phases of growth for Indian FMCG market, 1994-2016

FIGURE 2
P/E vs EPS CAGR comparison with Global Consumer sectors

Source: Reserve Bank of India (RBI), Barclays Research estimates Note: CAGR over FY13-16E.
Source: Company data, Barclays Research estimates
FIGURE 3
Staples deceleration tipping point at US$5.5k GDP; It takes
an average of 9-10 years to reach US$5.5k from US$1.5k
(Indias current GDP/capita)

FIGURE 4
Global evolution of annual per capita cigarette consumption

Source: International Monetary Fund (IMF), Barclays Research Source: Euromonitor, Company data, Barclays Research
FIGURE 5
Indian Consumer rural vs urban split of FY13 revenues

FIGURE 6
Indian Consumer P/E rerating of 120% in last four years

Source: Company data, Barclays Research Source: Company data, Barclays Research estimates
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
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4
2
0
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6
2
0
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8
2
0
1
0
2
0
1
2
2
0
1
4
E
2
0
1
6
E
Coverage Revenue Growth Nominal GDP Growth (RHS)
Ph5 Declining
growth phase
as macro
slows
Ph2 Revenue
growth dipped
sharply with GDP
Ph3 '03 - '10: Growth pickup
inline with macro recovery
Ph4 Inorganic
growth spike
Ph1 Spurt in consumption
post liberalization
US Food
US Cosmetics
& HPC
US B&T
Japan food,
B&T
Japan
Cosmetics &
HPC
European
food
European
HPC
European
B&T
Asia ex Japan
Staples (ex
India)
Dabur GCPL
HUL
ITC
Nestle
Indian
Consumer
Coverage
10
15
20
25
30
35
40
0% 5% 10% 15% 20% 25%
P
E
x

EPS 3 yr CAGR
500
1,500
2,500
3,500
4,500
5,500
6,500
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
China Korea Taiwan India
India
Trajectory from ~$1,5k -
~$5,5k
China: 2002 - 2011
Korea: 1980 - 1990
Taiwan: 1978 - 1988
China
Russia
USA
Indonesia
Japan
Vietnam
India
Brazil
Germany
UK
0
500
1,000
1,500
2,000
2,500
3,000
0 10,000 20,000 30,000 40,000 50,000
S
t
i
c
k
s

p
e
r

c
a
p
i
t
a
GDP per capita ($)
Bubble size represents
total market volume
(mn equivalent sticks)
30% 30%
35%
40%
50%
70% 70%
65%
60%
50%
0%
20%
40%
60%
80%
100%
Nestle GCPL ITC HUL Dabur
Rural Urban
0
10
20
30
40
50
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
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0
3
S
e
p
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0
4
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5
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6
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7
S
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8
S
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9
S
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p
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1
0
S
e
p
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1
1
S
e
p
-
1
2
S
e
p
-
1
3
Coverage PE multiple Average
+1 SD -1 SD
17 October 2013 4
FIGURE 7
Indian Consumer revenue & EPS CAGR snapshot

FIGURE 8
ITC Cigarettes segment sustained EBIT margin expansion
and volume growth to result in strong revenue growth

Note: CAGR over FY13-16E.

FIGURE 9
HUL 72% of revenues are from highly penetrated segments

FIGURE 10
Dabur strong revenue growth/OPM expansion

Note: Column bars denote penetration levels end-FY13.

FIGURE 11
Nestle India portfolio skewed towards urban consumption

FIGURE 12
GCPL improvement in cash returns important for re-rating
Milk
Products
Prep
dishes
Beverages
Choc /
Confectio
nary
0
4
8
12
0 4 8 12
C
a
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r
y

/

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e
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p
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p
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Company positioning in the segment
S
t
r
o
n
g
W
e
a
k
Strong
Weak
M
o
d
e
r
a
t
e
Moderate

42%
32%
31%
18%
29%
15%
14%
15%
16%
17%
18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Cash Returns (CROCI)
Sharp decline due to a spate
of international acquisitions
Material Improvment
needed

Note: Size of bubble indicates categorys proportional contribution to FY13 revs.
Source: Company data, Barclays Research

Source: Thomson Reuters Datastream, Barclays Research estimates
18.4%
23.8%
21.2%
17.3%
12.2%
4.6%
18.3%
19.7%
11.6%
14.0%
0%
5%
10%
15%
20%
25%
Rev Growth EPS Growth
Dabur GCPL HUL ITC Nestle
15.0%
16.6%
13.4%
17.0%
19.2%
15.5%
-2.8%
6.5%
1.0%
-0.1%
4.0% 4.0%
45%
50%
55%
60%
65%
70%
-5%
0%
5%
10%
15%
20%
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
Revenue Growth Volume Growth OPM (RHS)
Acclimatisation to the price hikes
96%
92%
87%
63% 63%
45%
26%
12%
0%
20%
40%
60%
80%
100%
120%
S
o
a
p
s
D
e
t
e
r
g
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n
t
s
T
e
a
H
a
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C
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C
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k
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C
a
r
e
F
o
o
d
s
C
o
f
f
e
e
72% of revenues 28% of
revenues
19% 21% 20% 30% 16% 17% 19% 19%
15.1%
16.9%
16.5%
14.8%14.9%
15.9%
16.6%
16.9%
14%
15%
16%
17%
18%
10%
15%
20%
25%
30%
35%
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Revenue Growth EBIT Margin (RHS)
Acquisition driven
17 October 2013 5
INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST IN DECLINING
GROWTH ENVIRONMENT
We initiate coverage of five Indian consumer stocks, highlighting ITC and Dabur India
(both rated OW) as our top sector picks. We rate Godrej Consumer Products (GCPL) as
EW and suggest investors avoid Hindustan Unilever (HUL) and Nestle India (both rated
UW). We think the long-term positive consumption trends are balanced by near-term
concerns, where the confluence of declining volume growth and peak multiples (95%
premium vs Sensex) limits returns to investors, and see stock selection as key. We
identify two strong pockets of growth: 1) rural India, where consumption spending has
overtaken urban Indian spend over past few years, and is further boosted by a strong
monsoon season and government spending support; and 2) export growth, which we
believe is looking increasingly attractive against the backdrop of a depreciated INR. Our
stock initiations bring additions to our Asia ex-Japan Staples coverage (where we add ITC
and Nestle; Neutral industry view) and to a new industry Asia ex-Japan Cosmetics and
HPC on which we initiate coverage with a Neutral view (adding Dabur, GCPL and HUL).
Framework to generate alpha when the beta play fades out
With 4-5 years of continuous outperformance of the consumer sector in general, and
specifically our coverage group, we believe that the beta play is fading in relevance. In such
a scenario, we lay out our framework to identify potential alpha generation opportunities
and highlight our preferred picks that screen well on these parameters.
Rural market exposure: Rural Indian income is still holding strong, despite broad
weakness in the consumer market, and consumption spend in rural regions is still on
average 400-500bps above its urban counterparts. This is also a view corroborated by
companies on a bottom-up basis, and hence our bias is towards companies with greater
percentage of revenues from this geographic section.
Leaders in niche segments: We believe companies that have a unique or niche portfolio
and are relatively resistant to economic dips (parts of the Dabur and Godrej portfolios), or
where consumption demand is inelastic (ITC), could be reliable havens to generate alpha.
Exports to newer emerging markets: Following a 12% average depreciation in the
rupee this year, companies with a significant export component (Dabur 32%; Godrej
44% of FY13 revenues) also appear favourably poised to deliver growth. Further, it also
de-risks the business model from being dependent on just the Indian growth narrative.
Further market penetration: In our view, companies with a greater component of
products in markets that are not yet fully saturated can continue to deliver growth.
Additionally, the ability to create new markets or shift market preferences are positives
like Godrejs paper-based Good Knight mosquito repellent, which we believe has the
potential to enhance further market penetration.
ITC Ltd; Overweight; 12-month PT Rs409 (20% potential upside)
Cigarette consumption on a roll; improving cash generation to sustain valuations
Global consumption evolution points to positive volume outlook: Contrary to studies
pointing to the price elasticity of demand (PED) of cigarettes being around -0.4, we
estimate ITC posted volume CAGR of 3.3% and price CAGR of 9.7% over FY03-FY13.
Analysis of global trends points to an explanation, where ~US$20k GDP/capita (PPP basis)
has generally been an inflection point for per capita cigarette consumption to peak, with
volumes declining thereafter. Assuming 12% Nominal GDP CAGR then we estimate India
could hit this peak around 2027. A more direct explanation could be that as rural
disposable income rises steadily (i.e. rural spend accelerating faster than urban), a shift to
cigarettes from chewable tobacco is likely to be a longer-term structural driver of growth.
17 October 2013 6
Volume growth recovery in Cigarettes drives 3-year revenue/EPS CAGR of
18.3%/19.7%: ITC has hiked the prices of cigarettes by around 15%+ in the last three
years, explaining the muted volume CAGR of 1.5% over the same period. As these price
hikes are absorbed we forecast stronger volume CAGR of 2.5% over the next three years
(FY13-16E). Considering the material profit contribution from cigarettes (81% of EBIT in
FY13), we expect operating leverage to increase further and thus forecast revenue
CAGR of 18.3% over FY13-16E and stronger EPS CAGR of 19.7%.
ROIC to improve further by 600bps; 120bps OPM expansion over next three years:
The expected improvement in ROIC is not just driven from Cigarettes, but is also due to
the improving profitability from FMCG (Fast-Moving Consumer Goods) and Hotels.
Other metrics like ROE (stable despite significant growth in equity base) and CROCI
(cash return on cash invested, on the rise) point to further improving operating
fundamentals.
Valuation: We value ITC using sum-of-the-parts (SOTP) as our primary methodology.
We use P/E methodology to value all of ITCs segments, except FMCG Others where
we use P/S as it is in an investment phase and has yet to generate sustainable earnings.
Our 12-month price target of Rs409 implies potential upside of 20% and an implied P/E
of 31x, broadly in-line with the average FY15E P/E for the Indian Consumer sector.
Downside risks: 1) adverse tobacco industry regulations, as segment contributes 81%
of ITCs operating profits; 2) strong recovery in broader Indian equity market and
liquidity flows from defensives to cyclicals; and 3) any delay in FMCG & Hotel business
profitability due to macro slowdown or increased competition.
Dabur: Overweight; 12-month PT Rs199 (18% potential upside)
Best play on resilient rural growth; potential to rerate further
Our preferred play on resilient rural growth; 3-year revenue CAGR of 18%: Dabur
currently derives 48% of its domestic revenues (33% of group revenues as of FY13)
from the rural segments, where monthly per capita expenditure continues to see healthy
mid- to high-teens y/y growth, and we believe this should continue to rise
incrementally. This places it on a strong growth trajectory and we forecast 3-year
revenue CAGR (FY13-16E) of 18.4% (vs the peer average of 16.3%).
Niche portfolio, most insulated from declining macro growth: We expect volume
growth to pick up, especially for key categories like Hair Oil (Vatika should see increased
volume growth following price rationalisation of 1QFY14) and Foods (better
performance expected in 2HFY14 driven by increased traction in trade channels).
International segment business flux due to Namaste rebranding should end:
Following a challenging FY13 for Namaste (Daburs US subsidiary) owing to a
rebranding of the portfolio, we believe FY14 onwards should witness a recovery as
branding efforts gain ground. Further, a steeply depreciated rupee brings in significant
translation gains, helping boost profitability at the consolidated level by c50-75 bps.
Operating leverage coming into play could offset commodity price rise pressure: Our
OPM expansion forecasts are supported by: 1) increasing revenue contribution from
rural segments; 2) easing ad spends; 3) favourable move in Palm and Mustard Oil prices,
helping offset adverse price moves of commodity basket (LLP, Honey, Sugar); 4)
translation benefits due to INR depreciation; and 5) price increase of 2%-3% in Foods
segment.

17 October 2013 7
Valuation: We value Dabur using one-year forward P/E as our primary methodology,
and applying a target multiple of 30x on FY15E which imputes a price target of Rs199.
The company currently trades on a one-year forward P/E of 26x (a 14% discount vs
peers), which is in-line with its historical trading range of 15-28x. We believe the stock is
likely to re-rate to higher end of its trading range, given its more resilient portfolio,
improving cash returns and ROE as operating leverage plays out.
Downside risks: 1) commodity pricing pressure on GM; 2) no margin expansion in the
International segment; 3) rural growth decline and slowdown in Project Double traction;
and 4) strong recovery in Indian equity market and liquidity shift from defensives.
Godrej Consumer: Equal Weight; 12-month PT Rs901 (9% potential upside)
Emerging market FMCG play; strong growth outlook priced in
Above peer growth (21.2% revenue CAGR vs 16.3% for coverage): We believe GCPL
will deliver one of the best revenue growth rates in our coverage over FY13-16E,
leveraging its unique hair care and household insecticides portfolio and also its
international market exposure. Hence, our forecast of 21.2% revenue CAGR over FY13-
16E (including organic CAGR of 17%) is ~490bps above our forecast for the industry of
16.3% CAGR.
Well positioned to cross sell its niche portfolio into newer markets: GCPLs household
insecticide and hair care portfolio in domestic markets are unique offerings vs other
FMCG peers. Hence, GCPL is a market leader in most categories, with dominant #1 or
#2 positions. With the spate of acquisitions over past few years, GCPL has also created
an international presence and distribution, where we believe these products can be
cross sold, driving organic growth over the near term. Hence, we forecast the
international business to grow at 25.3% CAGR (FY13-16E), even better than our
domestic revenue forecast of 17.8% CAGR.
Improved cash generation key for further re-rating: Rapid expansion of the companys
business through M&A has taken its toll on the returns profile, with most metrics
including ROE and ROIC showing a steep decline. In our view, GCPL needs to improve its
returns profile from these businesses to narrow the valuation discount vs peers at which
it trades, before we could get more constructive on the name.
Valuation: We value GCPL using one-year forward P/E as our primary methodology,
applying a target multiple of 28x (10% discount to peer average to reflect its weaker
cash returns profile) on FY15E which imputes a price target of Rs901. GCPL currently
trades at a P/E of 25.7x FY15E, which is a 24% premium to its 10-year historical trading
average of 21x, having re-rated materially in the past few years.
Risks: Downside risks: 1) heightened competition in the household insecticide segment;
and 2) international market volatility, including currencies and socio-political changes.
Upside risks include: 1) better operating leverage than anticipated; and 2) better cross
selling of hair color products in international markets.
Hindustan Unilever: Underweight; 12-month PT Rs521 (13% potential
downside)
Receding volumes meet expensive multiples; better exposure through Unilever PLC
70% of sales are from high-penetration segments; needs premiumisation support:
HULs growth rates have decelerated over the past few quarters due to: 1) a broader
economic slowdown leading to a deceleration in consumption spend; and 2) stalling of
premiumisation, which has been the driver of growth for mature segments with high
penetration (Soaps, Detergents, Tea, and Oral Care). On a bottom-up basis, we forecast
a weak 3-year volume CAGR of 5%, down from the past 5-year volume CAGR of 8%.
17 October 2013 8
Intensifying competitive landscape coincides with senior management change: Rising
competitive activity in Personal Care, including Skin Care (with launches by Dabur and
Emami) and Oral Care (P&Gs Oral B entered India in July 2013). This also coincides with
recently announced senior management changes and the new management will need
to tackle these growth issues in HULs core categories.
No downside protection in a weakening macro environment: Owing to a flight
towards defensives in the past few years (exaggerated in the past year), the Indian
consumer sector in general, and HUL in particular, are trading at P/E valuations much
higher than their historical range. HUL currently trades at a 25% premium vs the higher
end of its historical range and at a 127% premium vs BSE Sensex (vs an average
premium of 75% over the last 20 years).
Valuations: 10-year peak multiples not justified; HUL exposure through Unilever? We
value HUL using one-year forward P/E (target P/E multiple of 30x, in-line with peers).
The stock trades at a current P/E of 34.5x FY15E vs its10-year trading range of 20-30x.
As we discuss in more detail inside, for global EM consumption exposure, we believe
HULs parent company Unilever PLC (ULVR.L; OW; PT GBp2,900) trading at 16.5x P/E
for CY14E (ex-EM subsidiaries) may be a better way to play the theme vs HUL.
Upside risks: 1) a sharp recovery in staples and discretionary spending on the back of an
economic recovery; 2) stronger-than-expected traction in rural areas (40% of FY13 HUL
revenues); 3) moderation of pricing pressures in the Soaps & Skin Care segments.
Nestle India: Underweight; 12-month PT Rs4,224 (17% potential downside)
Sub-optimally positioned; mean reversion to sector multiples
Portfolio skewed towards urban consumers: Nestle generates ~70% of its revenues
from urban areas, because a large component of its portfolio is discretionary and
aspirational (higher-end products). However, the urban segment is facing pressure on
spending capability due to the weak macro environment, high inflation, and continued
discretionary spending headwinds.
Strategy of focusing on margins in lieu of volume growth limits ability to rebound: In
our view, over the last two years Nestle has focused more on pricing-driven growth than
expanding in a large market like India. While Nestle has managed to post healthy growth
rates, the economic downturn does limit its ability to consistently raise prices and focus
on premium products. The larger drawback of this strategy is that when the economy
rebounds, Nestle could be left significantly lagging peers who have gained overall
market share and enhanced their presence with consumers in rural communities.
Limited catalysts to support expanded multiples: Looking ahead, we see limited
catalysts over the near-term, either in the form of new product launches, focused efforts
to increase brand recall, or a rebound in the economy. Hence, we believe multiples that
have expanded by 75% in last five years may not be supported at the current levels.
Valuation: We value Nestle using one-year forward P/E as the primary methodology
and set our target P/E at 30x, in-line with the sector average and on par with its 20-year
historical average (a 20% discount to the current CY14E P/E of 36.2x) in view of its
modest revenue/earnings CAGR over CY12-15E of 11.6%/14.0%. Our 12-month price
target of Rs4,224 offers potential downside of 17%.
Upside risks: 1) a sharp spike in discretionary segment demand like Chocolates, Milk,
and Milk Foods on the back of a solid economic recovery; 2) less competitive pressure
than anticipated in beverages; and 3) sharper-than-expected recovery in urban market
consumption.
17 October 2013 9
Sector risks
Changes to the macro outlook: Volume growth levels and valuation premium levels of
Indian Consumer stocks are highly correlated to the overall macro environment.
Discretionary spends & premiumisation trends: Changes could affect Indian consumer
stocks both in terms of volumes & margins (product mix changes and realisations).
Growth in emerging markets (EMs): Following a spate of EM acquisitions in the last few
years (in particular by GCPL and Dabur), most companies are in consolidation mode but
may be affected if these geographies witness slower/faster recovery and worse/better
synergies than expected, along with any further volatility due to INR depreciation.
Rural consumption growth levels: Growth in rural areas and changes in disposable
incomes can be affected by multiple factors, including the monsoon season and also
government support for rural areas.
Liquidity shift: The Indian Consumer sector saw strong liquidity inflows following the
Global Financial Crisis in 2008, as the market rotated towards defensive sectors. Any
reversal of this could see liquidity flowing from defensives to cyclical.
Valuation comparison
FIGURE 13
Indian Consumer coverage summary valuation comparison
Stock
Stock Info Growth Metrics Valuation Metrics

Current
Price
12-mth
PT Pot. Up /
Mkt
Cap (FY13E - FY16E CAGR) FY2015E
Ticker Rating (in Rs) (in Rs) Downside (US$B) Sales EBIT EPS P/E EV/ EBITDA P/B ROE
2-yr
PEG
PT Implied
P/E
Dabur DABUR IN OW 169 199 18% 5.3 18.4% 23.6% 24.0% 25.6 18.4 8.1 32% 1.1 30.0

GCPL GCPL IN EW 827 901 9% 5.0 21.2% 23.1% 17.3% 25.7 18.3 5.7 22% 1.5 28.0

HUL HUVR IN UW 598 521 -13% 23.1 12.2% 11.4% 4.6% 34.5 25.9 25.9 73% 7.5 30.0

ITC ITC IN OW 340 409 20% 48.3 18.3% 19.7% 19.7% 26.0 18.0 8.2 32% 1.3 31.3

Nestle* NEST IN UW 5,095 4,224 -17% 8.8 11.6% 11.3% 14.0% 36.2 22.1 14.5 36% 2.6 30.0

Indian Consumers 90.5 16.3% 17.8% 15.9% 29.6 20.5 12.3 39% 2.8 29.9
US Food 5% 9% 9% 18.1 10.4 5.1 28% 1.8
US Cosmetics & HPC 4% 9% 11% 17.7 10.4 9.2 50% 1.9
US Beverages & Tobacco 3% 5% 9% 16.7 10.9 5.5 40% 2.1
Japan Food, Beverages & Tobacco 4% 7% 12% 21.5 7.2 1.8 9% 2.0
European Food 4% 6% 7% 15.7 9.3 2.2 16% 2.4
European HPC 3% 6% 7% 19.3 11.6 3.7 22% 5.1
European Beverages & Tobacco 6% 9% 11% 17.1 11.4 3.5 27% 1.8
Asia ex Japan Staples (ex India) 14% 15% 19% 23.1 22.9 5.0 24% 1.6
Notes: *Nestle is calendar year end, thus estimates are for CY14E.
Pricing as of close on 14 October 2013.
17 October 2013 10
CONTENTS
KEY CHARTS HIGHLIGHTING OUR INDIA CONSUMER INVESTMENT
THESIS .................................................................................................................. 3
INVESTMENT SUMMARY: SELECTED OPPORTUNITIES EXIST IN
DECLINING GROWTH ENVIRONMENT ........................................................ 5
INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND .......... 11
DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS ................... 15
LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDP
PER CAPITA ....................................................................................................... 22
CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON .... 30
DEEP DIVE INTO OPERATING FUNDAMENTALS .................................... 33
VALUATIONS LOOK EXPENSIVE NEED TO BE SELECTIVE ................. 45
KEY RISKS .......................................................................................................... 53
COMPANIES ...................................................................................................... 54
ITC (OW; PT INR409; +20%): CIGARETTE CONSUMPTION ON A
ROLL; INITIATE AT OVERWEIGHT .............................................................. 55
DABUR (OW, PT INR199, +18%): BEST PLAY ON RESILIENT RURAL
GROWTH; INITIATE AT OVERWEIGHT ...................................................... 93
GODREJ CONSUMER PRODUCTS (EW; PT INR901; +9%): EMERGING
MARKET FMCG PLAY; INITIATE AT EQUAL WEIGHT ......................... 130
HUL (UW; PT INR521; -13%): RECEDING VOLUMES MEET
EXPENSIVE MULTIPLES; INITIATE AT UNDERWEIGHT ....................... 165
NESTLE INDIA (UW; PT INR4,224; -17%): SUB-OPTIMALLY
POSITIONED; INITIATE AT UNDERWEIGHT........................................... 199
APPENDIX ....................................................................................................... 229
GLOBAL VALUATION SHEETS .................................................................. 230
17 October 2013 11
INDUSTRY OVERVIEW NEAR-TERM CHALLENGES ABOUND
Slowing GDP taking its toll revisiting 2000-2004?
FMCG market remains highly correlated to the macro environment
The Indian Consumer industry structurally remains highly correlated to the overall macro
environment with revenue levels broadly tracking nominal GDP growth. As shown in Figure
14, revenue growth levels dipped materially for the 2000-04 period, thus tracking the overall
moderation in nominal GDP growth.
Analysing the last twenty years of consumer revenue growth trends in India, we identify
four phases and discuss what we see as the fifth phase of growth for the FMCG market
(which includes all five companies being initiated on):
Phase 1 (1994-1999): There was a significant burst of growth post the 1991 economic
reforms and economic liberalisation. Following this, as consumer awareness grew and
nascent categories emerged in India, growth for the industry was strong and tracked at
least mid-teens even in the weak years.
Phase 2 (2000-2004): Following global recession in the 2000s, industry growth again
mirrored the decline in GDP trends, with a prolonged period of mostly single-digit
growth from around 2000 till 2004.
Phase 3 (2005-2009): A steady growth phase driven mostly by the economic burst of
growth in India, growth in income levels (especially urban), and significant inflows &
investments into multiple sectors. Industry growth recovered from the troughs of the
early part of the decade to mid- to high-teen levels.
Phase 4 (2010-2013): Along with the continuing domestic consumption growth, the
post GFC 2008 phase also saw companies like Dabur and Godrej expanding into other
emerging markets, fuelling a burst of inorganic growth.
Phase 5 (2014-2016): We believe this phase is more likely to see muted growth as
declining GDP and broader macroeconomic concerns affect consumption spend and
urban income growth, while keeping inflation at high levels. During this period, we
believe the broader FMCG market growth may be in low double-digits.
FIGURE 14
India Consumer revenue growth is highly correlated to the macro environment
Note: Coverage includes Dabur, GCPL, HUL, ITC and Nestle
26%
19%
13%
40%
14%
15%
6%
8%
17%
4%
5%
10%
20%
20%
17%
20%
22%
30%
24%
18%
14%
17%
17%
0%
5%
10%
15%
20%
25%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
Coverage Revenue Growth Nominal GDP Growth (RHS)
Phase 5 Muted growth
phase as macro slows
Phase 2 Revenue growth dipped
sharply as GDP growth declined to
7.8% from 15.7%
Phase 3 Revenue growth pickup in
line with macro recovery
Phase 4 Acquisition
fuelled spike in growth
Phase 1 Spurt in consumption
post liberatlization
17 October 2013 12
FIGURE 15
and a similar trend can be seen with net profit growth

FIGURE 16
GDP growth & private final consumption expenditure (PCFE) growth in India have contracted sharply in the last few years
4%
7%
8%
4%
6%
4%
8%
7%
9%
10%
9%
7%
8%
10%
6%
5%
3%
7%
6%
3%
6%
3%
6%
5%
9%
8%
9%
7%
7%
9%
8%
4%
0%
2%
4%
6%
8%
10%
12%
F
Y
1
9
9
8
F
Y
1
9
9
9
F
Y
2
0
0
0
F
Y
2
0
0
1
F
Y
2
0
0
2
F
Y
2
0
0
3
F
Y
2
0
0
4
F
Y
2
0
0
5
F
Y
2
0
0
6
F
Y
2
0
0
7
F
Y
2
0
0
8
F
Y
2
0
0
9
F
Y
2
0
1
0
F
Y
2
0
1
1
F
Y
2
0
1
2
F
Y
2
0
1
3
Real GDP growth Real PFCE growth

Source: Reserve Bank of India (RBI), Barclays Research

FIGURE 17
Consumer price inflation in India remains at high single- to low double-digit levels

7.7
8.8
9.4
10.3
10.4
9.9
9.9
10.0
9.7 9.8
9.9
10.6
10.8
10.9
10.4
9.4
9.3
9.9
9.6
4
6
8
10
12
J
a
n
-
1
2
F
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
J
u
l
-
1
2
A
u
g
-
1
2
S
e
p
-
1
2
O
c
t
-
1
2
N
o
v
-
1
2
D
e
c
-
1
2
J
a
n
-
1
3
F
e
b
-
1
3
M
a
r
-
1
3
A
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-
1
3
M
a
y
-
1
3
J
u
n
-
1
3
J
u
l
-
1
3
%

Source: RBI, Barclays Research
33%
38%
15%
42%
33%
23%
31%
17%
16%
21%
17%
17%
23%
21%
15%
18%
32%
23%
24%
20%
9%
18%
21%
0%
5%
10%
15%
20%
25%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
Net Income growth Nominal GDP Growth (RHS)
2008 - 2010: Robust
revenue growth + margin
expansion
PAT growth decline led
by GCPL & HUL in FY14
2000-2005: Strong margins
negated some of the impact due to
the sharp decline in revenue growth
17 October 2013 13
FMCG revenue growth of 12% in FY14E, lowest expectation
in last eight years
We expect near-term challenges in the Indian FMCG market to persist, owing to a
prolonged slowdown in the economy over the past 4-6 quarters. CII in its FMCG Roadmap
to 2020 estimates discusses base and bull case growth rates of 12% and 17% respectively
over the remaining part of this decade, predicting that the Indian FMCG market could be
worth Rs3,380-6,250bn by 2020. While our medium to long-term domestic CAGR forecast
of 14% for the FMCG market in India is higher than the base case forecast of CII, we are
cognizant of potential selection bias as our coverage universe consists of a select few
companies that are market leaders across multiple/niche categories.
As a result of the macro concerns discussed earlier, our expectations for the FMCG market
(current size is Rs2,020bn or US$37bn) are muted in the near-term, despite the intuitive
long-term attractiveness of an emerging markets consumption sector. Hence, despite the
last 10-year market CAGR of 15%, we expect domestic consumption growth for our
coverage to report 14% CAGR over FY13-16E, with most of the impact playing out in FY14E.

FIGURE 18
Indian Consumer industry is expected to grow ~12-17% pa over the next 5-6 years
For our coverage, we forecast
domestic CAGR of 14% over
the next three years (above the
base case forecast of CII)

Divergent performances we
forecast HUL and Nestle as
having the weakest revenue
outlook, while Dabur, GCPL and
ITC are expected to continue to
thrive
3380
1,300
2,300
620
550
2,250
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY10 FY15E FY20E
I
N
R

B
n
17%
12%
12%
17%
Bull case
Base Case
Bear case
8%

Source: CII FMCG roadmap to 2020 estimates, Barclays Research estimates
FIGURE 19
with the rural segment contributing one-third to the sector

FIGURE 20
along with a relatively unorganised supply chain network
Rural
33.5%
Urban
66.5%

Grocers
59%
General
Stores
13%
Chemists
8%
Paan plus
6%
Food stores
3%
Modern
trade
6%
Others
5%

Note: Data as per FY13
Source for both charts: India Brand Equity Foundation (IBEF), Barclays Research

The size of the Indian FMCG
market is currently around
Rs2trn (US$37bn)
17 October 2013 14
India Equity Strategy
Bhuvnesh Singh
+91 22 6719 6314
bhuvnesh.singh@barclays.com
BSIPL, Mumbai
Views on economic recovery from Barclays India Strategy team
We have a defensive stance on Indian equities and prefer to avoid domestic cyclicals.
We expect the revenue growth environment for Indian corporates to remain weak in
the near term, pointing to macro-concerns from persistently high inflation, a fiscal
deficit, and currency vulnerability to external flows.
We expect Indias growth momentum to remain weak in the near term and forecast a
GDP growth rate of 4.7% in FY14E versus 6.2%/5.0% in FY12/FY13 (link). Owing to
the healthy monsoon rainfalls this year, we expect consumption to be supported,
although the weak fiscal health of the government could act as a drag on overall
spending in the economy. We expect inflation to moderate in 2HFY14 as food prices
should lower on the back of healthy monsoons. We forecast a WPI inflation rate of
5.7%/6.0% at end-FY14E/FY15E (versus 9.0/7.4% in FY12/FY13).
We expect revenues and earnings of domestic cyclicals to remain strained in the
context of the weak macro growth environment and note that RoEs have not yet
bottomed (see India Equity Strategy: No fishing in troubled waters, 29 August 2013, for
more details). We expect weak domestic investment cycle to continue to persist given
elevated interest rates and upcoming national elections.
17 October 2013 15
DIVERGENT PROSPECTS ACROSS PRODUCT SEGMENTS
In the charts below we discuss key categories of the FMCG market, the current trends, and
also the penetration of each segment, which helps us to identify the future growth potential
of each category.
FIGURE 21
Key growth drivers for the FMCG market

Source: Federation of Indian Chambers of Commerce and Industry, Barclays Research
FIGURE 22
Structure of the Indian FMCG market

Note: Milk Products are included in the Beverages segment. DW* = Dishwashing
Source: Company information, Barclays Research
Newer Product Categories
Favorable Govt Policies
Infrastructure Development
Consumer Industry Growth Drivers
Increasing Discretionary Income
Supply side Drivers
Growth of Modern Retail
Innovation & new product launches
Demand Side Drivers
Consistent GDP Growth
Increasing Consumer Income
High Private Consumption
Rising Urbanization Systemic Drivers
Low Labour Cost
FMCG
(US$37bn)
Personal
Care
24%
Beverages
30%
Food
35%
Home Care
11%
Hair Care
24%
Oral Care
14%
Skin Care
12%
Soaps /
Bath
29%
Rest
21%
Biscuits
38%
Noodles
5%
Ice
Cream
4%
Ready to
eat
14%
Choco &
Confectiona
ry
16%
Condiments
7%
Sweets
11%
Rest
5%
Tea
14%
Coffee
4%
Juices
2%
Milk
Products
80%
Insecticides
34%
Detergents
26%
DW*
15%
Rest
25%
17 October 2013 16
Key product segments in FMCG
Personal Care: Including skin care, hair care, and oral care, this category is ubiquitous
with a current market size of ~Rs481bn in India. It is the most mature segment across
the Staples landscape, with very high penetration levels. As a consequence, we believe
future growth of this category will not depend on volume growth, but instead
premiumisation (selling products with a higher price point, with incremental benefits or
ease of use, e.g. dispenser bottles instead of a bottle with a cap). In the current
environment of a slowdown in the discretionary segments, this category is likely to take
the deepest hit as consumers avoid buying at higher price points, hence we have muted
expectations for this category. Sub-segments within this category, like deodorants or
creams, could still grow at a much stronger rate than soaps or toothpaste, in our view.
Foods: This segment varies widely in terms of format and presence. Categories like
soups, packaged cereals, etc, are still in an emerging phase, while biscuits are widely
present in India. That said, we think there is healthy growth potential for this category.
Beverages: Apart from tea, which has a very high penetration in India, other categories
including coffee continue to be relatively underpenetrated. This explains the number of
launches in the last few years of premium coffee (from Nestle and HUL) and juice
variants (from Dabur). However, the beverages segment could come under pressure as
consumers shift from milk in tetra packs to lower priced milk sachets or from milk
sachets to even loose milk.
Home Care: This segment, which includes detergents and cleaners, has mixed
penetration levels in India, with detergents being almost fully penetrated. Cleaning
agents, like floor cleaners and toilet cleaners, are still in a growth phase.
FIGURE 23
Segment categorisation in India penetration levels vs historical volume growth CAGRs (over FY08-13)


Milk
Tea
Juices
Coffee
Deodorants
Hair Oil
Cream
Shampoos
Soaps
Toothpaste
Cleaning
Detergents
Soups
Atta
Edible Oils
Noodles
Ice-cream
Biscuits
5
15
25
35
0 25 50 75 100
L
a
s
t

5

y
r

v
o
l
u
m
e

C
A
G
R

(
%
)
Underpenetrated with
high potential: 0 - 25%
Underpenetrated
with moderate
potential: 25 - 50%
Moderate
penetration: 50 - 75%
Mature segments with
low volume growth
potential: 75 - 100%
17 October 2013 17
Penetration levels driving growth across segments
Volume growth levels broadly track the penetration levels, as can be seen from Figures 24
and 25. New smaller categories like deodorants, soups and packaged milk have emerged
over the past few years which, on account of the low penetration levels, have been
registering high growth levels.
FIGURE 24
High growth categories have, as expected, been a result of low segment penetration levels
0
20
40
60
80
100
M
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a
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s
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u
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t
s
%
Penetration levels
Beverages
Personal Care Home Care Food

Note: Data as FY13.
Significant growth divergence among categories
Of the 20+ categories our coverage companies operate in, we note a high divergence in
volume growth levels over the past five years (from 10%-25%). We believe product mix &
positioning have become all the more important in the current moderate demand
environment.
FIGURE 25
Growth levels (5-yr growth CAGR over FY08-13) vary sharply across different categories and segments


5
10
15
20
25
30
M
i
l
k
T
e
a
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a
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s
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t
s
%
Beverages
Personal Care Home Care Food
Lowest penetrated segments
have witnessed the highest
CAGR in the last five years
17 October 2013 18
Premiumisation a long-term driver; substantial near-term
pressures
Driven by increasing disposable incomes, exposure to alternate lifestyles, and rising
urbanisation, many FMCG companies (examples for HUL given below) have focused
proactively on the premium segment of their portfolios in a bid to: 1) sub-segment the
existing categories, which helps increase the overall market and create new categories that
Indian consumers have erstwhile been relatively unexposed to; and 2) take advantage of
increasing disposable incomes across both the rural and urban categories.
FIGURE 26
Premiumisation trends across the different product categories of HUL
Category
Lifebuoy INR 20.5 Lux INR 60.0 Dove INR 132.0
Rexona INR 22.0 Breeze INR 30.0 Pears INR 150.0
Fair & Lovely INR 86-110
Ponds INR 54
INR 110.0 Dove INR 135.0
INR 140-220
INR 220.0
Surf Excel
INR 110.0 Lakme INR 140-200
Yellow Label INR 280.0 Red label Tea
Hair Care
Active Wheel INR 45.0 Rin
Clinic Plus Sunsilk INR 90-100
Skin Care Ponds
Taaza INR 150.0
Mass Market Middle Premium
Skin Cleansing
Laundry INR 76-115

Source: Company data, localbayana.com, Barclays Research
We believe that while these trends are positive over the long term, there are substantial
challenges in the near term that should put these advantages to the test. Based on our
discussions with the companies, along with our industry channel checks, there are signs of
a stalling of the premiumisation trends. This is primarily being driven by:
High inflationary levels (Figure 16)
Growth driven by rural segments instead of urban segments (Figures 31-33) and
Decline in volume growth levels across most of the FMCG companies, thus putting
pressure on price hikes (Figures 93-94).
One such example is HUL where growth in the Soaps segment, as per management, is now
being driven by the mass market product Lifebuoy rather than the premium offering of
Dove.

17 October 2013 19
Product portfolio: Competitive positioning vs sector
prospects
Following on from penetration and outlook discussions for the industry, we now look at
each of the companies we are initiating on and their associated positioning in key relevant
categories. We assess the positioning of the companies based on market dominance, brand
recalls and association, management outlook vs our views on sector penetration, and also
growth prospects as previously discussed. We conclude that:
Companies which are niche players with the ability to expand market size or create new
market categories are still enjoying growth (e.g. Dabur in Digestives, Godrej with
Household Care);
Competitive activity is intensifying across a few categories, especially in the HPC
(Household and Personal Care) segments, followed by the Foods segments. Beverages
(with the exclusion of Coffee) still seem to be dominated by individual companies for
specific categories (e.g. Nestle in Milk, Dabur in Juices, and HUL in Tea).
ITCs Cigarettes segment is in a unique positioning of its own, with penetration at 15%
and strong volume growth prospects.
ITCs entry into the FMCG segment has been disruptive for market leaders like HUL in
the past five years, and we expect ITC will continue to gain greater share in this segment
given its strong distribution reach.

FIGURE 27
Indian Consumer company positioning

Note: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.

Dabur
GCPL HUL
ITC
Nestle
-
4.00
8.00
12.00
4.50 8.50
C
a
t
e
g
o
r
y

p
o
s
i
t
i
o
n
i
n
g
Company positioning
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
17 October 2013 20
Deep dive into the Indian consumer coverage companies

FIGURE 28
ITC strong market position; relatively insulated from any discretionary slowdown

Cigarettes no promotions or
ads, but this is still a strong
category of growth for ITC

FMCG ITCs disruptive entry
and market share gain
continues, and we expect new
launches to intensify

Hotels increased capacity
and slowing macro
environment make this the
weakest segment, despite ITCs
well known hotel brands
Cigarettes
FMCG
Hotels
Agri Business
Paperboard
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
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m
e
n
t

p
r
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s
p
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t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate


FIGURE 29
Dabur significant presence in the niche segments is a strong positive

Digestives Dabur is uniquely
associated with most products
in this category, especially
Hajmola, its flagship brand

Hair Care strong positioning
in Perfumed Hair Care Oil
through the Amla brands, and
volume recovery is expected

Foods Dabur has the best
known brand of honey, with
increasing use by households

Hair Care
Digestives
OTC & Ethicals
Health Sup
Home Care
Oral Care
Skin Care
Foods
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
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c
t
s
S
t
r
o
n
g
W
e
a
k
Strong
Weak
M
o
d
e
r
a
t
e
Moderate
17 October 2013 21

FIGURE 30
Nestle high exposure to urban/discretionary segments which are facing downward
pressure

Prepared Dishes strong
brand recall for Nestle with
moderate growth prospects

Milk Products volume
growth likely to stall as
consumers may downtrend

Chocolates similar to other
discretionary segments,
Chocolates also face a dip in
growth

FIGURE 31
HUL highly competed segments constitute the bulk of its portfolio

Personal Care intensifying
competition and slowing urban
income growth are affecting
HULs Personal Care segments

Detergents strong
positioning, but likely muted
growth prospects

Coffee intensifying
competition in a growth
segment
Soaps
Detergent
Tea
Coffee
Foods
Skin Care
Hair Care
Oral Care
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
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c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate

FIGURE 32
GCPL leadership presence across the key segments

Hair Color GCPL is a leader in
this space, with strong growth
potential

Household Insecticides
dominant positioning with
innovative launches provide an
edge

Soaps weak positioning with
moderate growth outlook

Note for all charts: Size of the bubble indicates the categorys proportional contribution to FY13 revenues.
Source for all charts: Company data, Barclays Research

Beverages
Prep dishes
Choc /
Confectionary
Milk Products
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
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n
t

p
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p
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t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
Soaps
Hair Color
Household
Insecticides
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
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n
t

p
r
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s
p
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t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
17 October 2013 22
LONG-TERM DRIVERS INTACT: 10+ YEARS TO US$5,500-6,000 GDP PER CAPITA
While we have discussed near-term concerns (macro slowdown, stalling of premiumisation
trends, etc.) in the previous sections, we believe the longer term outlook also needs to be
analysed, as it could have a significant bearing on the Indian Consumer sectors 95%
premium vs BSE Sensex. Assessing the drivers of growth for the next 5-10 years, we believe
the industry can still see healthy growth, as multiple drivers exist. We also include analysis
from the Barclays Research regional team on GDP per capita evolution and how a level of
US$5,500 acts as a threshold for staples deceleration, which we think is likely another 10
years away for India.
Structural deceleration comes in at US$5,500 GDP per capita
GDP per capita in India is currently around US$1,450 (2012) according to World Bank
estimates, one of the lowest in the world and ranking the country at #79. We believe that a
multi-year multi-decade phase of development is still likely for the Indian economy. Analysis
by our Barclays Research regional counterparts covering the Asia ex-Japan Staples sector
(see Life slows at 55(00), 9 July 2012), points to an interesting evolution of the
consumption trend in an economy. After comparing the evolution of Japan, Korea, Taiwan
and China over a period of 40 years, the key conclusions were:
Consumption spending decelerates structurally once an economy reaches US$5,500-
6,000 GDP per capita.
Further, this is also the phase at which growth of the consumer industry starts to lag
growth in nominal GDP.
This deceleration is more evident in the staples sector (especially in Food, Beverages,
etc), while the discretionary segment typically continues to grow at a faster rate.
From an Indian Consumer perspective, the key takeaway for us is that India is likely still
around 10+ years away from reaching this threshold GDP per capita. Indian GDP per capita
has grown at 11.9% CAGR in the last ten years. Assuming it continues at this pace, we
expect the Indian economy could hit this threshold level of US$5,500 GDP per capita
somewhere around 2023-2024.
FIGURE 33
Evolution of per capita GDP ($US) among different economies

Source: IMF, Barclays Research

500
1,500
2,500
3,500
4,500
5,500
6,500
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
China Korea Taiwan India
India
Trajectory from ~$1,500 - ~$5,500
China: 2002 - 2011 (15.8% CAGR)
Korea: 1980 - 1990 (14.8% CAGR)
Taiwan: 1978 - 1988 (14.4% CAGR)
We believe a decade-long
period of growth in the AeJ
Staples sector is still likely and
that the consumer industry by
then would have transformed
itself and evolved into
substantially differentiated
segments, with higher-end
discretionary segments
continuing to drive growth

17 October 2013 23
Favourable dependency ratio
As shown in Figure 34, India has one of the lowest dependency ratios compared to other
geographies, indicating a high percentage of people in the income-generating class and a
lesser proportion of dependants. Industry forecasts suggest that even by 2050, Indias
dependency ratio could be in the mid-teens, pointing to at least three or four decades of
young/adult population in the working class, who could fuel consumption growth.
FIGURE 34
Dependency ratio in India remains favourable vs other
geographies

FIGURE 35
Number of households in the higher income category
expected to increase sharply
7% 7%
5% 5%
15%
12%
13%
17%
11%
8%
22%
19%
23%
27%
21%
15%
29%
21%
0%
5%
10%
15%
20%
25%
30%
35%
China Korea Thailand India Europe North
America
2005 2025P 2050P

91%
74%
41%
8%
22%
50%
2%
4%
9%
0%
20%
40%
60%
80%
100%
2004 2009 2015E
LSM 1-4 LSM 5-7 LSM 8+

Source: K S Oils, Barclays Research Notes: LSM = Living Standard Measures; Higher LSM points to higher standards
of living.
Source: HUL estimates, Barclays Research
Rural economy is a key driver for the FMCG industry
The rural segment currently constitutes c33% of the overall FMCG market in India, and has
been fast outpacing the urban segment in terms of growth. This has been driven by:
Low penetration levels: despite stronger growth levels in the last three years,
penetration levels in rural areas still remain much lower than in urban areas;
Rural income growth: increasing income levels driving the overall improvement in living
standards along with a higher disposable income; and
Expansion of rural distribution networks through efforts like Daburs Project Double
and HULs Shakti Project.
17 October 2013 24
FIGURE 36
% increase in monthly per capita expenditure in India; rural
has overtaken urban for first time in the last three years

FIGURE 37
along with a sharp increase in absolute incremental
consumption expenditure as well
7.3% 7.5%
13.2%
19.2%
14.0%
11.8%
13.9%
17.2%
0%
5%
10%
15%
20%
25%
1987-94 1993-05 2004-10 2009-12
Rural Urban

2,994
3,750
2,000
2,500
3,000
3,500
4,000
Urban Rural
I
N
R

M
n
+25%

Source: NSSO, Accenture, Barclays Research Source: NSSO, Accenture, Barclays Research
FIGURE 38
Lower penetration levels offer significant growth
opportunities

FIGURE 39
FMCG rural consumption growth has outpaced that of urban
in the last three years
42%
37%
67%
18% 18%
3% 2%
77%
57%
80%
32%
59%
19%
5%
0%
20%
40%
60%
80%
100%
T
o
o
t
h
p
a
s
t
e
S
h
a
m
p
o
o
H
a
i
r

o
i
l
S
k
i
n

C
r
e
a
m
M
o
s
-
R
e
p
e
l
l
a
n
t
s
I
n
s
t
a
n
t

N
o
o
d
l
e
s
H
a
i
r

D
y
e
s
Rural Urban

3%
10%
13%
11%
16%
-8%
1%
14%
18%
14%
-10%
-5%
0%
5%
10%
15%
20%
CY03 CY05 CY07 CY09 CY11
Urban Rural

Source: Dabur, Barclays Research Source: Dabur, Barclays Research

17 October 2013 25
Rural economy being driven by concerted government efforts
High spending on rural development, through measures such as NREGA (National Rural
Employee Guarantee Scheme) and Minimum Support Prices (MSPs), has witnessed robust
growth over the years. However, we see a relative softening in FY14, partly because of
already high inflation levels.

FIGURE 40
Strong growth levels in Minimum Support Prices

Strong increment levels across
minimum support prices in key
agricultural crops have helped
raise overall income levels for
the rural segment

but we see some tapering of
growth levels in FY14; one-third
of the crop categories have
seen no increase in MSPs.

Note: 3-year CAGR is from FY11-14
Source: Commission for Agricultural Costs and Prices, Barclays Research

FIGURE 41
Government spending on rural development in India remains high

213 243 288 569 566 721 642
0.2
0.5
0.7
1.3
1.9
2.6
3.2
0
0.5
1
1.5
2
2.5
3
3.5
0
100
200
300
400
500
600
700
800
FY06 FY07 FY08 FY09 FY10 FY11 FY12
I
N
R

T
n
I
N
R

b
n
Government spend (LHS) Cummulative spend (RHS)

Source: Dabur, Barclays Research

Crop FY11 FY12 FY13 FY14 3 yr CAGR FY14 y/y
Paddy 1,000 1,080 1,250 1,310 9% 5%
Wheat 1,100 1,120 1,285 1,350 7% 5%
Jowar 880 980 1,500 1,500 19% 0%
Bajra 880 980 1,175 1,250 12% 6%
Maize 880 980 1,175 1,310 14% 11%
Soybean 1,400 1,650 2,200 2,500 21% 14%
Cotton 2,500 2,800 3,600 3,700 14% 3%
Groundnut 2,300 2,700 3,700 4,000 20% 8%
Sunflower 2,350 2,800 3,700 3,700 16% 0%
Urad 2,900 3,300 4,300 4,300 14% 0%
Sesaum 2,900 3,400 4,200 4,500 16% 7%
Niger Seed 2,450 2,900 3,500 3,500 13% 0%
Ragi 965 1,050 1,500 1,500 16% 0%
Minimum Support Prices (INR / quintal)
17 October 2013 26
along with an increased focus by the FMCG companies
Sharp expansion of distribution networks and overall reach: Rural reach has been
more than doubled by most of the major companies, in a bid to tap the unexplored
market and take advantage of increasing income levels.
An increasing number of product innovations to cater to the rural segment: Many
companies have altered their product portfolio for new offerings especially aimed at
rural areas.
Management comments across different consumption categories highlight the increasing
prominence of rural areas in the overall strategy of big consumer players. Higher purchasing
power trends along with positive macro trends (better monsoons, Government support,
etc.) should help drive near-term revenues.
FIGURE 42
Dabur sharp increase in direct village coverage

FIGURE 43
HUL rural reach has increased by 4x in the last three years
14,865
17,882
30,091
10,000
15,000
20,000
25,000
30,000
35,000
FY11 FY12 FY13
Direct village coverage
+20%
+68%

0.3
0.8
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2009 2010 2011
Direct rural coverage
4x

Source: Company data, Barclays Research Source: Company data, Barclays Research
FIGURE 44
Promising annual income levels (rural household income
distribution)

FIGURE 45
could result in further improvement in the social indicators
for rural India
61%
41%
26%
35%
50%
48%
3% 7%
22%
1% 2%
4%
0%
20%
40%
60%
80%
100%
2005 2015 2025
< INR 90k INR 90 - 200k INR 0.2 - 0.5mn INR > 0.5mn

22%
46%
36%
59%
27%
59%
0%
10%
20%
30%
40%
50%
60%
70%
#Pucca houses Below poverty line Rural literacy
1981 2007

Source: CII - FMCG roadmap to 2020, Barclays Research # Pucca houses are concrete establishments
Source: CII - FMCG roadmap to 2020, Barclays Research

17 October 2013 27
Distribution expansion is reaching out to untapped villages
With the rural segment contributing just one-third of overall FMCG revenues, along with
low segment penetration levels across segments, distribution networks play a key
differentiating role among the FMCG players. HULs Project Shakti covers over 135k villages
and c3.3mn households in the rural segment.
We note that an extensive distribution network not only helps companies expand their
markets, gain consumer insights, and enhance earnings potential of the channel partners,
but it is also a sustainable advantage which can be leveraged for cross-segment revenues.
For instance, HUL through a network of over 700 rural distributors as part of its Project
Express distributes telecom products for Tata Teleservices in 95,000 telecom outlets.
We note that while the players have erstwhile been focusing extensively on enhancing the
number of touchpoints, there have been efforts to increase the quality of the reach in terms
of more revenues per store through innovative schemes, customised product launches, etc.
We expect these schemes to gain more traction in future, especially in a moderate demand
environment, and help improve average realisations.

Case Study: Quality of the expansion in distribution
According to a study by Nielsen (November 2011), the top 5 FMCG companies in India
(in terms of growth) have focused not only on increasing the overall number of
touchpoints but also on quality of the increased touchpoints in terms of offtake per
store.
Sharp divergence in the top 5 players and bottom 5 players (from the top 20) can be
seen in Figure 46, with the top players having witnessed a sharp uptick in revenue
growth/store (average of 16% vs 6% average for the bottom 5 for FY11).

FIGURE 46
Success of the top players is driven by well rounded growth across both distribution
reach and quality of the reach

There is a clear distinction
between the top 5 and bottom
5 companies, with the former
falling towards the top-right
side

which indicates that for the
same amount of distribution
growth, a top 5 company tends
to see much higher growth in
revenue per dealer
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25%
G
r
o
w
t
h

i
n

p
e
r

d
e
a
l
e
r

o
f
f
t
a
k
e
Distribution growth %
Bottom - 5 growth co Top - 5 growth co
Increasing offtake
per store

Note: Analysis based on rural stores only.
Source: Nielsen, Barclays Research

17 October 2013 28
Indias organised retail growth momentum
India lags significantly compared to its Asian peers in terms of retail penetration levels, as
illustrated by Figure 47. Estimated to be valued at US$26bn in 2011, as per industry sources
(Ernst & Young), the organised retail market is expected to grow at a CAGR of 26% over the
next five years, thus increasing overall penetration levels to c20% by FY21. In our view, this
should be driven by: 1) inroads made by key players in rural areas, both in terms of the
penetration levels (volumes sold) as well as the improving product mix; and 2) increasing
income levels to expose more population to branded products versus unbranded products
sold earlier. The launch of low volume shampoo sachet packets costing Rs1/Rs2 was a
pioneering example of this. In our view, these should both drive supply chain efficiencies,
and in the long term help reduce SG&A expenditure for firms.

FIGURE 47
Indias retail penetration levels are low compared to Asian peers
Organized retail relates to
corporate retail channels, while
unorganized retail is related to
local grocery shops etc.

Indias organised retail
penetration is at the lower end
of the spectrum compared to
global peers
15%
19%
45%
60%
70%
80%
94%
85%
81%
55%
40%
30%
20%
6%
0%
20%
40%
60%
80%
100%
US Taiwan Malaysia Thailand Indonesia China India
Unorganised retail penetration Organised retail penetration

Source: E&Y (2011), Barclays Research

FIGURE 48
and are expected to grow sharply as per industry estimates

and is expected to rise
sharply to c20% (from 6% in
2011), thus offering significant
opportunities wrt growth and
supply chain efficiencies to the
FMCG players
94%
91%
80%
6%
9%
20%
0%
20%
40%
60%
80%
100%
2011 2016E 2021E
Unorganised retail penetration Organised retail penetration

Source: Deloitte (2011), Barclays Research

Strong momentum in
organised retail should help
increase overall penetration
levels and drive supply chain
efficiencies for FMCG
companies; HUL expects
modern retail to contribute
c25% of its revenues in five
years (from 12-15% currently)
17 October 2013 29
Emergence of alternative distribution channels
Pharmacies seeing a big push; increasing share of private labels a challenge
We are beginning to see worrying signs of consumer down-trending in the form of an
increasing share of private label products in modern trade (private labels are generally
considered cheaper). As shown in Figure 49, private labels are growing faster than modern
retail trade and are gaining market share, as consumers increasingly prefer lower-priced
products to national brands.
We believe this poses an additional challenge for FMCG firms as most companies rely on a
modern retail format to drive future growth, especially those in the premium segment. A
sharp increase in the share of private labels could help expand the markets size by offering
cheaper alternatives, but it could also signal a shift in consumer loyalties from the known
brands to these cheaper products.

FIGURE 49
Private labels growing faster than modern trade; gaining market share

Private labels are gaining
market share from established
brands, which points to: 1) an
expanded market size by
offering cheaper alternatives,
and b) a shift in customer
loyalties
45%
34%
55%
49%
12%
46%
64%
32%
31%
26%
36%
25%
9%
22%
26%
0%
10%
20%
30%
40%
50%
60%
70%
Tissue
Paper
Floor
Cleaners
Washing
Powder
Glass
Cleaners
Refined Oil Spices Packaged
Tea
Biscuits
Modern Trade growth Private label growth
420%

Note: Bars represent category revenue growth y/y in FY12
Source: Nielsen, Barclays Research

FIGURE 50
still, we see significant headroom for growth, as private label share in overall organised
retail sales remains low in India vs developed countries
India is under-branded and
under-penetrated in many
categories. It makes immense
sense to build own brands to
do market and category
development, leading to
accelerating consumption
Devendra Chawla, President of
Food Bazaar at Future Group
46%
40%
35%
29%
27%
21%
20%
11%
20%
0%
10%
20%
30%
40%
50%
S
w
i
t
z
e
r
l
a
n
d
U
K
G
e
r
m
a
n
y
S
p
a
i
n
F
r
a
n
c
e
A
u
s
t
r
a
l
i
a
U
S
A
I
n
d
i
a
W
o
r
l
d

A
v
e
r
a
g
e

Source: CII - FMCG roadmap to 2020, Barclays Research
Private label spend is
estimated to grow 5x from
current levels to US$500mn by
2015, as per Nielsen
17 October 2013 30
CONSUMER EVOLUTION: THE GLOBAL GROWTH COMPARISON
Consumer industry follows an S-shaped consumption curve
The Consumer sector tends to follow an S-shaped consumption curve relating to the per
capita expenditure along with per capita GDP. The framework is widely accepted as having
three broad stages:
1. Warm up zone: The industry is still in the nascent stages and products are still
expensive for most potential customers. As a result, market penetration (as captured
by consumption expenditure per capita) grows much slower than GDP per capita.
2. Hot zone: As GDP per capita grows further, the product categories eventually reaches
takeoff point wherein penetration levels increase sharply as more customers adopt
the product.
3. Cool down zone: At a still higher level of GDP per capita, categories tend to reach a
saturation point post which penetration generally remains flat despite potential GDP
growth as consumers start to direct their incremental expenditure to other product
categories.
While growth patterns, along with the occurrence of take-off/saturation points, would vary
with products, services and countries, the broad trend remains consistent across the board.
FIGURE 51
S-shaped consumption curve for the Consumer industry

Source: McKinsey (November 2011), Barclays Research

P
e
r

C
a
p
i
t
a

C
o
n
s
u
m
p
t
i
o
n

E
x
p
e
n
d
i
t
u
r
e
GDP per capita
Warm up Zone
Cool down zone
Hot Zone
- Products still
expensive for most
consumers
- Market growth rate
below income growth
- Product reaches
high penetration
levels
- Market growth
slows down
- Products become
affordable
- Sharp increase in the
market growth levels
Takeoff point
Saturation
point
India is at the lower end of the
S- shaped consumption curve
vs global peers

and while different segments
are likely to follow different
trajectories, we believe there is
still significant headroom for
growth in India over the long
run.

17 October 2013 31
We use examples of the Footwear and the Healthcare Insurance industries in the US to
show the different stages of evolution for these sectors and where they are on this
consumption curve.

FIGURE 52
The footwear industry in the US is currently in the high penetration/cool down mode

Per capita expenditure trends
in the US footwear industry,
show that after a sharp
increase in growth penetration
from 1995-2004, the industry is
now in a cool-down zone
60
70
80
90
100
110
120
130
25 30 35 40 45
E
x
p
e
n
d
i
t
u
r
e

/

c
a
p
i
t
a

(
U
S
D
)
GDP / capita ('000s USD)

Source: United States Consensus Bureau, Barclays Research

FIGURE 53
The health insurance industry in the US is still in the incremental penetration/hot zone
mode

Per capita expenditure trends
in the US health insurance
industry show that the industry
is still in hot zone mode
0
100
200
300
400
500
600
700
25 30 35 40 45
E
x
p
e
n
d
i
t
u
r
e

/

c
a
p
i
t
a

(
U
S
D
)
GDP / capita ('000s USD)

Source: United States Consensus Bureau, Barclays Research

17 October 2013 32
While India is growing ahead of global peers, there is still a long way to go
FIGURE 54
Revenue growth for top 50 FMCG players (India vs global)

FIGURE 55
GDP per capita remains at the lower end of spectrum

Source: OC&C Strategy, Barclays Research Note: Data as per FY12
Source: IMF, Barclays Research
FIGURE 56
coupled with the low contribution of FMCG to GDP

FIGURE 57
resulting in a low per capita FMCG consumption
7.5%
4.6% 4.6%
2.9%
2.4%
2.2%
0%
1%
2%
3%
4%
5%
6%
7%
8%
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(
U
S
D
)

Source: KS Oils, Barclays Research Source: KS Oils, Barclays Research
FIGURE 58
India has low penetration levels in the key FMCG categories (examples of Skin Care and Shampoo shown below)

Note: Data as per FY13
Source: HUL, Barclays Research.

8% 8%
7%
1%
0%
-1%
17%
16%
26%
17%
11%
18%
-5%
0%
5%
10%
15%
20%
25%
30%
H
P
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Global 50 (CAGR 10 yrs) India 50 (CAGR 10 yrs)
36.7
20.3
12.1
10.3
8.9
6.1
5.7
3.9
3.0 2.9 2.6
1.5 1.5 1.3
0.9 0.9 0.6 0.6
0
5
10
15
20
25
30
35
40
H
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Thousand USD
3.2
0.8
0.3
7.4
7.7
0
1
2
3
4
5
6
7
8
9
China Indonesia India Malaysia Thailand
P
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c
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c
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p
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(
U
S
D
)
Skin Care
1.0
1.1
0.3
2.7
2.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
China Indonesia India Malaysia Thailand
P
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a

c
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u
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p
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(
U
S
D
)
Shampoo
17 October 2013 33
DEEP DIVE INTO OPERATING FUNDAMENTALS
While EBIT margins in the Indian Consumer sector have remained fairly robust and relatively
resilient in the last 15 years, we also analyse other variants driving the ROE of FMCG
companies:
International acquisitions: Both Dabur & GCPL have opted for a sharp expansion mode
through ventures in emerging markets like Africa. While both expect these to be high
growth areas, we believe this strategy has had a dampening effect on returns (because
of a sharp increase in the asset base) in the recent past
Corporate actions: The last 4-5 years have witnessed a significant amount of corporate
actions involving share buybacks (HUL) and share splits (GCPL) among others, all of
which have added to volatility in the return metrics.

FIGURE 59
Indian Consumer coverage EBIT margins have displayed strong resilience and are
showing an uptrend

EBIT Margins = EBIT/Sales

EBIT margins have remained
healthy for the FMCG
companies, showing strong
resilience levels even in the
demand slowdown
environment

Source: Thomson Reuters Datastream, Barclays Research

FIGURE 60
along with a stable interest burden ratio (declined in the last four years)

Interest Burden = PBT/EBIT

The interest burden ratio has
remained broadly stable over
the last 10-15 years as debt
levels remained at manageable
levels for most companies
under our coverage


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
10%
12%
14%
16%
18%
20%
22%
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
EBIT Margin ROE (RHS)
'96-'01: Sharp OPM expansion
underlines the recovery in ROE
'09-'13: Decilne in ROEs
despite strong margins
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
60%
70%
80%
90%
100%
110%
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Interest Burden ROE (RHS)
Improvement in interest burden
across all players
'09-'13: High interest costs for Dabur,
GCPL & Nestle - c300bps decline in
Interest burden ratio
17 October 2013 34

FIGURE 61
although a slightly increasing tax burden in 2013

Tax Burden = PAT/PBT

We note that the tax burden
has gradually come down to
c75% from 80-81% (in 2005-
06); increasing tax rates has
been an industry wide
phenomenon

FIGURE 62
and a sharp drop in the asset turnover ratio due to international acquisitions by Dabur
& GCPL

Asset Turnaround =
Sales/Assets

In our view, one of the primary
reasons behind the sharp ROE
decrease in the last 3-4 years
was GCPL (Africa business) &
Dabur (Namaste) acquiring
depressed international assets

FIGURE 63
Financial leverage has remained volatile in the last five years due to equity infusions and
buybacks in the Indian FMCG market

Financial Leverage =
Assets/Equity

Significant buybacks (HUL) and
corporate actions like bonus
shares/splits have resulted in a
volatile financial leverage ratio
during the last 4-5 years
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
40%
90%
140%
190%
240%
290%
340%
390%
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Financial Leverage ROE (RHS)

Source for all charts: Thomson Reuters Datastream, Barclays Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
40%
60%
80%
100%
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Tax Burden ROE (RHS)
Gradual decline led by
increasing tax rates across most
players
'97-'02: Tax rate increase
led by Dabur & Nestle
'02-'06: Improvement led by
GCPL (tax saving initiatives)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
80%
100%
120%
140%
160%
180%
200%
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Asset Turnaround ROE (RHS)
Sharp decline led by GCPL & Dabur
(international acquisitions)
HUL & Nestle lead the
steady improvement
17 October 2013 35
Operating margin improvement likely to be driven by Dabur
& ITC
Despite a moderation in the demand environment in the last couple of years resulting in a
softening of overall volume growth levels, we have witnessed an uptick in operating
margins, primarily driven by gross margin improvement (driven by commodity prices and
enhanced product mix) along with curtailment of advertising spends in a few companies.
We continue to expect a divergent performance between the India Consumer companies,
with Dabur and ITC continuing to increase OPMs but that of HUL & Nestle remaining under
pressure.
FIGURE 64
Operating margins expected to remain under pressure for our coverage universe

Note: Coverage includes Dabur, HUL, GCPL, ITC and Nestle

FIGURE 65
Indian Consumer coverage OPMs have improved in the last two years despite
moderation in the demand environment

OPMs have increased in the
last three years, despite an
overall moderation in the
volume environment

We expect OPMs to remain
divergent among the India
Consumer coverage
companies, and that ITC and
Dabur could drive the upward
margin trajectory for the sector


Coverage +ve -ve -ve +ve
Dabur +ve +ve NA +ve
GCPL +ve -ve NA +ve
HUL -ve -ve -ve
ITC +ve +ve NA
Nestle +ve -ve -ve -ve
Impact on EBIT Margins
Product mix Commodity Ad Spend Royalty Currency
23.3%
22.3%
20.4%
20.0%
20.0%
19.7%
18.4%
21.0%
20.7%
22.1%
22.3%
22.8%
23.0%
23.4%
14%
16%
18%
20%
22%
24%
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
17 October 2013 36
FIGURE 66
India Consumer sector expected operating margin trajectory over the next three years

Margin headwinds for the industry
Steady increase in advertising spends: We expect this to be the case as companies try
to protect market share in an otherwise weak demand environment. Ad spends
increased by c110bps in FY13 and we have seen a heightened focus among the
companies on this front as: 1) they launch new products and variants; 2)
premiumisation trends pick up; and 3) they try to fend off increasing competition from
private labels and the unorganised retail sector.
Increase in royalty payments for MNC players: HUL and Nestle (which are both
subsidiaries of global MNCs) have announced increased royalties to the parent
companies for availing the technical knowhow and product support. Nestle is expected
to see a 20bps royalty increase, while we forecast a 33bps increase for HUL in FY14E.
Volumes to remain under pressure: We expect consumers to remain highly selective in
terms of incremental purchases because of the relative slowdown in the discretionary
spends, thus putting the high discretionary categories under stress. This is also likely to
put further pressure on operating margins in the near term.
We expect the OPM of both ITC and Dabur to be driven by strong exposure to non-
discretionary segments. Both companies have a strong presence in the non-discretionary
segments through ITCs Cigarette segment (strong pricing power) and Daburs niche
positioning in the OTCs & Ethicals, Digestives, and Health Supplements categories. We
would expect these categories to continue providing the necessary cushion against macro
headwinds.

14.9% 14.6% 14.6%
33.2%
19.0%
15.9%
14.5%
14.9%
33.7%
18.9%
16.6%
15.2%
14.3%
34.1%
19.0%
16.9%
15.3%
14.3%
34.4%
18.9%
10%
15%
20%
25%
30%
35%
40%
2013 2014E 2015E 2016E
+200bps over
FY13-16E
+70bps over
FY13-16E
-30bps over
FY13-16E
-10bpsover
FY13-16E
+120bps over
FY13-16E
17 October 2013 37
Gross margins to remain stable
For our Indian Consumer coverage, we expect overall gross margins to remain stable.
Among the individual companies, we expect Dabur to witness an improvement in gross
margins on account of improving product mix & higher average realization levels, and we
forecast HUL to witness the highest contraction in gross margins on account of de-
premiumisation trends across a significant part of its portfolio.

FIGURE 67
Gross margins for the Indian Consumer coverage sector expected to remain stable

We believe headroom for gross
margin expansion is limited
near-term as the price of
commodities (including crude
and palm oil) are expected to
surge higher with sharp rupee
depreciation


FIGURE 68
Gross margin change comparison among coverage companies

ITC boasts the highest gross
margin among the coverage
companies, primarily led by its
cigarette business

but while most companies
saw an increase in FY13 gross
margins, ITC was the only one
in our coverage to witness a
decline


94 101 116 141 159 177 231 237 286 336 387 448 526
55%
54%
55%
53% 53%
54%
52%
55%
54%
55%
54%
55% 55%
45%
47%
49%
51%
53%
55%
57%
0
100
200
300
400
500
600
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
I
N
R

M
n
COGS (in Rs mn) Gross Margins (%)
GM trends have been broadly stable
except commodity volatilty during
GFC
186
159
131
-191
249
107
39
25
-166
-50
25
-26
25 25
103
-15
0
28 25
0
-34
0 0
-2
-250
-200
-150
-100
-50
0
50
100
150
200
250
300
Dabur GCPL HUL ITC Nestle Coverage
Bps
2013 2014E 2015E 2015E
17 October 2013 38
Key raw material trends
The last three months has seen both y/y and q/q rises in commodity prices, with Rice Bran,
Coconut Oil and HDPE showing the most significant changes y/y. These could pose near-
term (2QFY14) headwinds to input costs for the Indian Consumer companies. GCPL, which
is most exposed to HDPE, works with a 3-4 month inventory period and thus could feel the
pinch if the rise in prices sustains into 3QFY14E too.
The only major price decline has been in Wheat, typically used in the Foods category (for
Biscuits, Noodles, and a few other packaged foods). Thus, HUL, Nestle and ITC could see a
mild benefit at the gross margin level due to this decline.
FIGURE 69
India Consumer companies key raw material costs and latest price trends
% of Raw Material Costs Price trend in last three months
Raw Material Dabur GCPL HUL Nestle Y/Y Q/Q
Sugar 0 - 10% 0 - 10% +1% Flat
Milk 25%+ +4% +2%
Palm Oil 0 - 10% 0-10% 10 - 25% 0 - 10% -4% +1%
Tea 0 - 10% +2% +3%
Coconut Oil +13% +11%
Liquid Paraffin 0 - 10% 0 - 10% Flat +8%
HDPE 10 - 25% 0 - 10% 10 - 25% +13% +11%
Lime & Calcium Carbonate 0 - 10% 0 - 10% +4% +2%
Wheat 0 - 10% 0 - 10% -6% +4%

FIGURE 70
Price trend Sugar

FIGURE 71
Price trend Milk
80
100
120
140
160
180
200
220
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Sugar-M grade
SugarPrice trend in last 3 months
Y/Y: Up 1%; Q/Q: flat

100
120
140
160
180
200
220
240
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Milk - WPI
Milk Price trend in last 3 months
Y/Y: Up 4%; Q/Q: Up 2%

Source for all charts: Marico, Company data, Thomson Reuters Datastream, Barclays Research

17 October 2013 39
FIGURE 72
Price trend Tea

FIGURE 73
Price trend Coconut Oil
40
60
80
100
120
140
160
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
R
s
/
k
g
Tea Price trend in last 3 months
Y/Y: Up 2%; Q/Q: Up 3%

2,000
4,000
6,000
8,000
10,000
12,000
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
Rs / 100Kg
Coconut Oil Coconut Oil Price trend in last 3 months
Y/Y: Up 13%; Q/Q: Up 11%

Source: Tea Board of India, Barclays Research Source: Marico, Barclays Research
FIGURE 74
Price trend Liquid Paraffin

FIGURE 75
Price trend HDPE
30
35
40
45
50
55
60
65
70
75
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Liquid Paraffin Price trend in last 3 months
Y/Y: Up 0%; Q/Q: Up 8%

50
60
70
80
90
100
110
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
HDPE Price trend in last 3 months
Y/Y: Up 13%; Q/Q: Up 11%

Source: Marico, Barclays Research Source: Marico, Barclays Research
FIGURE 76
Price trend Palm Oil

FIGURE 77
Price trend Wheat
100
110
120
130
140
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Palm Oil Price trend in last 3 months
Y/Y: Down 4%; Q/Q: Up 1%

100
120
140
160
A
u
g
-
0
8
F
e
b
-
0
9
A
u
g
-
0
9
F
e
b
-
1
0
A
u
g
-
1
0
F
e
b
-
1
1
A
u
g
-
1
1
F
e
b
-
1
2
A
u
g
-
1
2
F
e
b
-
1
3
A
u
g
-
1
3
Indexed
Wheat
Wheat Price trend
Last 3 months: Y/Y: down 6%; Q/Q: Up 4%

Source: Thomson Reuters Datastream, Barclays Research Source: Thomson Reuters Datastream, Barclays Research

17 October 2013 40
Advertising and promotion spends increasing gradually
We expect a steady increase in advertising and promotion spends as companies try to
protect market share in an otherwise weak demand environment. Ad spends increased by
c110bps in FY13 and we have seen a heightened focus amongst the companies on this
front as: 1) new product variants are launched, along with a pick up in the premiumisation
trends; and 2) they try to fend off increasing competition from private labels and the
unorganised retail sector, along with a need for differentiation against the backdrop of
receding volumes. We expect HUL to continue to witness an increase in ad spends on new
premium products like the liquid Surf Excel, and also direct competition ads against Colgate
Palmolive etc.

FIGURE 78
Advertising spends are gradually increasing for coverage companies

14 14 17 20 24 33 38 46 47 59 68 78 91
6.7%
6.6%
6.4%
6.7%
6.9%
7.4%
8.3%
8.4%
7.4%
7.7%
7.8%
7.7%
7.6%
6.0%
8.0%
10.0%
12.0%
14.0%
-
10
20
30
40
50
60
70
80
90
100
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Ad Spends As a % of sales As a % of sales (ex ITC)

TRAI regulation to put upward pressure on ad spends
Under the latest regulations from Telecom Regulatory Authority of India (TRAI), from 1
October 2013, broadcasters are allowed advertisement time of not more than 10 minutes
for commercials and an additional 2 minutes for own channel promotion. This could have a
twin negative impact for FMCG companies, and especially those with relatively high A&P
spend (such as HUL and GCPL):
1. Increase in advertisement rates as broadcasters try to protect overall revenues in an
environment of falling volumes; and
2. Reduction in advertising volumes for FMCG companies, as overall advertising space is
now capped.

We forecast the ad spends for
our coverage universe to go up
on an average of 30bps over
the next year, led by HUL,
GCPL and ITC in that order
17 October 2013 41
FIGURE 79
HUL ad spends expected to remain high

FIGURE 80
GCPL sharp rise in promotional expenditure post
international acquisitions; expected to come down gradually

FIGURE 81
Nestle advertising spends expected to pick up sharply

FIGURE 82
Dabur expected to be broadly stable after a sharp increase
in FY13

FIGURE 83
ITC overall ad spends are low as it cannot advertise for its key segment (Cigarettes)

Post regulatory changes to
cigarette advertisements in
India (banned in 2003), ITCs
ad spends as a % of sales have
declined from ~4% to ~2.5%

Source for all charts: Company data, Barclays Research estimates

8 8 8 10 13 14 21 24 28 26 32 36 41 47
8.5%
7.5%
8.4%
9.1%
10.5%
10.5%
10.5%
13.6%
14.2%
11.9%
12.5%12.7%
12.8%
13.0%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0
5
10
15
20
25
30
35
40
45
50
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Ad Spends As a % of sales
1 1 1 1 1 1 1 2 4 4 7 9 11 13
12.4%
10.3%
10.9%
10.3%
8.1%
8.3%7.2%
8.4%
9.6%
9.2%
10.3%
11.8%
11.3%
11.0%
6%
7%
8%
9%
10%
11%
12%
13%
0
2
4
6
8
10
12
14
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
1.4 1.2 1.4 1.4 1.7 1.9 2.7 3.0 3.2 3.6 4.1 4.8 5.8
6.4%
5.4%
5.5%
4.9%4.9%
4.5%
5.2%
4.8%
4.3%4.3%
4.5%
4.8%
5.0%
3%
4%
5%
6%
7%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
2 2 2 3 3 3 5 5 7 8 9 11 13
13.6%
13.6%
11.6%
11.6%
12.5%
12.2%
14.6%
13.1%
12.4%
13.6%
13.0%
12.8%12.8%
8%
9%
10%
11%
12%
13%
14%
15%
0
2
4
6
8
10
12
14
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
2 3 2 2 3 4 5 5 6 7 8 9 10 12
3.7%
4.1%
2.9%
2.3%
2.4%
2.7%
3.2%
2.8%
2.9%
2.8% 2.7%
2.6%
2.5% 2.5%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
0
2
4
6
8
10
12
14
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
17 October 2013 42
Increasing payout to parent companies
Increase in royalty payments to put further pressure on margins
Both HUL and Nestle have announced increased royalties to the parent companies for
availing the technical knowhow and product support. Nestle is expected to see a 20bps
royalty increase, while we forecast a 33bps increase for HUL in FY14E

FIGURE 84
Royalty paid by key FMCG players to the parent companies in FY13

5.2%
4.9%
3.5% 3.5%
1.5%
1.0% 1.0%
0%
1%
2%
3%
4%
5%
6%
Colgate P&G Nestle GSK CH HUL Gilette Bata

While we believe the market has already priced in OPM moderations due to royalty
increases, we view these more as a sign of the Indian consumer markets increasing
prominence on a global level.
FIGURE 85
Nestle royalty expected to increase gradually by 20bps
every year

FIGURE 86
HUL royalty rates expected to up sharply over the next five
years

Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

3.3%
3.3%3.3%
3.4%
3.4%3.4%3.4%
3.5%
3.7%
3.9%
4.1%
4.3%
4.5%
12%
13%
14%
15%
16%
17%
18%
19%
20%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
Royalty % EBITDA Margin (RHS)
0.6% 0.6%
0.9%
1.4%
1.3%
1.5%
1.8%
2.1%
2.5%
2.8%
3.15%
10%
12%
14%
16%
18%
0%
1%
2%
3%
4%
2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
2
0
1
7
E
2
0
1
8
E
17 October 2013 43
Share buybacks by the parent companies a strong signal?
Long-term potential in the Indian consumer markets: As discussed earlier, the Indian
market remains under-penetrated compared to other key emerging/developed markets.
While the near-term outlook remains challenging due to the macro headwinds, we believe
the long-term potential of the Indian consumer markets could prompt buybacks as parent
companies want a bigger share of the profits by way of higher dividends.
Investments met through low cost of capital: Share buybacks also enable the parent
companies to invest significantly in the Indian entities at relatively cheaper costs of capital
(foreign borrowing costs are less than domestic borrowing costs). This is especially
important as most of the firms are in the process of launching key products and making
headway in new segments.

FIGURE 87
Share buybacks an opportunity for FMCG players?

30th April 2013: Unilever
announced offer to buy-back
c22.3% of HUL shares at a
26% premium to the stock
price

26th November 2012:
GlaxoSmithKline PLC
announced its offer to buy-
back c31.8% of GSK
Consumers shares at a 28%
premium to the stock price

Source: Barclays Research
FIGURE 88
HUL parent holding has increased to c67% from 53.2%
after the share buyback this year

FIGURE 89
Nestle current parent holding at 63%
Promoter
67%
FII
14%
DII
5%
Others
14%

Promoter
63%
FII
13%
DII
6%
Others
18%

Note: FII Foreign Institutional Investor; DII Domestic Institutional Investor
Source for both charts: BSE, Company data, Barclays Research

Buyback?
We believe share buybacks
could be viewed as a
reaffirmation of the parent
entitys confidence in the
Indian consumer market.
17 October 2013 44
India Consumer coverage key return ratios
FIGURE 90
Return on Assets (ROA) steady increase expected

FIGURE 91
ROA Indian coverage comparison

FIGURE 92
Free cash flow yield (FCF yield) sharp increase expected

FIGURE 93
FCF yield rising across the board

FIGURE 94
Cash Return on Capital Invested (CROCI) expected to
remain stable

FIGURE 95
CROCI Dabur/GCPL on a steady increase; HUL/Nestle
remain weak

24%25%
23%
23% 23%
24%
20%
18%
19%
20%
20%
21%
15%
20%
25%
30%
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Steady increase in
ROAs
FY11, FY12: Sharp decline
led by Dabur & GCPL due
to Int'l acquistions
16%
9%
28%
22%
21%
17%
10%
28%
22%
21%
20%
12%
25%
23%
22%
0%
5%
10%
15%
20%
25%
30%
FY13 FY14E FY15E
Driven by Dabur,
GCPL & ITC
HUL & Nestle
remain weak
1.0%
0.7%
0.5%
0.7%
0.7%
1.3%
-1.1%
1.1%
1.5%
2.0%
2.7%
3.0%
-2%
-1%
0%
1%
2%
3%
4%
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Sharp decline led
by GCPL
FY14: Dabur, ITC
and GCPL lead the
increase
2.2%
-0.3%
2.6%
1.6%
1.4%
2.9%
0.4%
2.4%
2.3%
1.8%
3.2%
2.3%
2.7% 2.7%
2.4%
-1%
0%
1%
2%
3%
4%
FY13 FY14E FY15E
57%
32%
35%
33%
35%
32%
33%
29%
25%
27% 28%
27%
26%
20%
30%
40%
50%
60%
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
FY12: Sharp decline
led by HUL & Nestle
FY11: Sharp decline in
GCPL post Int'l acquisitions
23%
15%
46%
25%
28%
25%
16%
46%
25%
26% 26%
17%
39%
25%
26%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY13 FY14E FY15E
Dabur & GCPL on
a steady increase
HUL & Nestle
remain weak
17 October 2013 45
VALUATIONS LOOK EXPENSIVE NEED TO BE SELECTIVE
Sector has been strong outperformer vs Sensex; difference
has amplified in last five years
Our India Consumer coverage universe has been a strong outperformer over the last 20
years vs BSE Sensex, primarily driven by high growth rates on the back of low penetration
levels and the relatively defensive nature of the sector providing a cushion during periods of
macro weakness. By splitting the last 20 years into three distinct time periods, we notice
that the return differential has really amplified in the last five years. While BSE Sensex saw
returns of 1% from CY08-CY13 YTD, our coverage group was up 271% over the same
period (primarily driven by GCPL +513%, ITC +224% and Nestle +240%).
FIGURE 96
India Consumer coverage stock outperformance vs BSE Sensex

FIGURE 97
India Consumer individual stock performance during the three time periods


-8%
-2%
20%
25%
70%
-22%
26%
12%
0%
-17%
-0%
30%
-25%
-36%
47%
-20%
19%
35%
16%
10%
-60%
-40%
-20%
0%
20%
40%
60%
80%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3

Y
T
D
Coverage vs BSE
+40% +271% +587% Coverage
-7%
+1% +454% Sensex
4 consecutive years
of outperformance
64%
405%
224%
135%
53%
179%
-41%
196%
0%
480%
513%
2%
451%
240%
-100%
0%
100%
200%
300%
400%
500%
600%
1995-1997 1998-2007 2008-2013 YTD
ITC HUL Dabur Godrej Consumer Nestle
+1546%
17 October 2013 46
Valuations now touching historical peaks
The sharp run up in stock prices over the last five years has resulted in a strong rerating of
valuation multiples for Indian Consumer stocks. As highlighted in Figure 98, from the lower
end of the trading range in March 2009, the one-year forward P/E multiple for our coverage
universe has now crossed the upper band (despite taking into account the recent correction
since May 2013) and is currently trading at almost two standard deviations above the long-
term historical average (last 13-years).
FIGURE 98
One-year forward P/E (x) valuations for the Indian Consumer coverage are trading significantly above the historical range

The one-year forward EV/EBITDA trend highlights the exponential sector rerating in the last
couple of years. We believe this is primarily due to the defensive nature of the sector which
has led to money inflows in times of macro headwinds. However, as discussed in the next
section, we believe sustained macro pressures resulting in challenges for the volume
growth/customer upgradation to premium products, could result in subdued multiple levels
over a long period, thus making it important to be selective in the Consumer Staples sector
with a bias towards stocks with steady growth potential and relatively high non-
discretionary portfolios.

FIGURE 99
One-year forward EV/EBITDA (x) sharp run up seen in the last couple of years

16
17
18
19
20
21
22
N
o
v
-
1
1
D
e
c
-
1
1
J
a
n
-
1
2
F
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
J
u
l
-
1
2
A
u
g
-
1
2
S
e
p
-
1
2
O
c
t
-
1
2
N
o
v
-
1
2
D
e
c
-
1
2
J
a
n
-
1
3
F
e
b
-
1
3
M
a
r
-
1
3
A
p
r
-
1
3
M
a
y
-
1
3
J
u
n
-
1
3
J
u
l
-
1
3
A
u
g
-
1
3
Coverage Average +1 SD -1 SD

0
5
10
15
20
25
30
35
40
45
50
S
e
p
-
0
1
M
a
r
-
0
2
S
e
p
-
0
2
M
a
r
-
0
3
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
a
r
-
0
6
S
e
p
-
0
6
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
Coverage PE multiple Average +1 SD -1 SD
150%rerating post GFC
vs 75% for Sensex
Owing to the maturity of the
FMCG industry, we use 1-year
forward P/E multiples as our
primary valuation
methodology
and we also cross-check this
with other relevant earnings &
growth metrics (1-year
forward EV/EBITDA,
Price/Sales, 3-year PEG, etc)
where applicable
17 October 2013 47
Multiple de-rating can be prolonged in a macro slowdown
Strong historical revenue growth levels along with the defensive nature of the sector in an
otherwise slowing economy, have resulted in a sharp increase in stock prices and have led
our coverage universe to trade at above standard deviation levels. However, as seen in
Figure 100, we note that in the case of a slowdown, there can be prolonged periods of sharp
de-ratings (i.e. 2000-2005).
FIGURE 100
P/E multiple de-rating can be prolonged in times of sustained macro headwinds
Volume growth levels under pressure; need to be selective
Macro headwinds along with a slowdown in the discretionary segments pose significant
challenges for FMCG players, in our view. We expect volume growth levels to remain under
pressure, especially for HUL and Nestle in the near-term, which is likely to be reflected in
valuation levels in due course. Both HUL and Nestle are trading at high premiums versus
their historical averages, as well as versus peers.
FIGURE 101
HUL sharp decline in volume growth levels over the last 10
quarters and we do not expect it to improve

FIGURE 102
Nestle volume growth levels to remain in single digits
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q
2

1
1

Q
4

1
1

Q
2

1
2

Q
4

1
2

Q
2

1
3

Q
4

1
3

Q
2

1
4
E

Q
4

1
4
E

Q
2

1
5
E

Q
4

1
5
E


0
5
10
15
20
25
30
35
40
45
50
S
e
p
-
9
4
M
a
r
-
9
5
S
e
p
-
9
5
M
a
r
-
9
6
S
e
p
-
9
6
M
a
r
-
9
7
S
e
p
-
9
7
M
a
r
-
9
8
S
e
p
-
9
8
M
a
r
-
9
9
S
e
p
-
9
9
M
a
r
-
0
0
S
e
p
-
0
0
M
a
r
-
0
1
S
e
p
-
0
1
M
a
r
-
0
2
S
e
p
-
0
2
M
a
r
-
0
3
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
a
r
-
0
6
S
e
p
-
0
6
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
Coverage PE multiple Average +1 SD -1 SD
Supernormal growth tapering off
led multiple derating
Prolonged phase of
multiple suppression
Recovery in the
multiples
216 234 266 311 357 418 446 450 458 484 519
5%
8%
14%
17%
15%
17%
7%
1%
2%
6%
7%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
-
100
200
300
400
500
600
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
0
0
0
s

T
17 October 2013 48
Premium to Sensex multiples at historical highs
Our coverage universe has historically (over the last 20 years) traded at an average
premium of 41% to the Sensex on a one-year forward P/E multiple basis. However, as
discussed earlier, the sharp run-up in stock prices has not only led to a sharp multiple re-
rating but also a material expansion vs the Sensex. Our coverage universe is currently
trading at a premium of 95% to the Sensex. As the business outlook becomes increasingly
challenging for the consumer industry, given the overall macro slowdown which we expect
in the near-term, we believe the valuation premium versus the Sensex should decrease.
FIGURE 103
One-year forward P/E multiple (x) Sensex versus our coverage universe
0
5
10
15
20
25
30
35
40
45
50
S
e
p
-
9
5
M
a
r
-
9
6
S
e
p
-
9
6
M
a
r
-
9
7
S
e
p
-
9
7
M
a
r
-
9
8
S
e
p
-
9
8
M
a
r
-
9
9
S
e
p
-
9
9
M
a
r
-
0
0
S
e
p
-
0
0
M
a
r
-
0
1
S
e
p
-
0
1
M
a
r
-
0
2
S
e
p
-
0
2
M
a
r
-
0
3
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
a
r
-
0
6
S
e
p
-
0
6
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
Sensex Coverage PE multiple

FIGURE 104
Our coverage universe is trading at historical highs w.r.t the premium to Sensex one-year forward P/E multiples
-50%
0%
50%
100%
150%
200%
S
e
p
-
9
5
M
a
r
-
9
6
S
e
p
-
9
6
M
a
r
-
9
7
S
e
p
-
9
7
M
a
r
-
9
8
S
e
p
-
9
8
M
a
r
-
9
9
S
e
p
-
9
9
M
a
r
-
0
0
S
e
p
-
0
0
M
a
r
-
0
1
S
e
p
-
0
1
M
a
r
-
0
2
S
e
p
-
0
2
M
a
r
-
0
3
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
a
r
-
0
6
S
e
p
-
0
6
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
Average


17 October 2013 49
Individual companies vs BSE Sensex
FIGURE 105
One-year forward P/E multiple (x): ITC vs Sensex

FIGURE 106
ITC 20 year average/current premium of 16%/71%
0
5
10
15
20
25
30
35
40
45
50
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Sensex ITC

-100%
-50%
0%
50%
100%
150%
S
e
p
-
9
5
S
e
p
-
9
7
S
e
p
-
9
9
S
e
p
-
0
1
S
e
p
-
0
3
S
e
p
-
0
5
S
e
p
-
0
7
S
e
p
-
0
9
S
e
p
-
1
1
S
e
p
-
1
3
Average

FIGURE 107
One year forward P/E multiple (x): HUL vs Sensex

FIGURE 108
HUL 20 year average/current premium of 75%/127%
0
10
20
30
40
50
60
70
80
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Sensex HUL

-50%
0%
50%
100%
150%
S
e
p
-
9
5
S
e
p
-
9
7
S
e
p
-
9
9
S
e
p
-
0
1
S
e
p
-
0
3
S
e
p
-
0
5
S
e
p
-
0
7
S
e
p
-
0
9
S
e
p
-
1
1
S
e
p
-
1
3
Average


17 October 2013 50
FIGURE 109
One year forward P/E multiple (x): Dabur vs Sensex

FIGURE 110
Dabur 20 year average/current premium of 20%/68%
0
10
20
30
40
50
60
70
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Sensex Dabur

-100%
-50%
0%
50%
100%
150%
S
e
p
-
9
5
S
e
p
-
9
7
S
e
p
-
9
9
S
e
p
-
0
1
S
e
p
-
0
3
S
e
p
-
0
5
S
e
p
-
0
7
S
e
p
-
0
9
S
e
p
-
1
1
S
e
p
-
1
3
Average

FIGURE 111
One year forward P/E multiple (x): Nestle vs Sensex

FIGURE 112
Nestle 20 year average/current premium of 65%/138%
0
10
20
30
40
50
60
70
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Sensex Nestle

-50%
0%
50%
100%
150%
200%
250%
S
e
p
-
9
5
S
e
p
-
9
7
S
e
p
-
9
9
S
e
p
-
0
1
S
e
p
-
0
3
S
e
p
-
0
5
S
e
p
-
0
7
S
e
p
-
0
9
S
e
p
-
1
1
S
e
p
-
1
3
Average

FIGURE 113
One year forward P/E multiple (x): GCPL vs Sensex

FIGURE 114
GCPL 20 year average/current premium of 33%/69%
0
5
10
15
20
25
30
35
40
45
J
u
n
-
0
1
J
u
n
-
0
2
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
J
u
n
-
1
2
J
u
n
-
1
3
Sensex Godrej Consumer

-100%
-50%
0%
50%
100%
150%
200%
J
u
n
-
0
1
J
u
n
-
0
2
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
J
u
n
-
1
2
J
u
n
-
1
3
Average


17 October 2013 51
Global valuation comparison
We compare valuations for our Indian Consumer coverage to global peers to assess how the
multiples stack up, i.e. whether the valuations look expensive on a global basis. Overall, our
India Consumer sector multiple screens as being expensive compared to the Japanese,
European and US Consumer sectors. However, we also note that it is one of the highest
earnings growth sectors over FY13-16E, offering 16% EPS CAGR. On an EV/EBITDA vs
EBITDA CAGR comparison, we believe our Indian Consumer coverage appears fairly valued.
We conclude that on a global valuation comparison basis, current earnings multiples appear
to back up our neutral stance on the Indian Consumer sector. While the market seems to be
willing to price in overall long-term growth potential for the Indian Consumer sector, the
individual companies show significant variation on earnings outlook and P/E multiples.
FIGURE 115
Global valuation comparison for the Consumer sector one-year forward P/E vs EPS CAGR (FY13-16E)

Note: Asia ex Japan Staples does not contain Indian companies for purposes of this comparison
FIGURE 116
Global valuation comparison for the Consumer sector one-year forward EV/EBITDA vs EBITDA CAGR (FY13-16E)

Note: Asia ex Japan Staples does not contain Indian companies for purposes of this comparison

US Food
US Cosmetics & HPC
US B&T
Japan food, B&T
Japan Cosmetics & HPC
European food
European HPC
European B&T
Asia ex Japan Staples (ex
India)
Dabur
GCPL
HUL
ITC
Nestle
Indian Consumer Coverage
10
15
20
25
30
35
40
0% 5% 10% 15% 20% 25%
P
E
x

EPS 3 yr CAGR
US Food
US Cosmetics & HPC
Japan food, B&T
Japan Cosmetics & HPC
European food
European HPC
European B&T
Asia ex Japan Staples (ex
India)
Dabur
GCPL
HUL
ITC
Nestle Indian Consumer Coverage
0
5
10
15
20
25
30
5% 10% 15% 20% 25%
E
V
/
E
B
I
T
D
A
x
EBITDA 3 yr CAGR
17 October 2013 52
Zoom in on the Indian consumer space
On a more detailed evaluation of how our coverage stocks stack up against one another,
and also against the broader Consumer universe (based on Bloomberg consensus
forecasts), we find that both ITC and Dabur screen attractively, indicating that the market
may be mispricing these stocks vis--vis their earnings potential.
Looking at the broader Consumer universe we note there is a high degree of correlation
between the earnings multiple and growth outlook, with HUL and Nestle standing out as
seemingly expensive stocks.
FIGURE 117
One-year forward P/E (x) ITC & Dabur screen favourably vs our India Consumer coverage & the broader Consumer sector

FIGURE 118
One year forward EV/EBITDA (x) ITC, Dabur & GCPL screen favourably vs our India Consumer coverage & the broader
Consumer sector

Source for all charts: Company data, Barclays Research estimates, Bloomberg estimates (for non covered companies), Thomson Reuters Datastream

Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
10
15
20
25
30
10% 15% 20% 25%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
FY13 - 16E EBITDA CAGR
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
UNSP
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
10% 15% 20% 25% 30%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
17 October 2013 53
KEY RISKS
Macro, rural growth, premiumisation and liquidity shift risks
Stronger macro backdrop: Volume growth levels and premium valuation levels for our
Indian Consumer coverage are highly correlated to the overall macro environment. Any
faster-than-expected improvement in the overall GDP growth and spending patterns
could spur the demand in their favour.
Pickup in premiumisation trends: While premiumisation trends have remained rather
subdued of late, a significant uptick could be a material positive for the companies both
in terms of volumes and a margin uptick (on account of improved product mix and
higher realisations).
Rural growth decline: Revenue growth in the Consumer sector is being significantly
driven by growth in rural areas and rising disposable incomes in the region. This is an
outcome of multiple factors including a normal/better monsoon season and also
government support to rural areas. Any factors adversely affecting consumption
expenditure in the rural economy would impact our revenue growth forecasts.
Growth in emerging markets (EMs); currency volatility: Following a spate of EM
acquisitions in the last few years (in particular by GCPL and Dabur), most companies are
in consolidation mode but could be affected if these geographies witness slower/faster
recovery and worse/better synergies than expected. EMs constituted c30% of group
revenues for GCPL and c15% for Dabur in FY13. In addition, strong currency
appreciation could be a negative event on account of the translational impact.
Liquidity shift: The Indian Consumer sector saw strong liquidity inflows following the
Global Financial Crisis in 2008, as the market rotated towards defensive sectors, leading
to significant outperformance versus BSE Sensex. Any reversal of this trend, where we
could see liquidity flowing from defensives to cyclical, may lead to underperformance of
the sector.

17 October 2013 54
Companies
COMPANIES

17 October 2013 55
ITC (OW; PT INR409; +20%): CIGARETTE CONSUMPTION ON A ROLL; INITIATE AT
OVERWEIGHT
We initiate coverage on ITC, our top pick in the India Consumer sector, with an
Overweight rating and a 12-month price target of Rs409, yielding a potential upside of
20%. Our positive stance is based on: 1) our view that ITCs Cigarettes business is likely
to sustain volume growth over the longer term, as we believe the inflection point for per
capita consumption peaking could be ~15 years away; 2) 3-year revenue/EPS CAGR of
18.3%/19.7% over FY13-16E, driven by a near-term recovery in volume growth of
Cigarettes as price hikes are absorbed; 3) improving returns metrics (cash returns
expected to improve by ~600bps over the next three years to 39.8%) and operating
fundamentals are likely to lead to a further re-rating of the stock.
Global consumption evolution points to positive volume outlook: Contrary to studies
(source: WHO) pointing to PED of cigarettes being around -0.4, we estimate ITC posted
volume CAGR of 3.3% and price CAGR of 9.7% over FY03-FY13. Our analysis of global
trends points to an explanation, where ~US$20k GDP/capita (PPP basis) has generally
been an inflection point for per capita cigarette consumption to peak, with volumes
declining thereafter. Assuming 12% Nominal GDP CAGR then we estimate that India
could hit this peak around 2027. A more direct explanation could be that as rural
disposable income rises steadily (i.e. rural spend accelerating faster than urban), it is
likely to be a longer-term structural driver of growth for cigarettes through the
conversion of chewable tobacco consumers to the aspirational smoking varieties.
Volume growth resumption in cigarettes likely to drive three-year revenue/EPS CAGR
of 18.3%/19.7%: ITC has hiked the price of cigarettes by around 15%+ in the past three
years, which explains the relatively low CAGR of 1.7% in volumes over the same period.
As these price hikes are absorbed, we forecast a much stronger volume CAGR of 2.5%
over the next three years. Considering the material profit contribution from Cigarettes
segment (81% of FY13 EBIT), we expect operating leverage to play out and thus
forecast revenue CAGR of 18.3% and EPS CAGR of 19.7% over FY13-16E.
ROIC to improve further by 600bps; 120bps OPM expansion over the next three
years: We expect ITC to steadily improve its ROIC by ~600bps from ~34% in FY13 to
40% over the next three years, thus driving a further re-rating of the stock. This is not
just driven off the Cigarettes business, but is also partially due to the improving
profitability from FMCG and Hotels. Other metrics like ROE (stable despite significant
growth in the equity base) and CROCI (cash return on cash invested, on the rise) also
point to improving operating fundamentals.
Valuation: We value ITC using sum-of-the-parts (SOTP) as our primary methodology
given it has multiple business segments, which are seeing a material phase of
investment but are not likely to generate high returns in the near term, being in a
nascent stage of growth. We use P/E methodology to value all of ITCs business
segments, except FMCG Others which is in a significant phase of investment and has
yet to generate sustainable earnings, hence we use a P/S metric in this case. Our 12-
month price target of Rs409 implies potential upside of 20% and an implied P/E of 31x,
broadly in-line with the average FY15E P/E for the Indian Consumer sector.
Risks: Downside risks to our investment thesis and price target include: 1) adverse
tobacco industry regulations, as the Cigarettes segment contributes 81% of ITCs
operating profits; 2) strong recovery in broader Indian equity market and liquidity flows
from defensives to cyclicals; and 3) any delay in FMCG & Hotel business profitability due
to macro slowdown or increased competition.
ITC IN / ITC.NS
Stock Rating
OVERWEIGHT
Industry View
NEUTRAL
Price Target
INR 409.00
Price (14-Oct-2013)
INR 339.50
Potential Upside/Downside
+20%

17 October 2013 56
Asia ex-Japan Staples Industry View: NEUTRAL
ITC Ltd. (ITC.NS) Stock Rating: OVERWEIGHT

Income statement (INRmn) 2013A 2014E 2015E 2016E CAGR Price (14-Oct-2013) INR 339.50
Price Target INR 409.00
Why Overweight? Our positive view is driven by ITCs:
1) strong brand presence and market share position
in one of the highest price elastic segments
cigarettes; 2) improving returns metrics and operating
fundamentals vs global peers; and 3) improving
profitability from FMCG and Hotels.

Upside case INR 472.00
In the upside case, we are assuming faster volume
growth for cigarettes along with a sharp margin
improvement in the FMCG business. We apply a 5%
higher P/E valuation multiple along with 10% higher
earnings for FY15E.

Downside case INR 296.00
In this case, we assume increased macro headwinds
which would lead to pressures across both the
cigarettes segment along with other businesses. We
use a 15% lower blended multiple along with a 15%
reduction in FY15E EPS.

Upside/Downside scenarios

POINT Quantitative Equity Scores

Source: POINT. The scores are valid as of the date of this
report and are independent of the fundamental analysts'
views. To view the latest scores, click here.
Revenue 296,056 340,252 405,450 490,712 18.3%
EBITDA 106,275 123,165 147,577 179,101 19.0%
EBIT 98,320 114,749 138,204 168,589 19.7%
Pre-tax income 106,842 122,788 148,504 181,548 19.3%
Net income 74,184 85,951 103,953 127,084 19.7%
EPS (reported) (INR) 9.33 10.81 13.07 15.98 19.7%
Diluted shares (mn) 7,951.1 7,951.1 7,951.1 7,951.1 0.0%
DPS (INR) 5.25 5.40 6.54 7.99 15.0%

Margin and return data Average
EBITDA margin (%) 35.9 36.2 36.4 36.5 36.2
EBIT margin (%) 33.2 33.7 34.1 34.4 33.8
Pre-tax margin (%) 36.1 36.1 36.6 37.0 36.4
Net margin (%) 25.1 25.3 25.6 25.9 25.5
ROIC (%) 33.7 35.6 37.7 39.8 36.7
ROA (%) 21.8 22.2 23.0 23.9 22.7
ROE (%) 33.3 32.2 31.7 31.5 32.2

Balance sheet and cash flow (INRmn) CAGR
Tangible fixed assets 125,914 137,062 151,003 168,707 10.2%
Intangible fixed assets 1,058 1,058 1,058 1,058 0.0%
Cash and equivalents 36,150 59,416 92,650 132,274 54.1%
Total assets 340,174 387,109 451,891 531,882 16.1%
Short and long-term debt 664 664 664 664 0.0%
Net debt/(funds) -35,486 -58,752 -91,986 -131,610 N/A
Other long-term liabilities 52,619 52,619 52,619 52,619 0.0%
Total liabilities 117,296 120,023 123,827 128,711 3.1%
Shareholders' equity 222,879 267,087 328,064 403,171 21.8%
Change in working capital -13,002 -4,594 -8,203 -12,178 N/A
Cash flow from operations 93,274 118,572 139,373 166,923 21.4%
Capital expenditure -20,977 -19,565 -23,313 -28,216 N/A
Free cash flow 46,200 65,010 76,209 91,601 25.6%

Valuation and leverage metrics Average
P/E (reported) (x) 36.4 31.4 26.0 21.2 28.8
EV/EBITDA (x) 25.1 21.4 17.7 14.3 19.6
Equity FCF yield (%) 1.7 2.4 2.8 3.4 2.6
EV/sales (x) 9.0 7.8 6.4 5.2 7.1
P/BV (x) 12.1 10.1 8.2 6.7 9.3
Dividend yield (%) 1.5 1.6 1.9 2.4 1.9
Total debt/capital (%) 0.3 0.2 0.2 0.2 0.2
Net debt/EBITDA (x) -0.3 -0.5 -0.6 -0.7 -0.5

Note: FY End Mar

Value
Quality
Sentiment
Low High
17 October 2013 57
Key charts detailing our ITC Overweight investment thesis
FIGURE 119
ITC strong product portfolio

FIGURE 120
Cigarettes segment per capita consumption tends to drop
off after GDP per capita hits US$20k; long way to go for India
Cigarettes
FMCG
Hotels
Agri
Business
Paperboar
d
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate

Source: Company data, Barclays Research Source: Euromonitor, Company data, Barclays Research
FIGURE 121
ITC expect revenue to grow at 18.3% CAGR over FY13-16E

FIGURE 122
ITC strong pricing power to drive 120bps OPM expansion
over the next three years

FIGURE 123
ITC sharp upward trend in ROIC expected to continue

FIGURE 124
ITC attractive on our valuation screener


China
Russia
USA
Indonesia
Japan
Vietnam
India
Brazil
Germany
UK
0
500
1,000
1,500
2,000
2,500
3,000
0 10,000 20,000 30,000 40,000 50,000
S
t
i
c
k
s

p
e
r

c
a
p
i
t
a
GDP per capita ($)
Bubble size represents
total market volume
(mn equivalent sticks)
122 139 156 182 212 248 296 340 405 491
24%
15%
12%
16%
17%17%
19%
15%
19%
21%
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
2
0
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Sales Sales Growth (YoY %)
FY08 - 13E CAGR: 16.2%
FY13 - 16E:
18.3%
1.4 1.4 1.4 1.5 1.6 1.7 1.9 2.1 2.4 2.6 3.0 3.4 3.8 4.3
40%
45%
50%
55%
60%
65%
70%
1
2
3
4
5
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

ASP (ex VAT) / stick EBIT Margin (RHS)
45.5%
26.9%
25.1%
30.6%
29.9%
31.7%
33.7%
35.6%
37.7%
39.8%
10%
20%
30%
40%
50%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
12% discount to coverage
peers
17 October 2013 58
Latest trends across the key business segments and drivers
FIGURE 125
ITC latest trends across key business segments and drivers
Category Recent trends (1Q FY14) Near-term expectations
FY13-16E
CAGR
Cigarette Volume
Growth
2% y/y decline

Volume growth challenges still likely as consumers come
around to adjusting to price hikes; full year volume growth
likely to be low
2.5%
Cigarette Pricing
Growth
16.6% y/y growth Following price hikes taken in July, any further price hikes may
be unlikely this year
14.2%
Input Costs/
Gross Margins
Down 40bps on a y/y basis Continues to be relatively insulated from GM fluctuations
owing to tobacco leaf being a small part of COGS

Impact of Currency Currency impacts through the effect on
the commodity prices

Segmental trends (% of FY13 revenues)
Cigarettes
(42% of revenues)
(81% of EBIT)
7.1% y/y net revenue growth
32.6% EBIT margin

Revenue growth of mid-teens factoring in flat volume growth
for FY14, with growth driven by price increase of ~15% taken
recently
15.2%
FMCG
(21% of revenues)
(-1% of EBIT)
18.4% y/y growth
-1.1% EBIT margin

Top-line growth to be healthy at high-teens, but critical to
return to breakeven or generate profits following last quarters
operating loss. Company expects to breakeven at operating
profits level for the year.
21.4%
Hotels
(3% of revenues)
(1% of EBIT)
7.5% y/y growth
3.6% EBIT margin

Prices which have declined in recent past (due to significant
capacity addition) likely to harden. Strong recovery needs
revival in economy and influx of business travellers.
10.1%
Agri Business
(22% of revenues)
(7% of EBIT)
29.4% y/y growth
9.1% EBIT margin

Mostly an opportunistic sector depending on commodity
prices. Margins likely to improve slightly to 10%-11%
26.2%
Paperboards
(13% of revenues)
(10% of EBIT)
12.3% y/y growth
20.4% EBIT margin
Post large-scale capacity addition (100,000 tons added in Mar
13), expect market share gains to drive growth higher by
100+bps.
13.6%

17 October 2013 59
Snapshot of segmental revenue trends and forecasts
FIGURE 126
ITC segmental revenue trends and Barclays Research growth forecasts

Note: Column charts are Barclays Research growth forecasts; Revenue and EBIT contribution as per FY13.
Cigarettes
42%
FMCG Others
21%
Hotels
3%
Agri Business
21%
Paperboards, paper
and packaging
13%
17%
13%
17%
16%
13%
7%
1%
0%
4%
3%
-4%
0%
4%
8%
12%
16%
20%
FY12 FY13 FY14E FY15E FY16E
Revenue Growth Volume Growth
20%
26%
24%
25%
30%
16%
20%
24%
28%
32%
Revenue Growth
0%
7%
9%
10% 11%
0%
4%
8%
12%
Revenue Growth
24%
26%
20%
22% 22%
16%
20%
24%
28%
Revenue Growth
12%
8%
11%
14%
16%
0%
4%
8%
12%
16%
20%
Revenue Growth
Cigarettes
81%
Hotels
1%
Agri Business
7%
Paperboards, paper
and packaging
10%
FMCG Others
-1%
55%
54%
55%
56%
60%
48%
52%
56%
60%
64%
FY09 FY10 FY11 FY12 FY13
EBIT Margins
-16%
-10%
-7%
-4%
-1%
-20%
-16%
-12%
-8%
-4%
0%
EBIT Margins
34%
25%
27%
28%
13%
10%
18%
26%
34%
42%
EBIT Margins
7%
11%
12%
11%
10%
0%
4%
8%
12%
16%
EBIT Margins
19%
22%
23%
24%
23%
12%
16%
20%
24%
28%
EBIT Margins
Revenues
EBIT
17 October 2013 60
Business segment mix: Cigarettes continues to dominate

FIGURE 127
While revenue contribution from the Cigarettes segment for ITC has decreased

Revenue contribution from the
Cigarettes segment has fallen
to c42% in FY13 from c57% in
FY03, primarily because of the
fast 20%+ growth witnessed in
the FMCG business


FIGURE 128
EBIT contribution from Cigarettes remains high at 80%+

EBIT contribution from
Cigarettes remains strong at
80%+


FIGURE 129
ITC strong competitive positioning among all key segments

We view ITCs product portfolio
positively given its strong
competitive positioning


57%
56%
52%
46%
42% 41% 42%
45% 44% 43%
42%
6%
9%
12% 16%
17%
18% 18% 19%
21%
24% 22% 20%
24% 25%
24% 21%
19% 20% 20% 22%
15% 15% 16% 15% 14% 13% 15% 15% 14% 14% 13%
0%
20%
40%
60%
80%
100%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Cigarettes FMCG Hotels Agri Business Paperboards
91% 92%
88%
84% 82% 83%
88%
83%
81% 81%
83%
-20%
0%
20%
40%
60%
80%
100%
Cigarettes FMCG Hotels Agri Business Paperboards
Cigarettes
FMCG
Hotels
Agri Business
Paperboard
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
17 October 2013 61

FIGURE 130
ITC revenue growth trend to remain strong


FIGURE 131
along with a sustained operating margin expansion


FIGURE 132
resulting in a robust 19.7% net income CAGR over the next three years


122 139 156 182 212 248 296 340 405 491
24%
15%
12%
16%
17% 17%
19%
15%
19%
21%
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
2
0
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
FY08 - 13 CAGR: 16.2% FY13 - 16E: 18.3%
34.0%
32.5%
31.6%
31.1%
33.5%
35.0%
35.7%
35.9%
36.2%
36.4% 36.5%
-200
-150
-100
-50
0
50
100
150
200
250
300
25%
27%
29%
31%
33%
35%
37%
39%
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
EBITDA margin change (bps - RHS) EBITDA Margin
27 31 33 41 50 62 74 86 104 127
20.8%
15.6%
4.6%
24.4%
22.8% 23.6%
20.4%
15.9%
20.9%
22.3%
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
2
0
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Net Income Net Income Growth (%)
FY08 - 13 CAGR: 18.9% FY13 - 16E: 19.7%
17 October 2013 62
Where is the inflection point for Cigarette volumes? Per
capita consumption tends to dip post GDP/capita of US$20k
Contrary to studies pointing to price elasticity of demand of cigarettes being around -0.4
(source: WHO), we estimate ITC posted volume CAGR of 3.3% and price CAGR of 9.7% over
FY03-FY13. Our analysis of global trends points to an explanation, where ~US$20k
GDP/capita has been an inflection point for per capita cigarette consumption to peak, with
volumes declining thereafter. Assuming 12% Nominal GDP CAGR, we believe India could hit
this peak around 2027.
A more direct explanation is that as rural disposable income rises steadily (rural spend
accelerating faster than urban), it is likely to be a longer-term structural driver of growth for
cigarettes through the conversion of chewable tobacco consumers to the aspirational
smoking varieties.
FIGURE 133
Per capita consumption of cigarettes tends to peak at around US$20k GDP per capita and decline thereafter

FIGURE 134
Average price (US$/20 sticks) tends to stabilize after GDP per capita of US$8k

Note: Bubble size represents total market volume (mn equivalent sticks).
Source for both charts: Euromonitor, Barclays Research
China
Russia
USA
Indonesia
Japan
Vietnam
India
Italy
Turkey
South Korea
Egypt
Brazil
Germany
Philippines
Ukraine
Spain
Pakistan
France
Poland
UK
Iran
Argentina
Thailand
Mexico
Taiwan
Canada
Romania
Kazakhstan
Algeria Saudi Arabia
Belarus
Greece
Czech Republic
Australia
South Africa
Uzbekistan
Colombia
Bulgaria
Nigeria
Tunisia
Morocco
Austria
Chile
Hungary
Malaysia
Azerbaijan
Switzerland
Venezuela
Netherlands
Belgium
Bosnia
Portugal
Kenya
Israel
Slovakia
Croatia
Georgia
Denmark
Sweden
0
500
1,000
1,500
2,000
2,500
3,000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
S
t
i
c
k
s

p
e
r

c
a
p
i
t
a
GDP per capita ($)
China
Russia
Indonesia
Vietnam
India
Turkey
Brazil
Philippines
Ukraine
Pakistan
Poland
Iran
Argentina
Thailand
Mexico Romania
Kazakhstan
Belarus
Serbia
South Africa
Colombia
Bulgaria
Tunisia
Morocco
Chile
Hungary
Malaysia
Azerbaijan
Venezuela
Kenya
Slovakia
Croatia
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000
A
v
g

p
r
i
c
e

U
S
D

(
2
0

s
t
i
c
k
s
)
GDP per capita ($)
Price elasticity of -0.4 does not
seem to correlate with
domestic trends seen in India

Global trends indicate that
India may still be more than a
decade away from hitting the
inflection point of ~USD20k
GDP/capita

17 October 2013 63
Cigarettes (42% of FY13 revenues): ITC dominates the
cigarette market in India
ITC has a dominant hold on the cigarette market in India with 80% market share, almost a
quasi-monopoly. We see this as unlikely to change over the medium- to long-term. Our
forecast of strong 15.2% revenue CAGR over FY13-16E (vs 13.2% in the last ten years) in
the Cigarettes segment for ITC is driven by:
Volume recovery post price acclimatisation: Over the last three years, ITC has hiked the
prices of its cigarettes by around 15%+, most notably in FY2013. This has primarily been
a function of the rise in VAT (from Rs0.24/stick in FY09 to Rs0.54/stick in FY13). As a
consequence, volume growth has been muted over the last five years, with a CAGR of
just 1.7%. As these price hikes are absorbed, we believe volumes could pick up in the
medium-term, thus we forecast stronger 3-year volume CAGR of 2.5%.
Operating leverage to play out, expect OPM improvement of 430bps in FY14E:
Considering the material profit contribution from the Cigarettes segment (EBIT margin
of 59.6% in FY13), we expect operating leverage (on the back of a recovery in volume
growth) to improve and forecast a 430bps improvement in EBIT margins for the
Cigarette segment this year (FY14E) and a further 70bps improvement in FY15E. This is
a primary driver of our EPS CAGR forecast of 19.7% for the group over FY13-16E

FIGURE 135
ITC cigarette revenues expected to grow at mid-teen levels over the next few years

We forecast revenue CAGR of
15.2% over FY13-FY16E

FIGURE 136
ITC volume growth decreased sharply in last eight quarters

FIGURE 137
ITC we expect mid-single-digit volume growth FY13-16E
21 21 23 22 21 22 23 23 20
7.1%
8.2%
5.3%
5.6%
-0.5%
1.2%
1.3%
1.9%
-2.0%
-4%
-2%
0%
2%
4%
6%
8%
10%
18
19
20
21
22
23
24
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Volume (bn sticks) Volume Growth Rate

66 76 92 106 123 140 163 189 214
12.6%
13.9%
21.7%
15.0%
16.6%
13.4%
16.6%
16.2%
12.9%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
I
N
R

B
n
Net Revenues Y/Y Growth
FY08 - 13 CAGR: 16.1% FY13 - 16E: 15.2%
76 81 81 79 84 82 87 88 88 91 95
8%
7%
-1%
-2%
7%
-3%
7%
1%
-0%
4%
3%
-4%
-2%
0%
2%
4%
6%
8%
10%
50
60
70
80
90
100
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Volume (bn sticks) Volume Growth Rate
The cigarette market in India is
a Rs200bn market (US$4bn)
and is a highly consolidated
industry
17 October 2013 64
Long-term structural drivers for ITC in cigarettes:
Cigarette consumption forms 15% of tobacco consumed in India: Currently, per our
industry channel checks, the consumption of cigarettes forms just 15% of the total
tobacco consumed in India, despite 48% of Indian adult males consuming tobacco.
Consequently, the per capita consumption of cigarettes is one-tenth of the global
average. The remaining tobacco consumption is in the form of bidis and chewable
tobacco. We expect this difference to narrow. Coupled with growing income levels
across both urban and rural areas, this could drive long-term growth of cigarettes and
long-term migration of consumers from alternative forms to cigarettes. As discussed in
Figure 140, we believe there is c3-4% volume growth potential for cigarettes solely due
to the transition from bidis to cigarettes over the next three years
Relative demand inelasticity of tobacco consumption: Tobacco consumption is a
relatively demand-inelastic product, thus similar quantities continue to be consumed
despite tax/price increases. That said, cigarette consumers in India are relatively price
sensitive compared to elsewhere, owing to the availability of substitutes, especially bidis.
Thus, while there may not be a significant shift in consumption from smoking tobacco
towards chewable tobaccos, there could be a migration of cigarette consumers towards
lower-priced cigarettes or bidis and then a gradual reversal back to cigarettes. This may
go some way to explaining why ITCs last 10-year volume CAGR has been strong at
3.3%, despite brief temporary fluctuations in volume growth.
Robust distribution network: ITC has a strong distribution network, with the ability to
directly service 100,000 markets and nearly two million retail outlets, and indirectly
reaching out to eight million outlets.
FIGURE 138
Indian tobacco industry is still skewed towards smokeless category; this is likely to see steady conversion to smoking
Khaini
33%
Gutkha
24%
Betel quid
18%
Others
25%
Bidi /
Others
65%
Cigarette
35%
Smoking
32%
Smokeless
68%

Source: Global Adult Tobacco Survey India (2009-2010), Barclays Research
17 October 2013 65
FIGURE 139
Gutkha ban across the country could result in a consumer
shift towards the smoked category

FIGURE 140
Cigarette volume growth could increase by a further 3-4%
on account of the shift from bidis
Ban State Ban State
Jul-05 Mizoram Nov-12 Andaman and Nicobar
Oct-05 Goa Jan-13 Odisha
Apr-12 Madhya Pradesh Jan-13 Uttarakhand
May-12 Kerala Jan-13 Andhra Pradesh
May-12 Bihar Mar-13 Assam
Jul-12 Himachal Pradesh Apr-13 Uttar Pradesh
Jul-12 Rajasthan May-13 West Bengal
Jul-12 Maharashtra May-13 Tamil Nadu
Jul-12 Chhattisgarh May-13 Karnataka
Jul-12 Jharkhand Arunachal Pradesh
Aug-12 Haryana Chandigarh
Aug-12 Punjab Manipur
Sep-12 Delhi Nagaland
Sep-12 Gujarat
Sep-12 Sikkim

100.0
91.2
57.0
8.8
6.6
63.6
0
20
40
60
80
100
120
2012 2015 2012 2015 2015
Bidis
Cigarettes
3% volume
growth decline
Could result in a 4%
volume growth even if
only 75% of consumers
shift to cigarettes

Source: Barclays Research Note: Volume base of bidis indexed at 100.
Source: Barclays Research estimates
Greater measures to curb illicit trade
High taxation on cigarettes coupled with increasing prices and the ban on gutkha has led to
a sharp increase in the illicit trade of tobacco within the country. Our recent discussions
with companies and industry sources suggest increasing concerns, and steps are being
taken to curb this practice. We believe that as the industry evolves, there could be a pickup
in these curbs thus favouring the organized players (where ITC has a 75% market share).
FIGURE 141
Over 2003-07 the legal sales of cigarettes decreased while
illicit trades saw a sharp ramp up

FIGURE 142
resulting in a sharp increase in penetration levels of the
illicit cigarette
2%
0% 0%
-1%
-3%
15%
14%
14%
14%
17%
-5%
0%
5%
10%
15%
20%
2003 2004 2005 2006 2007
Legal sales Illicit trade

14 16 18 21 24 28
12.9%
14.3%
16.0%
17.7%
19.9%
23.1%
10%
15%
20%
25%
10
12
14
16
18
20
22
24
26
28
30
2003 2004 2005 2006 2007 2008
B
i
l
l
i
o
n

s
t
i
c
k
s
Illicit trade Penetration

Source: Health Bridge, Barclays Research Source: Health Bridge, Barclays Research

17 October 2013 66
Indian consumption vs global average consumption trends
We believe there is headroom for cigarette consumption growth in India, both on account
of the low penetration levels compared to other developed (and developing economies) as
well as significant potential for customer upgradation. As shown in Figures 143 and 144,
while Indias per capita tobacco consumption is at c60% of the world levels, cigarette
consumption is only c11% of world average. We believe that increasing income levels and
higher urbanisation should play a critical role in bridging this gap.
The difference is further highlighted by the fact that while India constitutes just 1.8% of
global cigarette consumption, it accounts for over 90% of global smokeless tobacco
consumption. We would expect this difference to narrow as more people switch to the
smoked category.

FIGURE 143
Annual per capita consumption of tobacco (grams)

1145
1256
438
461 468
0
200
400
600
800
1000
1200
1400
China USA Pakistan Nepal India
World average: 743
India is c60% of world's average

Note: Data as of FY13.
Source: ITC, Barclays Research

FIGURE 144
Annual per capita consumption of cigarettes (number of sticks)
2786
1841
1711
1028
468
420
154
96
0
500
1000
1500
2000
2500
3000
R
u
s
s
i
a
j
a
p
a
n
C
h
i
n
a
U
S
A
P
a
k
i
s
t
a
n
N
e
p
a
l
B
a
n
g
l
a
d
e
s
h
I
n
d
i
a
World average: 872
India is c11% of world's average

Note: Data as of FY13.
Source: ITC, Barclays Research

17 October 2013 67
Demographic factors supportive

FIGURE 145
The number of households in higher income category expected to increase sharply

91%
74%
41%
8%
22%
50%
2%
4%
9%
0%
20%
40%
60%
80%
100%
2004 2009 2015E

Note: LSM = Living Standards Measure, with 1 being the lowest standard of living category.
Source: HUL presentation (Sept 2013), Barclays Research
FIGURE 146
Indias urban population is growing faster than overall
levels
FIGURE 147
as reflected in increasing urbanisation levels
2.8%
2.3%
2.5%
2.0%
1.5%
1.1%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
FY91-01 FY01-08 FY08-30E
Urban annualized growth Overall annualized growth

220 290 340 590
25.7%
27.9%
29.4%
40.1%
15%
20%
25%
30%
35%
40%
45%
0
100
200
300
400
500
600
700
1991 2001 2008 2030
M
i
l
l
i
o
n
Urban Population Urbanization Rate

Source: McKinsey Global estimates, Barclays Research Source: McKinsey Global estimates, Barclays Research

FIGURE 148
Cigarette consumption globally has seen a sharp increase

10 20 50
100
300
600
1,000
1,686
2,150
3,262
4,453
5,328
5,711
5,884
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1
8
8
0
1
8
9
0
1
9
0
0
1
9
1
0
1
9
2
0
1
9
3
0
1
9
4
0
1
9
5
0
1
9
6
0
1
9
7
0
1
9
8
0
1
9
9
0
2
0
0
0
2
0
0
9
B
n

s
t
i
c
k
s
+100x

Source: Tobacco Atlas, Barclays Research
17 October 2013 68
Continued focus on EBIT growth
We believe ITCs key strength lies in its ability to keep EBIT growth levels strong and
insulated from the variations in cigarette demand. Over the last eight years, EBIT growth for
ITC has remained within a 15%-21% band despite volume growth varying sharply over the
same period from -3% to 8%. Managements continued focus on EBIT growth levels instead
of volumes stems from the strong pricing power ITC enjoys in the domestic market.

FIGURE 149
ITC strong EBIT growth levels maintained over the last eight years

Strong pricing power driven by high price inelasticity
ITC has been able to successfully increase its average realisations (ex VAT increases) over
the last 10 years through different cycles of the volume growth trend. We believe this is a
strong testament to its dominant presence in the cigarette market and also the price
inelasticity of its consumers.

FIGURE 150
ITC strong EBIT growth levels are driven by a consistent increase in ASP levels despite
variations in the demand (volume growth)


3%
7%
8%
7%
-1%
-2%
7%
-3%
7%
1%
6%
13%
18%
17%
15%
15%
18%
17%
20%
21%
40%
45%
50%
55%
60%
65%
-5%
0%
5%
10%
15%
20%
25%
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
Volume Growth (RHS) EBIT Growth EBIT Margin (RHS)
1,381 1,412 1,429 1,493 1,579 1,713 1,920 2,057 2,426 2,556 2,956
3.1%
7.1%
8.4%
7.1%
-0.7%
-2.5%
6.7%
-2.8%
6.5%
1.0%
-4%
-2%
0%
2%
4%
6%
8%
10%
1,000
1,500
2,000
2,500
3,000
3,500
I
N
R

ASP (ex VAT) / '000 sticks Volume Growth (RHS)
17 October 2013 69
has resulted in a strong margin trajectory; expected to continue
Driven by the strong pricing increases, ITCs Cigarettes segment has witnessed a steady rise
in its margins from c47.8% in FY03 to 59.6% in FY13. Despite a relative slowdown in the
discretionary segments, we expect pricing to remain favourable for ITC and forecast a
14.2% ASP CAGR over the next three years. We also expect margins to further increase by
590bps over the next three years to 65.5% in FY16E.

FIGURE 151
ITC we expect EBIT margins to continue to expand

Increase in taxes unlikely to make a meaningful dent in demand
Increase in the ASP ahead of the increase in VAT
ITCs strong pricing power, driven by the relative price inelasticity of its cigarette consumers,
has enabled the company to absorb the VAT increases (from Rs0.24/stick in FY09 to
Rs0.54/stick in FY13) quite effectively. In fact, as shown in Figure 152, over the years ITC
has been able to raise its ASP much ahead of the increase in the taxes. ASP ex VAT (per 000
sticks) has increased by cRs1,377 over the last six years versus a corresponding increase of
Rs539 in the taxes.

FIGURE 152
ITC overall ASP has been growing ahead of the tax increases


1,381 1,412 1,429 1,493 1,579 1,713 1,920 2,057 2,426 2,556 2,956 3,422 3,835 4,262
47.8%48.0%
49.8%
52.1%
53.8%
54.8%
55.4%
53.7%
54.5%
56.1%
59.6%
63.9%
64.6%
65.5%
40%
45%
50%
55%
60%
65%
70%
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

ASP (ex VAT) / '000 sticks EBIT Margin (RHS)
1,381 1,412 1,429 1,493
1,579
1,713
1,920
2,057
2,426
2,556
2,956
207
240
267
352
435
539
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
ASP (ex VAT) / '000 sticks VAT / '000 sticks
17 October 2013 70
Cigarettes are taxed disproportionately vs other forms of tobacco
FIGURE 153
Taxation structure across different cigarette lengths

FIGURE 154
Cigarettes are the highest taxed category across all tobacco
segments
69
140
210
280
300
0
50
100
150
200
250
300
350
<65 mm <70 mm < 80 mm <85 mm >85 mm
b
p
s

Bidis Cigarettes Chewing Tobacco
Rs14/1000
sticks
Rs 1,700/kg
Rs 100/kg

Disproportionate increase in VAT is counterproductive for states
As discussed earlier, we believe ITC enjoys significant pricing power to ensure that steady
increases in VAT are absorbed in the price increases which are in turn passed on to
consumers without any disruptive threat to the volumes over the long-term. While most of
the states are increasing VAT steadily, we believe a more credible threat to volumes would
be from a disproportionate increase in VAT on tobacco, a situation which in our view is
highly unlikely. A disproportionate tax increase could turn out to have a twin negative
impact:
Increase in illicit trade as consumers tend to shift to contrabands and inferior tobacco
products on account of the sharp increase in the taxes.
Substantial differences in local taxes between neighbouring states could result in
rampant interstate smuggling, leading to a loss of revenue for the government.
Case Study: VAT increased to 50% from 17.5% in Uttar Pradesh (Jul-12)
Impact
Decrease in volumes: Taxable monthly sales of cigarettes decreased from
c.621mn in 1QFY13 to c.280mn in 3QFY13 (55% decline).
Consumption shift to neighbouring states: Neighbouring Delhis tax collections
for cigarettes almost doubled in the 10 months following the VAT increase.
Flat revenue collections: Despite the significant hike in the tax rate to 50%,
cigarette VAT collections for UP remained flat.
Increase in illicit trade: Industry experts suggest that there was a sharp increase in
the consumption of contraband and inferior tobacco products.
Result
VAT was rolled back to 25% in May 2013, which as per industry officials, is
expected to result in tax buoyancy
Source: Retailers Association of India, Barclays Research
17 October 2013 71
FIGURE 155
Current VAT status across different states in India
State Current VAT rate Remarks
Assam 25% Increased from 20%
Gujarat 30% Increased from 25%
Himachal Pradesh 36% Doubled from 18% (VAT for bidis increased to 22% from 11%)
Jammu & Kashmir 40% Increased from 30%
Jharkhand 20% Increased from 14%
Kerala 20% Increased from 15%
Maharashtra 25% Increased from 20%
Punjab 55% Increased from 22.55%
Rajasthan 65% Increased from 50%
Uttar Pradesh 25% Halved from 50% (within 10 months after it was increased sharply from 17.5%)
West Bengal 25% Increased from 20%
Affordability of Cigarettes has actually improved in India
FIGURE 156
Affordability of cigarettes actually improved in the
subcontinent in the last 10 years

FIGURE 157
Driven in part by the high salary increases (average of 12.2%
in the last 10 years)

12% 14% 14% 14% 15% 13% 7% 12% 13% 11% 10%
4.8%
4.2%4.3%
4.8%
5.9%
8.2%
5.2%
11.9%
8.3%
7.8%
7.6%
0%
2%
4%
6%
8%
10%
12%
14%
0%
4%
8%
12%
16%
20%
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
Salary Increase % CPI Inflation
Average 12.2% salary
increase in the last 10 years

Source: Tobacco World Atlas (2012), Barclays Research Source: Financial Times, Barclays Research
ITC vs global peers a comparison; Better than peer growth
The strong demand potential in India, along with low consumer price elasticity, forms the
backbone of ITCs strong performance on both cigarette revenues and margins over the last
three years. As discussed above, we believe this potential is likely to be sustained over the
next two to three years. In Figure 158, we highlight that ITC has one of the highest
revenue/EPS CAGRs among its global tobacco peers (FY13-16E). As shown in Figure 159,
this is driven by a volume growth expectation of 2.5% over the next three years, which
compares to the global peer average of -2.2%
-4%
9%
-48%
-35%
-18%
-60%
-40%
-20%
0%
20%
40%
A
m
e
r
i
c
a
s
E
a
s
t
e
r
n

M
e
d
i
t
.
E
u
r
o
p
e
S
o
u
t
h

E
a
s
t

A
s
i
a
W
e
s
t
e
r
n

P
a
c
i
f
i
c
Cigarettes became
More Affordable
Cigarettes became
Less Affordable
17 October 2013 72
FIGURE 158
ITC has best in class growth forecasts (across both revenue & EPS levels) as compared to global peers

FIGURE 159
as reflected in the strong volume/ASP growth expectations vs peers

EUROPEAN BEVERAGES & TOBACCO
Simon Hales
+44 (0)20 3555 2107
simon.hales@barclays.com
Barclays, London

BAT has a 30.7% shareholding
in ITC, representing 12% of the
BAT current enterprise value

While BAT has limited
management influence within
ITC, the Indian business is one
of its key associate investments
The British American Tobacco (BAT) perspective w.r.t ITC
ITC contributed 237m to the BAT (BATS.L; OW; PT GBp3950) P&L in 2012, equivalent
to 5.4% of group-wide profit after tax for BAT. At its recent September 2013 investor
seminar, BAT reiterated its commitment to its core associate investments (Reynolds
American and ITC), indicating that it may be interested in increasing its stake if Indian
foreign ownership laws (which currently limit BATs shareholding to no more than
31%) were to change.
Looking ahead, with many of BATs core developed and emerging markets
experiencing declining levels of per capita cigarette consumption, the growth
attractions of an Indian business which is still at a relatively early stage of
development are likely to become even more attractive.
Consequently, we expect the rapidly growing ITC business to become an increasingly
important contributor to BATs group earnings and valuation.

18.3%
1.9%
1.2%
8.7%
2.8%
0.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
ITC BAT Imperial
Tobacco
JTI Philip
Morris
RAI
Average of 3.3%
Revenue CAGR (FY13-16E)
19.7%
6.9%
4.8%
24.6%
8.2%
7.1%
0%
5%
10%
15%
20%
25%
30%
ITC BAT Imperial
Tobacco
JTI Philip
Morris
RAI
Average of 10.8%
EPS CAGR (FY13-16E)
2.5%
-1.3%
-2.2%
-4.2%
-1.0%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
ITC BAT Imperial JTI JTI Int'l
Average of -2.2%
Volume CAGR (FY13-16E)
14.2%
5.1%
3.9%
5.4%
4.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
ITC BAT Imperial JTI JTI Int'l
Average of 4.8%
ASP CAGR (FY13-16E)
17 October 2013 73
FIGURE 160
ITC has one of the best returns vs global cigarette players

FIGURE 161
and stable returns with one of the lowest stdev
36%
21%
14%
17%
47%
15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
ITC BAT Imperial
Tobacco
JTI Philip
Morris
RAI
ROIC - FY14E

1.6% 1.7%
1.1%
4.4%
7.4%
2.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
ITC BAT Imperial
Tobacco
JTI Philip
Morris
RAI
Stdev - ROIC

FIGURE 162
justifying the higher valuation levels for ITC and placing it attractively on our valuation screener

Note: ROIC Return on Invested Capital; Standard Deviation is over FY10-13.

FIGURE 163
Valuation comparison between ITC and key global tobacco players

Notes: British American Tobacco (BAT) and Imperial Tobacco (IMT) covered by Barclays Research analyst Simon Hales (European Beverages & Tobacco); Japan
Tobacco Inc (JTI) covered by Takayuki Hayano (Japan Food, Beverages & Tobacco); Philip Morris (PM) and Reynolds American (RAI) covered by Michael Branca (U.S.
Beverages & Tobacco). Prices as of the market close 14 October 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. For full disclosures on
each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com
Source: Company reports, Barclays Research estimates
ITC
BAT
Imperial
Tobacco
JTI
Philip
Morris
RAI
0
5
10
15
20
25
30
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
EPS CAGR (FY13-16E)
ITC
BAT
Imperial
Tobacco
JTI
Philip
Morris
RAI
0
2
4
6
8
10
12
14
16
18
20
0% 5% 10% 15% 20%
E
V
/
E
B
I
T
D
A
x

(
F
Y
1
5
E
)
EBTIDA CAGR (FY13-16E)
Current
Price
12-mth
TP
Pot. Up
Mkt
Cap
Currency Rating Down ($ bn) Sales EBIT EPS P/E
EV/
EBITDA
P/B ROE
2-yr
PEG
ITC Neutral INR OW 340 409 20% 44.2 18.3% 19.7% 19.7% 26.0 17.7 8.2 32% 1.3
BAT Neutral GBp OW 3,233 3,950 22% 100.0 1.9% 5.1% 6.9% 14.1 9.7 7.8 55% 2.1
IMT Neutral GBp EW 2,210 2,600 18% 35.1 1.2% 23.1% 4.8% 9.6 9.4 3.5 36% 2.0
JTI Neutral JPY OW 3,500 4,050 16% 64.7 8.7% 20.1% 24.6% 11.6 7.0 2.7 23% 0.5
PM Positive USD OW 85 98 15% 138.7 2.8% 3.9% 8.2% 14.4 10.6 na na 1.8
RAI Positive USD EW 51 44 -13% 28.3 0.1% 4.4% 7.1% 14.9 10.0 5.9 39% 2.1
Company
Industry
view
(FY13E - FY16E CAGR) FY 2015 E
Local Currency
17 October 2013 74
FMCG (21% of FY13 revenues): In for the long run
The FMCG business of ITC has registered strong c20%+ growth in revenues for the last five
years, resulting in its contribution to group revenues going up to 21% in FY13 (from 2% in
FY03). With 22.7% revenue CAGR over the last five years for its FMCG business, ITC has
bettered the industry growth rate of 17%. More impressively, it has been able to reduce EBIT
losses sharply and breakeven for the first time in 4QFY13 (versus an EBIT loss of Rs4.8bn in
FY09).
We view positively ITCs strategy to diversify into other faster growing segments and to
focus on garnering market share & brand equity ahead of the margins (as leeway is
provided by the high profitability of the cigarette business). We believe that with one of the
highest revenue growth CAGRs within ITC, and coming off such a low base, the FMCG
segment should be a strong contributor to the incremental operating profit for ITC in future.
FIGURE 164
ITC strong revenue growth levels continue in FMCG

FIGURE 165
along with a sharp reduction in EBIT losses
12.0 13.4 13.7 16.2 14.7 16.9 17.8 20.4 17.4
19.6%
27.0%
24.4%
23.2%23.0%
26.1%
30.1%
26.0%
18.4%
0%
5%
10%
15%
20%
25%
30%
35%
5
10
15
20
25
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
I
N
R

B
n
Net Revenues Net Revenue Growth

-0.8 -0.6 -0.5
-0.2
-0.4 -0.3
-0.2
0.1
-0.2
-6.4%
-4.2%
-3.4%
-1.0%
-2.6%
-1.8%
-1.3%
0.6%
-1.1%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
I
N
R

B
n
EBIT EBIT Margins

FIGURE 166
ITC key brands and segments in the FMCG segment
Category Segment Brand Name Comments
Beauty & Personal Care
Bath & Shower Vivel, Olive, Fiama Da Wills, Superia Vivel: brand size of Rs2bn+
Deodorants &
Fragrances
Engage, Ignite, Aqua
Hair Care Ultrapro, Vivel, Fiama Di Willa,
Skin Care Vivel, Fiama Di Wills
Home Care Agarbattis Mangaldeep, Aim, I kno
Packaged Food
Bakery Sunfeast #3 in biscuits; strong market position
Packaged Foods
Aashirvaad, Kitchens of India
Aashirvad: #1 brand in packaged atta (brand
size: Rs20bn+)
Kitchens of India: Strong brand position; still
ramping up
Pasta
Sunfeast
Ne w category; launched in 2010 (brand size:
Rs20bn+)
Snack Bars Sunfeast, Bingo #2 market position in Bingo
Sweet / Savoury Snacks Mint-O
Management aims to increase
its FMCG revenue base to
Rs150bn by FY18, translating
into a CAGR of 16%, which we
believe is achievable given
strong category prospects &
ITCs dominant positioning,
and thus we forecast revenue
CAGR of 21.4% over the next
three years.
17 October 2013 75
Ample long-term drivers in place
Strong supply chain: ITC maintains strong control over the supply chain dynamics,
including raw material costs. We believe ITCs e-Choupal initiative has additionally
helped expand its presence and dominance in rural markets
Lessons learnt across different segments a big advantage: We believe ITCs expertise
in diverse areas like sourcing raw materials from farmers through the e-Choupal
network and sourcing popular recipes from the hotel chefs, provides a strong advantage
vs peers as it enables the company to take lessons learnt from across different segments
and then leverage it in Foods.
Significant headroom for growth in key segments: The packaged atta (flour) market
still constitutes just 3% of the overall flour market, suggesting strong growth potential.
We believe ITC, being the #1 flour brand (revenues of Rs20bn+ in FY13) will be a
significant beneficiary of this shift.
Management goal of Rs150bn revenues by FY18: Management has highlighted its aim
to increase FMCG revenue base to Rs150bn by FY18, which translates into a 16% CAGR
(over FY13-18E). We believe this is achievable given the strong category prospects &
ITCs dominant positioning, and we forecast revenue CAGR of 21.4% over FY13-16E.

FIGURE 167
ITC FMCG segment revenue growth expected to remain strong

We expect revenue CAGR of
21.4% over FY13-16E

FIGURE 168
along with a sharp expansion in operating margins

We expect the margin
expansion to continue over the
next few years

while volume growth
pressures should be partially
offset by improving product
mix

Source for both charts: Company data, Barclays Research estimates
25 30 36 45 55 70 84 102 125
47.2%
19.8%
20.9%
23.1%
23.6%
26.4%
20.1%
22.1% 22.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
20
40
60
80
100
120
140
I
N
R

B
n

FY08 - 13 CAGR: 22.7% FY13 - 16E: 21.4%
-1.7 -2.0 -2.6 -4.8 -3.5 -3.0 -2.0 -0.8 -0.1
1.6 3.3
-17%
-12%
-11%
-16%
-10%
-7%
-4%
-1%
-0%
2%
3%
-20%
-15%
-10%
-5%
0%
5%
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
I
N
R

B
n
EBIT EBIT Margin
17 October 2013 76
Agri Business (21% of FY13 revenues): A market leader
The Agri Business for ITC has seen strong revenue growth in the last three years, and
reported 26.4% growth in FY13 compared to just 0.4% in FY10. This business segment
includes Leaf Tobacco and Agri Commodities, with ITC placed strongly in both segments at
#1 and #2 market share positions in India respectively.
While overall global leaf tobacco crop output saw a decline in 2012, we expect ITCs strong
growth to sustain, driven by value added products (through its cultivation of flavourful flue-
cured and growth of superior quality tobaccos in India) leading to better realisation levels.
On the commodities side, we see ITCs e-Choupal as a sustainable competitive advantage as
it links more than 40,000 villages and serviced four million farmers. This helps in the direct
procurement of agricultural products like soya, wheat, potato, coffee and other Agri
commodities, with farmers able to directly negotiate with ITC. In our view, there is still
significant potential to scale up the e-Choupal infrastructure to cover additional villages and
farmers.

FIGURE 169
ITC Agri Business growth rerating expected to sustain


FIGURE 170
with margins trending upwards on increasing volumes & improving product mix

39 38 39 47 57 72 89 111 145
10.5%
-0.6%
0.4%
22.9%
19.9%
26.4%
23.7%
25.0%
30.0%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0
20
40
60
80
100
120
140
160
I
N
R

B
n
FY08 - 13 CAGR: 13.2% FY13 - 16E: 26.2%
0.9 1.2 1.3 2.6 4.4 5.7 6.4 7.3 8.5 12.8 18.8
3.4%
3.5%
3.3%
6.7%
11.3%
11.9%
11.3%
10.2%
9.5%
11.5%
13.0%
0%
2%
4%
6%
8%
10%
12%
14%
-
2
4
6
8
10
12
14
16
18
20
I
N
R

B
n
EBIT EBIT Margin
Revenue CAGR of 26%
forecast over the next three
years vs 13% in the last five
years
17 October 2013 77
Ample levers of growth in the rural economy
FIGURE 171
India % increase in monthly per capita expenditure; rural
has overtaken urban in the last three years

FIGURE 172
FMCG rural consumption growth has outpaced urban
growth in the last three years
7.3% 7.5%
13.2%
19.2%
14.0%
11.8%
13.9%
17.2%
0%
5%
10%
15%
20%
25%
1987-94 1993-05 2004-10 2009-12
Rural Urban

3%
10%
13%
11%
16%
-8%
1%
14%
18%
14%
-10%
-5%
0%
5%
10%
15%
20%
Urban Rural

Source: NSSO, Accenture, Barclays Research Source: NSSO, Accenture, Barclays Research

FIGURE 173
Strong growth levels in the Minimum Support Prices (MSPs)

Strong increment levels across
minimum support prices in key
agricultural crops have helped
raise overall income levels for
the rural segment

but we see some tapering of
growth levels in FY14; one-third
of the crop categories have
seen no increase in MSPs

Note: 3yr CAGR is for FY11-14.
Source: Commission for Agricultural Costs and Prices, Barclays Research

Crop FY11 FY12 FY13 FY14 3 yr CAGR FY14 y/y
Paddy 1,000 1,080 1,250 1,310 9% 5%
Wheat 1,100 1,120 1,285 1,350 7% 5%
Jowar 880 980 1,500 1,500 19% 0%
Bajra 880 980 1,175 1,250 12% 6%
Maize 880 980 1,175 1,310 14% 11%
Soybean 1,400 1,650 2,200 2,500 21% 14%
Cotton 2,500 2,800 3,600 3,700 14% 3%
Groundnut 2,300 2,700 3,700 4,000 20% 8%
Sunflower 2,350 2,800 3,700 3,700 16% 0%
Urad 2,900 3,300 4,300 4,300 14% 0%
Seseaum 2,900 3,400 4,200 4,500 16% 7%
Niger Seed 2,450 2,900 3,500 3,500 13% 0%
Ragi 965 1,050 1,500 1,500 16% 0%
Minimum Support Prices (INR / quintal)
17 October 2013 78
Hotels (3% of FY13 revenues): Strong positioning amidst a
challenging environment
The Hotels segment constituted c3% of ITCs revenues and c1% of its operating profit in
FY13. The company has a strong position in the premium segment, along with its Fortune
brand catering to the mid-market to upscale segment in India (a total of 69 hotels, with
three hotels slated for commissioning in FY14). FY13 was a challenging year for the hotel
industry, and this was reflected in the muted 7% revenue growth for ITCs Hotels segment
along with a sharp decline in the margins. While we expect industry prospects to remain
challenging, we believe that ITCs Hotels segment should continue to outperform its peers
on the back of a strong portfolio, brand name and distribution reach.
Discretionary slowdown to impact the industry: As per management, the domestic
tourism industry remained sluggish in FY13 against the backdrop of a weak global and
domestic economic environment. While growth in foreign tourist arrivals slowed to
2.8% in FY13 (vs 9.9% in FY12), domestic air travel recorded a contraction. While we
expect the number of foreign tourists to pick up in FY14, partly assisted by the weaker
INR, we also believe domestic demand may continue to remain under pressure.
but higher margin structure vs peers: We believe that within the Hotels space, ITC
is strongly placed with a higher margin structure vs peers and a strong asset turnover
which should help it reap returns without significant capital expenditure pressures.
and increasing focus on managed hotels a positive: As part of its expansion plan,
ITC aims to add several managed hotels to its brand portfolio. This was highlighted by
its recent agreement with RP Group wherein ITC would manage RPs properties in India
& Dubai under the 5-star 'WelcomHotel' and mid-market to upscale Fortune brands.
We believe this is a good strategy that allows ITC to leverage its expertise and the
established brand to expand reach without incurring significant capital expenditure.
Revenue growth levels for the Hotels segment have remained rather subdued in the last five
years with just a 1.2% CAGR. We believe this was primarily driven by a weak global
environment during this period, with a steep decline in FY09/FY10 revenue growth and
then just 0.5% growth in FY12. We expect some stability to return to these growth levels
driven by ITCs leadership presence and forecast revenue CAGR for the Hotels segment of
10.1% over the next three years.

FIGURE 174
ITC Hotels revenue growth


10 9 9 10 10 11 12 13 14
11.7%
-7.6%
-9.1%
17.7%
0.5%
6.8%
8.9%
10.3%
11.2%
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
2
4
6
8
10
12
14
16
I
N
R

B
n
N t R Y/Y G th
FY08 - 13 CAGR: 1.2% FY13 - 16E: 10.1%
17 October 2013 79
Focus on the premium segment to drive margins
ITC is a well established brand within India and is strongly positioned in the business
class/premium category. This was strengthened further with the commissioning of ITC
Grand Chola (Chennai) in FY13 in the super premium category with a room capacity of 522.
In terms of operating margins, while ITCs Hotel segment continued to lead its peers in
FY13, there was also a sharp contraction of c15pps. This was driven by a relatively weak
pricing scenario along with the gestation costs relating to ITC Grand Chola (commenced in
September 2012). We forecast a recovery in OPM from these dipped levels over the next 2-3
years driven by a ramp up in the premium hotels.

FIGURE 175
ITC margin trends improving for the Hotels segment

Best in the class return metrics; strong asset turnover
We note that ITC has some of the best return metrics amongst its peers, which we believe is
primarily driven by its focus on the premium and the business class segments. Given the
high capital intensive nature of the business, we believe the strong cash position at ITC puts
it in a strong position. In addition, notwithstanding the growth decline in foreign tourists
and domestic air travel (in FY13), we look positively on the fact that ITC is committed to
investing in the luxury segment (i.e. Kolkata, Classic Golf Resort near Gurgaon).
FIGURE 176
ITC Hotel segment EBIT margins better than peers

FIGURE 177
along with robust asset turnover ratios
26.6%
27.8%
12.8%
11.7%
8.6%
6.8%
22.6%
23.4%
11.3%
0%
5%
10%
15%
20%
25%
30%
2011 2012 2013
ITC Indian Hotels Asian Hotels

0.32x
0.34x
0.29x
0.32x
0.37x
0.40x
0.10x 0.10x
0.12x
0.0x
0.1x
0.2x
0.3x
0.4x
0.5x
2011 2012 2013
ITC Indian Hotels Asian Hotels

Source: Bloomberg, Company data, Barclays Research Source: Bloomberg, Company data, Barclays Research

2.6 3.5 4.1 3.2 2.2 2.7 2.8 1.4 0.7 1.8 2.6
35.9%
38.7%
40.6%
33.8%
25.5%
26.6%
27.8%
12.8%
6.2%
14.0%
18.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
-
1
2
3
4
5
I
N
R

B
n
EBIT EBIT Margin
17 October 2013 80
Paperboards, Paper & Packaging (13% of FY13 revenues):
Dominant presence in a value added segment
Growth levels for ITC in this segment have decreased sharply in the last few years to 8% in
FY13 (from 17.4% in FY10), primarily due to: 1) a weak economic environment in the
developed countries of Europe and the US (global demand contracted by 0.5% in FY13) and
2) increased influx of supply from China and Indonesia, after the US and EU imposed anti-
dumping duties against import of paper & paperboard from these countries. Domestic
demand also recorded a slowdown in FY13, with 5.9% y/y growth vs 6.1% in FY12. Key
factors affecting demand in this segment include:
Higher demand for branded packaged foods in the FMCG and Pharma sectors; along
with an increasing number of product categories catering to aspirational lifestyles;
Increasing role of packaging for brand awareness, especially with the advent of
modern retail (organised retail penetration still low at 6%in FY13, suggesting high
growth potential);
Government educational initiatives like Sarva Shiksha Abhiyan & Right of Children to
free and compulsory education, coupled with rising literacy levels, should continue to
fuel the paper segment (expected to grow at c7%p.a over the medium-term); and
An increasing number of environmental initiatives, such as paper-free billing, paper-
free checkins at the airports/railways etc., act as an offsetting factor and could lead to a
structural decline in the long run.
We believe ITC is strongly placed through its focus on the value added segment in the
paperboard category (where it is the market leader) which we expect to grow at 12% CAGR
over the next few years (compared to the domestic industry which we expect to grow at
7.5% CAGR). As such, we forecast revenues for the Paperboards, Paper & Packaging
segment to grow at a CAGR of 13.6% over the next three years, which compares to a CAGR
of 14.4% over the last five years.

FIGURE 178
ITC Paperboards, Paper & Packaging segment revenue growth levels to recover from
FY13 levels and grow at 13.6% over FY13-16E


22 26 31 35 39 42 47 54 62
12.9%
22.7%
17.4%
12.8%
11.9%
8.0%
11.3%
14.0%
15.5%
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
70
I
N
R

B
n
FY08 - 13 CAGR: 14.4% FY13 - 16E: 13.6%
17 October 2013 81

FIGURE 179
and margins to remain broadly stable

Asset turnover to improve
ITC has seen a sharp increase in the capital expenditure over the last two years, and
incurred cRs12.8bn on capacity addition. From Figure 180, we note that while the asset
turnover improved sharply from 0.58x in FY08 to 0.81x in FY12 (leveraging on the
significant capex made in FY08 / FY09), there has been some moderation off late. We
expect the significant capacity addition during the last two years to follow a similar trend
leading to an improvement in the asset turnover over the next 2-3 years.

FIGURE 180
ITC capital expenditure and asset turnover for the paperboard segment


3.5 4.2 4.5 5.1 6.8 8.2 9.4 9.6 10.0 11.8 13.7
20.4%
21.8%
21.0%
19.2%
22.0%
23.4%
23.9%
22.8%
21.2%
22.0% 22.0%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
-
2
4
6
8
10
12
14
16
I
N
R

B
n
EBIT EBIT Margin
4.7 1.8 1.3 4.7 8.9 5.8 2.1 2.5 5.9 6.9
0.6x
0.7x
0.77x
0.66x
0.58x
0.63x
0.77x
0.83x
0.81x
0.77x
0.0x
0.1x
0.2x
0.3x
0.4x
0.5x
0.6x
0.7x
0.8x
0.9x
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
I
N
R

B
n
Capital Expenditure Asset Turnover (RHS)
17 October 2013 82
Business review: Strong balance sheet
Operating cash flows remain strong
ITC has one of the strongest operating cash flow (OCF) trajectories within our coverage
universe and delivered 18.2% OCF CAGR over the last five years. We expect this to
strengthen on continued high profitability within the cigarette business, along with
improving fundamentals in the FMCG and Hotels segments, with an OCF CAGR of 21.4%
over the next three years.

FIGURE 181
ITC strong operating cash flow trajectory

Gearing levels provide sufficient headroom for investments
ITC has one of the lowest gearing levels within our coverage which gives us comfort on any
potential high capital investments in the near to medium term.

FIGURE 182
ITC low gearing levels provide comfort on any potential high capex in the medium-term


34 40 47 66 75 81 93 119 139 167
27.8%
29.0%
29.9%
36.4%
35.3%
32.7%
31.5%
34.8%
34.4%
34.0%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
0
20
40
60
80
100
120
140
160
180
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
2
0
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Operating CF OCF as a % Of sales
FY08 - 13E CAGR: 18.2% FY13 - 16E: 21.4%
2.1 1.8 1.1 0.9 0.8 0.7 0.7 0.7 0.7
1.8%
1.3%
0.7%
0.6%
0.4%
0.3%
0.2%
0.2%
0.2%
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
0.0
0.5
1.0
1.5
2.0
2.5
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Total Debt Gearing
17 October 2013 83
Positive working capital trends expected to sustain
With a large difference between the number of receivable & payable days, ITC appears to
have favourable working capital arrangements. Its strong supply chain network, along with
raw material sourcing from farmers through the e-Choupal initiative, has helped it keep
working capital under check.
While the steady increase in the FMCG business contribution to overall group revenues
coupled with increasing modern retail contribution increases working capital requirements,
especially as ITC is focusing strongly on the FMCG segment, we believe it should be able to
offset this through significant cross segment synergies such as common sourcing through
the e-Choupal network, cross selling of its FMCG products in the hotels etc.
FIGURE 183
ITC favourable working capital arrangements with large
difference in days receivable/payable

FIGURE 184
ITC working capital changes
16
178
17
179
15
62
15
54
14
50
0
20
40
60
80
100
120
140
160
180
200
Days Receivable Days Payable
2009 2010 2011 2012 2013


-4 -2
5 1
-7 -13 -5 -8 -12
3%
1%
-3%
-0%
3%
4%
1%
2%
2%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-15.0
-10.0
-5.0
0.0
5.0
10.0
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
WCC WCC as a % Of sales
17 October 2013 84
Returns analysis; Strong improvement likely

FIGURE 185
ITC EBITDA margins to continue to improve gradually


FIGURE 186
ITC ROE expected to remain high

FIGURE 187
ITC sharp upward trend in ROIC expected to continue,
increasing by c600bps by FY16E

FIGURE 188
ITC CROCI expected to improve by c40bps over next three
years


34.0%
32.5%
31.6%
31.1%
33.5%
35.0%
35.7%
35.9%
36.2%
36.4% 36.5%
-200
-150
-100
-50
0
50
100
150
200
250
300
25%
27%
29%
31%
33%
35%
37%
39%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
25.9% 25.9%
23.8%
28.1%
31.3%
32.8% 33.3%
32.2%
31.7%
31.5%
20%
25%
30%
35%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
45.5%
26.9%
25.1%
30.6%
29.9%
31.7%
33.7%
35.6%
37.7%
39.8%
10%
20%
30%
40%
50%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
23.1%
23.0%
18.5%
21.5%
24.1%
25.2%
25.4%
25.0%
25.3%
25.8%
10%
20%
30%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
17 October 2013 85
Valuation: Expanded multiples to sustain on strong earnings
We value ITC using sum-of-the-parts (SOTP) as our primary methodology given it has
multiple business segments in varying phases of gestation and requiring capital investment.
While we use Price/Earnings multiples (FY15E) for most of ITCs segments, FMCG Others
(where ITC is in competition with peers such as HUL and Nestle, among others) has yet to
generate positive returns, thus we use Price/Sales as our valuation metric for this segment.
Multiples applied for different business segments include:
Cigarettes: 28x FY15E P/E multiple reflects the long-term positive volume growth
outlook, with pricing advantage and an oligopolistic industry in which ITC is the
dominant market leader.
FMCG Others: 3.5x FY15E P/S multiple is a 20% discount to our FMCG coverage group
(4.4x) to reflect ITCs relatively younger business compared to its peers.
Hotels: 15x FY15E P/E multiple is in-line with comparable peers in the Hotels segment
(Asian Hotels trade at around 14x on 1-year forward P/E).
Agri & Commodities: 15x FY15E P/E multiple is set at a c50% discount to the Cigarettes
business to reflect the lower returns profile, but still values the stable growth outlook for
this segment and the strategic advantage it provides ITC for its FMCG business.
Paperboards & Packaging: 15x FY15E P/E multiple is set at a c50% discount to the
Cigarettes business to reflect the lower returns profile, but still valuing the stable growth
outlook for this segment.
FIGURE 189
ITC SOTP valuation summary

Source: Barclays Research estimates
INR Mn Price Target (INR)
Segment Sales EBITDA PAT EPS (INR) Value per share
Cigarettes 189,165 124,849 87,394 11.0 P/E 28 307.8
FMCG Others 102,356 P/S 3.5 45.1
Hotels 12,906 2,065 1,445 0.2 P/E 15 2.7
Agri & commodities 111,379 15,593 10,915 1.4 P/E 15 20.6
Paperboards 53,752 16,126 11,288 1.4 P/E 15 21.3
Net Cash 91,986 11.6
Price Target (Sum of the Parts) 409.0
FY15E
Valuation
Methodology
Multiple
Our 12-month price target of
Rs409 implies potential upside
of 20% and a FY15E P/E of
31x, in-line with the average
FY15E P/E for the Indian
Consumer sector
17 October 2013 86
FIGURE 190
One-year forward PE ITC screens favourably vs our FMCG coverage group & the broader FMCG segment

Source: Company data, Bloomberg estimates (for non covered companies),
Thomson Reuters Datastream, Barclays Research estimates
Source: Company data, Bloomberg estimates (for non covered companies),
Thomson Reuters Datastream, Barclays Research estimates
FIGURE 191
One-year forward EV/EBITDA ITC screens favourably vs our FMCG coverage group & the broader FMCG segment

Source: Company data, Bloomberg estimates (for non covered companies), Thomson Reuters Datastream, Barclays Research estimates
FIGURE 192
ITC one-year forward P/E trading at the upper band of the long-term historical average, 1993-2013

Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
peers
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
10
15
20
25
30
10% 15% 20% 25%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
UNSP
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
10% 15% 20% 25% 30%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
0
5
10
15
20
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30
35
40
45
S
e
p
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P/E Average +1 SD -1 SD
17 October 2013 87
ITC has been one of the best value creators in the Indian market having outperformed the
broader BSE Sensex by c2500% over the past 20 years and delivered a 19% CAGR stock
return to investors over this period.
FIGURE 193
ITC has been a strong outperformer vs BSE Sensex over the last 20 years

Spike in ITCs premium to Sensex expected to sustain
ITC has enjoyed a significant re-rating over the last 10 years, in particular accelerating in the
aftermath of the financial crisis (i.e. since 2008/09). We believe this re-rating is likely to be
sustained as ITC continues to deliver strong earnings growth to investors. We forecast a 3-
year EPS CAGR of 19.7% vs the FMCG average of 15.9% over the same period.

FIGURE 194
One-year forward P/E multiple (x) ITC vs BSE Sensex

Source: Thomson Reuters Datastream, Bloomberg, Barclays Research

-5%
-13%
34%
68%
37%
-76%
57%
-7% -6%
-24%
20% 20%
-23%
-28%
34%
-35%
22%
40%
17%
13%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
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2
0
0
0
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0
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0
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9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3

Y
T
D
ITC vs. BSE
+64% +224% +405% ITC
-7%
+1% +454% Sensex
0
5
10
15
20
25
30
35
40
45
50
S
e
p
-
9
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S
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p
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1
2
S
e
p
-
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3
Sensex ITC
17 October 2013 88

FIGURE 195
ITC Bloomberg consensus revisions
Consensus EPS forecasts have
remained stable for ITC in the
past 12 months
250
270
290
310
330
350
370
390
10
11
12
13
14
M
a
r
-
1
2
J
u
n
-
1
2
S
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p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
FY14E EPS FY15E EPS Price (RHS)

Source: Bloomberg consensus estimates, Barclays Research
FIGURE 196
ITC Barclays Research forecasts vs Bloomberg consensus estimates

Source: Bloomberg consensus estimates, Barclays Research estimates
FIGURE 197
ITC historical EV/EBITDA trend (x)

FIGURE 198
ITC historical P/B trend (x)
4
6
8
10
12
14
16
18
20
M
a
r
-
0
7
S
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p
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M
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S
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p
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M
a
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S
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M
a
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S
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M
a
r
-
1
1
S
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p
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1
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M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
EV/EBITDA Average +1 SD -1 SD

20%
25%
30%
35%
40%
2
4
6
8
10
12
M
a
r
-
0
7
S
e
p
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0
7
M
a
r
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8
S
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a
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S
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p
-
1
3
P/B ROE (RHS)


INR Mn
Segment FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E
Revenues 340,252 405,450 490,712 344,957 402,126 466,123 -1% 1% 5%
Y/Y Growth -16.1% 19.2% 21.0% -14.9% 16.6% 15.9%
EBITDA 123,165 147,577 179,101 126,327 149,348 174,091 -3% -1% 3%
EBITDA Margin 36.2% 36.4% 36.5% 36.6% 37.1% 37.3% -42 -74 -85
PAT 85,951 103,953 127,084 88,011 104,922 122,226 -2% -1% 4%
EPS (INR) 10.8 13.1 16.0 11.1 13.3 15.4 -3% -1% 4%
EPS Growth -17.3% 20.9% 22.3% -14.9% 19.0% 16.5%
Barclays Forecasts Bloomberg Consensus Barclays vs Consensus
17 October 2013 89
Risks
Downside risks to our investment thesis and price target include:
Liquidity shift: The Indian Consumer sector has seen strong liquidity inflows since the
Global Financial Crisis arose in 2008. As a consequence, the sector has outperformed
the BSE Sensex index for most of this period, materially expanding the premium the
sector trades at versus the market. Any reversal of this trend, where we could see
liquidity flowing from defensives to cyclical, may lead to underperformance of the FMCG
segment, including ITC.
Risks to the cigarette business (contributes c.81% of ITCs operating profits),
primarily through legislative changes:
Plain packaging stipulation: Any potential moves by the government to stipulate
plain packaging for cigarette and tobacco products, coupled with increase in the size
of warnings and associated graphics, may be a psychological discouragement. One
peculiarity of the Indian cigarette market which could offset this is that the bulk of
consumers in India purchase cigarettes in the form of loose sticks.
Banning of loose stick sales: Could adversely affect our volume growth projections.
Enforcement could be a challenge owing to the millions of retail points of sale for
cigarettes in India.
Alternative cigarette variants: e-Cigarettes and patches could hurt current
projections, but is likely a long way from being a material concern to the tobacco
industry, in our view.
Economic slowdown affecting volume recovery expectations: Current volume
projections are based on medium- to long-term economic growth expectations,
especially in the rural economy. Any prolonged slowdown in the economy could
have long-term implications for the pricing structure and volume growth
expectations.
Delay in FMCG & hotel business profitability: A slower-than-expected ramp up in these
two segments and thus a delayed recovery could lead to a miss on our estimates.
Upside risks:
Better-than-anticipated improvements in FMCG Others & Hotels: Owing to strong
recovery in the economy could impact both these sectors positively and pose upside
risks to our profitability estimates.
Faster-than-expected volume ramp-up in Cigarettes: We forecast a 3% volume CAGR
over the next three years, along with a sharp ramp-up in operating margins. However,
there could be upside risk to this if there was increased regulations on the smokeless
tobacco category and also faster conversion to the cigarette category among others.
Earlier-than-expected project completion: We are forecasting a recovery in the hotel
segment driven by a gradual ramp-up in new properties. An early project completion
could bring forward the returns.

17 October 2013 90
Detailed financial statements
FIGURE 199
ITC income statement


Income Statement (Rs mn) FY12 FY13 FY14E FY15E FY16E
Sales 247,984 296,056 340,252 405,450 490,712
Sales Growth (YoY) 17.2% 19.4% 14.9% 19.2% 21.0%
Gross Profit 151,659 175,398 199,881 237,573 287,532
Gross Profit Margin 61.2% 59.2% 58.7% 58.6% 58.6%
EBITDA 88,486 106,275 123,165 147,577 179,101
EBITDA Margin 35.7% 35.9% 36.2% 36.4% 36.5%
EBIT 81,501 98,320 114,749 138,204 168,589
EBIT Margin 32.9% 33.2% 33.7% 34.1% 34.4%
Interest Income 3,094 3,555 2,892 4,753 7,412
Interest Expense (ST+LT) (779) (865) (53) (53) (53)
Associate income 0 0 0 0 0
Others non-operating items 5,159 5,832 5,200 5,600 5,600
EBT 88,975 106,842 122,788 148,504 181,548
As a % of Sales 35.9% 36.1% 36.1% 36.6% 37.0%
Taxes (27,352) (32,658) (36,836) (44,551) (54,464)
Tax Rate 30.7% 30.6% 30.0% 30.0% 30.0%
Minorities 0 0 0 0 0
Post Tax exceptionals 0 0 0 0 0
Net Income 61,624 74,184 85,951 103,953 127,084
Net Income Growth (YoY) 23.6% 20.4% 15.9% 20.9% 22.3%
Net Income Margin 24.8% 25.1% 25.3% 25.6% 25.9%
Per Share Data (INR)
Shares Outstanding (weighted avg; in
)
7771 7850 7850 7850 7850
Earnings per Share: Basic 7.93 9.45 10.95 13.24 16.19
Earnings per Share: Fully Diluted 7.84 9.33 10.81 13.07 15.98
Dividends 35,371 41,743 42,976 51,977 63,542
Dividend per Share 4.50 5.25 5.40 6.54 7.99
Dividend payout ratio 57.4% 56.3% 50.0% 50.0% 50.0%

Revenue growth expected to
remain strong we forecast a
18.3% CAGR over the next
three years vs 16.2% CAGR
during the last five years

EBIT margins expected to
remain strong and continue to
trend upward expecting an
improvement of 120bps over
FY13-16E

Earnings CAGR for FY13-16E
expected to be 19.7% vs
18.9% during the last five
years

17 October 2013 91
FIGURE 200
ITC balance sheet


Balance Sheet (Rs mn) FY12 FY13 FY14E FY15E FY16E
Assets
Cash & Securities 28,189 36,150 59,416 92,650 132,274
Trade Receivables 9,860 11,633 13,370 15,932 19,282
Inventories 56,378 66,002 76,786 91,832 111,143
Total Current Assets 139,430 170,793 206,580 257,421 319,707
Long Term Investments & Others 36,475 42,410 42,410 42,410 42,410
Property, Plant & Equipment, Net 112,529 125,914 137,062 151,003 168,707
Intangible Assets 1,230 1,058 1,058 1,058 1,058
Total Assets 289,664 340,174 387,109 451,891 531,882
Liabilities
Short-Term Debt 18 - - - -
Trade Payables 14,248 16,690 19,417 23,221 28,105
Total Current Liabilities 56,706 64,013 66,740 70,545 75,428
Long-Term Debt 773 664 664 664 664
Provisions 44,111 52,588 52,588 52,588 52,588
Total Liabilities 101,745 117,296 120,023 123,827 128,711
Minority Interests - - - - -
Share Capital 7,818 7,902 7,902 7,902 7,902
Reserves & Surplus 180,101 214,977 259,185 320,162 395,269
Total Shareholders' Equity 187,919 222,879 267,087 328,064 403,171
Total Liabilities & Equity 289,664 340,174 387,109 451,891 531,882

We expect ITCs cash position
to remain strong and forecast
54% CAGR over the next three
years, driven by strong
earnings and limited capital
expenditure

We expect the leverage to
remain low for ITC and that
gearing levels will continue to
decline

17 October 2013 92
FIGURE 201
ITC cash flow statement

Cash Flow (Rs mn) FY12 FY13 FY14E FY15E FY16E
Operating profit 81,501 98,320 114,749 138,204 168,589
Depreciation & Amortization 6,985 7,956 8,416 9,372 10,512
Receivables, (Increase) Decrease (4,007) (4,211) (1,737) (2,562) (3,350)
Inventories, (Increase) Decrease (3,687) (9,624) (10,784) (15,046) (19,311)
Payables, (Decrease) Increase 2,335 3,341 2,727 3,805 4,883
Others (2,107) (2,507) 5,200 5,600 5,600
Operating Free Cash Flow 81,021 93,274 118,572 139,373 166,923
Interest paid (779) (866) (53) (53) (53)
Interest received 3,094 3,555 2,892 4,753 7,412
Direct Taxes Paid (23,180) (28,864) (36,836) (44,551) (54,464)
Cash flow before investing activities 60,156 67,100 84,574 99,522 119,817
Acquisitions 0 0 0 0 0
Divestments 559 77 0 0 0
Capital Expenditure (23,036) (20,977) (19,565) (23,313) (28,216)
Cash From Investing Activities (22,476) (20,899) (19,565) (23,313) (28,216)
Free Cash Flow 37,680 46,200 65,010 76,209 91,601
Short-Term Debt (Decrease) Increase (2) (18) 0 0 0
Long-Term Debt (Decrease) Increase (99) (97) 0 0 0
Dividends (40,015) (40,884) (41,743) (42,976) (51,977)
Share Issue / Repurchase 7,650 9,223 0 0 0
Others 543 (6,464) 0 0 0
Cash From Financing Activities (31,923) (38,240) (41,743) (42,976) (51,977)
Cash Flow, Inclusive of Finance 5,757 7,961 23,266 33,233 39,625
Increases (Decreases) in Cash 5,757 7,961 23,266 33,233 39,625
Liquid funds at start of year 22,432 28,189 36,150 59,416 92,650
Liquid funds at the End of Year 28,189 36,150 59,416 92,650 132,274

Operating free cash flow
expected to remain robust,
driven by strong earnings
(21% CAGR over the next
three years

Capital expenditure in the
Hotel segment is expected to
remain rather limited

Dividend payout ratio is
forecast to remain high at 50%

17 October 2013 93
DABUR (OW, PT INR199, +18%): BEST PLAY ON RESILIENT RURAL GROWTH;
INITIATE AT OVERWEIGHT
We initiate coverage on Dabur India with an Overweight rating and 12-month price target
of Rs199, implying potential upside of 18%. Aided by its niche portfolio, we believe the
company is one of the best ways to play Indian rural growth story given Indias rising
purchasing power. Daburs products cater to rural consumers with its Ayurvedic/Herbal
positioning and we believe the company is most insulated to declining growth in our
coverage. Further, scope of operating leverage coming into play due to contained ad
spend and a recovery in the international segments increases the attractiveness of the
stock, in our view. With its improving cash generation, we expect Dabur to undergo a
rerating and we value the stock on a one-year forward P/E multiple of 30x (vs historical
range of 15-28x and average of 22x) to impute a price target of Rs199.
Best play on resilient rural growth; three-year revenue CAGR of 18%: We view Daburs
portfolio favourably as a large part (c50%) of it is consumed in rural & semi-urban areas,
where monthly per capita expenditure continues to see healthy mid-to-high teens y/y
growth. The company currently obtains 48% of its domestic revenues (32% of group
revenues as of FY13) from the rural segment, and we believe this should continue to rise
incrementally. In our view, this places it on a strong growth trajectory and we forecast
3-year revenue CAGR (FY13-16E) of 18.4% for Dabur (vs the peer average of 16.3%).
Niche portfolio, most insulated from declining macro growth: We expect volume
growth to pick up, especially for key categories like Hair Oil (Vatika should see increased
volume growth following price rationalisation of 1Q FY14) and Foods (better
performance expected in 2H FY14 driven by increased traction in trade channels).
International segment business flux due to Namaste rebranding should end:
Following a challenging FY13 for Namaste (Daburs US subsidiary) owing to a
rebranding of the portfolio, we believe FY14 onwards should bring better growth from
this segment, helping the International business to consolidate. Further, we believe a
steeply depreciated rupee could bring in significant translation gains, helping boost
profitability at the consolidated level by c50-75bps.
Operating leverage coming into play could offset commodity price rise pressure: We
believe there are multiple factors supporting our OPM expansion forecasts: 1) improving
profitability from faster-growing rural segments (gross margin of 46% vs 49% for
group); 2) easing ad spends; 3) favourable move in Palm and Mustard Oil prices, helping
offset adverse price moves of commodity basket (LLP, Honey, Sugar); 4) translation
benefits due to INR depreciation; and 5) a price increase of 2-3% in the Foods segment.
Valuation looks attractive: We value Dabur using 1-yr fwd P/E as our primary methodology,
and compare its key growth and earnings multiples vs peers. It currently trades on a 1-yr fwd
P/E of 25.6x (a 14% discount to the sector average) and at 18.4x FY15E EV/EBITDA (a 10%
discount), yet offers a significantly better EBITDA CAGR (FY13-16E) of 22.9% (vs sector
average of 17.8%). We believe Dabur is likely to re-rate to the higher end of its 15-yr trading
range (15-28x) given its more resilient portfolio vs peers, and improving cash returns & ROE
as operating leverage plays out. As such, we apply a target P/E multiple of 30x FY15E, in-
line with peers and a 15% premium to its historical average (in our view justified by the
companys reliable growth outlook), to impute a price target of Rs199.
Risks: Downside risks to our investment thesis and price target on Dabur include: 1)
strong recovery in the broader Indian equity market and liquidity flows from defensives
to cyclicals; 2) commodity pricing pressure on GM; 3) rural growth decline and traction
on Project Double stalling; and 4) lack of International business margin improvement.
DABUR IN / DABU.NS
Stock Rating
OVERWEIGHT
Industry View
NEUTRAL
Price Target
INR 199.00
Price (14-Oct-2013)
INR 169.30
+18%

17 October 2013 94
Asia ex-Japan Cosmetics and HPC Industry View: NEUTRAL
Dabur India Ltd. (DABU.NS) Stock Rating: OVERWEIGHT

Why Overweight? Our positive view is driven by
Daburs: 1) significant presence in rural segments,
which are growing at a much higher rate than urban
areas; 2) positioning in niche categories, leading to
strong pricing power; 3) relative insulation from the
discretionary spend category; and 4) improving cash
generation.

In this case, we are assuming an overall macro
recovery, which should provide additional support to
the discretionary categories. We apply a P/E valuation
multiple in-line with our base case and assume 15%
higher earnings for FY15E.

In this case, we are assuming a slowdown in the rural
areas which should result in slower growth in the
majorities of categories. We apply a P/E valuation
multiple of 24x (versus base case of 30x) and assume
10% lower earnings for FY15E.



Revenue 61,761 72,019 85,911 102,434 18.4%
EBITDA 10,298 12,891 15,808 19,104 22.9%
EBIT 9,174 11,473 14,227 17,331 23.6%
Pre-tax income 9,530 11,312 14,526 18,199 24.1%
Net income 7,634 8,993 11,549 14,468 23.8%
EPS (reported) (INR) 4.35 5.16 6.62 8.30 24.0%
Diluted shares (mn) 1,755.0 1,743.6 1,743.6 1,743.6 -0.2%
DPS (INR) 1.50 1.55 1.99 2.49 18.4%

EBITDA margin (%) 16.7 17.9 18.4 18.6 17.9
EBIT margin (%) 14.9 15.9 16.6 16.9 16.1
Pre-tax margin (%) 15.4 15.7 16.9 17.8 16.5
Net margin (%) 12.4 12.5 13.4 14.1 13.1
ROA (%) 16.1 17.5 19.6 21.0 18.6
ROE (%) 36.2 32.6 31.7 30.5 32.7
ROCE (%) 28.9 34.0 38.7 40.4 35.5

Total assets 47,364 51,410 58,869 68,872 13.3%
Short and long-term debt 11,514 8,014 5,014 4,014 -29.6%
Total liabilities 26,000 23,667 22,275 21,275 -6.5%
Net debt/(funds) 6,385 637 -6,480 -13,408 N/A
Cash flow from investing -1,696 -1,800 -2,148 -2,561 N/A
Cash flow from financing -6,055 -6,115 -5,698 -4,465 N/A
Free cash flow 6,999 8,363 9,814 10,392 14.1%

P/E (reported) (x) 38.9 32.8 25.6 20.4 29.4
EV/sales (x) 4.9 4.1 3.4 2.8 3.8
EV/EBITDA (x) 29.3 23.0 18.3 14.8 21.3
EV/EBIT (x) 32.9 25.8 20.3 16.3 23.8
Equity FCF yield (%) 2.6 1.6 2.3 3.2 2.4
P/BV (x) 14.0 10.7 8.1 6.2 9.7
Dividend yield (%) 0.9 0.9 1.2 1.5 1.1
Interest cover (x) 45.4 37.8 26.4 29.4 34.8
Net debt/EBITDA (x) 0.6 0.0 -0.4 -0.7 -0.1

Note: FY End Mar

Value
Quality
Sentiment
Low High
17 October 2013 95
Key charts detailing our Dabur Overweight investment thesis
FIGURE 202
Dabur organic revenue growth to remain strong

FIGURE 203
Daburs resilient portfolio is in a niche of its own
22 24 28 34 41 53 62 72 86 102
18%
7%
19%
21%
20%
30%
16%
17%
19% 19%
0%
5%
10%
15%
20%
25%
30%
35%
0
20
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100
120
F
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F
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E
(Rs bn)
Inorganic boost

Source: Company data, Barclays Research estimates Note: Size of the bubble represents the revenue contribution (as per FY13).
FIGURE 204
Dabur international business (Namaste) should turn around

FIGURE 205
Dabur cash return generation expected to improve
Health Sup
11%
Digestives
4%
OTC &
Ethicals
7%
Hair Care
16%
Home Care
4% Oral Care
9%
Skin Care
3%
Foods
11%
Others
4%
International
32%


Note: CROCI cash return on capital invested
FIGURE 206
Dabur attractively placed on our valuation screener

FIGURE 207
Dabur further scope for multiple expansion

Source: Barclays Research estimates Source: Bloomberg, Barclays Research estimates
Hair Care
Digestives
OTC &
Ethicals
Health
Sup
Home
Care
Oral Care
Skin Care
Foods
0
4
8
12
0 5 10 15
C
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Strong
Weak
M
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Moderate
32%
38%
34%
29%
31%
19%
22%
23%
25%
26% 26%
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CROCI
Cash returns declined
materially in 2011 due to
international acquisitions
Expected to
improve
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
peers
10
15
20
25
30
35
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17 October 2013 96
FIGURE 208
Dabur latest trends across key business segments and drivers
FY13-16E
CAGR
Volume growth Likely to be better over the next three years owing to better
Hair Care performance.

Pricing growth Likely to see price increases in few categories owing to cost
pressures; average price rise of 2%-3% looks likely.

Input costs/
Gross margins
Gross margins improved by 115bps on a
y/y basis; less than expectations
2Q unlikely to see pressure of INR depreciation yet. Pressure
on Gross Margins could be felt from 3Q onwards.

Impact of currency Likely to see significant translation gains; possible impact of
50-75bps on OPM.

Advertising spends Likely to decline marginally from the peak of Rs254cr in 1Q
FY14.

International
(32% of revenues)
17.4% y/y growth

Growth driven by 15% increase in
volumes
Recovery underway in Namaste business. 20.3%
Hair Care
(16% of revenues)
11.8% y/y growth

Hair Oil growth was driven by volumes
and also a move towards the premium
end. Shampoos sustained 20% y/y
growth
Overall growth should increase modestly in coming quarters.
Volumes should grow in 2Q following the pricing
rationalisation of Vatika (in the perfumed Hair Oil category) in
1Q; earlier price was cRs150/bottle, and this has now been
rationalised by 20%.
20.9%
Digestives
(4% of revenues)
15.1% y/y growth

Good performance across the key
brands
Should continue to see steady mid-teen y/y growth in the
coming quarters given the dominant positioning of Daburs
portfolio in the respective categories.
19.2%
OTC & Ethicals
(7% of revenues)
11.8% y/y growth

Both OTC & Ethical segments reported
double-digit growth levels
OTC: 250 Ayurvedic products should maintain past trends.
OTC & Ethicals segment should continue to see steady mid-
teen y/y growth in the coming quarters too.
15.4%
Health Supplements
(11% of revenues)
7.5% y/y growth

While Dabur Honey continued to be
strong, Glucose sales were impacted
due to an early onset of monsoons
Glucose D is currently gaining market share from Heinz.
Segment should show stronger performance from here.
13.9%
Home Care
(4% of revenues)
25.8% y/y
All round growth maintained across the
portfolio with strong market positioning
Maintain strong growth rate; Air fresheners continues to gain
traction in the Toilet freshener market.
23.7%
Oral Care
(9% of revenues)
8.6% y/y growth

Toothpaste continued to be driven by
the premium offerings, while
toothpowder declined marginally, in line
with the shift in customer preference
Continues on an 8%-10% blended growth rate trend, with
tooth powder on a long-term decline.
10.2%
Skin Care
(3% of revenues)
12.7% y/y growth

Fem bleach portfolio registered market
share gains with a double digit growth
in revenues
In the process of exploring product extensions; currently
selling to a few parlors and this channel could be in greater
focus. Also, expansion through the Oxylife sub brand.
10.4%
Foods
(11% of revenues)
18.7% y/y growth
All round growth; two new launches
drinking yoghurts & Supa fruits
Growth rate of 20% y/y likely driven by new variants launched,
especially Real Activ. 2H FY14 should see further volume
pickup.
21.8%
17 October 2013 97
Snapshot of segmental revenue trends & forecasts
FIGURE 209
Dabur segmental revenue trends and Barclays Research growth forecasts

Daburs Indianness to help grow its revenue base
Our forecast of a strong 18.4% revenue CAGR for Dabur over FY13-FY16E is underpinned
by the companys Indianness related to its unique brands like Chyawanprash, Hajmola,
Meswak, Lal (Red) Toothpaste. Dabur has been selling its products over the past 100 years,
and in the process has acquired a unique reference point both in urban and rural areas,
where it is instantaneously associated with Herbal/Ayurvedic products. Against the
backdrop of a slowing economy, but a still resilient rural base (owing to good monsoons,
increasing MSP, etc.), we believe this positioning will matter more than ever and that
Daburs future growth can tap into this legacy as its rural consumer base earns more
income than ever before.

Column charts indicate Barclays revenue CAGR forecasts over FY13-16E
Domestic
67%
International
32%
Retail
2%
Consumer
Care
81%
Foods
16%
Others
3%
Health Sup
21%
Digestives
7%
OTC &
Ethicals
12%
Hair Care
30%
Home Care
7%
Oral Care
17%
Skin Care
6%
Africa
21%
ME
36%
Asia
17%
US
22%
Others
4%
18%
20%
16%
18%
20%
22%
Domestic International
17%
22%
14%
18%
22%
26%
Consumer
Care
Foods
14%
19%
15%
21%
24%
10% 10%
5%
10%
15%
20%
25%
H
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S
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17 October 2013 98

FIGURE 210
Dabur revenue growth expected to remain strong despite the high base

22 24 28 34 41 53 62 72 86 102
18%
7%
19% 21%
20%
30%
16%
17%
19% 19%
0%
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30%
35%
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E
(Rs bn)
FY08 - 13E CAGR: 21.2% FY13 - 16E: 18.4%
Acquisition driven

FIGURE 211
along with a gradual expansion of operating margins

FIGURE 212
resulting in a robust earnings CAGR of 23.8% over FY13-16E

3 3 4 5 6 6 8 9 12 14
32%
15%
19%
29%
13%
13%
18%
18%
28%
25%
0%
5%
10%
15%
20%
25%
30%
35%
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12
14
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F
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1
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F
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1
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E
(Rs bn)
FY13 - 16E: 23.8%

Source for all charts on this page: Company data, Barclays Research estimates

15.4%
15.6%
17.4%
16.9%
18.4%
18.0%
16.8%
16.7%
17.9%
18.4%
18.7%
-150
-100
-50
0
50
100
150
200
15%
16%
16%
17%
17%
18%
18%
19%
19%
F
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E
Decline in Namaste
affected OPMs
Revenue growth
recovery drove OPMs
17 October 2013 99
Incremental rural consumption 25% above urban
Rural consumers across income segments are exhibiting a marked propensity towards
spending on higher quality products, particularly those which are backed by strong brand
values. This is reflected in rural consumption growth outpacing urban consumption growth
with the percentage increase in monthly per capita expenditure in rural markets surpassing
its urban counterparts during the 2009-2012 period.
In a recent interview on CNBC (26 September), management commented that while urban
areas have seen a marginal slowdown in the discretionary categories, rural segment
revenues continue to grow at 1.5x times the urban areas. For 1Q FY14, while urban grew by
9.6% y/y, the rural segment registered 14.2% y/y growth, a trend we believe should sustain
in the near term, especially on the back of a strong monsoon season and higher agricultural
GDP growth.

FIGURE 213
Percentage increase in the monthly per capita expenditure in India
Rural areas are relatively better
performers in terms of the
incremental purchasing power

According to Dabur, the FMCG
segment in rural India could
touch US$100bn by 2025,
offering significant market
potential
7.3% 7.5%
13.2%
19.2%
14.0%
11.8%
13.9%
17.2%
0%
5%
10%
15%
20%
25%
1987-94 1993-05 2004-10 2009-12
Rural Urban

Note: All years are financial years.
Source: NSSO, Company data, Barclays Research

Rural growth to be 1.5x that of
urban growth in the next 2-3
years
17 October 2013 100
Project Double continues to boost distribution; 3,000
villages added in 1Q FY14
In its bid to realise the significant potential from the rural market, Dabur kick-started Project
Double in 2010, with the aim of doubling the companys distribution reach in the rural
markets. Its earlier channel was just through the wholesalers, who would sell to those
retailers where there was demand. Dabur changed this model by appointing local sub-
stockists and sales representatives, with knowledge of their locality. In the process Dabur
has changed its model from an indirect one to a direct one in 33,000 villages (3,000 added
in 1Q FY14).
This project has helped Dabur launch new products with relatively better efficiency, and also
enables the company to choose the portfolio, unlike earlier where the wholesaler would
drive the demand. Technological advances like handheld devices have also been provided to
these local sub-stockists/sales representatives, which feeds back directly into a centralised
system, thus resulting in a more rapid replenishment system. The company continues to
focus on the rural channel, and has added 3,000 villages in 1Q FY14 alone.
FIGURE 214
Dabur direct rural coverage has increased >2x in the last
two years

FIGURE 215
Industry incremental consumption expenditure in FY12
over FY10
14,865
17,882
30,091
10,000
15,000
20,000
25,000
30,000
35,000
FY11 FY12 FY13
Direct village coverage
+20%
+68%

2,994
3,750
2,000
2,500
3,000
3,500
4,000
Urban Rural
+25%


Dabur has changed from an
indirect pull model to a direct
push structure
Project Double focus
continues; 3,000 villages added
in 1Q FY14 alone
17 October 2013 101
International M&A adds a different facet to growth profile
Apart from sustaining strong high teen growth levels in the domestic business over the past
few years, Dabur has also maintained an aggressive M&A strategy which has led to the
contribution from international business going up to 31% of group revenues in FY13 (vs
13% in FY07). Key amongst these acquisitions was Hobi in Turkey and Namaste Labs in the
US, catering to the ethnic hair care market (see table below).
FIGURE 216
Dabur list of international M&As


FIGURE 217
Dabur steady domestic revenue growth complemented by aggressive international
expansion

Sharp spike in international
revenue growth in FY11/12
driven by Namaste acquisition
and contribution from the
brands acquired from Ajanta
Pharma


FIGURE 218
has resulted in a sharp increase in revenue contribution from the international
businesses

Contribution from the
international segment
increased to c31% in FY13
(from 12% in FY06), driven by a
recovery in the Namaste
business and also aided in the
near term by INR depreciation.
We expect this contribution to
increase further


Year Company Acquired Country Category
2010 Namaste Labs US Hair Care products - Significant Presence in Middle East & North Africa
2010 Hobi Kozmetik Turkey Personal Care Products
2011
30 Plus brand from Ajanta
Pharma
India Herbal Energiser
22%
14%
6%
16%
18%
17%
15% 16%
17% 18%
19%
30%
32% 32%
37%
19%
46%
78%
17%
19%
22%
20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Domestic y/y revenue growth International
87%
85%
83%
81%
79%
77%
68% 67% 68% 67% 67%
12%
13% 16%
19%
18% 22%
30% 31%
31% 32% 32%
0%
20%
40%
60%
80%
100%
Domestic International
17 October 2013 102
Namaste (Daburs US subsidiary) on a recovery path
Post the acquisition of Namaste in FY11, Dabur experienced a strong year in FY12, with its
primary Organic Root Stimulator doing well. However, following the legal requirements to
eliminate the term Organic, this portfolio was rebranded as ORS, and faced acceptability
issues in FY13. In addition, FY13 saw Namastes CEO quit, thus disrupting regular
management of this segment
This business has stabilised now and we believe it is on a recovery path. Dabur believes
there is also strong margin recovery potential in the US business, and that overall OPM
could improve by 100-300bps for the International business segment over FY13-16E. In our
view, Dabur could justify its purchase of this business if it can effectively improve operating
profitability and, more importantly, successfully expand and tap into opportunities outside
the US. We estimate the US markets growth potential at a CAGR of only 5-6% over FY13-
16E, but we believe much higher growth can be achieved with expansion to other emerging
markets such as Africa and Brazil.
FIGURE 219
Namaste strong growth in revenue

FIGURE 220
but margins dipped sharply in FY12

FIGURE 221
International business FY13 geographical revenue split

FIGURE 222
Dabur FY13 y/y revenue growth among key geographies


1.2 5.5
13%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1
2
3
4
5
6
FY11 FY12
I
N
R

B
n
Revenue % of total international
180.1 687.4
15.5%
12.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
100
200
300
400
500
600
700
800
FY11 FY12
I
N
R

M
n
EBIT EBIT Margin
Africa
21%
ME
36%
Asia
17%
US
22%
Others
4%
17%
12%
41%
24%
-1%
-22%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
I
n
t
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n
a
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a
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A
f
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c
a
M
E
A
s
i
a
U
S
O
t
h
e
r
s
17 October 2013 103
Strong presence in the Herbal/Ayurvedic niche segments
Daburs dominant positioning in Herbal/Natural/Ayurvedic products leaves the company
better placed to manage cost and competitive pressures vs peers, in our view. The majority
of its segments fall in the top-right corner (see Figure 224), which highlights the
attractiveness of both the company and its segments in these markets.

FIGURE 223
Domestic product portfolio: strong presence in the niche segments to drive growth

Note: Size of the bubble represents the revenue contribution.
Sufficient headroom for growth across most segments
We note low to medium penetration levels across most of Daburs segments, which gives us
comfort in the long-term growth potential for the overall category. We also view the
significant difference between rural and urban consumption levels as beneficial for Dabur
because of its strong distribution set-up (direct rural coverage has increased by two times in
the past two years) and also specific focus initiatives like Project Double.

FIGURE 224
Dabur promising penetration levels in rural areas provide sufficient headroom for
growth
Dabur has a presence across
most categories, including
Toothpaste, Shampoo, Hair Oil,
Skin Cream, and Mosquito
Repellents

Source: Dabur presentation (September 2013), Barclays Research

Hair Care
Digestives
OTC & Ethicals
Health Sup
Home Care
Oral Care
Skin Care
Foods
0
4
8
12
0 4 8 12
C
a
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g
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y

/

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W
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Strong
Weak
M
o
d
e
r
a
t
e
Moderate
42%
37%
67%
18% 18%
3%
2%
4%
77%
57%
80%
32%
59%
19%
5%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Toothpaste Shampoo Hair oil Skin Cream Mosquito
Repellent
Instant
Noodles
Hair Dyes Floor
Cleaners
Rural Urban
17 October 2013 104
Focus to be on realisation; Price increases to help
While volume growth for Dabur has remained fairly resilient in the last two years, the
realisation levels (defined as revenues/volumes) have remained rather subdued (at 4% y/y
in 1Q FY14 vs c8% in 4Q FY12). Given the overall weak demand environment in India, we
believe management will focus on improving the realisation levels through: a) an enhanced
product mix and b) price hikes.
Price increases to help the realisation levels
Dabur recently announced price increase of c2-3% across its major segments to partially
offset the negative impact due to INR depreciation. As shown in Figure 226, realisation
growth has been rather subdued in the recent few quarters, which we believe provides
sufficient headroom for the absorption of such price increases (price hike of ~1% was taken
in 1Q FY14).

FIGURE 225
Dabur y/y volume growth levels have remained broadly resilient in the last six
quarters

Volume growth was 9% in
1Q FY14 and could pick up
modestly
15%
10%
11%
9%
8%
5%
8%
12%
12%
9%
10%
12%
9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4


FIGURE 226
but there is wide variation in the realisation levels

Realisation growth has
remained relatively subdued in
the domestic market


3%
5%
10%
6%
4%
6%
8%
6%
4%
6%
4%
2%
4%
0%
2%
4%
6%
8%
10%
12%
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

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Q
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Q

3

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2
Q
4

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Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Subdued realizations
17 October 2013 105
Consumer Care (55% of FY13 group revenues remains the
mainstay; Hair Care is key
Dabur has registered a moderate revenue CAGR of 14% over the last three years in the
Consumer Care segment (which contributes c55% to overall revenues), partially affected by
pricing issues and portfolio optimisation. We expect this trend to be strengthened over
FY13-16E and forecast a 18% revenue CAGR, driven by: 1) niche segments of Health
Supplements and OTC & Ethicals (15% growth CAGR); 2) sharp increase in the Hair Care
segment revenue growth on the back of entry into the hair oil category and launch of
premium shampoo brands (21% growth CAGR); and 3) Digestives growing at 19% CAGR,
driven by the increased market size.
FIGURE 227
Dabur segmental revenue breakdown for Consumer Care

FIGURE 228
Dabur growth CAGRs across segments of Consumer Care
Health
Supplement
s
21%
Digestives
7%
OTC &
Ethicals
12%
Hair Care
30%
Home Care
7%
Oral Care
17%
Skin Care
6%

Note: Data as per FY13.
Hair Care (30% of FY13 Consumer Care revenues): Market dominated by
Indian FMCG companies; Dabur dominates the Perfumed section
Dabur currently has a strong market share position in Hair Care, being #2 in Hair Oils and
#4 in Shampoo in India. The Hair Care market is one of the segments where MNC FMCG
firms do not dominate, with the market instead dominated by Marico, Bajaj and Emami,
which compete with Dabur. However, Daburs differentiation here lies in the Perfumed
(Non-Coconut Oil) section, while the Coconut Oil section is dominated by Marico with its
Parachute Brand of Hair Oils.
Dabur is dominant in the Perfumed Hair Oil section, where it has a 27% market share, and is
enjoying a y/y growth rate of 14-15%. According to the company, Dabur Amla Hair Oil is
the largest hair oil brand in India with 35m+ consumers. Additionally, we believe the volume
growth in the premium (Perfumed or Non-Coconut Oil variety) segment represented by
Dabur Almond & Amla Hair Oil is likely to pick up. This comes after the 20% price
rationalisation undertaken by the company in 1Q FY14, following the assessment that at
~Rs150 per 200gms bottle, the Almond brand was priced slightly too high. We believe a
20% price reduction in this segment allows the brand to be more competitive and we
expect volumes for this category to pick up.
15.2%
4.3%
14.3%
12.2%
26.8%
11.2%
14.7%
13.9%
19.2%
15.4%
20.9%
23.7%
10.2%
10.4%
0%
5%
10%
15%
20%
25%
30%
H
e
a
l
t
h

S
u
p
D
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O
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E
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h
i
c
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a
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a
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e
O
r
a
l

C
a
r
e
S
k
i
n

C
a
r
e
FY10-13 CAGR FY13-16E CAGR
Dabur is #2 in Hair Oils and #1
in the Perfumed Oil subcategory
Daburs premium Amla Hair
Oil is largest selling hair oil
brand in India (35m+
consumers)
Premium Hair Oil volumes
expected to pick up following
price rationalisation
17 October 2013 106
FIGURE 229
Indian Hair Care market revenue contribution from
different segments

FIGURE 230
Hair Care market in India market expected to grow at a
12% CAGR
Shampoo
(Rs35bn)
31%
Perfumed Oil
(Rs35bn)
27%
Coconut
based oil
(Rs28bn)
25%
Hair
conditioners
(Rs2bn)
2%
Hair Dyes
(Rs15bn)
15%

Source: Company data, Barclays Research estimates Note: years are financial years.
Source: Industry data, Barclays Research estimates

FIGURE 231
Hair Care revenue growth trends for Dabur

Hair Oils: Entry into the light hair oil segment to augment the overall portfolio
Daburs strong brand recall and dominance in the Amla Hair Oil category provides a
sustainable advantage, in our view. However, a recent shift in customer preference towards
the Light Hair Oil category has led to Dabur lagging the overall category growth levels. The
last few quarters have also seen additional pressure (Hair Oils revenue growth declined to
10% y/y in 1Q FY14 vs 27% y/y in 2Q FY12) due to the price hikes taken by Dabur across
its Amla Hair Oil and Coconut Hair Oil (Vatika) categories.
We believe growth levels will rebound from current levels, as we expect consumers to
upgrade to branded and value added products, thus fitting well with Daburs differentiated
portfolio. Additionally, we believe Daburs entry into the Light Hair Oil market, albeit late,
should help in a rerating of the growth levels.
55.9 115.0 180.0
20
40
60
80
100
120
140
160
180
200
2007 2012 2016E
I
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R

b
n
16%
12%
4.4 4.5 5.2 6.4 7.2 7.8 9.0 10.1 11.8 14.4 17.9
6%
4%
14%
23%
13%
9%
16%
12%
17%
22%
24%
0%
5%
10%
15%
20%
25%
30%
0
2
4
6
8
10
12
14
16
18
20
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

b
n
Hair Care Y/Y Growth
Expect recovery
now
Lost competitive edge due to
pricing
17 October 2013 107
FIGURE 232
Hair Oil market in India strong growth levels, but dipped
slightly in FY13

FIGURE 233
Dabur has 15% market share in the overall Hair Oils segment
28.3 37.1 45.0 50.4 57.3 69.8 78.6
31%
21%
12%
14%
22%
13%
0%
5%
10%
15%
20%
25%
30%
35%
15.0
25.0
35.0
45.0
55.0
65.0
75.0
85.0
I
N
R

B
n
Hair Oil Market Y/Y Growth

Dabur
15%
Bajaj
8%
Marico
40%
Emami
4%
Others
33%

Source: Bajaj group presentation (Sept 2013), Barclays Research Note: as per FY13.
Source: Company data, Industry data, Barclays Research

FIGURE 234
Dabur Hair Oil revenue growth trends to improve, driven by entry into Light Hair Oils
and price correction

Hair Oil revenue growth levels
have declined sharply in the
last 4-5 quarters, although
witnessed a marginal uptick in
1Q FY14. We expect the
growth improvement to
continue to mid-teen levels
over the next 6-8 quarters
19.0%
12.4%
15.0%
18.0%
16.1%
26.6%
22.0%
20.2%
8.4%
9.1%
11.8%
7.0%
10.0%
0%
5%
10%
15%
20%
25%
30%
Q
1

1
1

Q
2

1
1

Q

3

1
1

Q
4

1
1

Q
1

1
2

Q
2

1
2

Q

3

1
2

Q
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1

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3

Q
2

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3

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3

1
3

Q
4

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1

1
4

Shampoos: Premium launches to drive the growth
Revenue growth levels for the Shampoo segment have ramped up sharply in the last six
quarters (even though on a low base) as Dabur has focused on launching the premium
variants, along with increased promotional expenditure. However, we expect the growth
levels to moderate from here on a high base and also increasing competition from premium
brands like HUL Dove.
17 October 2013 108
FIGURE 235
Shampoo market in India stable growth levels; dip in FY13

FIGURE 236
Dabur a small player in the India shampoo market

Dabur
11%
HUL
46%
P&G
24%
Cavin Care
2%
Others
17%

Source: Company information, Barclays Research Note: as per FY11. Source: Company data, Barclays Research

FIGURE 237
Dabur Shampoo revenue growth levels have picked up sharply in the last eight quarters

-17.1%
-15.0%
-29.8%
-22.3%
-19.2%
-25.4%
4.1%
16.8%
23.0%
40.2%
29.6% 29.4%
22.8%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Q
1

1
1

Q
2

1
1

Q

3

1
1

Q
4

1
1

Q
1

1
2

Q
2

1
2

Q

3

1
2

Q
4

1
2

Q
1

1
3

Q
2

1
3

Q

3

1
3

Q
4

1
3

Q
1

1
4

FIGURE 238
Dabur latest management comments about Hair Care segment
Good growth segment with consumers upgrading to branded & value added products
Two pronged strategy in Dabur Amla
Targeting mustard oil users in the Hindi belt and convert them to Amla
Communicating the benefit of Dabur Amla to consumers in South India and introduce them to non-coconut
segments
Coconut hair oil brand (Vatika) witnessed pressures in FY13 due to high differential in pricing as plain coconut prices
remained soft through the year

18.2 20.1 23.4 26.5 28.6 32.4 35.7
11%
16%
14%
8%
13%
10%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
15.0
25.0
35.0
45.0
I
N
R

B
n
Shampoo market Y/Y Growth
17 October 2013 109
Health Supplements (21% of FY13 Consumer Care revenues): Core segment
driven by Daburs expertise in the niche segment
Daburs strong presence in the Herbal/Ayurvedic segment has enabled it to maintain a
robust 65% market share in the Health Supplements category (we forecast revenue from
this category to grow 18-20% over the next few years). While we see increasing
competition in Chyawanprash (from Emami Sona Chandi) and Glucose-D (from market
leader Heinz), we expect Dabur to deliver strong revenue CAGR of 13.9% over FY13-15E.

FIGURE 239
Health Supplements revenue growth trends for Dabur expected to remain strong

FIGURE 240
Health Supplements revenue contribution to overall
business to remain steady

FIGURE 241
Dabur remains the largest player in this segment

Dabur
65%
Emami
8%
Baidyanath
13%
Zandu
4%
Others
10%

Source: Company data, Barclays Research estimates Note: As of FY13. Source: Company data, Barclays Research
FIGURE 242
Dabur latest management comments about Health Supplements segment
Dabur Chyawanprash: Maintained market share and witnessed steady offtake in FY13, despite lower offtakes in
institutional channels
Dabur Honey: Strong growth levels maintained, despite stiff competition from regional players and price increases due
to a sharp increase in raw material prices
Dabur Glucose: Moved away from generic positioning of energy to more differentiated proposition of cooling energy
2.6 3.1 3.5 3.8 4.6 5.5 6.1 7.1 8.0 9.1 10.4
2%
20%
13%
11%
20%
20%
10%
16%
13%
14%
15%
0%
5%
10%
15%
20%
25%
0
2
4
6
8
10
12
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

b
n
Health Supplements Y/Y Growth
18% 20% 21% 19% 20% 21% 20% 21% 21% 20% 20%
14%
15%
16%
17%
18%
19%
20%
21%
22%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
17 October 2013 110
Oral Care (17% of FY13 Consumer Care revenues): High presence in the
tooth-powder segment remains a drag
Oral Care is quite a saturated market, with most consumers in India using one form of oral
care or the other. The market has been going through a sharp segmental shift with an
increasing customer preference for toothpastes vs toothpowders, especially in rural areas.
This shift has largely played out in the urban areas. While over the medium- to long-term,
this trend should help in terms of customers upgrading to premium products and aid
realisations of the overall category, it is also resulting in divergent performances between
industry participants as they try to rationalise portfolios in the near-term (see Figure 244 for
Colgate vs Dabur).

FIGURE 243
The toothpaste shift: Oral Care y/y revenue growth comparison between Dabur and
Colgate

Colgate has outperformed
Dabur in terms of Oral Care
revenue growth for the last 11
quarters

which we believe is primarily
attributable to Daburs adverse
portfolio mix (with a high share
of the toothpowder segment)
20%
15%
9%
9%
13%
9%
12%
18%
8%
7%
14%
12%
9%
13%
13%
14%
13%
16%
19%
20%
18%
20%
18%
14%
18%
15%
0%
5%
10%
15%
20%
25%
Q
1

1
1

Q
2

1
1

Q

3

1
1

Q
4

1
1

Q
1

1
2

Q
2

1
2

Q

3

1
2

Q
4

1
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Q
1

1
3

Q
2

1
3

Q

3

1
3

Q
4

1
3

Q
1

1
4

Dabur Colgate

FIGURE 244
Indian Oral Care market the Rs45bn market is expected to
grow at c6% CAGR over the next four years

FIGURE 245
Dabur is the third largest player in this market (with 32%
market share in toothpowder)

Colgate
46%
HUL
19%
Dabur
11%
Gilette
6%
Others
18%

Source: Company data, Barclays Research estimates Note: as of FY13.

29.0 45.5 58.3
20
25
30
35
40
45
50
55
60
65
2007 2012 2016E
I
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b
n
9%
6%
Oral Care industry still shifting
from toothpowder to
toothpaste in rural India
17 October 2013 111
Dabur is positioned strongly at #3 in the Oral Care industry through toothpastes with a 11%
market share (after Unilever and Colgate), having started with its legacy product Lal Dant
Manjan (Red Toothpowder) which has gradually evolved into Daburs largest Oral Care
product the RED toothpaste. The strong selling proposition of this product is that it is
totally herbal, with medicinal properties and is expected to address gum problems. RED
toothpaste has around 5% share of the total toothpaste market in India.
The other brands in the toothpaste category owned by Dabur are Meswak and Babool (the
last one being a mass product brand). Apart from RED, the other two toothpastes got into
Daburs portfolio through M&A (Balsara). Pricing for these products is currently as follows:
1. Meswak Rs70 per 200gms tube
2. RED Rs35
3. Babool Rs20-25
Dabur Red Toothpowder is the non-toothpaste in this category and has been on a steady
decline for the last few years. Primary competitors in this category are Himalaya and Vicco,
offering similar products with herbal flavour.
In terms of outlook, revenue growth levels for Daburs Oral Care segment have declined to
c10% in FY13 vs peak levels of 23% in FY06. We expect that in the near-term, blended
growth levels will remain at around ~10% and highlight the three key factors of this
segment:
1. Highly penetrated market: As shown in Figure 249, penetration levels across both the
toothpowder and toothpaste segments remain high, which we believe could result in a
softening of industry growth levels to c4% CAGR over 2012-16E (vs 11% over 2007-
12).
2. Adverse portfolio mix: Within the Oral Care segment, Dabur derives c30% of its
revenues from the toothpowder segment which has been undergoing a market revenue
decline as consumer preferences shift towards toothpastes. This has led to a sharp
divergence vs Colgate in the domestic market (average growth of 11% in the last eight
quarters for Dabur vs 18% for Colgate).
3. Mass market presence: While Dabur has had successful launches in the premium
category (Meswak & Dabur Red), the bulk of its toothpaste revenues still come from the
economy segment (Babool) which has remained sluggish on account of heightened
competition at lower price points and Daburs inability to pass on the higher input costs.
17 October 2013 112

FIGURE 246
Dabur Oral Care blended growth rate stable at 9-10%

2.7 3.1 3.6 3.8 4.2 4.7 5.2 5.7 6.2 7.0 7.7
23%
17%
14%
5%
11%
13%
10% 10%
9%
12%
10%
0%
5%
10%
15%
20%
25%
0
1
2
3
4
5
6
7
8
9
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

b
n
Oral Care Y/Y Growth

FIGURE 247
Oral Care revenue contribution from the business to continue to decrease for Dabur

19% 20% 21% 19% 18% 18% 17% 17% 16% 15% 14%
10%
12%
14%
16%
18%
20%
22%
24%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E

FIGURE 248
Dabur latest management comments about Oral Care segment
Toothpaste segment
Red/Meswak: Market shares maintained despite heightened competitive intensity
Strongly differentiated positioning; In-roads into South India apart from north, east & west markets
Babool: Sluggish on account of heightened competition at lower price points & pressure on the value proposition
Toothpowder segment
Lal Dant Manjan reported steady demand, riding on rural activation programmes that seek to convert non-dentifrice
users to toothpowder
This segment should remain relevant for the next two years at least

17 October 2013 113

FIGURE 249
Oral Care high penetration levels in the toothpowder segment, penetration levels for the
toothpaste segment remain attractive
Overall penetration levels
remain high in Oral Care in
India

Within this, toothpowders have
84% penetration, while
toothpastes have 70%
penetration

Correspondingly, the
toothpowder segment is
expected to slow down vs the
historical CAGR and on our
estimates should grow at 5%
CAGR over the next four years

Note: Years are financial years.
Source: Company information, Barclays Research estimates

FIGURE 250
Toothpaste penetration levels in India rural market remains the growth driver

While penetration levels remain
high overall, we believe there is
still significant headroom for
growth in rural areas
75%
78%
79%
80%
84%
87%
90%
91%
38%
42%
43%
46%
49%
56%
61%
63%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Urban Rural

Source: Colgate Palmolive presentation (29 August 2013), Barclays Research

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Dental Toothpaste Toothpowder
17 October 2013 114
Skin Care (6% of FY13 Consumer Care revenues): Product launches driven
by innovation and continued advertisement spends
Daburs skin portfolio consists of two broad segments: 1) skin creams (under the brands
Uveda & Gulabari) and 2) bleaches & hand wash (under the brands Fem & Oxy). Growth
levels in this segment for Dabur have remained largely under pressure due to its limited
product portfolio vs competitors.
Management has highlighted its focus on the Fem portfolio, driven by increased advertising
spends along with continued innovation and new variant launches. We expect the bleach
segment to remain strong and maintain its market share. On the other hand, we expect skin
creams to remain under stress, primarily due to: 1) a lack of innovation & new product
launches and 2) contained promotional efforts, especially in the Uveda brand.

FIGURE 251
Skin Care growth trends for Dabur to remain stable

FIGURE 252
Skin Care market in India is expected to grow at 9% CAGR
over the next four years, per our estimates

FIGURE 253
Dabur has not been able to make any significant inroads in
this segment market share remains below 4.5%
26.7 57.1 81.5
20
30
40
50
60
70
80
90
2007 2012 2016E
I
N
R

b
n
16%
9%

4.2%
3.0%
3.9%
2.0%
4.2%
3.5% 3.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2006 2007 2008 2009 2010 2011 2012


1.1 1.0 0.8 1.2 0.7 1.7 1.8 2.0 2.2 2.5 2.7
39%
-6%
-17%
41%
-41%
140%
5%
15%
11% 10% 10%
-80%
-40%
0%
40%
80%
120%
160%
0
1
2
3
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

b
n
Skin Care Y/Y Growth
17 October 2013 115
Foods (11% of FY13 group revenues): Margins to come at a
cost?
Foods comprised 10-11% of Daburs domestic business (as of FY13), a large component of
which is Fruit Juices, which includes prominent brands like Real and Activ. Dabur is the
market leader in this segment with 57% market share (as of FY13), competing directly with
Tropicana across the range of products. Daburs Fruit Juices portfolio contains one of the
widest varieties of options for consumers, including both seasonal and non-seasonal fruits.
Activ is the higher end category within this segment, and includes a range of unsweetened
juices that contain no added sugar or preservatives. As such, this category tends to appeal
to the health conscious people (typical profile includes urban, professional, and conscious
of metabolic diseases) and is thus almost entirely an urban brand, priced above Rs100 (per
pack) in most cases. We forecast revenue in this category to grow at a CAGR of 21.8% over
the next three years (in-line with expected overall segment growth rate of 20%+). A greater-
than-anticipated slowdown in discretionary spend remains the key risk for this segment.
FIGURE 254
Dabur latest management comments about the Foods segment
Continues to be driven by innovation & sustained demand for the packaged fruit juices & nectars
Demand came not only from the urban markets, but rural pockets as well
Market share gains across both General trade & modern trade in FY13
Culinary pastes: Launch of pan-India consumer connect initiative
FIGURE 255
Dabur revenue growth trends for Foods segment

FIGURE 256
Fruit Juices form the bulk of Foods segment revenues

Fruit Juices
94%
Culinary
Pastes
6%

Source: Company data, Barclays Research estimates Note: As per FY13.
Pressure on food segment margins due to INR depreciation a concern
Management had earlier expressed concerns over margin pressures in Fruit Juices category,
owing to a sharp rise in input costs due to INR depreciation. In our view, this has driven
sharp price increases recently (4-5% in the Juices category). We believe management faces
the tough choice of a trade-off between going for volume growth or protecting margins.

1.9 2.4 2.7 2.7 3.3 4.2 5.4 6.7 8.2 9.9 12.0
46%
28%
11%
1%
21%
27%
29%
25%
23%
20%
22%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
2
4
6
8
10
12
14
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

b
n
Foods Y/Y Growth
Many products have not
crossed the Rs100/litre (ex
Activ) barrier which, according
to management, might be
demand destructing
17 October 2013 116
Business review: Operating margin expansion expected
Post a strong rerating from 2009-11 (due to improved product mix and volume leverage),
operating margins at Dabur have come down sharply in the last two years, the result of
increased M&A. We expect this trend to reverse, and forecast Daburs OPM to increase by
c200bps over the next three years, with multiple levers coming into play:
1. Strong rural growth with improving gross margins;
2. Margin recovery in the International business (Namaste);
3. Easing ad spends;
4. Tailwinds provided by the depreciating INR; and
5. Price hikes of 2%-3% across key categories of Hair Care and Foods (owing to increased
COGS), driven by low price elasticity among niche categories with limited competition.
FIGURE 257
Dabur ample positive levers for operating margin expansion

Note: Coverage includes Dabur, HUL, ITC, Nestle and GCPL.

FIGURE 258
Dabur operating margin trend likely to increase by 200bps over next three years

15.4%
15.6%
17.4%
16.9%
18.4%
18.0%
16.8%
16.7%
17.9%
18.4%
18.7%
-150
-100
-50
0
50
100
150
200
15%
16%
16%
17%
17%
18%
18%
19%
19%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Decline in Namaste
affected OPMs
Revenue growth
recovery drove OPMs


Dabur +ve +ve NA +ve
17 October 2013 117
Gross margins likely to improve

FIGURE 259
Dabur gross margins are expected to improve

Notwithstanding the
movement in commodity
prices, we expect gross
margins to improve slightly on
the back of an improving
product mix

FIGURE 260
Price trend Coconut Oil

FIGURE 261
Price trend Sugar

80
100
120
140
160
180
200
220
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
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9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Sugar-M grade

FIGURE 262
Price trend Liquid Paraffin

FIGURE 263
Price trend HDPE

Source: Thomson Reuters Datastream, Barclays Research Note: HDPE = High Density Polyethylene.
56.7%
55.8%
53.4%
50.5%
54.3%
53.3%
49.3%
51.1%
51.5%
51.8%
52.0%
-500
-400
-300
-200
-100
0
100
200
300
400
500
44%
46%
48%
50%
52%
54%
56%
58%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Gross margin change (bps - RHS) Gross Margins
2,000
4,000
6,000
8,000
10,000
12,000
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
Rs / 100Kg
Coconut Oil Coconut Oil Price trend in last 3 months
Y/Y: Up 13%; Q/Q: Up 11%
30
35
40
45
50
55
60
65
70
75
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 0%; Q/Q: Up 8%
50
60
70
80
90
100
110
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 13%; Q/Q: Up 11%
17 October 2013 118
Advertising spend to stabilise; Unlikely to trend upwards of 13.5%
After cutting advertising spend aggressively in FY12 (by 70bps) to protect margins, FY13
has seen a gradual uptrend in these costs. We believe this was necessary to improve
revenue growth levels and to regain the market share that Dabur had lost across a few sub-
categories. That said, while we expect advertising spends to remain healthy, we believe it is
unlikely they would trend upwards of ~13.5%-14% (as % of sales). We forecast average
advertising spends of c12.8% of sales over the next three years.

FIGURE 264
Dabur advertising spend expected to ease from 2Q FY14 onwards; should aid margins

Margin recovery in the International business
As discussed earlier, we expect Namaste margins to improve materially from the troughs of
FY13, as business flux has now stabilised. Dabur expects margins for Namaste US to recover
materially and the International segment OPM increase is expected to be in the range of
c200bps over the next three years.
FIGURE 265
Despite strong revenue growth for Daburs International
segment Namaste

FIGURE 266
margins dipped sharply in FY12, but we expect recovery
ahead
1.2 5.5
13%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1
2
3
4
5
6
2011 2012
I
N
R

B
n
Revenue % of total international

180.1 687.4
15.5%
12.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
100
200
300
400
500
600
700
800
2011 2012
I
N
R

M
n
EBIT EBIT Margin


1.5 1.2 1.3 1.3 1.5 1.3 2.0 1.8 2.3 1.8 2.4 1.9 2.5 2.3 2.5 2.0
16.4%
12.5%12.5%
11.5%
12.6%
10.1%
13.6%
13.4%
15.7%
11.9%
14.4%
12.5%
15.4%
13.0%13.0%
10.8%
8%
10%
12%
14%
16%
18%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Q
2

1
4
E
Q

3

1
4
E
Q
4

1
4
E
R
s

B
n
Advertising Costs As a % of sales
Ad spend curtailed
17 October 2013 119
Deleveraging trend to continue on strong cash flows
Dabur has reported strong operating cash flows with a CAGR of 17.8% over the last five
years, a trajectory we expect to continue over the next three years. In our view, this should
drive a deleveraging story for Dabur which reported a sharp increase in gearing to 0.76x in
FY11 (from 0.19x in FY10) because of the international M&A. We expect limited M&A
activity from Dabur as the company focuses on better integration of the Namaste business
and a recovery of the same.
Strong operating cash flows coupled with muted capex, should help gearing levels come
down to 8% in FY16E (from 54% in FY13), in our view.

FIGURE 267
Dabur operating cash flow trajectory to remain robust

Despite a streak of M&A in
recent years, Dabur still
reported healthy operating
cash flows (CAGR of 17.8%
over the last five years)

We expect this trajectory to
continue and forecast 16.6%
CAGR in operating cash flows


FIGURE 268
which should result in a sharp deleveraging as capex stays relatively flat

Gearing declined to 54% in
FY13 from the peak level of
76% in FY11

Driven by contained capital
expenditure and limited M&A,
we expect gearing to decline
further to 8% by FY16E


3 4 4 6 6 7 10 13 15 16
13%
19%
15%
18%
16%
14%
17%
18%
17%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
2
4
6
8
10
12
14
16
18
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
FY13 - 16E: 16.6%
2 1 2 2 11 11 12 8 5 4
33%
15%
24% 19%
76%
62%
54%
29%
14%
8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
2
4
6
8
10
12
14
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Total Debt Gearing
17 October 2013 120
Continuous reduction in working capital
We note the favourable working capital arrangements at Dabur with a large difference
between the number of receivable & payable days. We expect a continuous reduction in
working capital, driven by a steady ramp-up in the International business and also cross
pollination of products across geographies. Global sourcing of raw materials and increased
scale would also enable the company to get better creditor terms, in our view.

FIGURE 269
Dabur favourable working capital arrangements; large difference in days
receivable/days payable


FIGURE 270
Dabur working capital changes expected to remain favourable

-1 -1 -1 -2 -1 -3
3%
-2%
2%
0%
2%
3%
0%
0%
1%
3%
-2%
-1%
0%
1%
2%
3%
4%
-4
-3
-2
-1
0
1
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)


26.6
82.0
23.1
35.7
12.9
94.4
31.8
121.6
31.8
64.6
0
20
40
60
80
100
120
140
17 October 2013 121
Valuation: Why a re-rating is merited in the case of Dabur
We value Dabur using one-year forward P/E as our primary methodology to set our 12-
month price target, and also compare its key growth and earnings multiples vs peers.
As shown in Figure 271, Dabur has historically (in the last 10 years) traded in a one-year
forward PE range of 15-28x, at a slight discount to other FMCG companies. While we
believe this discount was understandable owing to Daburs smaller market cap status vs its
FMCG peers, we believe the stock could re-rate to the higher end of the historic trading
range given Daburs:
Geographic mix favouring the rural growth areas;
Translation benefits for the international business due to INR depreciation;
Niche portfolio with limited competition; and
Unique mix of a very Indian portfolio, coupled with being one of the few FMCGs to
have an International segment.
We value Dabur at a P/E multiple of 30x, in-line with its coverage peers (and at a 15%
premium to its historical average, which we believe is justified given the companys reliable
growth outlook), on our FY15E EPS which imputes a price target of Rs199 and potential
upside of 18%.

FIGURE 271
Dabur historical one-year forward P/E multiple (trading range of 15-28x)


0
5
10
15
20
25
30
35
40
M
a
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M
a
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0
5
S
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p
-
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5
M
a
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-
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6
S
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p
-
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6
M
a
r
-
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7
S
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p
-
0
7
M
a
r
-
0
8
S
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p
-
0
8
M
a
r
-
0
9
S
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p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
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p
-
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1
M
a
r
-
1
2
S
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p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
17 October 2013 122
FIGURE 272
Dabur historical EV/EBITDA trend (x)

FIGURE 273
Dabur historical P/B trend (x)
8
10
12
14
16
18
20
22
24
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
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1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3

30%
35%
40%
45%
50%
55%
5
6
7
8
9
10
11
12
13
14
15
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
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p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3
P/B ROE (RHS)

FIGURE 274
Dabur has been a strong outperformer vs Sensex in the last 20 years


-16%
12%
-35%
121%
94%
-18%
18%
-39%
28%
-7%
83%
-7%
-31%
26%
8% 9%
24%
4%
26%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3

Y
T
D
Dabur vs. BSE
-41% +196% +1546% Dabur
-7%
+1% +454% Sensex
17 October 2013 123
FIGURE 275
One-year forward P/E Dabur looks attractively placed on our valuation screener vs coverage group & FMCG space

FIGURE 276
One-year forward EV/EBITDA Dabur leads its peers on our valuation screener

Source: Bloomberg estimates for non-covered companies, Barclays Research estimates

Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
peers
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
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FY13 - 16E EPS CAGR
5% discount to FMCG
space
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
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HUL(UW)
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17 October 2013 124
Premium to Sensex in-line with historical average
Despite a strong run in the last few months (outperforming Sensex by 10% and our India
Consumer universe by 8% in the last six months), Dabur is still trading within its historical
P/E range. Additionally, we find comfort in the fact that the current valuation premium
levels (to Sensex) are broadly in-line with the historical average. Highlighting strong
revenue/EPS CAGR of 18.4%/24.0% expected over FY13-16E, we expect Daburs multiples
to rerate and thus initiate coverage with an Overweight rating and a price target of Rs199, a
potential upside of 18%.

FIGURE 277
One-year forward P/E multiple: Dabur vs Sensex

Source: Thomson Reuters Datastream, Barclays Research, Bloomberg
We also note that the Bloomberg EPS consensus has remained rather muted for Dabur in
the last few months (likely due to weaker than expected 1Q FY14). Our numbers are
5%/12% above consensus for FY15E/FY16E, and we expect to see further upgrades in the
consensus numbers as evidence of strong growth and operational improvement unfolds.

FIGURE 278
Daburs premium to the Sensex (on one-year forward PE) has remained broadly stable in
the last couple of years


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Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13
Average
17 October 2013 125
FIGURE 279
We expect Daburs re-rating to sustain as it continues to deliver above industry average growth
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Price 22x 24x 28x 32x

FIGURE 280
Dabur Bloomberg consensus revisions

Consensus earnings have
remained muted over the last
three months

We are 5-12% above
Bloomberg consensus for
FY15-16E and expect to see
consensus earnings upgrades
from here
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FIGURE 281
Dabur Barclays Research forecasts vs Bloomberg consensus
INR Mn
Revenues 72,019 85,911 102,434 71,070 81,989 94,029 1% 5% 9%
Y/Y Growth 16.6% 19.3% 19.2% 15.1% 15.4% 14.7%
EBITDA 12,891 15,808 19,104 12,160 14,241 16,387 6% 11% 17%
EBITDA Margin 17.9% 18.4% 18.7% 17.1% 17.4% 17.4% 79 103 122
PAT 8,993 11,549 14,468 9,275 10,469 12,893 -3% 10% 12%
EPS (INR) 5.2 6.6 8.3 5.3 6.3 7.4 -3% 5% 12%
EPS Growth 18.6% 28.4% 25.3% 22.3% 18.6% 16.9%


17 October 2013 126
Key risks
Downside risks to our investment thesis and price target include:
Global Financial Crisis arose in 2008. As a consequence, the sector has outperformed
the BSE Sensex index for most of this period, materially expanding the premium the
sector trades at versus the market. Any reversal of this trend, where we could see
liquidity flowing from defensives to cyclical, may lead to underperformance of the FMCG
segment, including Dabur.
Commodity pricing pressure on gross margin: Dabur could face significant gross
margin challenges if there is a rise in either Coconut Oil or Crude Oil prices. Our forecast
margin expansion of 100-130bps over the next three years could be under pressure if
Dabur is not able to control its COGS in such an environment.
Rural growth decline: Our revenue growth forecasts are primarily being driven by rural
growth and rising disposable income in this region, the outcome of multiple factors
including a normal/better monsoon and government support to rural areas. Any factor
which affects consumption expenditure in the rural economy could impact our revenue
growth forecast.
Inability to improve International business segment margins: Management hopes to
expand International margins by 100-300bps in the near future, which is also based on
an expectation that the business flux at Namaste US is now under control. Any delay in
the recovery of Namaste could impact our expectations of International margin
expansion.
Any return dilutive M&A: We believe Dabur is on a consolidation mode in its
international operations and any return dilutive M&A could lead to challenges in the
near term.
Upside risks:
Sustained traction of Project Double, helping rural outreach: Project Double has
helped Dabur address a larger population, especially in the hinterlands. Sustained efforts
in this project could lead to greater volume growth.
Continued INR depreciation: INR brings both headwinds and tailwinds to Dabur. While
the cost of some imported raw materials (primarily beverages) could rise, it also brings
in significant translation gains due to international revenues (31% of the group
revenues), with the net benefit still likely being positive. Continued INR depreciation
could thus boost profitability.

17 October 2013 127
FIGURE 282
Dabur income statement
Income Statement (Rs mn) 2013 2014E 2015E 2016E
Sales 61,761 72,019 85,911 102,434
Sales Growth (YoY) 16.4% 16.6% 19.3% 19.2%
Gross Profit 31,568 37,090 44,459 53,266
Gross Profit Margin 51.1% 51.5% 51.8% 52.0%
EBITDA 10,298 12,891 15,808 19,104
EBITDA Margin 16.7% 17.9% 18.4% 18.7%
EBIT 9,174 11,473 14,227 17,331
EBIT Margin 14.9% 15.9% 16.6% 16.9%
Interest Income 775 410 590 919
Interest Expense (ST+LT) (589) (921) (641) (401)
Associate income 0 0 0 0
Others non-operating items 170 350 350 350
EBT 9,530 11,312 14,526 18,199
As a % of Sales 15.4% 15.7% 16.9% 17.8%
Taxes (1,826) (2,319) (2,978) (3,731)
Tax Rate 19.2% 20.5% 20.5% 20.5%
Minorities (24) 0 0 0
Post Tax exceptionals (46) 0 0 0
Net Income 7,634 8,993 11,549 14,468
Net Income Growth (YoY) 18.4% 17.8% 28.4% 25.3%
Net Income Margin 12.4% 12.5% 13.4% 14.1%
Per Share Data (INR) 2013 2014E 2015E 2016E
Shares Outstanding (in mn) 1755.0 1743.6 1743.6 1743.6
Earnings per Share: Basic 4.35 5.16 6.62 8.30
Earnings per Share: Fully Diluted 4.35 5.16 6.62 8.30
Dividends 2,615 2,698 3,465 4,340
Dividend per Share 1.50 1.55 1.99 2.49
Dividend payout ratio 34.2% 30.0% 30.0% 30.0%


Revenue CAGR of 18.4% over
the next three years

Operating margins expected to
improve by c200bps over
FY13-16E

Interest expense should come
down gradually, driven by the
lower gearing levels

We expect a PAT CAGR of
23.8% over the next three
years

17 October 2013 128
FIGURE 283
Dabur balance sheet
Balance Sheet (Rs mn) 2013 2014E 2015E 2016E
Assets
Cash & Securities 5,128 7,377 11,493 17,421
Trade Receivables 4,841 4,933 5,884 7,016
Inventories 8,439 9,762 11,585 13,742
Others 7,623 7,623 7,623 7,623
Total Current Assets 26,031 29,694 36,585 45,801
Long Term Investments & Others 4,589 4,589 4,589 4,589
Property, Plant & Equipment, Net 10,383 10,765 11,332 12,120
Intangible Assets 6,362 6,362 6,362 6,362
Total Assets 47,364 51,410 58,869 68,872
Liabilities
Short-Term Debt 6,114 4,114 3,114 2,114
Trade Payables 7,443 8,610 10,218 10,218
Other Payables 4,320 4,320 4,320 4,320
Total Current Liabilities 17,877 17,044 17,652 16,652
Long-Term Debt 5,399 3,899 1,899 1,899
Provisions 2,360 2,360 2,360 2,360
Others 363 363 363 363
Total Liabilities 26,000 23,667 22,275 21,275
Minority Interests 121 121 121 121
Share Capital 1,743 1,743 1,743 1,743
Reserves & Surplus 19,501 25,880 34,730 45,734
Total Shareholders' Equity 21,244 27,623 36,473 47,477
Total Liabilities & Equity 47,364 51,410 58,869 68,872


We forecast the cash balance
to accrue strongly, given
limited M&A expected near-
term

Debt (short term + long term)
expected to reduce by Rs7.5bn

Gearing ratio forecast to
decline to 8% by FY16E vs 54%
in FY13

17 October 2013 129
FIGURE 284
Dabur cash flow statement
Cash Flow (Rs mn) 2013 2014E 2015E 2016E
Operating profit 9,174 11,473 14,227 17,331
Depreciation & Amortization 1,124 1,418 1,580 1,773
Receivables, (Increase) Decrease (411) (91) (952) (1,132)
Inventories, (Increase) Decrease (199) (1,324) (1,823) (2,157)
Payables, (Decrease) Increase 1,469 1,167 1,608 0
Others (963) 350 350 350
Operating Free Cash Flow 10,194 12,994 14,991 16,166
Interest paid (589) (921) (641) (401)
Interest received 775 410 590 919
Direct Taxes Paid (1,685) (2,319) (2,978) (3,731)
Cash flow before investing activities 8,695 10,164 11,962 12,953
Acquisitions 0 0 0 0
Divestments 714 0 0 0
Capital Expenditure (2,410) (1,800) (2,148) (2,561)
Cash From Investing Activities (1,696) (1,800) (2,148) (2,561)
Free Cash Flow 6,999 8,363 9,814 10,392
ST Debt (Decrease) Increase (521) (2,000) (1,000) (1,000)
LT Debt (Decrease) Increase 1,352 (1,500) (2,000) 0
Dividends (2,830) (2,615) (2,698) (3,465)
Share Issue / Repurchase 0 0 0 0
Others (4,056) 0 0 0
Cash From Financing Activities (6,055) (6,115) (5,698) (4,465)
Cash Flow, Inclusive of Finance 944 2,249 4,116 5,928
Others
Increases (Decreases) in Cash 944 2,249 4,116 5,928
Liquid funds at start of year 4,184 5,128 7,377 11,493
Liquid funds at the End of Year 5,128 7,377 11,493 17,421


Operating cash flow likely to
remain strong, 16.6% CAGR
forecast over the next three
years

We do not expect any major
acquisitions by Dabur over the
next two-three years

and capital expenditure
likely to remain limited

Dividend payout expected to
remain strong; we forecast an
annual 30% dividend payout
over FY13-16E

17 October 2013 130
GODREJ CONSUMER PRODUCTS (EW; PT INR901; +9%): EMERGING MARKET
FMCG PLAY; INITIATE AT EQUAL WEIGHT
We initiate coverage of Godrej Consumer Products (GCPL) with an Equal Weight rating
and a 12-month price target of Rs901, implying potential upside of 9%. In our view,
GCPLs unique portfolio gives it a dominant and resilient presence in the domestic
market. On the international front, GCPLs ability to cross sell its portfolio into other
emerging markets should highlight its international organic growth. However, post a
multiple expansion of 50% in the last 18 months, the market may have priced in this
growth. In our view, this expansion needs to be reversed to previous levels for the stock
to rerate further from current levels and generate attractive upside for investors. Thus,
we value the stock on a one-year forward P/E multiple of 28x (vs past 10-year average
of 21x), but still at a discount of 10% vs peers to obtain our 12-month price target of
Rs901, yielding potential upside of 9%.
Above peer growth (21.2% revenue CAGR vs 16.3% for coverage): We believe GCPL
will deliver one of the best revenue growth rates in our coverage over FY13-16E,
leveraging its unique Hair Care and Household Insecticides portfolio and also its
international market exposure. Hence, our forecast of 21.2% revenue CAGR over FY13-
16E, including an organic component of 17% CAGR, is c490bps above our forecast of a
16.3% CAGR for our coverage universe. For FY14E, this is more pronounced with 21.8%
revenue growth vs 13.6% for our coverage universe.
Well positioned to cross sell its niche portfolio into newer markets: GCPLs Household
Insecticide and Hair Care portfolio are unique offerings vs other FMCG peers, which
have no major presence in these areas. Hence, GCPL is a market leader in most
categories, with dominant #1 or #2 positions. With a spate of acquisitions over the past
few years, GCPL has also established an international presence and distribution
channels, where we believe these products can be cross sold, driving organic growth for
the next two to three years. Hence, we forecast revenue from the International business
to grow at a 25.3% CAGR over FY13-FY16E, even better than our strong domestic
revenue forecast of 17.8% CAGR.
For further re-rating, strong cash generation is key: Rapid expansion of GCPLs business
through M&A has, however, taken its toll on the returns profile, with most returns metrics
including ROE and CROCI declining (CROCI has declined from 30%+ to sub-15% in the last
seven years). In our view, the stocks strong performance is a vindication of this strategy
on EM consumption growth. However, it still trades at a discount to peers and we believe it
needs to demonstrate the ability to substantially improve the returns profile from these
businesses, bringing it closer to the historical level of returns, to narrow this discount.
Valuation: We value GCPLs stock using one-year forward P/E as our primary
methodology and also compare it with other key growth and earnings multiples as a cross
check. GCPL trades at a P/E of 26x FY15E, which is a 30% premium to its historical trading
average of 21x (range of 16-25x over the past 10 years), having re-rated materially in the
past few years. We believe current valuation levels adequately price in the fundamentals,
and our 12-month price target (set by applying a target multiple of 28x, a 10% discount
to peer average to reflect GCPLs weaker cash returns profile, to our FY15E EPS) implies
potential upside of 9% from current levels.
Risks: Downside risks to our investment thesis and price target on GCPL include: 1)
heightened competition in the household insecticide segment; and 2) international market
volatility, including currency and socio-political changes. Upside risks include: 1) better
operating leverage; and 2) cross selling of products in International markets.
GCPL IN / GOCP.NS
Stock Rating
EQUAL WEIGHT
Industry View
NEUTRAL
Price Target
INR 901.00
Price (14-Oct-2013)
INR 826.50
+9%

17 October 2013 131
Godrej Consumer Products Ltd. (GOCP.NS) Stock Rating: EQUAL WEIGHT

Why Equal Weight? In our view, GCPLs unique
portfolio gives it a dominant and resilient presence in
the domestic market, while ability to cross sell its
portfolio into other EMs should highlight its
international organic growth. However, trading at a
50%+ premium to its historical levels, the stock
already appears to be pricing in the fundamentals.

In the upside case, we assume GCPL witnesses
sharper improvement in EBITDA margins and
sustained strong revenue growth trends. We apply a
P/E valuation multiple of 28x (in-line with the base
case) and assume 10% higher earnings for FY15E.

In the downside case, we assume GCPL sees higher
pressure in the international segments along with
market share losses in the domestic market. We apply
a P/E valuation multiple of 24x (vs base case of 28x)
and assume 10% lower earnings for FY15E EPS.



Revenue 64,074 78,053 96,426 114,019 21.2%
EBITDA 10,152 12,410 16,054 19,269 23.8%
EBIT 9,382 11,340 14,669 17,494 23.1%
Pre-tax income 9,285 11,755 15,026 18,222 25.2%
Net income 8,289 8,506 10,950 13,368 17.3%
EPS (reported) (INR) 24.36 25.00 32.18 39.28 17.3%
Diluted shares (mn) 340.3 340.3 340.3 340.3 0.0%
DPS (INR) 5.21 5.00 6.44 7.86 14.7%

EBITDA margin (%) 15.8 15.9 16.6 16.9 16.3
EBIT margin (%) 14.6 14.5 15.2 15.3 14.9
Pre-tax margin (%) 14.5 15.1 15.6 16.0 15.3
Net margin (%) 12.9 10.9 11.4 11.7 11.7
ROA (%) 10.8 10.4 11.6 12.3 11.3
ROE (%) 21.1 21.3 22.3 22.2 21.7
ROCE (%) 13.3 13.7 16.2 17.6 15.2

Total assets 77,010 82,132 94,243 108,388 12.1%
Short and long-term debt 19,486 19,486 19,486 19,486 0.0%
Net debt/(funds) 10,798 11,534 6,884 371 -67.5%
Cash flow from financing 3,553 -1,771 -1,701 -2,190 N/A
Free cash flow -1,264 1,036 6,350 8,704 N/A

P/E (reported) (x) 33.9 33.1 25.7 21.0 28.4
EV/sales (x) 4.6 3.8 3.0 2.5 3.5
EV/EBITDA (x) 29.0 23.8 18.2 14.9 21.5
EV/EBIT (x) 31.4 26.1 19.9 16.4 23.4
Equity FCF yield (%) 0.9 0.4 2.3 3.1 1.7
P/BV (x) 8.5 7.1 5.7 4.7 6.5
Dividend yield (%) 0.6 0.6 0.8 1.0 0.7
Interest cover (x) 84.5 26.0 22.3 22.6 38.8
Net debt/EBITDA (x) 1.1 0.9 0.4 0.0 0.6

Note: FY End Mar

Value
Quality
Sentiment
Low High
17 October 2013 132
Key charts detailing our GCPL Equal Weight investment thesis
FIGURE 285
GCPL best revenue growth outlook in the sector

FIGURE 286
GCPL OPM recovery to historical levels essential

FIGURE 287
GCPL M&A has bought in significant EM exposure

FIGURE 288
GCPL Better cash returns needed for further re-rating
Domestic
56%
Indonesia
20%
Africa
11%
LatAm
8%
Europe
4%
Others
1%

42%
32%
31%
18%
29%
15%
14%
15%
16%
17%
18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
F
Y
0
6
F
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F
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6
E
Cash Returns (CROCI)
Sharp decline due to a spate
of international acquisitions
Material Improvment
needed

Note: as of FY13 sales
Source: Company data, Barclays Research.
Note: CROCI cash return on capital invested
FIGURE 289
GCPL has seen the sharpest P/E rerating relative to its
historical average amongst the coverage group

FIGURE 290
Global comparison: valuation levels price in the growth
expectations

Source: Company data, Barclays Research estimates Source: Barclays Research estimates, Bloomberg estimates for non-covered firms

18.4%
21.2%
12.2%
18.3%
11.6%
15.9%
0%
5%
10%
15%
20%
25%
Group
Revenue growth CAGR FY13-16E
19%
17%
18%
13%
19%
16%
17%
15%
15%
15%
15%
-600
-400
-200
0
200
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10%
12%
14%
16%
18%
20%
F
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E
EBIT margin change (bps - RHS) EBIT Margin
Margin decline: restructuring
operations, adverse product mix
product mix enhancements
& tapering ad spend
25%
34%
5%
28%
21%
21%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Current premium to 20 yr historical average
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
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FY13 - 16E EPS CAGR
Inline with peers
17 October 2013 133
FIGURE 291
GCPL latest trends across key business segments and drivers
FY13-16E
CAGR
Volume growth Domestic portfolios saw healthy volume
growth of 6-7% across most categories
Volume growth likely to be strong, with the rural markets
being especially strong in 3Q and 4Q. GCPL believes rural GDP
is at 6%, and we estimate growth across all 3 domestic
categories could be in the range of 25-28%

Pricing growth Pricing trends have remained rather
subdued with no major price revisions
Mixed outlook, with pricing-led growth tapering off in more
mature categories like Soaps vs Insecticides; pricing will likely
still be better in the Hair Color category

Input costs/gross
margins
Gross margins improved by 130bps y/y
(to 53.6%), primarily driven by a decline
in key raw materials like palm oil
Inventory cover exists to cover another 3-4 months at a lower
INR price. Hence, impact unlikely to be felt in 2Q; for the full
year FY14 GM expansion is likely, as product mix improves
with greater revenue contribution from Hair Color

Impact of currency
movement
Material depreciation in EM currencies
led to margin decline along with a
translationary decline in international
revenue growth
(Consolidated forex loss of Rs154mn)

Advertising spend Expenses up by 54% y/y; at 13.9% of
net sales
We expect ad spend to continue to increase; GCPL may switch
to print/radio media to counter TRAI norms, or even have
shorter ads

Domestic business
(54% of overall
revenue)
While revenue growth remained strong
at 19% y/y, EBITDA margin dipped
sharply to 15.8%
Niche business segments and rural areas to drive growth 17.8%
Household
Insecticides
(44% of dom.
revenue)
24% y/y growth

Continues to grow ahead of the industry
Owing to good monsoons, insecticides continues to see strong
sales; company is continuing with new launches; we expect
25% y/y growth from this segment for next few quarters
22.6%
Soaps
(31% of dom.
revenue)
13% y/y growth
Sharp growth decline though continued
to grow ahead of the industry. Lower
palm oil pricing helped gross margins
Company expects pricing-led revenue growth to decline, and
growth to come from increase in volumes only. 2Qs INR
depreciation has increased input costs, though inventory cover
exists
14.3%
Hair Color
(14% of dom.
revenue)
32% y/y growth
Strong traction in the crme format
Sustained media investments behind
the new portfolio
Premiumisation trend has continued to work well for Hair
Color; We expect a strong growth in 2Q; this trend is likely to
continue for the next 4-5 quarters at least
16.5%
International
business
(46% of overall
revenue)
Strong revenue growth of 30% despite
depreciation of EM currencies;
EBITDA Margins declined sharply to
9.9% owing to one-off factors
Intl markets are witnessing macro issues persisting in 2Q, but
may not directly impact FMCGs
25.3%
Indonesia
(44% of intl revenue)
17% y/y growth (21% CC*)
Sharp margin decline on increase in
wages & impact of the divested food
business
We expect continued margin squeeze for intl business in 2Q
esp. as GCPL adopts a calibrated wage hike
19.6%
Africa
49% y/y growth (58%CC*)
Margins recovering to normal levels
Mixed trends Kenya has performed well, while Nigeria and
even S. Africa are seeing a slowdown
Also, depreciating currencies in EMs could impact negatively
38%
LatAm & Chile
21% y/y growth (31% CC*)
Margin impact due to price cuts; Chile
consolidation on track
2Q seeing steady state performance; however inflation of 20%
coupled with adverse currency moves has deterred GCPL from
achieving targeted milestones
18.2%
Europe (UK)
59% y/y growth
Strong organic + inorganic growth (Soft
& Gentle integration)
We expect double-digit growth to continue for GCPL vs single-
digit growth for industry
27.4%
* Constant currency. Source: Company data, Barclays Research estimates
17 October 2013 134
Snapshot of segmental revenue trends & forecasts
FIGURE 292
Godrej Consumer Products business segments and revenue growth CAGRs over FY13-16E

Note: Revenue contribution is as per FY13

GCPL
Domestic
56%
International
44%
Hair Care
11%
HI
44%
Soaps
34%
Others
11%
17.8%
25.3%
21.2%
15%
20%
25%
30%
Domestic International Group
17%
23%
14%
8%
0%
5%
10%
15%
20%
25%
Hair
Care
HI Soaps Others
Indonesia
44%
Africa
25%
LatAm
19%
Europe
10%
Others
2%
19.6%
38.0%
18.2%
27.4%
14.8%
10%
30%
50%
I
n
d
o
n
e
s
i
a
A
f
r
i
c
a
L
a
t
A
m
E
u
r
o
p
e
O
t
h
e
r
s
Darling
77%
Rapidol
12%
Kinky
6%
Tura
5%
Insecticide
(Hit)
34%
Air
Freshners
(Stella)
26%
Baby care
(Mitu Kids)
15%
Others
25%
17.9%
13.2%
15.8%
0%
5%
10%
15%
20%
Domestic International Group
RevenueCAGR
Margins
RevenueCAGR
RevenueCAGR
17 October 2013 135
Post spate of acquisitions, GCPL in consolidation mode
GCPL has been in a rapidly acquisitive mode over the past few years, building its presence in
key emerging consumer markets like Indonesia, sections of Africa, and LatAm. These
overlay on top of its solid positioning in the Indian domestic market in niche categories. As a
consequence, the companys revenues have grown at a 42% CAGR over the last five years.
Looking ahead, as the final phase of the Darling acquisition is completed, we believe the
next three years revenue CAGR will be 21.2%, of which we see the organic component
growing at a 17% CAGR. We think GCPL has now entered consolidation mode in terms of
integrating these acquisitions, seeking and extending cross pollination ideas, tapping into
distribution synergies, and enabling technology transfers, with a view to improving the cash
generation of these businesses.

FIGURE 293
GCPL revenue growth: strong growth outlook incl. both organic & inorganic drivers
FY08-13 revenue CAGR of 42%
driven by M&A, up from CAGR
of 18.6% over FY03-08

21% FY13-16E revenue CAGR
forecast incl. organic
component of 17% CAGR and
completion of final phase of
Darling acquisition

In our view, operating margins which have taken a hit in the last few years, especially on
the back of an aggressive ramp-up in Ads & Promotional Spend could begin to gradually
improve from current levels. We forecast a 70bps expansion over the next three years, with
most margin expansion being back-ended. Smoother integration of acquisitions, especially
of the Darling operations in African countries that are new to the companys footprint,
could drive further expansion.

FIGURE 294
GCPL operating margin trend: we expect 70bps improvement over next three years
Steep decline in OPM could
reverse gradually as company
consolidates various piecemeal
acquisitions within its fold

10 11 14 20 36 49 64 78 96 114
36%
16%
26%
47%
77%
35%
31%
22%
24%
18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
20
40
60
80
100
120
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
FY08 - 13 CAGR: 42.2% FY13 - 16E: 21.2%
18.5%
17.4%
17.8%
13.5%
18.8%
16.4%
16.7%
14.6%
14.5%
15.2%
15.3%
-600
-400
-200
0
200
400
600
10%
12%
14%
16%
18%
20%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
operations, adverse product
70bps OPM improvement: product mix
enhancements & tapering ad spend
17 October 2013 136

FIGURE 295
GCPL net income trend
We forecast strong EPS CAGR
of 17% for FY13-16E, with
balanced contribution from
both domestic market and
emerging consumer markets.

Domestic market (56% of group revenues): Well balanced
growth to continue
GCPL has registered a strong revenue CAGR of 29% over the last three years in the
domestic market (which contributes c56% to overall revenues), following the FY11
acquisition of Godrej Sara Lee. Its three core categories for the domestic market are
Household Insecticides, Hair Care and Soaps. Of these three, we consider the first two as
niche portfolios, where GCPL has a dominant positioning. These categories also behave like
quasi-discretionary segments and are thus largely immune to the deceleration in general
discretionary spend that we are seeing elsewhere. We believe that while the Soaps segment
could see some headwinds on low category volume growth prospects and increasing
competition, the other core categories should continue to grow strongly and we forecast an
overall growth CAGR of 17.8% over FY13-16E.
FIGURE 296
GCPL domestic business segmental revenue breakdown

FIGURE 297
GCPL CAGR forecasts across various segments

11.0%
42.4%
14.2%
28.7%
16.5%
22.6%
14.3%
8.4%
17.8%
0%
20%
40%
60%
Hair Care Household
Insecticides
Soaps Others Domestic
139%
Quasi Discretionary

Note: Data as per FY13.
1.4 1.6 1.7 3.4 5.0 7.5 8.3 8.5 11.0 13.4
19%
11%
9%
96%
49%
48%
11%
3%
29%
22%
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
16
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
FY08 - 13 CAGR: 39.1% FY13 - 16E: 17.3%
Hair Color
11%
Household
Insecticides
44%
Soaps
34%
Others
11%
17 October 2013 137
Attractive penetration levels provide sufficient headroom for growth
Analyzing the penetration patterns, we believe that the toilet soap category is deeply
penetrated, as it is a highly mature segment. Greater growth from expansion of penetration
levels in the domestic business is more likely from the Household Insecticides and Hair
Color segments, where average penetration is c40%. The introduction of newer formats
(the recent Good Knight Card being an example), expansion of distribution and greater
promotional efforts reinforce our belief in the long-term growth outlook for these
categories.
Furthermore, the material difference in penetration levels between the rural and urban
markets is beneficial for GCPL because of its strong distribution setup. As rural consumers,
in line with our overall thesis discussed earlier in the industry section, seek to spend on
newer products/product categories, underpenetrated segments like Hair Color or
Household Insecticides stand to benefit disproportionately.
FIGURE 298
GCPL penetration levels significant headroom for growth
in Household Insecticides and Hair Color

FIGURE 299
and volumes to be driven by the rural segment

99%
44%
37%
0%
20%
40%
60%
80%
100%
Toilet Soaps Insecticides Hair Color

26%
60%
28%
77%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Rural Urban Rural Urban
Hair Color
Household
Insecticides
17 October 2013 138
Leadership presence in home care segment is a competitive advantage
GCPL continues to enjoy a leadership presence across the core categories with a #1 ranking
in Hair Color, Household Insecticides and liquid detergents and #2 ranking in toilet soaps
(as at FY13). As illustrated in Figure 297, while we expect the Household Insecticide and
Hair Color segments to contribute significantly to GCPLs growth (driven by both industry
growth and strong competitive positioning), the Soaps segment could be relatively muted
on low volume growth prospects and GCPLs mass market presence.

FIGURE 300
GCPL domestic product portfolio: leadership presence to be sustained

GCPL enjoys a strong
competitive positioning across
all the three core categories in
the domestic business

While we expect Soaps as a
category to remain relatively
muted, Household Insecticides
and Hair Color should continue
to drive overall growth

Note: Size of the bubble denotes the revenue contribution from that particular segment.
We expect revenue growth levels to be maintained
We do not expect any inorganic activity in the domestic market in the near future and based
on our views for these three core categories, we forecast organic revenue CAGR of 17.8%
over the next three years. This compares favourably with past growth and should be a
strong driver of operating profitability.

FIGURE 301
GCPL we forecast a revenue growth CAGR of 18% over the next three years


Soaps
Hair Color
Household
Insecticides
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
8.8 10.9 16.8 24.0 30.1 35.8 42.3 49.7 58.5
24%
54%
43%
26%
19%
18%
17% 18%
0%
10%
20%
30%
40%
50%
60%
0
10
20
30
40
50
60
70
I
N
R

B
n
Domestic Revenue Growth
Sara Lee Acquisition
17 October 2013 139
Focus on the rural areas to drive volumes?
Rural consumers across income segments are exhibiting a marked propensity towards
spending on high-quality products, which are backed by strong brand values. This is
reflected in rural consumption growth outpacing urban consumption, with the percentage
increase in monthly per capita expenditure in rural markets surpassing its urban
counterparts during the period 2009-2012.
Management commented that rural segments continue to grow at two times the urban
segments driven by high headroom for growth on low penetration levels.
FIGURE 302
GCPL direct rural coverage increased >2.5x in the last 3 yrs

FIGURE 303
Industry incremental consumption expenditure (FY10 vs
FY12)


FIGURE 304
Industry percentage increase in total monthly per capita expenditure
Rural areas are better off in
terms of incremental
purchasing power

As per the company, the FMCG
segment in rural India could
touch US$100bn by 2025

Note: All years are financial years (Y/E March).
Source: NSSO, Company data, Barclays Research

20.8
27
35
50
0
10
20
30
40
50
60
FY10 FY11 FY12 FY13
T
h
o
u
s
a
n
d
s
2.5x
2,994
3,750
2,000
2,500
3,000
3,500
4,000
Urban Rural
+25%
7.3% 7.5%
13.2%
19.2%
14.0%
11.8%
13.9%
17.2%
0%
5%
10%
15%
20%
25%
1987-94 1993-05 2004-10 2009-12
Rural Urban
17 October 2013 140
Household Insecticides (44% of FY13 domestic revenues): Leadership
presence and innovation to drive the growth
We expect the household insecticide segment to continue to grow, driven by both strong
prospects for the segment and GCPLs leadership presence.
Low penetration levels: There is sufficient headroom for growth in this segment,
especially across the rural segment, which in our view justifies the structural long-term
growth prospects. Continued headway in the rural segment should result in market
share gains. Even for a category like mosquito repellents, a necessity in large parts of
India, penetration levels are just around 45%.
Evolving purchasing habits: We believe products like Good knight and Hit are
increasingly becoming a part of the regular purchase basket rather than an occasional
purchase which has resulted in a high consumption frequency.
Innovations like paper format mosquito repellent: GCPL recently launched a paper
format mosquito repellent, called the Good Knight Fast Card, priced at a compelling Rs1
per card and sold in a pack of 10 cards. In our view, innovations like these, which offer
significantly better ease of use and convenience could dramatically alter the volume
growth outlook, and provide a long-term sustainable competitive advantage.
Operational synergies expected: As per our discussion with management, the company
expects significant cost synergies with Sara Lee to continue over the next few years
(cRs2-3bn by FY15E) driven by supply chain efficiencies and raw material procurement.
We believe this should help not only increase margins in this segment, but also position
it strongly against key players in this market like Reckitt Benckiser.

FIGURE 305
Household Insecticides revenue growth trends for this segment
We expect the growth trend to
remain strong in the household
insecticide segment and
forecast revenue CAGR of
22.6% over FY13-16E (vs
42.4% in FY10-13)
1.0 1.1 5.5 9.6 13.2 15.8 19.6 23.9 29.2
15%
76%
37%
20%
24%
22% 22%
-20%
0%
20%
40%
60%
80%
100%
0
4
8
12
16
20
24
28
32
I
N
R

B
n
Household Insecticides Revenue Growth
2010: 395% growth
driven by acquisition of
Sara Lee

FIGURE 306
Latest management comments about the Household Insecticide segment
Strong leadership presence maintained across brands; sustained brand investments should lead to more innovation-led
product launches
Management is confident of a strong FY14 driven by the good monsoon this year
Household insecticides like Good Knight and Hit are increasingly becoming a part of the regular purchase basket for an
average consumer, thus lending a non-discretionary touch to this segment
17 October 2013 141
Soaps (34% of FY13 domestic revenues): Realisation levels to remain muted
While GCPL continues to grow ahead of the market in terms of both value and volume,
owing to its leadership presence and the strong distribution network, we note that growth
levels in the Soaps segment have actually tapered off in the last few quarters. As per our
discussion with management, growth should be volume led going forward (realisation
growth levels have remained stable in the last 8-10 quarters), which in our view would be
challenging given the high penetration levels in this segment (99% as per the company).

FIGURE 307
Soaps both volume and realisation growth are expected to remain muted

While realisation levels have
remained broadly stable,
volume growth has come down
sharply in the last 4 quarters

Continued market share gains highlight the leadership presence
As can be seen in Figure 307, despite volume/value growth levels tapering off in FY13,
GCPL has continued to grow ahead of the industrys levels and gain market share. Given the
high category penetration levels, we expect the trend to continue in future with market
share gains for GCPL despite an overall moderation in growth levels.

FIGURE 308
Soaps strengthening leadership in the core segment; volume growth declined in FY13


19%
19%
17%
24%
6%
2%
4%
7%
5% 5% 5%
10%
7%
10%
11%
11%
14%
13%
11%
6% 6% 6%
0%
5%
10%
15%
20%
25%
30%
Q
2

1
2

Q

3

1
2

Q
4

1
2

Q
1

1
3

Q
2

1
3

Q

3

1
3

Q
4

1
3

Q
1

1
4

Q
2

1
4
E

Q

3

1
4
E

Q
4

1
4
E

Volume Growth Realization Growth
10%
20%
-2%
4%
27%
26%
15%
9%
-5%
0%
5%
10%
15%
20%
25%
30%
FY12 FY13 FY12 FY13
Category GCPL
Value Growth Volume Growth
17 October 2013 142
Key influencing factors in the Soaps segment are:
a) Highly penetrated market to limit category volume growth: As per management,
Soaps remain a highly penetrated segment (c99%) which in our view is a limiting factor
for volume growth. This is reflected in Figure 308, with subdued volume growth of 4%
in FY13 (over a low base of a 2% volume decline in FY12). Within this, however, we
expect GCPL to continue to gain market share despite an overall moderation in growth
levels.
b) Adverse product mix: In our view, GCPLs portfolio is highly skewed towards mass
market toilet soaps such as Cinthol despite the launch of premium products such as
Godrej No.1.
c) Varianting strategy to leverage the existing brands: With the recent launches of aloe
vera and white lily variants for its premium brand Godrej No.1, management is
leveraging its existing successful brands. We believe this strategy should not only help
create price pyramids but also build on the brand.

FIGURE 309
Soaps revenue growth levels expected to remain within the same band

Variations like gels, body wash
could further drive future
growth, creating newer
submarkets.

FIGURE 310
Latest management comments about the Soaps segment
Foray into the shower gels format leveraging the strong Cinthol brand to provide a growth impetus. Management
commented that they would look to enter into the other HPC categories like face wash, body wash and skin cream over
time as well
Management expects growth going forward to be volume-led rather than being driven by realisation levels
Continued focus on launching the different variants for premium brands; for instance aloe vera and white lily variants for
Godrej No.1 have been well received as per the management

5.7 7.1 8.3 8.0 10.1 12.3 14.0 16.0 18.4
26%
16%
-4%
26%
22%
13%
14%
15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0
4
8
12
16
20
I
N
R

B
n
Soaps Revenue Growth
17 October 2013 143
Hair Color (11% of FY13 domestic revenues): Strong structural growth
trends
The Hair Color segment has witnessed strong growth levels in the last few years, primarily
driven by GCPLs acquisition of Sara Lee in 2010. We expect this segment to be a strong
growth driver for GCPL over the next few years, driven by:
Innovation-led launches like gels continue to enhance status: One key differentiator for
this segment has been the innovation-led product launches on the back of greater
technological prowess post acquisition. One case in point is the launch of hair colour in the
crme format which has been very successful compared to the earlier powder-based
format.
Attractive penetration levels: Packaged hair colour is still a relatively new category in India,
a space which was earlier dominated by mehendi (henna), reflected in the low penetration
levels (26% in rural, and 60% in urban). We believe there is enough headroom for growth as
well as premiumisation potential.
Increasing consumption frequency: Our channel checks coupled with management
comments reaffirm the increasing frequency of consumption amongst users because of the
stickiness of the products. Previously, while these products were used primarily for grey hair
protection, there is an increasing trend amongst consumers to explore and adopt different
hair colours, which should provide sufficient headroom for a premiumisation strategy.

FIGURE 311
Hair Color we expect revenue growth trends to remain strong

We expect the Hair Color
segment to be a significant
growth driver for GCPL, and
forecast a 16.5% revenue
CAGR over FY13-16E (vs 11%
in FY10-13)

FIGURE 312
Latest management comments about the Hair Color segment
Market leadership is expected to be maintained, driven by innovation-led product launches
Hair colour in the crme sachet format has been well received by consumers and should see strong traction
Growth components: one-third from customer upgrades, one quarter from market share gains and the remainder from
new customers entering the segment

2.0 2.3 2.7 2.9 3.3 3.8 4.5 5.2 6.0
14%
19%
4%
15%
14%
20%
15% 15%
0%
5%
10%
15%
20%
25%
0
2
4
6
8
I
N
R

B
n
Hair Color Revenue Growth
Rural market can convert from
traditional methods like
mehendi for grey hair coverage

Grey hair protection use makes
it quasi discretionary

Younger generations hair
colour use is discretionary

17 October 2013 144
International segments (44% of group revenues): Cross-
pollinating disparate units in EMs
As part of its 3x3 strategy to focus on the emerging markets of Asia, Africa and Latin
America, GCPL has followed an aggressive international expansion strategy, resulting in the
contribution from its international business rising to c44% in FY13 from c18% in FY10. We
believe that while low penetration levels across these emerging markets (Indonesia, Africa,
etc) should support long-term growth, there might be near-term volatility as GCPL
integrates these acquisitions and fluctuating EM currencies pose a challenge.

FIGURE 313
GCPL international expansion complements stable domestic growth

International growth will get an
additional boost when Phase 3
of Darlings acquisition is
completed in 4Q FY14
or 1Q FY15

FIGURE 314
GCPL list of international M&A

Note: Revenues are at the time of the acquisition. Source: Company data, Barclays Research
We forecast a growth CAGR of 25.3% over FY13-16E (vs 98% driven by inorganic
components over FY10-13E), thus increasing the overall contribution from the international
segment to c49% in FY16E (vs 44% in FY13E).
13%
36%
21%
52%
52%
26%
31%
19%
17%
24%
54%
43%
26%
19%
18%
17% 18%
0%
10%
20%
30%
40%
50%
60%
International India
Year Company Acquired Country Market Position
Revenues
(USD Mn)
2005 Keyline Brands UK Hair care and skin care products 33.4
2006 Rapidol South Africa Leader in ethnic hair color 5.0
2008 Kinky South Africa Manufacturer of hair accessories 10.3
2010 Tura Nigeria Manufactures soaps & skin creams 5.4
2010 Megasari Indonesia
Leader in baby wipes, air fresheners and No.2 in
household insecticides
148.0
2010 Issue Latin America Hair Care products 33.0
2010 Argencos Argentina Leader in hair sprays, focussed on hair colors 12.0
2011 Darling Pan-Africa Leader in hair extensions 200.0
2012 Cosmetica Nacional Chile Leader in hair colors 36.0
2012 Soft & Gentle UK Fourth-largest female deodorant brand 33.6
Total 516.6
3x3 strategy to sharpen focus:
Three continents (Asia, Africa,
S. America) through three core
categories Home Care, Hair
Care, and Personal Wash
17 October 2013 145

FIGURE 315
resulting in a sharp increase in contribution from international businesses

Contribution from the
international segment
increased to c44% in FY13
(from 20% in FY07). We expect
this trend to continue and that
the international segment
could contribute c49% of
GCPLs FY16E revenues

Focus shifts to consolidation and cross-pollination
Following our discussions with the company, we believe that GCPL is likely to focus more
on the consolidation and integration of the key acquisitions, namely the Darling Group and
Soft & Gentle, rather than pursuing other M&A opportunities. That said, we believe the
company could potentially enter a few other countries in Africa to leverage the companys
already existing presence and distribution network in Africa, without any significant capex
requirement.
FIGURE 316
GCPL FY13 Intl revenues: geographical contribution

FIGURE 317
GCPL CAGRs across geographies

Note as of FY13. Source: Company data, Barclays Research Source: Company data, Barclays Research estimates
Management comments on future expansion plans
Our idea of 3x3 is to be in three continents, and when we enter a new geography, it has to be with a player in one of those
categories. Once we are in a geography, we are much more open to look at new categories. For instance, historically we
were a toilet soaps player; now we have entered shower gels. Over time, we will look at face wash, body wash and skin
cream as well. Similarly, in Indonesia we have the scale to look at other categories as well. Vivek Gambhir (MD)
Source: Media Reports - LiveMint (5 July 2013), Barclays Research
80% 80%
79%
82%
66%
62%
56%
54%
52% 51%
20% 20%
21%
18%
34%
38%
44%
46%
48% 49%
0%
20%
40%
60%
80%
100%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
India International
Indonesia
44%
ME/Others
2%
Europe
10%
S Africa
6%
Africa
(others)
19%
Latam
19%
39%
14%
24%
20%
38%
18%
27%
15%
25%
0%
20%
40%
60%
Indonesia Africa LatAm Europe Middle
East /
Others
Total
99%
72% 61%
Phase 3 of
acquistion
17 October 2013 146
Margin recovery expected
We believe that as GCPL enters into a consolidation phase, there should be an increase in
the EBITDA margins for the international operations as cross product synergies, common
global sourcing, operational leverage etc come into effect. In our view, margins should be
driven by the key geographies of Indonesia and Africa (constituting 69% of FY13
international revenues), which should offset any price cut pressures in Latin America (19%
of FY13 international revenues).

FIGURE 318
GCPL we expect EBITDA margins to recover in the international business

FIGURE 319
GCPL margin drivers for the International business
Geography
Contribution to
international revenues
FY13 EBITDA
margin Expectations Margin drivers
Indonesia 44% 19% +ve Price hikes across major products (which was offset
by wage hikes in 1Q FY14) to reflected 2H FY14
onwards
Operational leverage to play out due to a continued
increase in volumes
Negative impact due to the divested foods business
impacting 1Q FY14 margins
Africa 25% 16% +ve Positive impact
Store rationalisation and consolidation expected in the
Kinky business, which should help overall margins (11
stores have been closed so far on a y/y basis)
Focus on extending Darling brand to other personal
categories should help in expanding margins
Negative impact
Early signs of consumers trading down witnessed in
South Africa
Latin America 19% 5% -ve Pricing cuts were taken by management in 1Q FY14
on the back of increased competition and Peso
depreciation (margins dipped to 3% in 1Q FY14 from
9% in 4Q FY13)
Europe (UK) 10% 11%
International 13% +ve Translation gains only

0.4 0.4 0.4 0.7 1.1 0.9 0.8 0.9 1.2 0.9 0.8 1.1 1.3 1.4
10.4%
12.7%
11.7%
15.8%
19.9%
16.8%
12.3%
12.9%
15.3%
12.1%
10.0%
13.3%
13.5%
14.3%
0%
5%
10%
15%
20%
25%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Q
2

1
4
E
Q

3

1
4
E
Q
4

1
4
E
I
N
R

B
n
International EBITDA EBITDA Margin
Acquisition of Darling group
17 October 2013 147
Currency trends among the key geographies (% of FY13 Intl revenues)
FIGURE 320
Currency trend: USD/Indonesia Rupiah (Indonesia 44%)

FIGURE 321
Currency trend: USD/Nigerian Naira

FIGURE 322
Currency trend: USD/Chilean Peso (LatAm & Chile 19%)

FIGURE 323
Currency trend: USD/Argentinean Peso

FIGURE 324
Currency trend: USD/GBP (UK 10%)

FIGURE 325
Currency trend: USD/South African Rand (South Africa 6%)

6,000
7,000
8,000
9,000
10,000
11,000
12,000
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
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-
1
1
M
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-
1
2
J
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-
1
2
S
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p
-
1
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D
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-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
Depreciation of 15.4 % in last 3 months
140
145
150
155
160
165
170
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
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p
-
1
1
D
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M
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r
-
1
2
J
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n
-
1
2
S
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p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
Appreciation of 0.6 % in last 3 months
400
420
440
460
480
500
520
540
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
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n
-
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S
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-
1
1
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-
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M
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r
-
1
2
J
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-
1
2
S
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p
-
1
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D
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c
-
1
2
M
a
r
-
1
3
J
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n
-
1
3
S
e
p
-
1
3
3
4
5
6
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
0.6
0.6
0.6
0.6
0.6
0.7
0.7
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
4
6
8
10
12
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
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p
-
1
1
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e
c
-
1
1
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a
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J
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-
1
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p
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-
1
3
S
e
p
-
1
3
17 October 2013 148
Indonesia: Healthy growth prospects
The Indonesia business has been one of the strongest international forays by GCPL and
contributes c44% to overall international revenues as of FY13 (which constitutes c46% of
consolidated sales). Apart from robust revenue growth levels (average of 39% over the last
two years), the Indonesian business has also been of synergetic importance to the domestic
business as the company has derived significant supply chain efficiencies and raw material
procurement benefits. Additionally, the launch of similar products across both the Indian
and Indonesian geographies has helped (eg, the launch of Hit Magic in 1H FY12).
Market share gains: Especially under the Mitu and Stella brands, driven by new product
launches and sustained marketing investment.
Increasing distribution network: Sustained increase in the distribution network should
help in volume rerating and strengthen the leadership presence, especially as attractive
penetration levels provide sufficient headroom for growth.
Working capital reduction to continue: Despite a minor offsetting factor in the form of
increased working capital requirement from modern retail channels, we expect working
capital reduction to continue on the back of: a) inventory optimisation due to increasing
investment in automation processes; and b) global sourcing of common ingredients
which has historically resulted in better credit terms.
Price hikes to help margins: As per management, the bulk of the price hike impact in
1Q FY14 was offset due to a hike in workers wages (by 58%); we expect this to be
reflected in 2H FY14, resulting in an improvement in realisation levels along with a
margin rerating. Additionally, we expect the negative margin impact due to the divested
foods business to even out.
We forecast revenue CAGR of 19.6% in Indonesia over the next three years despite the high
base (vs 38.9% over FY11-13).
FIGURE 326
Indonesia: strong revenue growth trajectory to be
maintained

FIGURE 327
along with an expansion of EBITDA margins


7 9 13 15 18 22
43%
35%
17%
20%
22%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
5
10
15
20
25
FY11 FY12 FY13 FY14E FY15E FY16E
I
N
R

B
n
Indonesia Revenue Growth
0.3 0.3 0.3 0.4 0.5 0.5 0.5 0.6 0.6 0.7 0.5 0.7 0.8 0.8
15%
17%
14%
19%
20%
21%
18%
19%
20%
19%
15%
18%
20%
21%
10%
15%
20%
25%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Q
2

1
4
E
Q

3

1
4
E
Q
4

1
4
E
I
N
R

B
n
Indonesia EBITDA Margin
17 October 2013 149
Africa: Phase 2 acquisition of Darling, overlays organic growth in Hair
GCPL obtains 25% of its International revenues from Africa, a business which we expect to
grow at a 38% CAGR over FY13-16E. While we expect a large component of this growth to
be inorganic, as GCPL completes the final phase of its acquisition of Darling, underlying
organic growth is still robust at a 16% CAGR.
GCPLs presence in Africa expanded through a series of acquisitions starting with Rapidol
and Kinky in South Africa. After developing a better understanding of this emerging market,
Darling was acquired in 2011, bringing with it factors which we think are critical for success
in a disparate market like Africa, namely:
A robust distribution network, where scale provides a distinctive competitive
advantage; and
Gaining brands presence, being largely unknown in Africa and key markets within the
continent like Nigeria and Kenya, Darling brought established and well known brands
into GCPLs fold, which have since been enhanced.
FIGURE 328
The acquisition of 51% of Darling, announced on 1 June 2011, is to happen in a phased manner
Phase Timeline Remarks
Darling revenues
incorporated
Phase 1 Jul, Aug 2011 Companies contributing 45% to Darling Group revenues (for 8 mths) 45.0%
Phase 2 FY13 Will include 70% of the group's revenues 65.0%
Phase 3 FY14-15 Will include 100% of the revenues of the 51% acquisition 100.0%
FY14-16 Will have rights to acquire 100% of Darling through call & put options on the business

FIGURE 329
Africa: revenue growth levels to remain strong despite high base

Hair care in Africa a US$2bn market opportunity
The hair care business in Africa consists of two categories, which are amongst the most
attractive discretionary spend categories, especially for African women:
Hair extensions: a US$1bn market, and
Hair relaxers: an additional US$0.6bn market.
2 4 7 10 16 19
135%
68%
42%
60%
16%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
2
4
6
8
10
12
14
16
18
20
FY11 FY12 FY13 FY14E FY15E FY16E
I
N
R

b
n
Africa Revenue Growth
Phase 1: 45% of Darling
revenues acquired
Phase 2: 65% of Darling
revenues acquired
Phase 3: 100% of
Darling revenues
acquired
17 October 2013 150
As per GCPL, this market has been growing at a low to mid-teens CAGR over the past few
years, with the market being a largely consolidated one as three players account for nearly
~80% of the market. Darling is the market leader, with a market share of roughly 20-25% in
the larger hair extension category, present in 14 countries (including Kenya and Nigeria)
with its key brands being Darling and Amigos.
Group operational review: Margins to improve by 70bps
GCPLs margins have decreased by c420bps in the last three years (from 18.8% in FY10 to
14.6% in FY13) due to: 1) continued restructuring of the international businesses,
2) adverse product mix, and 3) INR depreciation. While we expect these pressures to
partially sustain in the near term, we expect margins overall to recover by 70bps over the
next two to three years, for the following reasons:
Product mix enhancements and tapering ad spend should help the margins in our
view, primarily driven by the Hair Color and Household Insecticide segments. That said,
we view any promotional efforts to drive volumes positively, and prefer that consumer
companies enhance market share especially in rapidly growing markets, than try to
maintain OPM at the cost of letting up on growth.
Additionally, the translationary benefit of INR depreciation also helps OPM.
However, integration of Phase 3 of the Darling acquisition is likely to offset some of
these benefits.
FIGURE 330
GCPL operating margins to improve from these levels


FIGURE 331
GCPL OPM to improve by c70bps over FY13-16E; recovery expected to be back ended

GCPL +ve -ve +ve
18.5%
17.4%
17.8%
13.5%
18.8%
16.4%
16.7%
14.6%
14.5%
15.2%
15.3%
-600
-400
-200
0
200
400
600
10%
12%
14%
16%
18%
20%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
operations, adverse product mix
70bps OPM improvement: product mix
enhancements & tapering ad spend
17 October 2013 151
Trends in raw materials

FIGURE 332
GCPL we expect gross margins to remain stable

Notwithstanding the
movement in commodity
prices, we expect gross
margins to improve slightly on
the back of an improving
product mix

FIGURE 333
GCPL HDPE (packing costs are 22% of raw materials)

FIGURE 334
GCPL palm oil (Oils & Fats are 35% of raw materials)


53.4%
51.4%
53.0%
44.8%
53.6%
53.8%
52.4%
53.9%
54.2%
54.4% 54.4%
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
40%
42%
44%
46%
48%
50%
52%
54%
56%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Gross margin change (bps - RHS) Gross Margin
50
60
70
80
90
100
110
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 13%; Q/Q: Up 11%
100
110
120
130
140
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
17 October 2013 152
Recovery in the International business margins
As discussed above, we think margins should improve for the International business from
these levels driven by a consolidation of recent acquisitions, especially in Indonesia and
Africa; we expect the performance from LatAm to be relatively flat.

FIGURE 335
GCPL we expect EBITDA margins to recover in the International business

As discussed in the previous
section, we expect the key
geographies of Indonesia and
Africa to drive International
margins (after a sharp 230bps
drop in 1Q FY14)

Advertising spend focused on new launches; could taper slightly
GCPL reported a sharp spike in advertising spend in 1Q FY14 with a 42% y/y increase and
ad spend constituting 13.9% of net sales (the highest in the last 24 quarters). We note that
around 24% (of the 42% overall y/y growth) was driven by new product launches, a
strategy that we view positively and a critical investment for the near term especially as
GCPL focuses on its Varianting strategy along with the introduction of new brands in India
(from its global acquisitions).
Per our discussions with management, we believe that advertising spend was front-end
loaded in 1Q FY14 and should moderate in future as a percentage of sales, providing an
uptick to margins.

FIGURE 336
GCPL we expect advertising spend to ease from 2Q onwards, helping margins


0.4 0.4 0.4 0.7 1.1 0.9 0.8 0.9 1.2 0.9 0.8 1.1 1.3 1.4
10.4%
12.7%
11.7%
15.8%
19.9%
16.8%
12.3%
12.9%
15.3%
12.1%
10.0%
13.3%
13.5%
14.3%
0%
5%
10%
15%
20%
25%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Q
2

1
4
E
Q

3

1
4
E
Q
4

1
4
E
I
N
R

B
n
International EBITDA EBITDA Margin
Acquisition of Darling group
0.7 0.9 1.1 0.8 1.2 1.1 1.1 1.1 1.5 1.6 1.8 1.7 2.4 2.7 2.6 2.6
10%
10%
11%
7%
12%
9%
8% 8%
11%
10%
11%
10%
14%
14%
13%
12%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0
1
2
3
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
Q
2

1
4
E
Q

3

1
4
E
Q
4

1
4
E
I
N
R

B
n
Ad spends as a % of sales
17 October 2013 153

FIGURE 337
GCPL advertising spend skewed towards new product launches & development (NPD)

Three-quarters of the increase
in advertising and publicity
spend in the quarter was
targeted towards new launches

Note: numbers are for FY13.
The importance of innovation
GCPL is a leading player in terms of innovation-led product introduction. We believe this is
one of the primary reasons the company has been able to maintain a leading position
across various categories of Hair Care & Household Insecticides. We include a summary of
the key findings of a case study undertaken by British Brands Group regarding the role of
innovation at FMCG companies.
Product innovation: The proportion of new products in the sales mix correlates strongly
with the level of real market growth.
FMCG more sensitive to innovation: The impact on the returns and the value added per
employee because of higher R&D spend is much higher in the branded FMCG
businesses vs other segments.
FIGURE 338
Successful innovation drives market growth

FIGURE 339
Impact on value added per employee of higher R&D spend is
much higher for the FMCG sample vs other sectors

Source: Brands, Innovation & Growth British Brands Group, Barclays Research Source: Brands, Innovation & Growth British Brands Group, Barclays Research
3%
24%
17%
20%
18% 18%
42%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Base NPD Overall Base NPD Overall
Domestic Net Sales growth Advertisement growth
1.9%
0.1%
1.0%
2.8%
3.2%
5.3%
0%
1%
2%
3%
4%
5%
6%
<1% 1-2% 2-7% 7-15% 15-25% > 25%
R
e
a
l

M
a
r
k
e
t

g
r
o
w
t
h

%

p
.
a
Starting % sales from new products
83
91
165
109
143
333
0
50
100
150
200
250
300
350
<1.0 1.0 - 4.0 > 4.0
R
O
C
E
R&D per employee (Euro '000 p.a)
All businesses
Branded FMCG businesses
17 October 2013 154
Business review: Gradual balance sheet improvement

FIGURE 340
GCPL operating cash flow trajectory to improve gradually

FIGURE 341
though we expect gearing levels to come down gradually

FIGURE 342
GCPL gearing should remain higher than that of peers in the Indian Consumer sector

2 2 2 4 4 13 10 7 13 17
16%
18%
11%
20%
10%
27%
15%
8%
14%
15%
0%
5%
10%
15%
20%
25%
30%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
1.1 1.9 2.3 0.4 14.7 15.6 19.5 19.5 19.5 19.5
89%
109%
40%
4%
85%
56%
59%
49%
40%
32%
0%
20%
40%
60%
80%
100%
120%
0
5
10
15
20
25
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Total debt Gearing
54%
29%
14%
8%
59%
49%
40%
32%
58%
30%
10%
6%
0%
10%
20%
30%
40%
50%
60%
70%
FY13 FY14E FY15E FY16E
Dabur GCPL Nestle
17 October 2013 155
Continued reduction in working capital
We note the favourable working capital arrangements with a large difference between the
number of receivable and payable days. We expect a continued reduction in working capital
driven by a steady ramp-up in the international business.
FIGURE 343
GCPL favourable working capital arrangements large
difference in receivable/payable days

FIGURE 344
GCPL working capital changes

Debt maturity profile

FIGURE 345
GCPL forex debt to be reduced by US$117mn in FY14E

As per the company, foreign
current debt should steadily
reduce over the next few years,
which in our view should
mitigate earnings volatility

Source: Company data and estimates, Barclays Research

15.8
54.3
20.6
52.9
38.7
71.2
35.4
121.3
41.5
128.0
0
20
40
60
80
100
120
140
-0.2 -0.1 -0.5 0.0 -2.8
4.6
-0.3 -5.8 -2.7 -2.6
3%
1%
3%
0%
8%
-9%
0%
7%
3%
2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
(8)
(6)
(4)
(2)
0
2
4
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
372
357
342
305
255 255
193
145
97
15
15
37
50
62
48
48
59
37
0
50
100
150
200
250
300
350
400
F
Y
1
3
Q
1

F
Y
1
4
Q
2
F
Y
1
4
E
Q
3
F
Y
1
4
E
Q
4
F
Y
1
4
E
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
F
Y
1
7
E
F
Y
1
8
E
F
Y
1
9
E
Pending Debt (USD Mn) Debt repayments (USD Mn)
17 October 2013 156
Valuation: Exceptional value creation for investors over the
years, but current valuations fair
We use a one-year forward P/E multiple as our primary methodology to set our 12-month
price target, and use other valuation metrics as a cross-check. GCPL has witnessed a sharp
valuation rerating in the last four years and the stock is now trading above its historical 10
year band of 16-25x. The sharp rerating is also highlighted by the exceptional returns that
GCPL has generated over the last four years (214% vs 19% for Sensex).
At current stock price levels, we believe the market is pricing in continued market
leadership, margin traction, as well as historical volume growth levels. GCPLs valuation
appears fair and justified on our valuation screens (see Figures 347 and 348). All else equal,
we would wait for significant improvement in cash returns, along with signs of strong
growth fundamentals being sustained, before becoming more positive on GCPL.
We value GCPL on a one-year forward P/E multiple of 28x, at a 10% discount to peer
average to reflect GCPLs weaker cash returns profile, applied to our FY15E EPS, which
imputes a 12-month price target of Rs901, 9% above the current share price.
FIGURE 346
One-year forward P/E (x) GCPL fairly valued on our valuation screens vs coverage group & FMCG segment

FIGURE 347
One-year forward EV/EBITDA (x) GCPL screens favourably on our valuation screener

Source for both charts: Company data, Barclays Research estimates, Bloomberg estimates for non covered companies, Thomson Reuters Datastream
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
Inline with sector average
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
Inline with peers
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
10
15
20
25
30
10% 15% 20% 25%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
UNSP
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
10% 15% 20% 25% 30%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
17 October 2013 157
Valuations have rerated sharply
The sharp run in the stock price (as shown in Figure 351) has resulted in a gradual
expansion of the trading multiple over time and is trading at 30x+ now. This saw an
especially sharp jump in the last 18 months with a 50% rerating in the one-year forward P/E
from 24x to 32x. The stock is now trading beyond its historical range, driven by the 214%
increase in the stock price in the last four years. While we like GCPLs strong fundamentals,
the elevated valuation levels are preventing us from being positive on the stock.
We note that while most of the big FMCG companies have seen a sharp rerating in their
multiple levels over the last decade, GCPL is trading at the highest P/E premium to its
historical 10-year average (34% vs average of 21% for its peers) within our Indian
consumer coverage universe.
FIGURE 348
GCPL sharp rerating of the one-year forward P/E multiple from c20x in March 2012 to 32x-plus now
FIGURE 349
GCPL sharp rerating in P/E multiple levels; trading beyond
the historical range

FIGURE 350
GCPL current premium to historical average: GCPL is
trading at the highest level within our coverage universe


0
100
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1,000
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25%
34%
5%
28%
21%
21%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Current premium to 20 yr historical average
17 October 2013 158
Re-rating of just c40% in last 10 years but returns of c6600% vs BSE
Sensexs 610% and BSE FMCGs 715% over the same period
GCPL has been a strong performer historically and has generated cumulative returns of
c6600% over the last 10 years (10x that of BSE Sensex and 9x that of BSE FMCG). We
believe that while this was driven by the companys robust leadership presence in the
domestic market for the first five to six years, the last few years have seen an additional
boost due to international expansion and enhanced synergies.

FIGURE 351
GCPLs share price has performed very strongly over the last 10 years

FIGURE 352
outperforming Sensex in 10 of the last 12 years


0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
S
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S
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3
GCPL Sensex BSE FMCG
10 yr returns
GCPL: +6584%
BSE: +610%
BSE FMCG: +715%
69%
15%
56%
34%
-33%
-56%
55%
9%
29%
24%
62%
9%
69%
31%
56%
4%
-8%
-21%
8%
29%
11%
-11%
45%
-1%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD
Godrej vs.BSE Godrej vs.Coverage
17 October 2013 159
GCPL: Trading at historical high vs the Sensex on a one-year forward P/E

FIGURE 353
One-year forward P/E multiple GCPL vs Sensex at historic high


FIGURE 354
Trading at a premium of 69% vs Sensex (vs historical average of 33%)


0
5
10
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30
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45
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Sensex Godrej Consumer
-100%
-50%
0%
50%
100%
150%
200%
J
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Average
17 October 2013 160
FIGURE 355
GCPL historical EV/EBITDA

FIGURE 356
GCPL historical P/B


FIGURE 357
GCPL Bloomberg consensus has shown gradual downward revisions

FIGURE 358
GCPL Barclays Research forecasts vs Bloomberg consensus forecasts
INR Mn
Revenues 78,053 96,426 114,019 77,689 92,234 106,308 0% 5% 7%
Y/Y Growth 21.8% 23.5% 18.2% 21.2% 18.2% 10.2%
EBITDA 12,410 16,054 19,269 12,396 15,157 17,852 0% 6% 8%
EBITDA Margin 15.9% 16.6% 16.9% 16.0% 16.4% 16.8% -6 22 11
PAT 8,506 10,950 13,368 8,394 10,319 12,559 1% 6% 6%
EPS (INR) 25.0 32.2 39.3 24.7 30.4 36.9 1% 6% 6%
EPS Growth 2.6% 28.7% 22.1% 1.4% 21.8% 14.7%

8
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22
24
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0%
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180%
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1000
22
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26
28
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32
34
36
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17 October 2013 161
Key risks
Upside risks to our investment thesis and price target:
Better than anticipated margin expansion: We are currently building in a 70bps margin
expansion over the next three years. However, increase in premiumisation trends along
with a sharper-than-expected turnaround in the international business could drive
margins much higher, representing upside risk to our estimates.
Strong growth in emerging markets (EMs): Emerging markets (EMs) constitute c30%
of overall revenues for GCPL. While most of them are in consolidation mode right now
post a spate of acquisitions in the last few years, our estimates could be beaten if these
geographies witness a faster recovery and better synergies than we currently expect,
along with any further tailwinds due to INR depreciation.
Downside risks to our investment thesis and price target:
Headwinds to margin expansion: This could be driven by continued macro headwinds
in the domestic market along with de-premiumisation trends. Pressures on the raw
material front could present a further overhang on the margins.
Greater competition from LOreal and others in the Hair Color business: This could not
only lead to a volume growth decline, but also mar GCPLs ability to take sustained price
increases.
EM currency volatility: With EMs forming c30% of group revenues for GCPL, we believe
it is highly exposed to emerging market currency fluctuations. A strong currency
appreciation would be a negative event for GCPL on account of the translational impact.

17 October 2013 162
FIGURE 359
GCPL income statement
Income Statement (Rs mn) 2012 2013 2014E 2015E 2016E
Sales 48,761 64,074 78,053 96,426 114,019
Sales Growth (YoY) 34.6% 31.4% 21.8% 23.5% 18.2%
Gross Profit 25,476 34,563 42,298 52,496 62,074
EBITDA 8,769 10,152 12,410 16,054 19,269
EBITDA Margin 18.0% 15.8% 15.9% 16.6% 16.9%
EBIT 8,125 9,382 11,340 14,669 17,494
EBIT Margin 16.7% 14.6% 14.5% 15.2% 15.3%
Interest Income 398 350 695 636 1,008
Others non-operating items 122 328 500 500 500
EBT 7,986 9,285 11,755 15,026 18,222
As a % of Sales 16.4% 14.5% 15.1% 15.6% 16.0%
Taxes (2,261) (1,792) (2,351) (3,005) (3,644)
Tax Rate 28.3% 19.3% 20.0% 20.0% 20.0%
Minorities (245) (493) (898) (1,070) (1,210)
Post Tax exceptionals 2,002 1,289 0 0 0
Net Income 7,482 8,289 8,506 10,950 13,368
Per Share Data (INR Mn)
Shares Outstanding (weighted avg; in mn) 335 340 340 340 340
Dividends 1,591 1,771 1,701 2,190 2,674

We forecast 21.2% CAGR in
revenues over FY13-16E
(strongest within our coverage
universe)

EBIT margins expected to
improve by c70bps over FY13-
16E; recovery to be back-
ended

17.3% earnings CAGR
expected over the next three
years (FY13-16E)

17 October 2013 163
FIGURE 360
GCPL balance sheet
Balance Sheet (Rs mn) 2012 2013 2014E 2015E 2016E
Assets
Cash & Securities 6,399 8,688 7,952 12,601 19,115
Trade Receivables 4,725 7,288 8,877 10,967 12,968
Inventories 7,839 10,471 12,686 15,587 18,430
Others 1,227 2,037 2,037 2,037 2,037
Intangible Assets 32,973 39,939 39,939 39,939 39,939
Total Assets 60,092 77,010 82,132 94,243 108,388
Liabilities
Short-Term Debt 359 824 824 824 824
Trade Payables 7,702 10,348 7,837 9,628 11,385
Other Payables 6,902 11,033 11,033 11,033 11,033
Long-Term Debt 15,281 18,662 18,662 18,662 18,662
Provisions 743 807 807 807 807
Others 182 111 111 111 111
Minority Interests 882 2,095 2,993 4,064 5,273
Share Capital 340 340 340 340 340

We forecast the cash balance
to accrue strongly; with a 30%
CAGR over FY13-16E

Gearing levels are expected to
come down gradually; forex
debt to be reduced by
US$117mn in FY14E

17 October 2013 164
FIGURE 361
GCPL cash flow statement
Cash Flow (Rs mn) 2012 2013 2014E 2015E 2016E
Depreciation & Amortization 644 770 1,070 1,385 1,775
Receivables, (Increase) Decrease (936) (2,177) (1,590) (2,090) (2,001)
Inventories, (Increase) Decrease (3,445) (2,632) (2,215) (2,901) (2,844)
Payables, (Decrease) Increase 4,371 2,646 (2,512) 1,792 1,757
Others 4,588 1,905 500 500 500
Interest paid (658) (775) (779) (779) (779)
Interest received 398 350 695 636 1,008
Acquisitions 0 0 0 0 0
Free Cash Flow 3,629 (1,264) 1,036 6,350 8,704
Short-Term Debt (Decrease) Increase (57) (36) 0 0 0
Long-Term Debt (Decrease) Increase (1,391) 0 0 0 0
Dividends (1,697) (1,879) (1,771) (1,701) (2,190)
Share Issue / Repurchase 9,089 2,993 0 0 0
Others (5,443) 2,475 0 0 0
Cash From Financing Activities 501 3,553 (1,771) (1,701) (2,190)
Cash Flow, Inclusive of Finance 4,130 2,289 (735) 4,649 6,514
Others 0 0 0 0 0
Increases (Decreases) in Cash 4,130 2,289 (735) 4,649 6,514

Operating cash flow forecast
to remain strong; 19.0% CAGR
(FY13-16E)

Capital expenditure expected
to remain rather limited as we
believe the bulk of acquisitions
are done

Dividend payouts to remain
strong; we forecast 20%
annual dividend payout over
FY13-16E

17 October 2013 165
HUL (UW; PT INR521; -13%): RECEDING VOLUMES MEET EXPENSIVE MULTIPLES;
INITIATE AT UNDERWEIGHT
Hindustan Unilever (HUL) is a dominant player in the Indian Consumer sector, with a
wide presence across most major categories. Despite this, we rate the stock
Underweight, driven primarily by: 1) a weaker revenue and earnings growth outlook
volumes have receded across most categories since 3Q FY13, due to the weaker macro
environment, and we expect this to continue despite resurgent rural spending;
2) multiples have expanded materially, and offer limited downside protection the
stock trades at a 127% premium to the Sensex vs the 20-year historical average of 75%;
and 3) growing competition across most of HULs core categories. We set our 12-month
price target at Rs521, based on a P/E multiple of 30x applied to our FY15E EPS of
Rs17.4, implying 13% potential downside.
70% of sales are from high-penetration segments; needs premiumisation support:
HULs growth rates have decelerated over the past few quarters due to: 1) a broader
economic slowdown leading to a deceleration in consumption spend; and 2) stalling of
premiumisation, which has been the driver of growth for mature segments with high
penetration (Soaps, Detergents, Tea, and Oral Care). Our India Strategist, Bhuvnesh
Singh, expects the macro environment to remain weak and inflation to persist (see
Where are the risks, 8 August 2013). We echo this view, with slight pressure on input
costs anticipated as well. On a bottom-up basis, we forecast a weak 3-year volume
CAGR of 5%, down from the past 5-year volume CAGR of 8%. A strong economic
recovery, with premium products returning to past 20+% CAGR is critical for HUL to get
to high-teens growth trajectory, in our view.
Intensifying competitive landscape coincides with senior management change: We
expect competitive intensity to rise across HULs product portfolio, likely most intense in
personal care including in skin care (with launches by Dabur and Emami) and oral care
(P&Gs Oral B entered India in July 2013). A stalling of premiumisation and intensifying
competition also coincides with recently announced senior management changes and
the new management will need to tackle these growth issues in HULs core categories.
Future-focused model could be a differentiator longer term: HUL has articulated an
interesting three-pronged strategy: 1) investing into a Portfolio of the Future;
2) reaching out to Geography of the Future; and 3) an intensifying focus on Channel of
the Future. We are positive about these future-focused strategies, which should help it
reap the benefits of an economic rebound. However, near-term pressures cannot be
ignored, which prevents us from taking a more positive stance.
Valuations: 10-year peak multiples not justified; HUL exposure through Unilever? We
value HUL using one-year forward P/E as the primary methodology, cross-checked with
EV/EBITDA, PEG and other metrics. It trades on a one-year forward P/E of 34.5x FY15E vs
its10-year historical trading range of 20-30x. We set our target P/E at 30x FY15E, in-line
with the India Consumer sector average, which imputes a price target of Rs521, yielding
potential downside of 13%. As discussed in the HUL in a Unilever Group context section,
for global EM consumption exposure, Unilever PLC (OW; PT GBp2,900) trading at 14.8x
P/E for FY15E (ex-EM subsidiaries) may be a better way to play the theme vs HUL.
Risks: Upside risks to our investment thesis and price target on HUL include: 1) a sharp
recovery in staples and discretionary spending on the back of a solid recovery in the
economy; 2) stronger-than-expected traction in rural areas (c40% of HUL profits come
from this segment); 3) moderation of pricing pressures in the Soaps and Skin Care
segments; and 4) pickup in premiumisation trends in the Personal Products segment.
HUVR IN / HLL.NS
Stock Rating
UNDERWEIGHT
Industry View
NEUTRAL
Price Target
INR 521.00
Price (14-Oct-2013)
INR 598.05
-13%

17 October 2013 166
Hindustan Unilever Ltd. (HLL.NS) Stock Rating: UNDERWEIGHT

Why Underweight? Our view is primarily driven by: 1)
macro headwinds that are likely to keep consumption
patterns under check; 2) its significant presence in
intensely competitive segments; 3) premiumisation
trends are reversing, leading to adverse product mix
changes; 4) rising royalty payments impacting OPM;
and 5) valuation levels look high.

In the upside case, we assume HUL witnesses the
twin impact of increased volumes along with margin
recovery (enhanced product mix). We apply a P/E
valuation multiple of 33x (vs base case of 30x) along
with 15% higher EPS in FY15E.

In the downside case, we assume HUL sees a faster
decline in volumes, mostly from a further deceleration
in the discretionary segments. We apply a P/E
multiple of 28x (vs base case of 30x) along with 5%
lower earnings in FY15E.



Revenue 258,102 286,143 323,945 364,777 12.2%
EBITDA 40,038 45,211 49,240 55,264 11.3%
EBIT 37,677 42,616 46,377 52,098 11.4%
Pre-tax income 43,495 46,982 51,428 59,511 11.0%
Net income 37,967 35,360 37,542 43,443 4.6%
EPS (reported) (INR) 17.55 16.35 17.35 20.08 4.6%
DPS (INR) 18.50 9.81 10.41 12.05 -13.3%

EBITDA margin (%) 15.5 15.8 15.2 15.1 15.4
EBIT margin (%) 14.6 14.9 14.3 14.3 14.5
Pre-tax margin (%) 16.9 16.4 15.9 16.3 16.4
Net margin (%) 14.7 12.4 11.6 11.9 12.6
ROA (%) 33.0 27.4 24.5 23.9 27.2
ROE (%) 119.2 103.9 73.1 60.1 89.1
ROCE (%) 138.7 147.5 152.0 159.1 149.3

Intangible fixed assets 464 464 464 464 0.0%
Total assets 115,125 128,990 153,000 181,820 16.5%
Short and long-term debt 0 0 0 0 N/A
Net debt/(funds) -17,079 -25,629 -42,663 -63,994 N/A
Cash flow from investing 2,402 -4,292 -4,859 -5,472 N/A
Free cash flow 37,698 33,465 38,251 43,856 5.2%

P/E (reported) (x) 34.1 36.6 34.5 29.8 33.8
EV/sales (x) 4.9 4.4 3.9 3.4 4.2
EV/EBITDA (x) 31.9 28.1 25.4 22.3 26.9
EV/EBIT (x) 33.9 29.8 27.0 23.6 28.6
Equity FCF yield (%) 2.9 2.6 3.0 3.4 3.0
P/BV (x) 48.4 36.9 25.2 17.9 32.1
Dividend yield (%) 3.1 1.6 1.7 2.0 2.1
Interest cover (x) 539.8 17,756.7 3,740.1 207.2 5,560.9
Net debt/EBITDA (x) -0.4 -0.6 -0.9 -1.2 -0.8

Note: FY End Mar

Value
Quality
Sentiment
Low High
17 October 2013 167
Key charts detailing our HUL Underweight investment thesis
FIGURE 362
HUL high penetration segments form bulk of revenues

FIGURE 363
HUL competitive intensity on the rise for most portfolios

FIGURE 364
HUL revenue CAGR at 12.2% to mirror GDP dip

FIGURE 365
HUL increasing royalties (30-35bps/yr) an OPM headwind
121 137 162 175 194 221 258 286 324 365
9%
13%
18%
8%
11%
14%
17%
11%
13%
13%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
300
350
400
2
0
0
7
2
0
0
8
2
0
0
9

(
a
d
j
)
2
0
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0
1
1
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2
2
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3
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
R
s

b
n
Revenues Revenue Growth GDP Growth

Note: 2009 is adjusted as the reporting pattern shifted from calendar year end to
fiscal year end. Source: Company data, Barclays Research estimates
FIGURE 366
HUL unattractively positioned on our valuation screener

FIGURE 367
HUL multiples likely to de-rate from the current 10-yr peak

10
20
30
40
50
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
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-
0
6
S
e
p
-
0
6
M
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r
-
0
7
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7
M
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0
8
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0
8
M
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r
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0
9
S
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0
9
M
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r
-
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e
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-
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M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3

Source: Company data, Barclays Research estimates, Bloomberg estimates for
non covered companies, Thomson Reuters Datastream
Source: Company data, Barclays Research estimates, Bloomberg estimates for
non covered companies, Thomson Reuters Datastream
96%
92%
87%
63% 63%
45%
26%
12%
0%
20%
40%
60%
80%
100%
120%
S
o
a
p
s
D
e
t
e
r
g
e
n
t
s
T
e
a
H
a
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r

C
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e
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l

C
a
r
e
S
k
i
n

C
a
r
e
F
o
o
d
s
C
o
f
f
e
e
72% of revenues 28% of
revenues
Soaps
Detergent
Tea
Coffee
Foods
Skin Care
Hair Care
Oral Care
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

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e
g
m
e
n
t

p
r
o
s
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c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
0.6% 0.6%
0.9%
1.4%
1.3%
1.5%
1.8%
2.1%
2.5%
2.8%
3.15%
10%
12%
14%
16%
18%
0%
1%
2%
3%
4%
2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
2
0
1
7
E
2
0
1
8
E
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
28% premium
to FMCG peers
17 October 2013 168
FIGURE 368
HUL latest trends across the key drivers and business segments
FY13-16E
CAGR
Volume growth Volume growth was partially impacted by
the up-stocking trends linked to the
transport strike. Additionally, management
mentioned a slowdown at the premium end
of the portfolio.
Deceleration in volume growth continues and near-term volume
growth to remain challenging. From HULs perspective, its focus
would be growth which is competitive (industry-beating).
Likely more pronounced in the soaps & detergents (high
penetration levels) and foods segments (slowdown in the
discretionary categories). Personal products & beverages are
relatively better placed in terms of volume traction.
5.3%
Pricing growth Pricing growth was mixed, as a relatively
benign cost environment was offset by the
anniversary effect of price increases last
year.
HUL commented that the price component of its growth has been
fading over the past few quarters (10% in Dec to just 3% now). We
expect the relative slowdown in discretionary spending to not only
lead to an overall de-premiumisation but also weak pricing power.
6.9%
Input costs/gross
margins
Input costs remained benign. HUL stated that operating leverage is not working in its favour
currently (owing to lowering volume growth). So, the company is
not rationalising yet, but driving efficiency to offset this.
Also, a depreciating currency along with a reversal of the declining
price trend in PFAD (a key input in soaps) could add near-term
pressures to gross margins.

Impact of currency Currency impacts through the effect on
commodity prices.
Depreciating rupee should add pressure on input costs (PFAD,
crude oil, etc) and could impact gross margins near term. This
could possibly lead to a round of pricing hikes.

Advertising spend Increased by c40bps (Rs700mn) and was
13.1% of sales in 1Q.
A&P spends are expected to go up in the near term, as: 1) HUL
maintains its focus on premium products; and 2) TRAI norms cap
ad time. The net impact of the volume vs value change brought
about by TRAI norms will depend on the channel mix and size for
HUL, which is still being assessed.

Soaps & detergents
(49% of revenues)
Growth levels declined sharply in this
segment.
HUL is taking market share in this segment and compared to two
quarters ago when Dove & Lux were driving growth, now it is
being led by Lifebuoy an indication that premiumisation is
decelerating?
While this could be partially offset by product innovations such as
liquid detergent, we forecast revenue growth will taper from the
20%+ levels.
14.1%
Personal products
(29% of revenues)
A sharp decline in growth levels, driven
primarily by the skin care market. However,
growth of the overall market moderated,
with volume growth down more than
1000bps vs last year.
After underperforming for 4-6 quarters, HUL has been picking up
market share since launching products in the oral care category in
June. On F&L, significant action was taken in Aug, which should
revive growth for this important brand.
We expect margins to sustain in the high 25%+ range for this
segment, as any volume pressure should be offset by the
improving product mix and scope for increasing prices.
9.0%
Beverages
(12% of revenues)
Strong growth momentum led by tea (all
brands have grown in double digits).
Tea, despite being a mature segment, has seen strong growth
recently, led by pricing growth.
Steady progress in the tea bag category should help drive beverages
growth. Additionally, premium launches of Bru should continue to
help HUL outperform the slowing coffee market.
10.7%
Foods
(6% of revenues)
While the soups segment showed double-
digit growth, other segments remained
relatively muted.
HUL stated that efforts to turn around Knorr with the relaunch are
still on; Kwality is facing significant pressure still and is likely to
return to a 20% trajectory when discretionary consumption
returns.
We expect the Foods segment to remain under pressure, owing to:
1) de-premiumisation of the segment; and 2) weak trends in the
ice-cream segment.
9.7%
17 October 2013 169
FIGURE 369
HUL segmental revenue growth and EBIT margin trends

Soaps and Detergents
49%
Personal Products
29%
Beverages
12%
Foods
6%
Others
4%
13%
13%
8%
10%
9% 9%
12.2%
6.0%
5.5%
5.0% 5.2%
5.2%
0%
4%
8%
12%
16%
FY12 FY13 FY14E FY15E FY16E CAGR
21%
19%
12%
16%
14%
14%
5.9% 6.1%
5.5%
7.0% 6.0%
6.2%
0%
4%
8%
12%
16%
20%
24%
12%
14%
11%
10% 10%
11%
5.1% 5.0% 5.2%
4.9%
5.1%
5%
0%
4%
8%
12%
16%
15%
11%
9%
10% 10%
10%
11.9%
3.0%
4.0%
5.1% 5.4%
4.8%
0%
4%
8%
12%
16%
20%
Soaps and Detergents
49% Personal Products
29%
Beverages
12%
Foods
6%
Others
4%
15%
14%
9%
12%
13%
0%
5%
10%
15%
20%
2009 2010 2011 2012 2013
EBIT Margins
1.0%
1.8%
2.5%
1.8%
2.5%
0%
1%
2%
3%
2009 2010 2011 2012 2013
EBIT Margins
27%
26%
26%
26%
26%
25%
26%
27%
2009 2010 2011 2012 2013
EBIT Margins
15%
14%
9%
12%
13%
0%
5%
10%
15%
20%
2009 2010 2011 2012 2013
EBIT Margins
EBIT
Revenue
Coffee
37%
Tea
63%
Hair
16%
Skin
68%
Oral
16%
Detergent
48%
Soaps
52%

Note: Column charts are Barclays Research growth forecasts for the respective segments; Revenue contribution is as per FY13.
17 October 2013 170
Declining volume growth + flat OPM = muted earnings
Overall, we forecast HUL to generate a 12.2% revenue CAGR and 4.6% earnings CAGR over
the next three years (FY13-16E), vs its historical 5-year (FY08-13) CAGRs of 13.5% and
14.5%, respectively.
Volume growth on the decline: We forecast a volume CAGR of 5.3% over FY13-16E, lower
than its historical 5-year volume CAGR of 8%. Categories contributing to this lowered
volume growth are Beverages (through coffee), Foods (through ice-cream and water) and
Personal Care (through skin care products). Coupled with a pricing CAGR of 4.8%, our net
revenue CAGR forecast for FY13-16E is 12.2%, which compares to the historical 5-year
CAGR of 13.5%.
OPM headwinds abound: We forecast a flat trajectory for OPM over the next three years,
owing to the headwinds HUL faces in the form of rising royalty payments (we estimate the
impact to OPM is c165bps, 30-40bps per year), rising ad spend and adverse OPM changes
resulting from product mix changes (Figure 381).
Senior management changes giving a fresh perspective or adding to near-term
headwinds? We highlight the recent management changes announced at HUL, with Nitin
Paranjpe (former Managing Director) being elevated to Unilevers global head of home care
business. Mr Paranjpe is replaced in India by Sanjiv Mehta (who previously ran the Middle
East and North Africa business and who has been working outside of India for nearly two
decades).
While the company has mentioned that this would not lead to a material change in their
overall strategy, we believe there is still a routine gestation period before which such
transitions are effective. It could be more challenging for HUL since this transition happens
at a time when the companys premiumisation strategy is stalling in the domestic market.
Earnings CAGR of 4.6% (adjusted 10.9%) amongst the lowest in the sector: We forecast
HUL will deliver an earnings CAGR (FY13-16E) of 4.6%, one of the lowest in our coverage
universe (15.9%). However, adjusting for the high base of FY13E (when HUL booked profit
of Rs6.1bn from the sale of properties), our EPS CAGR forecast is still 10.9% one of the
lowest across the regional mainstream FMCG firms.
FIGURE 370
HUL revenue growth to remain muted, as volumes take a hit (in-line with the weak macro environment)

Note: 2009 is adjusted as the reporting pattern shifted from calendar year end to fiscal year end
Source: Bloomberg, Company data, Barclays Research estimates

78 95 102 106 100 101 100 101 99 111 121 137 162 175 194 221 258 286 324 365
18%
21%
7%
4%
-6%
2%
-2%
2%
-2%
11%
9%
13%
18%
8%
11%
14%
17%
11%
13%
13%
-10%
-5%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
300
350
400
1
9
9
7
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(
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F
Y
1
4
E
F
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1
5
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Y
1
6
E
R
s

b
n
Revenues Revenue Growth GDP Growth
FY08 - 13 CAGR: 13.5%
FY13 - 16E:
12.2%
1997-2003: Steep decline in revenue
growth as GDP growth halved to
7.8% from 15.7%
17 October 2013 171
FIGURE 371
HUL performance vs BSE Sensex strong outperformance over the past five years masks long-term underperformance

FIGURE 372
HUL we forecast EBITDA margins will remain subdued over the next three years


FIGURE 373
resulting in a muted earnings outlook for the next 2-3 years

Weak revenue growth coupled
with flat operating margin
trends is likely to result in a
muted EPS growth trajectory

We forecast an EPS CAGR of
4.6% over FY13-16E, vs our
universe average of 15.9%

-14%
25%
28%
58%
36%
-36%
17%
26%
-22%
-60%
-43%
-5%
-37%
-48%
70%
-75%
1%
55%
3%
8%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
1
9
9
4
1
9
9
5
1
9
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6
1
9
9
7
1
9
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1
2
2
0
1
3

Y
T
D
HUL vs. BSE
+135% +179% +53% HUL
-7%
+1% +454% Sensex
Multi year underperformance
19.6%
19.5%
14.5%
13.0%
13.6%
13.7%
13.1%
14.5%
12.2%
14.9%
15.5%
15.8%
15.2% 15.2%
-600
-500
-400
-300
-200
-100
0
100
200
300
400
10%
12%
14%
16%
18%
20%
22%
2
0
0
3

2
0
0
4

F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
19 19 25 22 23 27 38 35 38 43
32%
4%
30%
-12%
5%
17%
41%
-7%
6%
16%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
5
10
15
20
25
30
35
40
45
50
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
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1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
FY08 - 13E CAGR: 14.5% FY13 - 16E: 4.6%
17 October 2013 172
Future-driven strategy could pay off in a strong economic
recovery scenario
In its Annual Report 2013, HUL articulated an interesting three-pronged future strategy
which includes: 1) investing into a Portfolio of the Future; 2) reaching out to Geography of
the Future; and 3) intensifying its focus on Channel of the Future. We are positive about
these future-focused strategies, which should help the company reap the benefits of an
economic rebound. However, our India Strategist, Bhuvnesh Singh, expects GDP to decline
in the near term, owing to multiple macro issues (refer to shaded box below) that pose a
challenge.
Portfolio of the Future: HUL is currently investing into 13 innovative/emerging
segments in India, including areas like body wash and fabric conditioners, where
penetration is either low or the market still needs to be developed. The company
expects growth levels in these categories to be 2-3 times that of the group level;
although these are off a very low base.
Geography of the Future: Although it has one of the widest distribution reaches in the
industry, built up over the past few decades, HUL continues to reinvest in expanding its
distribution outlets after having taken its direct reach to retail outlets from 0.9mn three
years ago to 2mn outlets currently. This has been achieved largely through its Shakti
project, where local villagers have been empowered to become sellers within their
villages or peripheral villages.
Channel of the Future: Modern trade currently constitutes 15% of HULs business vs
the 8-9% industry average. This channel primarily includes large Indian outlets such as
Big Bazaar and Reliance, which are expanding in most Tier 1 and Tier 2 Indian cities.
While HUL does face a disadvantage in terms of margins dealing with large retail chains,
this is generally adequately offset through the elimination of distribution intermediaries.
As retail chains in India continue their expansion over the longer term, we believe these
channels could provide a significant competitive advantage to HUL.

17 October 2013 173
Better exposure to EM consumption through Unilever Group
Subsequent to Unilever increasing its stake increase in HUL to 67.3% (from 53%) in July
2013, we believe that gaining exposure to emerging markets (or Indian) consumption
through parent Unilever (rated OW with a PT of GBp2,900 by the Barclays Research
European Consumer team) may present a better opportunity for global investors (vs
through HUL, which we rate UW). Unilever group has exposure to emerging markets
through its three key subsidiaries in India (HUL), Indonesia and Nigeria, which together
contributed 14.7% of group profits for 2012 but currently account for c30% of the groups
total market capitalisation.
The thesis of Unilever being a more attractive option for investors on an emerging market
focus theme is driven by our view that HUL will be negatively impacted on a twin basis:
a) Low earnings growth: Within the key subsidiaries, HUL has one of the lowest forecast
earnings CAGRs (4.6%) over FY13-16E, affected by pressures across both volume and
realisation growth. Stripping away the three subsidiaries (India, Indonesia and Nigeria),
we believe the rest of the Unilever group could grow by c5.8% at the earnings level
over the next three years.
b) High valuation multiples: While HULs one-year forward P/E multiple is less than
those of the Indonesia and Nigeria subsidiaries on an absolute basis, it is still at a 100%
premium to the parent, which we believe not only offers better earnings growth but
would also gain materially from any upside surprise in HULs performance.
FIGURE 374
Comparison of Unilevers various divisions HUL screens
sub-optimally on our valuation screener

FIGURE 375
HUL has one of the highest 3-year PEG ratios among
Unilever subsidiaries

FIGURE 376
Current market snapshot of key subsidiaries of Unilever
HUL Indonesia Nigeria Unilever - Rest Unilever
Unilever stake 67.3% 85.0% 50.0%
PAT contribution (n 2012) 7.5% 6.9% 0.3% 85.4%
Market cap contribution (as of 14 Oct 2013) 12% 16% 1% 71%
EPS GAGR (FY13-16E)* 4.6% 11.1% 16.9% 5.8% 6.2%
PE (x) 33.8 47.8 41.2 14.8 16.6
3-year PEG ratio 7.4 4.3 2.4 2.5 2.7
Note: *EPS CAGRs for Indonesia and Nigeria are Bloomberg consensus estimates
Source: Company data, Bloomberg, Barclays Research estimates
HUL
Indonesia
Nigeria
Unilever
Group
Unilever -
Rest
10.0
20.0
30.0
40.0
50.0
60.0
0% 5% 10% 15% 20%
P
E
x
3yr EPS CAGR (FY13-16E)
Prefer parent
over HUL
7.4
4.3
2.4
2.7
2.6
0
1
2
3
4
5
6
7
8
HUL Indonesia Nigeria Unilever
Group
Unilever -
Rest
3 yr PEG ratio
Per our comparative analysis,
HUL looks one of the most
expensive stocks in the
Unilever universe with a 3-year
PEG ratio of 7.4, compared
with 4.3 for Unilevers
Indonesia subsidiary and 2.7
for Unilever Group

17 October 2013 174
Interplay of various OPM drivers indicates a flat trajectory
FIGURE 377
HUL operating margins expected to remain muted on account of multiple headwinds

Note: Coverage includes Dabur, HUL, GCPL, ITC and Nestle.
Advertising spend to remain high; Competitive intensity on the rise
A&P spend by HUL has increased c500bps (as a percentage of sales) in the past nine years,
along with an 180bps increase in the past eight quarters. We expect this to continue to
trend up given the following:
New product launches: Especially at the premium end (for example, Indias first liquid
detergent Surf Excel Liquid at Rs230/litre), along with introduction of global Unilever
brands in India (launch of Unilever global brand TIGI under the premium hair care
segment). HUL needs to drive awareness of these products, or play the market maker
role for some of the Products of the Future categories.
TRAI regulation change: Structural increases in the industry A&P spend due to the
recent TRAI regulations, as advertisement minutes/hour are now capped at 10min/hr
(from the high teens previously).
Spend to protect oral care turf: Direct competition against Colgate-Palmolive in the oral
care segment through HULs recently launched campaign should add further to overall
spend. Colgate continues its focus on this segment with sustained media investments,
even at the cost of margins (A&P expenses were up 21% in 1Q FY14).
FIGURE 378
HUL long-term upward trend in A&P spend

FIGURE 379
HUL A&P spend increased sharply in the last eight quarters,
and is expected to remain high
8.4 7.6 8.4 10.1 12.7 14.4 21.3 23.9 27.6 26.3 32.3
8.5%
7.5%
8.4%
9.1%
10.5%
10.5%
10.5%
13.6%
14.2%
11.9%
12.5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0
5
10
15
20
25
30
35
2
0
0
3

2
0
0
4

2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
I
N
R

B
n

6.3 6.5 6.9 6.8 8.2 7.7 8.2 8.2 8.9
11.5%
11.8%11.8%
12.0%
13.1%
12.5%
12.8%
12.9%
13.3%
10%
11%
12%
13%
14%
4
5
6
7
8
9
10
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4
I
N
R

B
n
Advertising & Promotion As a % of sales


HUL -ve -ve -ve
Product mix Commodity Ad Spends Royalty Currency
17 October 2013 175
Increasing royalties to dampen OPMs by c165bps over the next five years
HULs royalty payments are scheduled to go rise to c3.15% of net sales in 2018E from 1.5%
in 2013. While this was broadly expected, putting HUL broadly in line with Unilevers other
subsidiaries (Pakistan, Indonesia, Nigeria), it would nonetheless remain a key overhang on
margins. We forecast royalty payments to increase by c30-35bps each year over the next
two to three years.
FIGURE 380
HUL royalties expected to rise sharply, which should be a
drag on the overall margins

FIGURE 381
Royalties paid by HUL are amongst the lowest of Unilever
subsidiaries globally

1.50%
3.55%
3.50%
3.00%
0%
1%
1%
2%
2%
3%
3%
4%
4%
HUL Unilever
Pakistan
Unilever
Indonesia*
Unilever Nigeria

Source: Company data, Barclays Research Note: Royalty rate for Indonesia has been increased to 5% from 2013 onwards.
EBITDA margin trend
Overall, we see limited opportunities for HUL to increase margins over the next three years
and expect a flat OPM trajectory until FY16E.

FIGURE 382
EBITDA margin trend for HUL


0.6% 0.6%
0.9%
1.4%
1.3%
1.5%
1.8%
2.1%
2.5%
2.8%
3.15%
10%
12%
14%
16%
18%
0%
1%
2%
3%
4%
2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
2
0
1
7
E
2
0
1
8
E
14.5%
13.0%
13.6%
13.7%
13.1%
14.5%
12.2%
14.9%
15.5%
15.8%
15.2%
15.2%
-600
-500
-400
-300
-200
-100
0
100
200
300
400
10%
12%
14%
16%
18%
2
0
0
3

2
0
0
4

F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
17 October 2013 176
Share buyback: strong parent support
We view the share buyback by the parent (Unilevers stake in HUL increased to 67.3% in
June 2013 from 53.2%) as a reaffirmation of Unilevers confidence in Indias consumption
market.
Long-term potential in the Indian market: While the near-term outlook remains
challenging, we believe the long-term potential is prompting these buybacks, especially as
parent companies want a larger share of the profits by way of higher dividends.
Investments met through low cost of capital: This also enables the parent companies to
invest significantly in the Indian entities at relatively cheaper costs of capital (foreign
borrowing costs are less than domestic). This becomes more important as HUL has
reaffirmed its focus on innovation, sustainability initiatives and launch of new products.

FIGURE 383
Share buybacks? An opportunity for the global FMCG players
30 Apr 2013:
Unilever announced an offer to
buy back c22.3% of HUL
shares at a 26% premium to
the share price

26 Nov 2012:
GlaxoSmithKline PLC
announced its offer to buy back
c31.8% of GSK Consumers
shares at a 28% premium to
the share price

FIGURE 384
HULs revenue contribution to Unilever

FIGURE 385
HUL margins lag those of Unilever global


Buyback?

4.9%
5.3%
6.0%
7.8%
6.5%
7.2%
7.3% 7.3%
4%
5%
6%
7%
8%
9%
2006 2007 2008 2009 2010 2011 2012 2013

18%
16%
17%
17%
17% 17%
17%
16%
13%
14%
14%
13%
15%
12%
15%
16%
10%
12%
14%
16%
18%
20%
2006 2007 2008 2009 2010 2011 2012 2013
Unilever Margins HUL Margins
17 October 2013 177
EUROPEAN CONSUMER STAPLES
Iain Simpson
+44 (0)20 3555 3598
iain.simpson@barclays.com
Barclays, London
HUL in a Unilever Group context
Unilever is seen as an emerging market play by global HPC and food investors, a view it
has encouraged through frequent commentary around the importance of emerging
markets to the group. Emerging markets have received a disproportionate share of
investment (both capex and A&P in recent years) and have driven well over 90% of group
organic growth. Within this, HUL is widely viewed in the market one of the crown jewels.
We expect Unilever to continue investing disproportionately in emerging markets,
including HUL. More broadly, Unilevers commentary around strategy at the group level
has some implications for HUL.
Global category management to the fore: The degree of autonomy enjoyed by local
subsidiaries of Unilever has reduced in recent years. In 2011 Unilever restructured its
management, moving to four categories under powerful global presidents. As a result,
decisions around innovation and brand identity are now made more at a global level than
was previously the case. Unilevers COO has responsibility for re-allocating resource
between category/region combinations in response to market trends. This implies that
HULs A&P budget and innovation launch phasing are, to a certain extent, out of its hands;
developments in other regions will have consequences for its budget.
Volume growth remains the key metric: Unilever CEO Paul Polman has consistently
stated that volume growth and market share are the key operational objectives for
Unilever. The company has talked about how previously it failed to respond to aggressive
promotional campaigns from local competitors, resulting in share loss. This is no longer
the case, and Unilever has stated it will prioritise defending market share over defending
margin, believing it to be cheaper to defend market share than regain it.
New focus on margin improvement: Cost-saving programmes and gross margin
accretive mix were flagged as new areas of focus in December 2012. Since Polmans
tenure as CEO started in 2009, volume growth has been the key focus, but there is now
increased emphasis on the need to walk and chew gum i.e. deliver both top- and
bottom-line improvements simultaneously. Trial cost-saving programmes in Laundry and
Ice Cream were flagged in July 2013, with the potential that ultimately these would be
rolled out to other categories.
Need for cash generation: At a group level we look for Unilever to have a 69% dividend
payout ratio in CY13E, falling to 65% in CY14E. In addition, we expect capex to remain at
150%+ of depreciation medium-term, and Unilever is making cash pension contributions
in excess of its IAS19 P&L charge. The implications of this are clear; cash generation is
likely to remain a key area of focus for the group.
Determined to extract economic value from minorities: Unilever has previously spoken
of a need, on a 20-30 year view, to reduce the P&L and cash leakage from minorities. We
expect this to continue through two main mechanisms. Firstly, it has talked of how
greater centralisation of group functions requires greater royalty payments from
minorities. On a long-term view (five-plus years), we expect royalty payments to continue
to increase beyond the already announced step-ups. Secondly, we believe that ultimately
Unilever could reduce the minorities in its quoted subsidiaries to the minimum necessary
to maintain a listing (i.e. 25% for HUL). However, Unilevers recent stake increase in HUL
was widely seen by the industry as poorly timed, coming just before currency devaluation
and the Unilever group profit warning on emerging markets. As a result, we do not expect
a further stake increase near-term, although it remains a longer-term possibility.

17 October 2013 178
Distribution and rural reach expanding in recent times
HULs footprint in the rural areas is increasing not only on the number of touch points, but
more significantly for us, also in terms of quality of the reach. According to management
and our channel checks, we take note of several innovative measures to equip people with
hand-held devices etc that help the company monitor the trends more effectively.
FIGURE 386
Significant penetration difference between the rural and
urban areas

FIGURE 387
HUL rural reach has increased by 4x in the last three years

Project Shakti: Widening reach by partnering with local customers
Project Shakti is a rural distribution initiative aimed at targeting small villages to increase the
reach of HUL products. As part of this, local women are established as touchpoints in the
villages, acting as distributors in more remote areas. This has been a strong initiative by
HUL. Through this program it now covers c3.3mn households in 135,000 villages, with the
help of 48,000 ShaktiAmmas (female touchpoints) and 30,000 Shaktimaans (male
touchpoints). According to management, this not only helps in increasing the reach, but
also encourages brand loyalty by building strong local relationships with customers.
Launch of Shakti DMS: Effective use of technology
HUL has deployed a low-cost mobile IT solution on entry level smartphones, which is
provided to all the ShaktiAmmas. This not only helps to manage inventory, bill orders and
receive the latest promotional offers, but also facilitates offline databases, which takes care
of the poor network coverage in the rural areas.
Project Express: Leveraging the vast distribution network; increasing the
quality of earnings
Project Express was launched in 2011 in order to increase the earnings potential of the
channel partners including ShaktiAmmas. In 2011, HUL entered into an agreement with
Tata Teleservices to distribute the products in the rural markets. At the end of FY13, it
covered 95,000 telecom outlets through a network of 700+ rural distributors. We believe
this initiative not only helps improve the quality of earnings/outlet for HUL, but also
provides a strong traction for the channel partners through extra income.

42%
37%
67%
18% 18%
3% 2%
77%
57%
80%
32%
59%
19%
5%
0%
20%
40%
60%
80%
100%
T
o
o
t
h
p
a
s
t
e
S
h
a
m
p
o
o
H
a
i
r

o
i
l
S
k
i
n

C
r
e
a
m
M
o
s
q
u
i
t
o

R
e
p
e
l
l
e
n
t
I
n
s
t
a
n
t

N
o
o
d
l
e
s
H
a
i
r

D
y
e
s
Rural Urban
0.3
0.8
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2009 2010 2011
Mn
4x
17 October 2013 179
Innovation-driven product launches towards premium end
HUL has been a key player in the FMCG space with regards to the introduction of innovative
products, especially at the premium end of the portfolio. This has enabled it to straddle a
wide price range for its products across different segments, and helped to gradually
upgrade customer preferences to premium products.
FIGURE 388
Premiumisation trends across the different product categories a price snapshot

Source: Industry data (www.localbanya.com), Barclays Research
Premiumisation: Steady rise in household incomes; near-term pressures
remain
A supportive demographic structure, along with increasing disposable incomes, should lead
to an average increase in household income, which, in our view, helps support the
premiumisation trends. This helps companies further segment the market, leading to
consumers upgrading their preferences along with an expansion of the overall market size.
However, we believe that macro weakening has lately led to a relative slowdown amongst
the discretionary segments and a reversal of the premiumisation trends. HULs product
portfolio, skewed towards the premium end, should continue to witness volume growth
pressures in the near term, in our view.

FIGURE 389
Number of households in the higher income category, expected to increase sharply
An increase in average
disposable income augurs well
for a portfolio skewed towards
the premium end over the long
term

However, given the slowdown
in discretionary segments, we
believe this translates into
near-term pressure on volume
growth levels
91%
74%
41%
8%
22%
50%
2%
4%
9%
0%
20%
40%
60%
80%
100%
2004 2009 2015E

Source: HUL presentation (September 2013), Company data, Barclays Research

Category
Lifebuoy INR 20.5 Lux INR 60.0 Dove INR 132.0
Rexona INR 22.0 Breeze INR 30.0 Pears INR 150.0
Fair & Lovely INR 86-110
Ponds INR 54
INR 110.0 Dove INR 135.0
INR 140-220
INR 220.0
Surf Excel
INR 110.0 Lakme INR 140-200
Yellow Label INR 280.0 Red label Tea
Hair Care
Active Wheel INR 45.0 Rin
Clinic Plus Sunsilk INR 90-100
Skin Care Ponds
Taaza INR 150.0
Mass Market Middle Premium
Skin Cleansing
Laundry INR 76-115
Macro slowdown has
impacted premiumisation
trends, with customers down
trading in discretionary
segments
17 October 2013 180
Business overview: Twin impact on margins & volumes
FY13 growth was driven primarily by a sharp increase in the realisation levels, while volume
growth remained tepid, a trend that continued in 1Q FY14. We forecast a twin negative
impact across both volumes and realisation levels for HUL in the near term.
Portfolio skewed towards intensely competed segments: We believe heightening
competition across the key segments of HULs product portfolio soaps, detergents and
oral care will continue to pressure volume growth levels. This is partially reflected in
the sharp volume drawdown in the last few quarters and driven both by heightened
competition as well as a macro slowdown.
A slowdown in premiumisation levels: Management comments, along with our
channel checks, have highlighted this, which, in our view, should keep realisation
growth levels under check, Growth moderation in the discretionary segments is in turn
resulting in a slowdown in consumer uptrending, in our view. For example, the soaps
segment, which was a prime beneficiary of the premiumisation trends, is now driven by
the mass market product Lifebuoy rather than the premium offering Dove.

FIGURE 390
HUL sharp decline in volume growth levels over the past 8-10 quarters
Volumes have declined
materially over the past couple
of years, impacted in part by
the significant macro
headwinds
11.0%
14.0%
13.0% 13.0%
8.3%
9.8%
9.1%
10.0%
9.0%
7.0%
5.0%
6.0%
4.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Q

3

1
3
Q
4

1
3
Q
1

1
4


FIGURE 391
HUL FY13 was driven by an increase in realisation levels across the board
A prolonged slowdown likely to
impact the ability to sustain
price hikes too
6.1% 6.0%
5.0%
3.0%
12.5%
7.0%
8.2%
7.5%
0%
2%
4%
6%
8%
10%
12%
14%
Soaps and Detergents Personal Products Beverages Foods
FY13 Volume Growth FY13 Price Growth


17 October 2013 181
Product mix: High presence in intensely competed segments

FIGURE 392
HUL Soaps/detergents & personal products has gradually increased in terms of revenue
contribution

Revenue contribution increased
from soaps & personal
products category, both of
which are witnessing
increasing competition
44% 43%
45% 44% 46% 46%
48%
47%
45%
48% 49%
21% 24%
25% 26%
27% 26%
26% 28%
30%
30%
29%
12%
12%
12%
11%
11% 11%
11%
12% 12%
12% 12%
8% 7%
4%
4%
4% 5%
5%
5% 6%
6% 6%
0%
20%
40%
60%
80%
100%
Soaps and Detergents Personal Products Beverages Foods


FIGURE 393
HUL increasing competition with volume pressures is an overhang on the high-margin
Personal Products segment

High margins for the personal
products segment is witnessing
increasing competition, which
along with de-premiumisation
trends, should not only result in
a volume growth moderation
but also keep the realisation
levels muted


FIGURE 394
HUL intensely competed segments with high penetration constitute bulk of the portfolio

HUL has a high presence in the
categories, with intensely
fought for market share
consisting of a larger number
of players

Note: Size of the bubble
indicates the category
contribution to revenues

51%
47%
45%
38% 39%
45% 46%
42%
30%
37%
40%
34% 40% 46%
47%
49%
46% 45%
46%
55%
52%
48%
11%
10%
14%
14% 11%
10% 10%
11%
13%
11% 12%
-20%
0%
20%
40%
60%
80%
100%
Soaps and Detergents Personal Products Beverages Others/Foods
Soaps
Detergent
Tea
Coffee
Foods
Skin Care
Hair Care
Oral Care
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
17 October 2013 182
Soaps & Detergents (49% of FY13 revenues): High
penetration levels
Soaps & Detergents is HULs largest segment and constitutes c49% of overall revenues. HUL
is a major player in this segment with a dominant market share (45% in soaps and 38% in
detergents), and a strong growth trajectory in the past decade (growth dipped in 2010, due
to the high 15-month base in 2009). Subsequently, the contribution to overall revenues
from this segment increased to 49% in FY13 (from 44% in FY03). However, the contribution
to EBIT has decreased sharply from c51% in FY03 to 40% in FY13, which is reflected in the
margins decreasing from high 25% (in FY03) to 13% (in FY13).
High penetration levels (at c96%) should limit the volume growth upside for the players in
this segment, in our view. Some of this effect can be seen in the last two years, with volume
growth moderating to c6% (in FY12 and FY13).
Hence, we view positively HULs strategy to improve the product mix by introduction of
premium brands/innovation like the launch of Surf Excel Detergent Liquid and Domex.
As per our estimates, this segment has witnessed a realisation growth of 14.2% and
12.7% in FY12 and FY13, respectively, thus buoying revenues. This was in turn
reflected in expansion of EBIT margins (at 12.7% in FY13 vs 9.3% in FY11).
That said we believe there are significant near-term challenges for the premiumisation
strategy as company has witnessed a slowdown in the consumer uptrending.
Adverse product mix: Our interactions with HUL suggest that category growth was driven
primarily by the mass-market product Lifebuoy rather than by Dove, which is at the
premium end. We expect this trend to continue for the next couple of quarters, owing to
companys inability to uptrend consumers because of weak economic conditions.
Input costs (50% driven by imports) remain an overhang: For this category, more than
50% of raw material costs are import driven, thus resulting in strong upward pressures of
late, as per management. We believe this should not only impact the margins, but any price
increases to pass off these increased costs would be negative for the volumes.

FIGURE 395
Soaps expected to grow at mid-teen rate over the next few years
14.1% over FY13-16E


44 45 50 56 64 99 83 88 106 127 143 165 189
-0%
2%
11%
13%
14%
55%
-16%
6%
21%
19%
12%
16%
14%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-
20
40
60
80
100
120
140
160
180
200
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Soaps + Detergents Revenue Growth
While the non-discretionary
nature of the soaps &
detergents segment should
prove defensive in a weak
environment, we believe high
penetration levels will limit
further volume growth

While we expect product
innovations like liquid
detergent (at the premium
end) to help offset some of the
volume pressures due to an
increase in average realisation,
we forecast revenue to taper
off from the 20%+ level

17 October 2013 183

FIGURE 396
Soaps volume growth decline offset by a sharp increase in realisation levels

Price increases/product mix
change have been able to
offset the dip in volume growth

We expect the pressures on the
volume to increase further, due
to heightened regional
competition and high
penetration levels


FIGURE 397
Soaps sequential rise in EBIT margins over the last 2 years driven by higher realisations

We expect margins to remain
subdued because of high input
costs (more than 50% of costs
are import driven), along with
inability to uptrend consumers
because of weak economic
conditions

FIGURE 398

FIGURE 399
Price trend Copra

30%
-22%
17%
6%
6%
6%
7%
6%
20%
8%
-9%
14%
13%
6%
8%
8%
-30%
-20%
-10%
0%
10%
20%
30%
40%
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Volume Growth Price Growth
10.9 7.8 6.8 7.4 10.0 14.8 11.9 8.2 12.3 16.2
24.8%
17.3%
13.8%
13.2%
15.6%
15.0%
14.3%
9.3%
11.6%
12.7%
0%
5%
10%
15%
20%
25%
30%
4
6
8
10
12
14
16
18
I
N
R

B
n
Soaps and Detergents EBIT Margins
100
110
120
130
140
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
2,000
4,000
6,000
8,000
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / 100Kg
Copra Copra Price trend in last 3 months
Y/Y: Up 20%; Q/Q: Up 11%
17 October 2013 184
Personal Products (29% of FY13 revenues): Most profitable
segment is witnessing a slowdown
Personal Products is the highest margin segment for HUL and constitutes c29% of the
overall revenues (contribution to overall revenues has increased by c800bps in the last 10
years and to 29% in FY13 from 21% in FY03). HULs market leadership in the key products,
premiumisation trends within this segment along with relative under penetration has led to
a robust profitable growth over the last few years. Personal Products now accounts for 48%
of overall EBIT (in FY13) vs 34% contribution in FY03.
Thus, we believe a slowdown in the highest profitable segment for HUL would be a material
negative.
While there is sufficient headroom for category volume growth due to low-medium
penetration levels across segments (shampoos - 60%; hair oils - 70%; powders 48%;
and deodorants at c8%), we do expect FY14/15 to remain relatively muted due to a
weak macro environment. This is primarily driven by the sharp moderation in the skin
care segment (65% of category revenues, per our estimates), which registered a 2%
revenue growth in 1Q FY14 (slowest in the last few years).
Increasing competition should limit price increases: We note that the oral care and skin
care segments continue to be challenged by Colgate and LOreal (In the premium
segment), which should moderate volume growth for HUL. Additionally, this should also
limit managements ability to increase prices in this segment especially given the decline
in consumer price elasticity of late.
Premiumisation trends to slow down in the near term: Management has been focusing
extensively on their premiumisation strategy through the introduction of Tresemme in
the hair care category (Keratin Smooth variant was launched recently), and refocusing
on the premium brands of Dove, Clear in Hair Care and Ponds (new offerings in
complexion care cream and B&B cream) and Lakme (Premium portfolio revamping
under the Lakme Absolute brand) in Skin Care.
We believe that while this is positive over the long term, weak macro conditions should
continue to put pressure on customer uptrending.

FIGURE 400
Personal Products impacted by the economic slowdown; likely to post 8% revenue
growth this year

We forecast a revenue CAGR of
9% over FY13-16E

24 25 30 34 37 54 50 59 66 75 81 89 97
15%
3%
19%
14%
9%
47%
-6%
16%
13%
13%
8%
10%
9%
-10%
0%
10%
20%
30%
40%
50%
-
20
40
60
80
100
120
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Personal Products Revenue Growth
Personal Products 29% of
sales (contributes c48% of the
overall EBIT)

The company has indicated
that skin care segment
remains challenging because
of muted growth in Fair &
Lovely

Improvement in the product
mix/upgrading customers was
reflected in the 6% realisation
growth in FY13 (vs a flat price
trend in the past five years)

A discretionary sluggish
environment should slow down
any improvement on this front,
in our view

17 October 2013 185

FIGURE 401
Personal Products margin improvement unlikely, in our view

We expect a twin impact of
volume moderation (driven by
skin care segment) along with
a slowdown in the customer
premiumisation trends to
impact margins

FIGURE 402
Personal Products volume growth decline offset by realisation improvement in FY13; we
expect significant pressure on both fronts going forward

Realisation levels have
remained broadly stable over
the past few years (barring the
6% increase in FY13)

We expect heightened
competition to mar
managements ability to take
price increases in this segment

FIGURE 403
Price trends HDPE

FIGURE 404
Price trends Liquid Paraffin

9.0 8.1 8.5 9.2 10.4 14.3 13.0 14.9 17.4 19.5
37.5%
32.7%
28.6%
27.5%
28.2%
26.5%
25.7% 25.6%
26.5%
26.1%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
4
6
8
10
12
14
16
18
20
22
I
N
R

B
n
Personal Products EBIT Margins
36%
-8%
15%
12%
6%
5%
5%
5%
8%
1%
1%
0%
7%
3%
5%
4%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
50
60
70
80
90
100
110
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 13%; Q/Q: Up 11%
30
35
40
45
50
55
60
65
70
75
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 0%; Q/Q: Up 8%
17 October 2013 186
Beverages (12% of FY13 revenues): Yet another victim of the
discretionary dip
Beverages account for c12% of HULs revenues, which have been broadly stable in the past 10
years (along with a stable EBIT contribution at c12%). Within this, tea constitutes c73% of the
revenues (where HUL has a 22% share in the organised market) and coffee constitutes the
rest, with 27% of segment revenues (where HUL has a 50% share in the organised market).
This segment is dominated by the unorganised players who constitute c50% of the overall
market. The rest of the market is shared between HUL, Nestle and Tata Tea.
Launch of premium variants unlikely to result in a significant rerating: HUL has
recently launched the premium brands for Bru Gold and Bru Exotica, thereby leveraging
its well established brand to venture into new segments. While we expect HUL to gain
market share in this segment (at the expense of Nestle) backed by the increased
advertising spends, we believe the overall growth levels should remain rather muted
because of the discretionary nature of the portfolio.
Coffee should outperform tea: We expect the coffee segment to drive the revenue
growth for this segment in near term owing to: a) launch of premium variants (which
contribute just 6-7% of coffee revenues vs c18-20% for the tea segment); and b) more
headroom for growth as the tea segment has upwards of 80% penetration, while coffee
has sub15%.
Upward pressures on the raw material: Industry commentary suggests a continued
stress on the input costs (fresh milk, green coffee and sugar) in this segment. While we
agree these prices are volatile over a long period of time, we would remain cautious over
the near term on this.
Overall, we expect this segment to grow at moderate revenue CAGR of 10.3% over FY13-
16E (vs the historical five-year CAGR of 14.2%).

FIGURE 405
Beverages expected to remain muted on account of broader decline in spend
We expect this segment to
grow at moderate revenue
CAGR of 10.3% over FY13-16E
(vs the historical five-year
CAGR of 14.2%)


12 12 13 13 15 23 21 23 26 30 33 37 40
-4%
1%
7%
4%
15%
50%
-7%
10%
12%
14%
11%
10% 10%
-10%
0%
10%
20%
30%
40%
50%
60%
-
5
10
15
20
25
30
35
40
45
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Beverages Revenue Growth

Coffee could outperform tea
growth, owing to launch of
new variants, with low
penetration

However, the company
reiterated its focus on tea bags
revenues nearly doubled in
1Q FY14 for smaller sub-
categories like flavoured &
green tea bags

17 October 2013 187

FIGURE 406
Beverages margins trended upwards in FY13 on account of improving pricing

FIGURE 407
Beverages realisation growth levels lag the volume growth trends
Stable trends across both
volume and realisation levels
have been the highlight in the
past three years

FIGURE 408
Price trend Tea

FIGURE 409
Price trend Sugar


2.2 2.4 2.4 2.1 2.3 3.1 3.2 3.6 3.7 4.7
19.0%
20.0%
19.0%
15.7%
15.1%
13.4%
14.9%
15.2%
14.0%
16.0%
0%
5%
10%
15%
20%
25%
1
2
3
4
5
I
N
R

B
n
Beverages EBIT Margins
36%
-8%
15%
12%
6%
5%
5% 5%
8%
1%
1%
0%
7%
3%
5%
4%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
40
60
80
100
120
140
160
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
R
s
/
k
g
Tea Price trend in last 3 months
Y/Y: Up 2%; Q/Q: Up 3%
80
100
120
140
160
180
200
220
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Sugar-M grade
17 October 2013 188
Foods (6% of FY13 revenues): Needs economic revival for
stronger growth
We believe that changing lifestyle in India would be a major structural support due to:
1) increasing number of nuclear families; 2) gradual preferential shift towards more
convenient western dishes; and 3) a high proportion of women in the work force. These
coupled with the overall low penetration levels provide us comfort in the LT prospects.
That said, we believe that the discretionary nature of this segment should continue to pose
challenges in the near term with this segment remaining a drag on the overall margins.
De-premiumisation: We expect this to occur as discretionary segments see a slowdown
because of the overall weak environment and increasing competition from major players
like ITC.
Ice cream growth decline: We expect the recent slowdown in the ice cream segment to
sustain on account of heightened competition from MNC players like Haagen-Dazs and
increased promotional efforts from domestic players like Mother Dairy.
Low margins to remain an overhang: HUL had earlier scaled back its presence in flour
and withdrew from the biscuits segment as it found the business highly commoditised
with low profit margins. We see no change in the situation as margins have remained in
the low single digits over the past six years.

FIGURE 410
Foods realisation growth levels have been maintained despite a volume drop
We expect the Food segment
to grow at 10.5% CAGR over
the next three years, with near-
term growth decline
Source Company data, Barclays Research estimates

FIGURE 411
Foods margin trends have remained subdued over the past seven years

We note that after turning EBIT
positive in 2007, the operating
margins have remained within
the low single digit range. We
expect this to remain under
pressure because of de-
premiumisation trends in this
segment

Source Company data, Barclays Research estimates
7 4 4 5 7 10 10 12 14 15 16 18 20
-15%
-46%
10%
27%
34%
49%
-8%
23%
15%
11%
9%
10% 10%
-60%
-40%
-20%
0%
20%
40%
60%
-
5
10
15
20
25
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
Foods - Revenues (INR Mn) Revenue Growth
-45 -865 -110
274 324 101 171 299 242 370
-0.7%
-23.1%
-2.7%
5.2%
4.6%
1.0%
1.8%
2.5%
1.8%
2.5%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
-1,000
-800
-600
-400
-200
0
200
400
600
I
N
R

M
n
Foods EBIT Margins
Foods contributes 6% to HULs
revenues

Primarily composed of two
segments: 1) packaged foods
(Kissan and Knorr); and 2) ice-
creams (Kwality Walls and
recent launch of Magnum)

Packaged food segment has
been growing at double digit
rates for the past three years;
however, the ice cream
segment has seen some
softening affected by the
overall decline in the
discretionary spends in the
economy

17 October 2013 189
Balance sheet and returns metrics overview
FIGURE 412
HUL return on equity trend

FIGURE 413
HUL cash return on capital invested trend

FIGURE 414
HUL stable operating cash flow trajectory

FIGURE 415
along with an improvement in the FCF yield

FIGURE 416
OCF as a % of sales peer comparison (as per FY13)

FIGURE 417
FCF yield peer comparison (as per FY13)
17%
15%
17%
32%
25%
10%
15%
20%
25%
30%
35%

3.7%
-0.1%
2.5%
1.7%
1.5%
-1%
0%
1%
2%
3%
4%

57%
123%
121%
81% 82%
73%
119%
104%
73%
60%
0%
20%
40%
60%
80%
100%
120%
140%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
FY13: Sharp increase in ROE
driven by the change in equity
To
rationalize
now
56% 56%
45% 46%
38%
46%
46%
39%
36%
25%
30%
35%
40%
45%
50%
55%
60%
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
Cash returns to remain weak
20 21 26 40 24 34 43 49 55 62
16%
16%
13%
23%
13%
15%
17%
17% 17% 17%
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
70
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
15 15 16 30 17 28 38 33 38 44
1.1%
1.1%
1.1%
2.2%
1.2%
2.0%
2.6%
2.4%
2.7%
3.0%
0%
1%
2%
3%
4%
0
5
10
15
20
25
30
35
40
45
50
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
Free Cash Flow Net FCF Yield
17 October 2013 190
Working capital trends
As is similar to most FMCG firms, HUL operates on a negative working capital cycle, owing
to favourable working capital arrangements (significantly higher payable days of 144
compared to receivable days of 11). Operating cash flow as a percentage of sales is a
healthy 17.5% and we expect this to be stable over the next three years.
FIGURE 418
HUL favourable working capital arrangements large
difference in days receivables and payables

FIGURE 419
HUL increasing contribution from modern retail to put
pressure on the working capital cycle

Valuation: Declining volumes offer no downside protection,
in our view
We use one-year forward P/E as our primary methodology to set our 12-month price target,
cross-checked with other valuation metrics. HUL has witnessed a sharp valuation re-rating
in the past four years and stock is now trading at 34.5x FY15E P/E, above its 10-year
historical band of 20-30x.
At current stock price levels, we believe the market is pricing in continued market leadership
and margin traction, as well as historical volume growth levels. However, we believe there
are significant headwinds in the near-term that are likely to keep earnings under check and
lead to a multiple de-rating over the next couple of years. As illustrated in Figures 425 and
426, HUL appears unattractive on our valuation screener vs coverage peers as well as the
broader spectrum of FMCG companies.
Our target multiple is 30x, in-line with the Indian consumer sector average and at a 10%
discount to its 20-year historical average of 32.8x, justified in our view by the muted growth
outlook versus peers over the next three years, which we apply to our FY15E EPS imputing a
price target of Rs521 and implying potential downside of 13%.
9.7
107.4
14.0
179.4
17.7
166.7
11.2
143.8
11.8
139.8
0
20
40
60
80
100
120
140
160
180
200
3 3 15 1 1 3 4 6 7
-3%
-2%
0%
-8%
0%
-1%
-1%
-1%
-2% -2%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
(2)
0
2
4
6
8
10
12
14
16
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(Rs bn)
WCC As a % of sales
17 October 2013 191
FIGURE 420
One-year forward P/E: reaching the upper end of the trading band for the past 20 years

FIGURE 421
One-year forward P/E: trading at the upper end of the trading band despite the correction

Defensive shift and an open
offer from parent Unilever have
meant that multiples rerated
sharply despite a challenging
macro environment

FIGURE 422
HUL historical EV/EBITDA (x) trend

FIGURE 423
HUL historical P/B (x) trend
14
16
18
20
22
24
26
28
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
S
e
p
-
1
1
M
a
r
-
1
2
S
e
p
-
1
2
M
a
r
-
1
3
S
e
p
-
1
3

40%
60%
80%
100%
120%
140%
160%
6
10
14
18
22
26
30
34
38
N
o
v
-
0
2
N
o
v
-
0
3
N
o
v
-
0
4
N
o
v
-
0
5
N
o
v
-
0
6
N
o
v
-
0
7
N
o
v
-
0
8
N
o
v
-
0
9
N
o
v
-
1
0
N
o
v
-
1
1
N
o
v
-
1
2
P/B ROE (RHS)

12
20
28
36
44
52
60
68
76
S
e
p
-
9
4
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
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0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Multiple derating from
60-65x to 12-13x
Multiple rerating of
~100% in the last 5
years
10
20
30
40
50
S
e
p
-
0
3
J
a
n
-
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4
M
a
y
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5
M
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5
S
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p
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5
J
a
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-
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6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
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7
M
a
y
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0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
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-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
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-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
J
a
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-
1
3
M
a
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1
3
S
e
p
-
1
3
17 October 2013 192
FIGURE 424
HULs outperformance vs BSE Sensex: strong outperformance in the past five years masks the long-term underperformance
FIGURE 425
One-year forward P/E HUL appears unattractive on our valuation screener among our coverage group & FMCG segment

Source: Company data, Bloomberg estimates for non covered companies, Thomson Reuters Datastream, Barclays Research estimates
FIGURE 426
One-year forward EV/EBITDA HUL screens unfavourably on our valuation screener

Source: Company data, Bloomberg estimates for non covered companies, Thomson Reuters Datastream, Barclays Research estimates

-14%
25%
28%
58%
36%
-36%
17%
26%
-22%
-60%
-43%
-5%
-37%
-48%
70%
-75%
1%
55%
3%
8%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3

Y
T
D
HUL vs. BSE
+135% +179% +53% HUL
-7%
+1% +454% Sensex
Multi year underperformance
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
16% premiumto
coverage peers
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
28% premium
to FMCG peers
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
10
15
20
25
30
10% 15% 20% 25%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
UNSP
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
10% 15% 20% 25% 30%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
17 October 2013 193
Spike in HULs premium vs the Sensex (at 127% premium) likely to correct
HUL has historically traded at a material premium of 75% to the Sensex, driven by the
defensive nature of the segment (based on the last 20 years). This premium was erased in
2008-09 on account of the Global Financial Crisis, with HUL even trading at a discount to
the market for a brief period. However, in the last two years, we have seen HULs premium
vs the Sensex expanding materially to its current premium of c127%. This has been a
function of market preference for defensive earnings growth companies, and also the recent
open offer by HULs parent, Unilever. As such, we believe any significant further multiple
expansion is unlikely and that the stock could, in fact, de-rate given the muted earnings
outlook.

FIGURE 427
One-year forward P/E multiple (x) HUL vs the Sensex

0
10
20
30
40
50
60
70
80
S
e
p
-
9
4
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Sensex HUL


FIGURE 428
HUL trading at a premium of 127% vs the Sensex (vs 20-year historical average of 75%)

-50%
0%
50%
100%
150%
200%
S
e
p
-
9
4
S
e
p
-
9
5
S
e
p
-
9
6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
0
1
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Average


17 October 2013 194
FIGURE 429
HUL sharp rerating in trading levels driven by the strong stock price run in the past 2-3 years

FIGURE 430
HUL Bloomberg consensus revisions
Limited protection for the stock
in view of consistently lowered
consensus earnings forecast
300
350
400
450
500
550
600
650
15
17
19
21
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
J
u
l
-
1
2
A
u
g
-
1
2
S
e
p
-
1
2
O
c
t
-
1
2
N
o
v
-
1
2
D
e
c
-
1
2
J
a
n
-
1
3
F
e
b
-
1
3
M
a
r
-
1
3
A
p
r
-
1
3
M
a
y
-
1
3
J
u
n
-
1
3
J
u
l
-
1
3

FIGURE 431
HUL Barclays Research forecasts vs Bloomberg consensus estimates

Source: Bloomberg consensus estimates, Company data, Barclays Research estimates

0
100
200
300
400
500
600
700
800
M
a
y
-
9
7
O
c
t
-
9
7
M
a
r
-
9
8
A
u
g
-
9
8
J
a
n
-
9
9
J
u
n
-
9
9
N
o
v
-
9
9
A
p
r
-
0
0
S
e
p
-
0
0
F
e
b
-
0
1
J
u
l
-
0
1
D
e
c
-
0
1
M
a
y
-
0
2
O
c
t
-
0
2
M
a
r
-
0
3
A
u
g
-
0
3
J
a
n
-
0
4
J
u
n
-
0
4
N
o
v
-
0
4
A
p
r
-
0
5
S
e
p
-
0
5
F
e
b
-
0
6
J
u
l
-
0
6
D
e
c
-
0
6
M
a
y
-
0
7
O
c
t
-
0
7
M
a
r
-
0
8
A
u
g
-
0
8
J
a
n
-
0
9
J
u
n
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
J
u
l
-
1
1
D
e
c
-
1
1
M
a
y
-
1
2
O
c
t
-
1
2
M
a
r
-
1
3
A
u
g
-
1
3
INR Mn
Revenues 286,143 323,945 364,777 298,200 338,667 388,928 -4% -4% -6%
Y/Y Growth 10.9% 13.2% 12.6% 15.5% 18.4% 20.1%
EBITDA 45,211 49,240 55,264 45,660 51,643 60,683 -1% -5% -9%
EBITDA Margin 15.8% 15.2% 15.2% 15.3% 15.2% 15.6% 49 -5 -45
PAT 35,360 37,542 43,443 36,190 39,440 45,935 -2% -5% -5%
EPS (INR) 16.3 17.4 20.1 16.6 18.1 21.2 -2% -4% -5%
EPS Growth -6.9% 6.2% 15.7% -5.2% 10.9% 22.4%
17 October 2013 195
Key risks
Sharper-than-expected improvement in the macro environment: HULs volume
growth levels and the valuation premium levels are highly correlated to the overall
macro environment. Any faster-than-expected improvement in the overall GDP growth
and spending patterns could spur demand in HULs favour.
Pickup in the premiumisation trends: HUL is one of the pioneer firms in terms of
premium products and straddling the pyramid. While the premiumisation trends have
remained rather subdued of late, a significant uptick could be a material positive for HUL
both in terms of volumes and a margin uptick (on account of improved product mix and
higher realisations).
Measures to monetise the trade partners: HUL has one of the largest distribution
networks in India which has been a strong sustainable differentiator for it. Latest
measures like Project Telecalling + deal with Tata Teleservices highlight the increasing
focus on the quality of the earnings from these trade partners. A significant pick up in
these activities along with continued superior growth levels in the rural area could pose
a risk to our numbers.
Moderation in pricing pressures in personal product segments: We are expecting a
relatively subdued margin trajectory in the highest-margin segment for HUL, primarily
driven by heightened competition and a subdued skin care market. Any moderation in
these levers could result in a meaningful uptick in margins.
Downside risks:
Further increase in the royalty payments: Any further increase in the royalty payments
remains a tangible risk on operating margins.
Regulatory changes and increased competition in the baby food segment: Till now,
the baby food segment has had a high entry barrier in the form of an advertisement ban,
providing structural benefits to established players. However, if regulations were to
change, HUL could see a sharp increase in overall competitive intensity.
GFC arose in 2008. As a consequence, the sector has outperformed the BSE Sensex for
most of this period, materially expanding the premium the sector trades at versus the
market. Any reversal of this trend, where we could see liquidity flowing from defensives
to cyclical, may lead to underperformance of the FMCG segment, including HUL.
Rural growth decline: Our revenue growth forecasts are primarily being driven by rural
growth and rising disposable income in this region, the outcome of multiple factors
including a normal/better monsoon and government support to rural areas. Any factor
which affects consumption expenditure in the rural economy could impact our revenue
growth forecast.

17 October 2013 196
FIGURE 432
HUL income statement


Income statement (Rs mn) FY13 FY14E FY15E FY16E
Sales 258,102 286,143 323,945 364,777
Sales growth (y/y) 16.7% 10.9% 13.2% 12.6%
Gross profit 123,214 136,776 154,522 174,728
Gross profit margin 47.7% 47.8% 47.7% 47.9%
EBITDA 40,038 45,211 49,240 55,264
EBITDA margin 15.5% 15.8% 15.2% 15.2%
EBIT 37,677 42,616 46,377 52,098
EBIT margin 14.6% 14.9% 14.3% 14.3%
Interest income 2,700 1,366 2,050 3,413
Interest expense (ST+LT) (252) 0 0 0
Associate income 0 0 0 0
Others non-operating items 3,369 3,000 3,000 4,000
EBT 43,495 46,982 51,428 59,511
As a % of sales 16.9% 16.4% 15.9% 16.3%
Taxes (11,612) (12,685) (13,885) (16,068)
Tax Rate 26.7% 27.0% 27.0% 27.0%
Minorities 0 0 0 0
Post tax exceptionals 6,084 (1,063) 0 0
Net income 37,967 35,360 37,542 43,443
Net income growth (y/y) 41.1% -6.9% 6.2% 15.7%
Net income margin 14.7% 12.4% 11.6% 11.9%
Per share data (INR Mn)
Shares outstanding (weighted avg; in
)
2162 2162 2162 2162
Earnings per share: basic 17.56 16.35 17.36 20.09
Earnings per share: fully diluted 17.55 16.35 17.35 20.08
Dividends 40,022 21,216 22,525 26,066
Dividend per share 18.50 9.81 10.41 12.05
Dividend payout ratio 105.4% 60.0% 60.0% 60.0%

We forecast 12.2% revenue
CAGR over FY13-16E (one of
the lowest within our coverage
universe)

Margins are expected to
remain subdued, with EBIT
margin compression of c30bps
over FY13-16E

Earnings CAGR of 4.6% is the
lowest within our coverage
universe

Dividend payout ratio to
remain strong at 60%

Operating cash flow expected
to remain strong; forecast a
19.0% CAGR over FY13-16E

Capital expenditure to remain
rather limited as we believe the
bulk of acquisitions are done

Dividend payout to remain
strong we forecast an annual
60% dividend payout over
FY13-16E

17 October 2013 197
FIGURE 433
HUL balance sheet


Balance sheet (Rs mn) FY13 FY14E FY15E FY16E
Assets
Cash & securities 17,079 25,629 42,663 63,994
Trade receivables 8,335 9,240 10,461 11,780
Inventories 25,270 27,982 31,740 35,604
Total current assets 75,700 87,867 109,880 136,394
Long term investments & others 14,339 14,339 14,339 14,339
Property, plant & equipment, net 24,621 26,319 28,316 30,622
Intangible assets 464 464 464 464
Total assets 115,125 128,990 153,000 181,820
Liabilities
Short-term debt - - - -
Trade payables 51,677 57,224 64,907 72,809
Total current liabilities 57,838 63,385 71,069 78,971
Long-term debt - - - -
Provisions 25,784 25,784 25,784 25,784
Total liabilities 88,385 93,931 101,615 109,517
Minority interests - - - -
Share capital 2,163 2,163 2,163 2,163
Reserves & surplus 24,578 32,896 49,222 70,140
Total shareholders' equity 26,740 35,059 51,385 72,303
Total liabilities & equity 115,125 128,990 153,000 181,820

We do not expect any
borrowings by HUL given its
strong cash balance

17 October 2013 198
FIGURE 434
HUL cash flow statement


Cash flow (Rs mn) FY13 FY14E FY15E FY16E
Operating profit 37,677 42,616 46,377 52,098
Depreciation & amortization 2,360 2,594 2,862 3,165
Receivables, (increase) decrease (1,619) (906) (1,221) (1,319)
Inventories, (increase) decrease (103) (2,712) (3,757) (3,864)
Payables, (decrease) increase 5,414 5,547 7,684 7,902
Others (835) 1,937 3,000 4,000
Operating free cash flow 42,894 49,077 54,945 61,983
Interest paid (252) 0 0 0
Interest received 2,700 1,366 2,050 3,413
Direct taxes paid (10,047) (12,685) (13,885) (16,068)
Cash flow before investing activities 35,296 37,758 43,110 49,328
Acquisitions 0 0 0 0
Divestments 6,459 0 0 0
Capital Expenditure (4,057) (4,292) (4,859) (5,472)
Cash From investing activities 2,402 (4,292) (4,859) (5,472)
Free cash flow 37,698 33,465 38,251 43,856
Short-term debt (decrease) increase 0 0 0 0
Long-term debt (decrease) increase 0 0 0 0
Dividends (28,446) (27,042) (21,216) (22,525)
Share issue / repurchase 73 0 0 0
Others (10,547) 2,126 0 0
Cash From financing activities (38,920) (24,916) (21,216) (22,525)
Cash flow, inclusive of finance (1,222) 8,550 17,035 21,331
Increases (decreases) in cash (1,222) 8,550 17,035 21,331
Liquid funds at start of year 18,300 17,079 25,629 42,663
Liquid funds at the end of year 17,079 25,629 42,663 63,994

We forecast operating cash
flow CAGR of 13.1% over
FY13-16E

17 October 2013 199
NESTLE INDIA (UW; PT INR4,224; -17%): SUB-OPTIMALLY POSITIONED; INITIATE
AT UNDERWEIGHT
We initiate coverage on Nestle India with an Underweight rating and a 12-month price
target of Rs4,224, or potential downside of 17% from the current price. Despite Nestles
dominance in baby food and prepared dishes, our Underweight rating is based on three
key factors: 1) with 70% of its portfolio skewed towards urban consumers, we view it as
less optimally positioned to drive volume growth in the current environment within our
coverage universe; 2) two years of high price hikes further limit its ability to raise prices,
in our view, thus limiting future revenue growth; and 3) valuation is at a 138% premium
vs the BSE Sensex, largely owing to a shift to defensives, in our view, and may not be
sustainable. Further upside from here will likely be constrained considering our
revenue/EPS CAGR forecasts of 11.6% and 14.0%, respectively, for CY12-15E.
70% of product portfolio faces growth challenges: Nestle generates c70% of revenue
from urban areas, as a significant component of its portfolio is mostly discretionary
(chocolates) or aspirational (products like baby food for rural consumers), catering to
urban consumers. However, because of the weak macro environment, high inflationary
levels and continued headwinds on discretionary spending, the urban segment is facing
pressure on its spending capability. We forecast revenue for the milk products and
chocolates segments (which comprise c60% of the companys revenue) to grow at a
muted rate of 3-8% over FY13-16.
Strategy of focusing on margins in lieu of volumes limits ability to rebound: In a large
market such as India where there is room to enhance penetration levels, Nestle has
focused more on pricing-driven growth than on expanding its presence over the past
two years. While the company has managed to post healthy growth rates, the economic
downturn limits its ability to consistently raise prices and focus on premium products.
The larger drawback of this strategy is that when the economy rebounds, the company
could be left severely lagging peers that have gained overall market share (ITC in
noodles, and Amul and Danone in milk products) and enhanced their consumer base.
Limited catalysts to support expanded multiples: We see limited catalysts over the next
six to nine months, either in the form of new product launches, focused efforts to
increase brand recall, improvement in margins (increasing ad spend and royalty rates an
overhang) or a rebound in the economy. Hence, we believe multiples that have
expanded by 70% in the past five years may not be supported at the current levels.
Valuation: We value Nestle using one-year forward P/E as the primary methodology,
cross-checked with EV/EBITDA, three-year PEG and other metrics. We set our target
P/E multiple at 30x, which is on par with its 20-year historical average (a 20% discount
to the CY14E P/E of 36x) in view of its modest revenue/earnings CAGR versus peers
over CY12-15E of 11.6%/14.0%. Our 12-month price target of Rs4,224 offers potential
downside of 17% and implies a P/E of 30x which is on par with the Indian Consumer
sector P/E for FY15E.
Risks: Upside risks to our investment thesis and price target for Nestle include: 1) a
sharp spike in discretionary segments such as chocolates, milk and milk foods on the
back of a solid recovery in the Indian economy; 2) weaker pressure from competition in
beverages than we currently anticipate; 3) the launch of global Nestle S.A. products in
India; and 4) lower-than-anticipated royalties, which could pose upside risk to our
margin estimates.
NEST IN / NEST.NS
Stock Rating
UNDERWEIGHT
Industry View
NEUTRAL
Price Target
INR 4224.00
Price (14-Oct-2013)
INR 5095.30
-17%

17 October 2013 200
Asia ex-Japan Staples Industry View: NEUTRAL
Nestle India Ltd. (NEST.NS) Stock Rating: UNDERWEIGHT

Income statement (INRmn) 2012A 2013E 2014E 2015E CAGR Price (14-Oct-2013) INR 5,095.30
Price Target INR 4,224.00
Why Underweight? Our view is primarily driven by: 1)
Nestle Indias high presence in discretionary
segments, which have witnessed a relative slowdown;
2) increasing competition in key categories keeping
pricing power and market share gains in check; 3)
lowest EPS CAGR over CY12-15E in our coverage; and
d) valuation premium vs Sensex may not be
sustainable.

Upside case INR 5,343.00
In the upside case, we assume Nestle witnesses a
pick-up in the premiumisation trends along with an
improvement in the discretionary segments. We apply
a P/E valuation multiple of 33x (vs base case of 30x)
and assume 15% higher earnings for CY14E.

Downside case INR 4,013.00
In the downside case, we assume further pressures in
the economy result in increased challenges for the
discretionary segments and Nestle. We apply a P/E
valuation multiple of 30x (in-line with base case) and
assume 5% lower earnings for CY14E.



Revenue 83,018 90,017 100,621 115,431 11.6%
EBITDA 18,562 20,451 22,860 25,937 11.8%
EBIT 15,791 16,985 19,077 21,800 11.3%
Pre-tax income 15,835 16,904 19,392 22,570 12.5%
Net income 10,661 11,833 13,575 15,799 14.0%
EPS (reported) (INR) 110.58 122.73 140.79 163.87 14.0%
Diluted shares (mn) 96.4 96.4 96.4 96.4 0.0%
DPS (INR) 48.41 49.09 63.36 81.93 19.2%

EBITDA margin (%) 22.4 22.7 22.7 22.5 22.6
EBIT margin (%) 19.0 18.9 19.0 18.9 18.9
Pre-tax margin (%) 19.1 18.8 19.3 19.6 19.2
Net margin (%) 12.8 13.1 13.5 13.7 13.3
ROIC (%) 25.7 26.9 28.9 31.3 28.2
ROA (%) 20.6 21.0 21.9 22.1 21.4
ROE (%) 61.1 47.1 39.9 36.2 46.1

Intangible fixed assets 0 0 0 0 N/A
Total assets 51,639 56,363 61,862 71,471 11.4%
Net debt/(funds) 8,082 1,825 -5,619 -13,402 N/A
Other long-term liabilities 10,558 12,551 12,551 12,551 5.9%
Change in working capital 2,574 -1,892 -201 -361 N/A
Free cash flow 7,223 8,932 12,177 13,892 24.4%

P/E (reported) (x) 46.1 41.5 36.2 31.1 38.7
EV/EBITDA (x) 26.9 24.1 21.2 18.4 22.7
Equity FCF yield (%) 1.4 0.9 1.1 1.5 1.3
EV/sales (x) 6.0 5.5 4.8 4.1 5.1
P/BV (x) 27.3 19.5 14.5 11.2 18.1
Dividend yield (%) 1.0 1.0 1.2 1.6 1.2
Total debt/capital (%) 36.8 22.9 9.2 5.3 18.5
Net debt/EBITDA (x) 0.4 0.1 -0.2 -0.5 -0.1

Note: FY End Dec

Value
Quality
Sentiment
Low High
17 October 2013 201
Key charts detailing our Nestle India Underweight investment thesis
FIGURE 435
Nestle product portfolio is sub-optimally positioned

FIGURE 436
Nestle lowest rural revenue amongst peers

Source: Company data, Barclays Research Note: Data as per FY13.
FIGURE 437
Nestle low teen revenue growth forecast

FIGURE 438
Nestle OPM headwinds: higher royalty & ad spend
28 35 43 51 63 75 83 90 101 115
14%
24%
23%
19%
22%
20%
11%
8%
12%
15%
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)

FIGURE 439
Nestle screens sub-optimally on our valuation screener

FIGURE 440
Nestle multiple expansion unlikely; muted earnings outlook

Source: Bloomberg estimates, Barclays Research estimates Source: Thomson Reuters Datastream, Barclays Research
Milk
Products
Prep
dishes
Beverages
Choc /
Confectionary
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong
Weak
M
o
d
e
r
a
t
e
Moderate
30% 30%
35%
40%
50%
70% 70%
65%
60%
50%
0%
20%
40%
60%
80%
100%
Nestle GCPL ITC HUL Dabur
Rural Urban
3.4% 3.4% 3.4%
3.5%
3.7%
3.9%
4.1%
5.2%
4.8%
4.3% 4.3%
4.5%
4.8%
5.0%
3%
4%
5%
6%
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Royalty Paid Ad Spends
Combined OPM impact of
c130bps over CY12-15E
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
37% premiumto FMCG
space
0%
20%
40%
60%
80%
100%
120%
15
20
25
30
35
40
45
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Stagnant multiples
17 October 2013 202
FIGURE 441
Nestle latest trends across key business segments and drivers
Category Recent trends (1H CY13) Near-term expectations
CY12-15E
CAGR
Volume growth Overall volume was impacted on account of the
continued portfolio optimisation that the company is
going through
We do not expect strong volume recovery in the next 2-
3 quarters
4.9%
Pricing growth Unlikely for consumers to withstand a third year of mid
to high-teens pricing hike
6.4%
Input costs /gross
margins
GMs improved by 115bps on a y/y basis owing to
moderation in input costs

Impact of currency
Advertising spend Increased by 30bps on a y/y basis Expected to increase on heightened competition and
volume pressure

Depreciation Increased to c4% of sales (up 60bps on a y/y basis) Depreciation likely to stay at 4% level for CY13, and
trend down modestly for CY14-15

Segmental trends (% of CY12 revenues)
Milk & Milk products
(45% of revenues)
3.3% y/y growth
Revenue growth was muted on account of a 5%
volume decline because of the HCN supply issues
and impact of portfolio optimisation
While volumes could pick up modestly post stabilisation
of supply issues, we believe a meaningful pick-up in
volumes will be limited in a slowdown, as consumers
shift from plastic packets to Tetra packs at twice the
price, yogurt pack, food preparations may be affected.
9.6%
Beverages
(13% of revenues)
18.6 y/y growth
Continued to grow driven by new product
introductions & media investments, especially the
premium part of the product portfolio
Post portfolio optimisation, return to growth can be
expected, helped by media campaigns
12.5%
Prep dishes
(28% of revenues)
15.4% y/y growth
Maintained its market leadership driven by sustained
media investments; volume growth of 6.5%
Continues to grow modestly on the back of innovative
launches, incl. multiple flavours in Maggi
13.9%
Choc & confectionary
(14% of revenues)
5.8% y/y growth
-3.3% volume growth was due to portfolio
optimisation as premium versions were launched
Similar to other discretionary food segments, like Ice
Cream, we expect limited volume growth for the next 2-
3 quarters
2.9%
17 October 2013 203
Snapshot of segmental revenue trends and forecasts
FIGURE 442
Nestle India segmental revenue trends and Barclays growth forecasts

Note: Revenue distribution as per CY13, all years are calendar year-end.
European Food
Liam Rowley
+44 (0)20 3134 3200
liam.rowley@barclays.com
Barclays, London

Nestle SA aims for India to be its fourth largest market by 2020
The parent Nestle SA (NESN.VX; OW; PT CHP73) is certainly under-indexed in India,
deriving <2% of its global sales from the country and India doesnt even make the list of
the companys top 10 markets. However, Nestle ambitiously expects India to be its
fourth largest market on a revenue basis by CY20. Superior growth in Asia also provides
an important margin tailwind, in our view, as India margins sit c300bps above the group
average.
Over the last few years, Nestle SA has ramped up capex from 5% of sales towards 6%
of sales. Most of the incremental capex was pumped into emerging markets to increase
capacity on the ground. We estimate emerging market capex has been growing at a
+15% CAGR over the last six years. Specifically in India, Nestle invested CHF500m over
CY10-12, which represented c3.5% of total group capex during the period (almost
double Indias importance on a revenue basis). Over the next several years,
management intends to cap capex at a more normalised level of 4-5% group sales and
focus on returns. We expect Nestle to begin harvesting this heavy investment which will
likely facilitate gross margin expansion.

Milk Products
45%
Beverages
13%
Prep dishes
28%
Chocolates
14%
19%
5%
10%
12%
16%
12%
1%
-5%
6%
7%
8%
7%
-8%
-4%
0%
4%
8%
12%
16%
20%
CY11 CY12 CY13E CY14E CY15E CAGR
21%
15%
2%
12%
15%
10%
2%
-5%
-3%
4% 4%
2%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
25%
13%
11%
15%
16%
14%
13%
8%
6%
8%
10%
8%
0%
8%
16%
24%
32%
13%
6%
-3%
1%
10%
3%
-2%
-9%
-4%
-1%
4%
-1%
-12%
-8%
-4%
0%
4%
8%
12%
16%
17 October 2013 204

FIGURE 443
Nestle India revenue growth expected to remain in low teens
Revenue CAGR of 19.7% over
the last seven years contrasts
with our forecast CAGR of
11.6% over the next three
years

FIGURE 444
Nestle India further OPM expansion unlikely as it focuses on maintaining margins
OPM headwinds include:
Muted revenue growth
Increased royalty rates
Increase in ad spend

We expect to see a combined
impact of 130bps over CY12-
15E owing to last two factors

FIGURE 445
Nestle India forecast 11% EPS growth this year, followed by a recovery off a low base
Earnings growth of 11% for
CY13E is likely to be the lowest
seen in the last seven years


28 35 43 51 63 75 83 90 101 115
14%
24%
23%
19%
22%
20%
11%
8%
12%
15%
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
19.1%
17.7%
20.0%
20.2%
20.0%
21.0%
22.4%
22.7% 22.7%
22.5%
-250
-200
-150
-100
-50
0
50
100
150
200
250
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
3 4 5 7 8 10 11 12 14 16
2%
31%
29%
23%
25%
17%
11% 11%
15%
16%
0%
5%
10%
15%
20%
25%
30%
35%
0
2
4
6
8
10
12
14
16
18
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
17 October 2013 205
Business overview: Weighed down by volume pressure
Nestle India has witnessed a sharp slowdown in overall volume levels in the past couple of
years. It has been unable to entirely offset this through an average 11.5% price increase over
the same period of time for two main reasons:
1) Discretionary nature of the portfolio with an urban tilt: Nestle Indias portfolio (including
chocolates, confectionary and soups) tends to be geared more toward discretionary than
other staples categories. Furthermore, these are largely products focused on the urban
consumer, whose wallets are currently being pinched. Thus, the company has been
significantly impacted by overall demand side pressures, due to the macro slowdown.
2) Product mix change initiatives: We note that the company has rationalised its product mix
over the past few quarters in an effort to focus on high-margin SKUs/products. We view
this as one of the key reasons behind the disruption in healthy volume growth levels.
While we expect volume growth to recover from the subdued levels of CY12 (at 0.8% y/y),
especially as the supply-side pressures are mitigated after Rs20bn in capex over the past
two years, we forecast it to be a gradual recovery, as ample demand-side pressure
continues to weigh on the sector. Thus, its price-led growth strategy may not be ideal in a
challenging macro environment with decelerating discretionary spend.

FIGURE 446
Nestle India volume growth declined significantly in past two years; likely to continue
We expect volume growth to
recover from the lows of CY12
(at 0.8% y/y), especially as
supply-side pressures are
mitigated after the Rs20bn
capex of the past two years

We forecast it will be a gradual
recovery, as ample demand-
side pressures continue to
weigh on the company


FIGURE 447
Nestle India product positioning: the majority of the portfolio in discretionary segments
Prepared Dishes: Strong recall
for Nestle with moderate
growth prospects

Milk Products: Volume growth
likely to stall as consumers may
downtrend

Chocolates: Similar to other
discretionary segments,
Chocolates too face dip in
growth

Note: Size of the bubble indicates the category contribution to FY13 revenues.
5.1%
4.9%
8.3%
13.8%
16.9%
14.9%
17.0%
6.8%
0.8%
1.8%
5.6%
7.4%
-0.9%
6.2%
2.8%
8.9%
4.9%
1.6%
4.4%
12.6%
10.9%
6.5%
5.9%
6.8%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Blended volume Growth Blended realization Growth
Beverages
Prep dishes
Choc /
Confectionary
Milk Products
0
4
8
12
0 4 8 12
C
a
t
e
g
o
r
y

/

s
e
g
m
e
n
t

p
r
o
s
p
e
c
t
s
S
t
r
o
n
g
W
e
a
k
Strong Weak
M
o
d
e
r
a
t
e
Moderate
Overall, we forecast a 4.9%
blended volume CAGR over the
next three years for Nestle
India, primarily driven by
resilience in the prep-dishes
segment

Pricing driven growth (average
11.8% realisation growth in
the past two years) will be
difficult to sustain in the
current environment

17 October 2013 206
Product mix change: Shifting in favour of prepared dishes
Overall, while contribution from the chocolates & milk products segments has remained
stable, there is a sharp shift in favour of prepared (prep-) dishes at the expense of the
beverage segment. This was primarily driven by the high revenue growth in the prep-dishes
segment (owing to low penetration) coupled with a continued innovation-led focus on this
core segment.

FIGURE 448
Product mix for Nestle India in favour of prep-dishes at the expense of beverages

High market share and
dominant presence in the
prepared dishes and cooking
aid market through its flagship
product Maggi, have led to a
steady improvement in Nestles
overall product mix

As shown in Figure 449, CY12 was driven primarily by an improvement in realisation levels
across all segments while volumes remained subdued except for prep-dishes and cooking
aids. While we expect volumes to rebound in CY13 from the subdued CY12 levels,
realisation growth should be rather limited (we forecast 6.5% y/y in CY13 vs 10.9% in
CY12) due to the relative slowdown in the discretionary segments, which constitute c70%
of the overall portfolio.

FIGURE 449
Nestle India CY12 was driven by an improvement in realisation levels across segments

Volume growth declined across
all segments other than prep-
dishes


45% 44% 44% 43% 43% 44% 44% 44% 45%
22%
22%
21%
20% 18% 15%
14% 14%
13%
18% 19%
20% 21% 24% 26%
27% 28% 28%
15% 15% 15% 16% 15% 15% 15% 14% 14%
0%
20%
40%
60%
80%
100%
CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12
Milk products Beverages Prep dishes Choc and confectionery
-5.1%
21.4%
-5.0%
10.6%
8.0%
4.4%
-9.4%
17.3%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Milk products Soluble Beverage Powder Prep dishes & cooking aids Choc and confectionery
17 October 2013 207
Chocolates (14% of CY12 revenues): 21% of Rs3.2bn market
Nestle has witnessed a sharp slowdown in revenue growth levels in the past couple of years
despite a 16% realisation increase. Chocolates as a segment is seeing increased competition
due to new launches by Cadburys, ITC, Mars, Mondelez (Toblerone), and Lindt which are
competing intensely for share in a segment that also faces the challenge of a discretionary
squeeze. Hence, we expect this segment (cRs3.2bn in size) to ease slightly from its 15%
revenue CAGR in CY11/12 to c10-12%.
Increased competition in premium segments: A sharp ramp-up in the total distribution
outlets of Ferrero Rocher chocolates helped it register a strong 30% y/y growth last year.
Additionally, we believe Cadbury is getting increasingly aggressive in the promotion
channels across both the premium (Toblerone) and mass segments (Perk).
High penetration levels plus macro slowdown: We estimate 88% penetration levels for this
category at the mass end, leaving little headroom for category growth. Also, given the
discretionary nature of the product, we expect it to be impacted by the demand slowdown.
Price increase unable to provide the necessary cushion: Nestle has seen a sharp decline in
volume in the past 6-8 quarters, which it has not been able to offset through price increases.
We believe an uptick in volumes is imperative, although this is only becoming more difficult
as competition ramps up.

FIGURE 450
Realisation growth to remain subdued; expect negative volume growth over CY13-14E

The price increases have not
been able to offset the sharp
decline in volumes

We expect the pressures on
volume to increase further due
to heightened competition


FIGURE 451
hence, we expect CY13-14E to be challenging for revenue growth
2.9% over CY12-15E

10%
11%
16%
18%
12%
10%
21%
-2%
-9%
-4%
-1%
4%
-6%
-0%
2%
6% 6%
4%
4%
14%
17%
2%
3%
6%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
8 quarters of poor
volume growth
3 4 5 6 7 8 10 11 12 11 12 13
3%
11%
19%
25%
20%
14%
26%
13%
6%
-3%
1%
10%
-5%
0%
5%
10%
15%
20%
25%
30%
-
2
4
6
8
10
12
14
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
I
N
R

B
n
Choc and confectionery Revenue Growth
Volumes also impacted by
Nestles decision to reduce its
focus on the low unit packs in
this category to improve
overall margins

Nestle has lost 250bps market
share over the past four years,
primarily to Mars and Ferrero
Rocher

The new launch of Alpino at
the premium end highlights
the companys plan to
maintain its premiumisation
strategy within chocolates

17 October 2013 208
Milk Products (45% of CY12 revenues)
This is Nestles largest segment, which we believe is facing the most challenging
environment predominantly urban spend and the challenge of raising prices after two
consecutive years of mid to high-teen price hikes. We estimate Milk & Milk Products are a
cRs250bn market with an urban market penetration rate of c15%.
Nestles leadership position (88% market share) in the baby foods segment secure:
Nestles position in this segment (which comprises c20% of its overall portfolio) is
relatively secure from competition, as advertising is not allowed under the Infant Milk
substitute Act, 1992. Having said that, we do not think growth in baby foods will be
enough to offset the growth slowdown in the rest of the segment.
Portfolio optimisation to create near-term challenges: Taking its focus off the low unit
packs (LUPs), which are typically low margin, Nestle is currently revamping its product
portfolio, which could create supply disruptions in the near term.
Increasing competition through ITC and Danones entry: This should pressure both
the volume growth as well as Nestles ability to raise prices. Additionally, this would
lead to an increase in competition for milk procurement.

FIGURE 452
Nestle India expect a sharp drop in realisation growth levels with subdued volumes


FIGURE 453
Nestle India mid-teen revenue growth expected over CY14-15E; CY13E to remain muted
9.6% over CY12-15E


7%
3% 3%
5% 10%
13%
8%
2%
-5%
-3%
4% 4%
2%
6% 6%
16%
12%
5%
12%
18%
21%
6%
8%
10%
-10%
-5%
0%
5%
10%
15%
20%
25%
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
11 12 13 16 19 23 28 34 39 39 44 51
9% 9%
9%
23%
23%
19%
20%
21%
15%
2%
12%
15%
0%
5%
10%
15%
20%
25%
30%
-
10
20
30
40
50
60
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
I
N
R

B
n
Milk products Revenue Growth

We believe Amul is better
placed than Nestle to procure
milk from farmers and different
districts

17 October 2013 209
Beverages/Powder (13% of CY12 revenues): Competition
heats up
Nestles beverage segment continued to be under pressure in CY12, growing by just 5% (on
the back of a 5% volume decline), with its contribution further decreasing by 80bps to
13.1%. We expect the pressures to be sustained in the near term, driven by the following:
Aggressive promotional efforts by HUL have led to Nestles displacement as the
monopoly player in the market. Apart from the impact on volumes, we expect the
realisations to be under pressure as well because of direct competition with Nescafes
premium brands through HULs Bru Gold and Bru Exotica.
As expected, Nestle is investing in ad spend, which we believe is an important and necessary
step in the highly competitive environment to just maintain current volumes.
Upward pressure on raw material costs: Nestle commentary suggests continued stress on
input costs (fresh milk, green coffee and sugar) in this segment.
Given Nestles strategy to protect margins, even at the cost of volumes, we would expect
price increases (or launches of premium products) to offset these items (high A&P spend,
raw materials), which could put further pressure on the already subdued volumes.

FIGURE 454
Nestle expect muted growth trends as increasing competition limits price increases
Steady realisation growth levels
during 2005-08 have given way
to more volatile trends recently,
where Nestle is trying to
maintain its volume market
share even at the expense of
price/margins


FIGURE 455
Nestle revenue growth to remain in the mid teens
We are expecting a revenue
CAGR of 12.5% over CY12-14E

-4%
-2%
-9%
8%
0%
-3%
13%
1%
-5%
6%
7%
8%
1%
12%
14%
11% 11%
4%
-1%
18%
11%
4%
5%
7%
-15%
-10%
-5%
0%
5%
10%
15%
20%
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
5 6 6 7 8 8 9 11 11 12 14 16
-3%
10%
4%
19%
11%
0%
12%
19%
5%
10%
12%
16%
-5%
0%
5%
10%
15%
20%
25%
-
2
4
6
8
10
12
14
16
18
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
I
N
R

B
n
Beverages Revenue Growth
The Indian beverage market
(ex milk products) is cRs129bn
in size with tea constituting
c70% of the overall market

This can be seen in the high
penetration level of c87% for
the tea segment vs c12% for
coffee

Nestles Nescafe competes
with HULs Bru premium
variants
17 October 2013 210
Prep-Dishes and Cooking Aids (28% of CY12 revenues): Cult
brand Maggi
Nestle has enjoyed a strong presence in the prep-dishes and cooking aids segment with a
revenue CAGR of 26% in the past five years (and now constitutes c28% of its portfolio vs
c21% in 2007). This was driven by an overall under-penetration in this segment, coupled
with the companys continued focus on innovation led products in its cult brand Maggi.
We believe that changing lifestyles in India will be a major structural support for this
category, due to: 1) an increase in the number of nuclear families; 2) a gradual preferential
shift towards western dishes; and 3) a high proportion of women in the working force.
However, challenges include:
Increasing competition: Strong historical growth levels have led to a sharp rise in the
overall number of competitors in this segment, most notably ITC, which has ramped up
to #2 in market share. While Nestle enjoys a big brand advantage with Maggi, we expect
increasing competition to keep the realisation levels in check.
Macro headwinds remain due to the discretionary nature of this segment. This can be
witnessed in volume growth declining to 8% in CY12 despite large capacity additions.

FIGURE 456
Nestle India realisation growth levels have been maintained despite a volume drop
Realisation growth levels have
remained steady despite
volatility in volume trends

This, combined with above-
average volume growth, has
led to prep-dishes accounting
for 28% of overall portfolio
revenues from c18% in 2004


FIGURE 457
Nestle India revenue growth to recover to high teens for the prep-dishes segment
While we agree that the
historical growth levels are
supernormal, especially given
the increased competition in
the segment, we expect them
to recover from subdued 2012
levels and forecast a 13.9%
CAGR over CY12-15E

4%
9%
20%
25%
30%
22%
24%
13%
8%
6%
8%
10%
-1%
10%
-1%
5%
4%
4%
4%
10%
4%
5%
7%
6%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
4 5 6 8 11 13 17 22 24 27 31 36
3%
19% 19%
31%
35%
27%
29%
25%
13%
11%
15%
16%
0%
5%
10%
15%
20%
25%
30%
35%
40%
-
5
10
15
20
25
30
35
40
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
I
N
R

B
n
Prep dishes Revenue Growth

A refocus on promotional
efforts

Innovation-led products should
help maintain the market
share lead

This is the only segment that
witnessed an uptick in capacity
utilisation levels in CY12

17 October 2013 211
Near-term capacity utilisation improvement unlikely
Over the past three years Nestle India has invested significantly to increase the capacity for
milk products and prep-dishes. CY12 saw a drop in utilisations across the board (except
prep-dishes) driven by demand side pressures (along with increased capacities), a trend
that we expect to continue. We do not anticipate any significant capex over the next 2-3
years.
FIGURE 458
Nestle India capacities increased sharply over CY09-11

FIGURE 459
Nestle India the decline in capacity utilisations across all
segments (except prep-dishes) was driven by weak demand

Operational review: No positive margin levers
FIGURE 460
Nestle India significant pressures on the operating margin front

144
48
191
33
148
48
205
33
162
46
226
36
25
75
125
175
225
275
Milk products Beverages Prep dishes Choc and
confectionery
Bn Tonnes
CY09 CY10 CY11
+13%
+10%
+19%
92%
58%
97%
144%
87%
55%
106%
131%
25%
50%
75%
100%
125%
150%
175%
Milk products Beverages Prep dishes Choc and
confectionery
CY11 CY12
Nestle +ve -ve -ve -ve
Volumes remained rather
subdued in CY12 despite large
capacity addition in CY11
17 October 2013 212
Operating margin trend

FIGURE 461
Nestle India limited levers to drive a material improvement in OPM from current levels
We expect operating margins
to remain muted over the near
term

Advertising spend faces upward pressure
Nestle India has the lowest ad spend as a percentage of sales within our coverage universe
(excluding ITC, which is not allowed to advertise for its Cigarettes segment). As competition
increases and pressures in the urban segments mount, we expect a sharp rise in the ad
spend of Nestle India in an effort to protect market share. According to our estimates,
operating margins could be impacted c70bps over the next three years because of the
increased advertising spend.
FIGURE 462
Ad spend of Nestle India is significantly lower than its peers
we expect it to rise as competition heats up

FIGURE 463
We estimate Nestle India ad spend will increase c70bps over
4.5%
11.8%
12.7% 12.8%
11.2%
0%
2%
4%
6%
8%
10%
12%
14%
Nestle GCPL HUL Dabur Coverage
Ad spend as a % of sales

Note: Data as per CY13E.

19.1%
17.7%
20.0%
20.2%
20.0%
21.0%
22.4%
22.7% 22.7%
22.5%
-250
-200
-150
-100
-50
0
50
100
150
200
250
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
1.4 1.2 1.4 1.4 1.7 1.9 2.7 3.0 3.2 3.6 4.1 4.8 5.8
6.4%
5.4%
5.5%
4.9%4.9%
4.5%
5.2%
4.8%
4.3%4.3%
4.5%
4.8%
5.0%
3%
4%
5%
6%
7%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
I
N
R

B
n
17 October 2013 213
Gross margin commodity price trends have become negative

FIGURE 464
Nestle India gross margins expected to remain flat as product mix benefits are unlikely

FIGURE 465
Price trend HDPE

FIGURE 466

Source: Marico, Barclays Research
FIGURE 467
Price trend Milk Price

FIGURE 468
Price trend Sugar

53.1%
51.9%
51.3%
52.3%
51.1%
52.0%
54.5%
54.7% 54.7% 54.7%
-150
-100
-50
0
50
100
150
200
250
300
49%
50%
51%
52%
53%
54%
55%
56%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Gross margin change (bps - RHS) Gross margins
50
60
70
80
90
100
110
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
N
o
v
-
1
1
F
e
b
-
1
2
M
a
y
-
1
2
A
u
g
-
1
2
N
o
v
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
Rs / lt
Y/Y: Up 13%; Q/Q: Up 11%
100
110
120
130
140
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
100
120
140
160
180
200
220
240
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Milk - WPI
Milk Price trend in last 3 months
Y/Y: Up 4%; Q/Q: Up 2%
80
100
120
140
160
180
200
220
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
A
u
g
-
1
1
D
e
c
-
1
1
A
p
r
-
1
2
A
u
g
-
1
2
D
e
c
-
1
2
A
p
r
-
1
3
A
u
g
-
1
3
Indexed
Sugar-M grade
17 October 2013 214
Increasing significance globally; royalties likely to add to margin pressure
Nestle India, though still small, is increasing in significance for the parent Nestle S.A. and in
CY12 it contributed c1.6% to overall revenues (vs 0.7% in 2004) along with higher-than-
average EBIT margins. The increasing importance can further be highlighted with Nestle
S.A.s aim of making India the fourth-largest market by 2020.
Royalty payments for Nestle India are slated by the company to increase by c110bps over
the next five years and could dampen the margins by c20-25bps each year over the next
five years in our view. We believe that while increasing support from the parent in terms of
external commercial borrowings and potential new launches is a positive, there remains an
overhang from any further increase in the royalty rate.
FIGURE 469
Indias revenue contribution to Nestle S.A., though still quite
small, is rising sharply

FIGURE 470
Nestle Indias margins are higher than those at Nestle S.A.


FIGURE 471
Nestle India royalties to the parent expected to rise sharply


0.7%
0.8%
0.8%
1.0%
1.1%
1.2%
1.6%
1.7%
1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
India as a % of global Nestle revenues
11.2%
12.4%
11.1%
11.7%
12.3%
12.7%
13.0%
12.7%12.7%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
Nestle SA Margins Nestle India Margins
0.8 0.9 1.2 1.5 1.8 2.2 2.6 2.9 3.3 3.8 4.6
3.3%
3.3% 3.3%
3.4%
3.4% 3.4% 3.4%
3.5%
3.7%
3.9%
4.1%
4.3%
4.5%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0
1
2
3
4
5
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
C
Y
1
6
E
C
Y
1
7
E
I
N
R

B
n
Royalty Paid As a % of sales
17 October 2013 215
Increased depreciation levels an additional hit on margins
Owing to large capital expenditure of Rs26bn in the last two years, Nestle Indias overall
gross block has increased to c43% of sales in CY12 (vs 22% in CY10). We believe that while
the capex should be limited, higher depreciation costs from the increased gross block could
offset any gains at the gross margin level going forward.
FIGURE 472
Nestle India capex shot up in 2011/12

FIGURE 473
resulting in a sharp increase in the gross block levels

Some of this effect has already started to come into play with depreciation as a percentage
of sales increasing sharply to 4.0% in 2Q CY13 (from 2.1% in 2Q CY11). This has resulted in
net margins remaining subdued at c12%, despite a 270bps+ improvement in EBITDA
margins (at 22.5% in 4Q CY12).
FIGURE 474
Nestle India a sharp increase in the depreciation levels

FIGURE 475
has negated any EBITDA margin improvement in the last nine
quarters


1 2 3 3 4 16 10 4 5 5
5%
5% 6%
5%
7%
21%
12%
5% 5% 5%
0%
5%
10%
15%
20%
25%
0
2
4
6
8
10
12
14
16
18
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
Capex Capex as % of sales
5 7 8 10 14 29 35 36 37 38
19%
19%
20%
19%
22%
39%
43%
41%
38%
34%
10%
20%
30%
40%
50%
0
5
10
15
20
25
30
35
40
45
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
Gross Block GB as a % of sales
367 394 446 528 673 735 835 821 887
2.1%
2.0%
2.3%
2.6%
3.4%
3.5%
3.9%
3.7%
4.0%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
300
400
500
600
700
800
900
1000
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
Depreciation As a % of sales (RHS)
19.8%
21.2%
21.5%
22.7%
22.0%
21.4%
23.4%
24.0%
22.5%
12.1%
13.3%
11.8%
13.5%
12.4%
12.6%
13.0%
12.4%
12.3%
10%
12%
14%
16%
18%
20%
22%
24%
26%
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
EBITDA margin Net Margin
17 October 2013 216
Focus on protecting margins could come at cost of volumes
We note that Nestle India has sustained its EBIT margins within the 18-20% band over the
past 15 quarters, passing through any commodity gains to the consumers. We believe that
while the company has been able to maintain these strategies over the recent past, as
discussed above, there are significant headwinds to margins.
We believe that a continued focus on protecting margins in the weak demand environment,
through measures such as launching premium products and increasing prices, could come
at a cost and be detrimental to revenue growth levels as consumers are expected to display
high elasticity towards any increase in prices.

FIGURE 476
Nestle India has been able to maintain its margins within a narrow band
Nestle India has been able to
maintain its margins within the
18-20% band over the past 15
quarters. . .


FIGURE 477
although volumes have declined sharply in the past few quarters
. . .which is partially responsible
for the sharp decline in the
volume growth levels

10%
12%
14%
16%
18%
20%
22%
24%
Q
1

0
7
Q
2

0
7
Q

3

0
7
Q
4

0
7
Q
1

0
8
Q
2

0
8
Q

3

0
9
Q
4

1
0
Q
1

0
9
Q
2

0
9
Q

3

0
9
Q
4

0
9
Q
1

1
0
Q
2

1
0
Q

3

1
0
Q
4

1
0
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
20% margin
18% margin
99 98 109 112 108 105 117 116 111 108 115 117 113 110
12.1%
16.3%
20.6%
18.6%
9.1%
7.2%
7.0%
4.4%
2.9%
2.5%
-2.0%
0.2%
1.9% 1.9%
-5%
0%
5%
10%
15%
20%
25%
88
92
96
100
104
108
112
116
120
Q
1

1
0
Q
2

1
0
Q

3

1
0
Q
4

1
0
Q
1

1
1
Q
2

1
1
Q

3

1
1
Q
4

1
1
Q
1

1
2
Q
2

1
2
Q

3

1
2
Q
4

1
2
Q
1

1
3
Q
2

1
3
B
n

t
o
n
n
e
s
Overall Volumes Volume y/y growth
When the economy rebounds,
the company could lag peers
materially in driving volumes
17 October 2013 217
Business review: Strong balance sheet
Strong operating cash flows

We forecast operating cash
flows will remain strong over
FIGURE 478
Nestle India strong operating cash flow trajectory

along with low capex likely to result in deleveraging
We believe operating cash flows should continue to be at the c21-23% range, which, due to
lack of a significant capex, should help in deleveraging the balance sheet. We forecast
gearing levels will decrease to c10% in CY14E (vs 58% in CY12).
FIGURE 479
Nestle India capex should taper off

FIGURE 480
resulting in a sharp deleveraging from the peak levels


6 7 9 12 13 15 21 19 23 26
20%
20%21%
23%
21%
20%
25%
21%
23%
22%
15%
17%
19%
21%
23%
25%
27%
0
5
10
15
20
25
30
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
1 2 3 3 4 16 10 4 5 5
5%
5%
6%
5%
7%
21%
12%
5% 5% 5%
0%
5%
10%
15%
20%
25%
0
2
4
6
8
10
12
14
16
18
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
Capex Capex as % of sales
10 10 7 3 2
4%
1%
0%
0%
1%
76%
58%
30%
10%
6%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
2
4
6
8
10
12
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
Total Debt Gearing
17 October 2013 218
Positive working capital trends
FIGURE 481
Nestle India favourable working capital arrangements a
large difference in days receivable/payables

FIGURE 482
Nestle India changes in working capital

Expect dividend payouts to rise
We note that the dividend payout ratio has decreased sharply from the 75% level in CY07 to
44% in CY12, primarily because of increased capex requirements. We believe that while
CY13 should see continued investment, dividend per share should start rising beginning in
CY14E, as capex tapers off.

FIGURE 483
Nestle India dividend payouts should rise on low capex


3.8
87.9
4.6
87.5
3.7
89.9
5.6
48.8
3.9
52.1
0
10
20
30
40
50
60
70
80
90
100
5 7 8 10 14 29 35 36 37 39
19%
19%
20%
19%
22%
39%
43%
40%
37%
33%
10%
20%
30%
40%
50%
0
5
10
15
20
25
30
35
40
45
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
(Rs bn)
Gross Block GB as a % of sales
25.0 25.5 33.0 42.5 48.5 48.5 48.2 48.4 49.1 63.4 81.9
78% 78%
77% 77%
71%
57%
48%
44%
40%
45%
50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
10
20
30
40
50
60
70
80
90
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Dividend per Share Dividend payout ratio
17 October 2013 219
Returns expected to remain subdued
FIGURE 484
Nestle India return on equity trajectory

FIGURE 485
Nestle India return on assets trajectory

FIGURE 486
Nestle India ROIC trajectory

FIGURE 487
Nestle India CROCI trajectory

FIGURE 488
Indian consumer coverage CROCI comparison

Within our coverage universe,
we expect HUL and Nestle
India to report a moderation in
cash returns (CROCI cash
returns on capital invested)
over the next two years

Note: Data for Nestle India is CY12, CY13E, and CY14E.
84% 85%
119%
120%
98%
80% 61%
47%
40%
36%
0%
20%
40%
60%
80%
100%
120%
140%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Return on Equity
27%
25%
33%
34%
33%
23%
21% 21% 22%
22%
0%
5%
10%
15%
20%
25%
30%
35%
40%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Return on Assets
46.2%
64.6%
51.5%55.5%
51.7%
27.2%
25.7%
26.9%
28.9%
31.3%
10%
20%
30%
40%
50%
60%
70%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Return on Invested Capital
35.4%
33.1%
40.4%40.4%
38.8%
27.9%
27.6%
26.0% 25.6%
24.6%
10%
20%
30%
40%
50%
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
E
C
Y
1
4
E
C
Y
1
5
E
Cash return on Invested Capital (CROCI)
23%
15%
46%
25%
28%
25%
16%
46%
25%
26% 26%
17%
39%
25%
26%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY13 FY14E FY15E
Dabur & GCPL on a steady
increase
HUL & Nestle remain
weak
17 October 2013 220
Significant exposure to currency due to ECBs from parent
As a means to fund the significant capex, Nestle has a committed line of borrowing from its
parent, with the loan repayment to be completed five years from the date of drawdown.

FIGURE 489
Nestle India has drawn a total of US$192mn from its parent till now
Until now, Nestle India has
borrowed US$192mn from its
parent to fund its capex.
Management has highlighted
that the majority of capacity
additions are now complete,
which explains why there has
been no drawdown from the
parent in the past four quarters

Repayment schedule
2016: Rs7.44bn
2017: Rs3.03bn


FIGURE 490
Nestle India costs pertaining to the ECB loans are decreasing over time

Source: Company data, Thomson Reuters Datastream, Barclays Research
FIGURE 491
Nestle India interest cost structure due to ECBs
Finance Costs (INR Mn) Interest
Exchange Loss (Gain)
Total
(CY12)
Interest
Exchange Loss (Gain)
Total
(CY11)
Realised Unrealised Realised Unrealised
Interest cost 315 0 0 315 109 0 0 109
Exchange loss on revaluation 0 0 380 380 0 0 876 876
Exchange loss (net) on forward contracts 0 20 0 20 0 184 0 184
Subtotal 315 20 380 714 109 184 876 1,169
Earnings from surplus liquidity -20 0 0 -20 -40 0 0 -40
Net finance costs 295 20 380 694 69 184 876 1,129
Treated as capex 78 20 380 477 57 185 842 1,084
Recognised in P&L 216 0 0 216 12 -1 33 45
50.0
25.0
61.0
21.0
35.0
0.0 0.0 0.0
10.0
60.0
85.0
136.0
157.0
192.0 192.0 192.0 192.0 192.0
0
20
40
60
80
100
120
140
160
180
200
Q1 11 Q2 11 Q 3 11 Q4 11 Q1 12 Q2 12 Q 3 12 Q4 12 Q1 13 Q2 13
U
S
D

M
n
No drawdown in the
last 4 quarters
4.9%
32.2%
43.1%
22.0%
29.9%
15.6%
16.6%
13.9%
19.0%
0.2%
9.8%
19.1%
14.2%
25.2%
18.3%
22.9%
21.9%
33.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Q2 11 Q 3 11 Q4 11 Q1 12 Q2 12 Q 3 12 Q4 12 Q1 13 Q2 13
Annualized cost since inception Total INR Depreciation
17 October 2013 221
Valuation: Screens as expensive on multiple parameters
We use one-year forward P/E as our primary methodology to set our 12-month price target,
and use other valuation metrics as a cross check. Nestle has witnessed a sharp valuation re-
rating in the past four years and now trades above the historical 10-year band of 21-34x.
These high multiples are not sustainable, in our view, as the market does not seem to be
entirely pricing in the challenges that Nestle faces. We highlight the sharp disconnect
between the premium trading multilpes and the decline in volume growth levels (Figure 58).
Additionally, as illustrated in Figures 495 and 496, with one of the lowest EPS forecasts for
the next three years within our coverage universe, Nestle India is placed sub-optimally on
our valuation screener vs its peers as well as a broader spectrum of FMCG companies. We
set our target P/E multiple at 30x, which is on par with its 20-year historical average (a 20%
discount to the CY14E P/E of 36x) in view of its modest revenue/earnings CAGR versus
peers over CY12-15E of 11.6%/14.0%. Our 12-month price target of Rs4,224 offers
potential downside of 17% from current levels.
FIGURE 492
Nestle India 1-year forward P/E (x) trading above its 20-year historical average; sharp multiple derating over 1993-03

FIGURE 493
Nestle India premium gap of multiples vs volume growth has widened significantly in the last 12 months; we expect
multiples to derate


0
10
20
30
40
50
60
70
80
S
e
p
-
9
3
S
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p
-
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
5
10
15
20
25
30
35
40
45
S
e
p
-
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p
-
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e
p
-
1
3
P/E Average +1 SD -1 SD Volume Growth (RHS)
Gap b/w multiples &
volume growth
17 October 2013 222
FIGURE 494
Nestle India has underperformed the broader market in six of the past ten years; we expect this underperformance to
continue

FIGURE 495
One-year forward P/E (x): Nestle India is unattractively placed on our valuation screener vs coverage group & FMCG space

Source: Company data, Barclays Research estimates Source: Bloomberg, Barclays Research estimates
FIGURE 496
One-year forward EV/EBITDA: Nestle lags its peers on our valuation screener

Source: Company data, Barclays Research estimates Source: Bloomberg estimates, Barclays Research estimates
-5% -4%
6%
10%
85%
-70%
48%
12%
-2%
-41%
-28%
18%
-25%
-15%
49%
-6%
32% 32%
-4%
-1%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3

Y
T
D
Nestle vs. BSE
+2% +240% +451% Nestle
-7%
-2% +454% Sensex
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 15E EPS CAGR
22% premiumto coverage
Dabur(OW) GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
40
0% 5% 10% 15% 20% 25% 30%
P
E
x

(
F
Y
1
5
E
)
FY13 - 16E EPS CAGR
35% premiumto FMCG
space
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
10
15
20
25
30
10% 15% 20% 25%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
Dabur(OW)
GCPL(EW)
HUL(UW)
ITC(OW)
Nestle(UW)
UNSP
Tata Global
Bev
GSK CH
CLGT
Marico
Britannia
0
10
20
30
10% 15% 20% 25% 30%
E
V
/
E
B
I
T
D
A

x

(
F
Y
1
5
E
)
17 October 2013 223
Sharp increase in the premium to Sensex expected to decrease
Nestle has historically traded at a material premium of 65% to the Sensex, driven by the
defensive nature of the segment (based on the past 20 years). It has sustained this premium
over the past 10 years, even during the global financial crisis (GFC) of 2008-09. However,
over the past two years, we have seen this premium expanding materially to its current
premium of c138%. This has been a function of market preference for defensive earnings
growth companies. However, we believe the market is not pricing in the significant
challenges we expect for Nestles premiumisation strategy. As discussed earlier, the sharp
decline in volume growth levels was somewhat offset by the healthy realisation levels
(driven by price increases and product mix enhancements). However, with increasing
pressures on discretionary spend, we expect its ability to hike prices to be fairly limited.
Thus, we believe any further multiple expansion is highly unlikely, and the stock could, in
fact, de-rate, given the muted earnings outlook.

FIGURE 497
One-year forward P/E (x) Nestle India vs Sensex


FIGURE 498
Nestle India is trading at a premium of 138% vs Sensex (vs historical 20-year average of
65%)


0
10
20
30
40
50
60
70
S
e
p
-
9
5
S
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p
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9
6
S
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p
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9
7
S
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p
-
9
8
S
e
p
-
9
9
S
e
p
-
0
0
S
e
p
-
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1
S
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2
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6
S
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7
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e
p
-
1
3
Sensex Nestle
-50%
0%
50%
100%
150%
200%
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8
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9
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1
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S
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3
Average
17 October 2013 224
FIGURE 499
Nestle India has seen a strong re-rating in the past few years, despite a gradual decline in EPS forecasts

FIGURE 500
Nestle India Bloomberg consensus revisions

FIGURE 501
Nestle India Barclays Research forecasts vs Bloomberg consensus estimates

Source: Bloomberg consensus estimates, Company data, Barclays Research estimates
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
S
e
p
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9
7
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6
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7
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9
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4000
4500
5000
5500
6000
120
140
160
180
M
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A
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3
CY13E EPS CY14E EPS Price (RHS)
INR Mn
Segment CY13E CY14E CY15E CY13E CY14E CY15E CY13E CY14E CY15E
Revenues 90,017 100,621 115,431 93,716 108,781 123,991 -4% -8% -7%
Y/Y Growth 8.4% 11.8% 14.7% 12.9% 16.1% 14.0%
EBITDA 20,451 22,860 25,937 21,007 24,299 28,003 -3% -6% -7%
EBITDA Margin 22.7% 22.7% 22.5% 22.4% 22.3% 22.6% 30 38 -12
PAT 11,833 13,575 15,799 12,098 14,325 16,738 -2% -5% -6%
EPS (INR) 122.7 140.8 163.9 125.2 147.8 168.9 -2% -5% -3%
EPS Growth 11.0% 14.7% 16.4% 13.3% 18.0% 14.3%
17 October 2013 225
FIGURE 502
Nestle India historical EV/EBITDA trend

FIGURE 503
Nestle India historical P/B trend

Key risks
Sharper-than-expected improvement in the macro environment: Nestles volume
growth levels and the valuation premium levels are highly correlated to the overall
macro environment. Any faster-than-expected improvement in overall GDP growth and
spending patterns could spur demand in Nestles favour.
Pickup in premiumisation trends: The bulk of Nestles portfolio is positioned at the
premium and discretionary end. We believe that while the premiumisation trends have
remained rather subdued of late, a significant uptick could be a material positive for the
company both in terms of volumes and a margin uptick (on account of improved
product mix and higher realisations).
Downside risks:
Further increase in royalty payments: Any further increase in royalty payments remains
a tangible risk to Nestles operating margins (currently, we estimate an operating profit
margin impact of c115bps over the next three years because of the increased royalty
rate).
Liquidity shift: The Indian consumer sector has seen strong liquidity inflows since the
GFC in 2008. As a consequence, the sector has outperformed the BSE Sensex index for
most of this period, materially expanding the premium that the sector trades at vs the
market. Any reversal of this trend, where we could see liquidity flowing from defensives
to cyclicals, could lead to strong underperformance of the FMCG companies, including
Nestle India.
5
10
15
20
25
30
M
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7
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0%
20%
40%
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140%
10
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35
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M
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P/B ROE (RHS)
17 October 2013 226
FIGURE 504
Nestle India income statement


Income Statement (Rs mn) CY11 CY12 CY13E CY14E CY15E
Sales 74,908 83,018 90,017 100,621 115,431
Sales Growth (YoY) 19.8% 10.8% 8.4% 11.8% 14.7%
Gross Profit 38,957 45,241 49,277 55,082 63,190
EBITDA 15,765 18,562 20,451 22,860 25,937
EBITDA Margin 21.0% 22.4% 22.7% 22.7% 22.5%
EBIT 14,232 15,791 16,985 19,077 21,800
EBIT Margin 19.0% 19.0% 18.9% 19.0% 18.9%
Interest Income 200 215 190 450 726
Others non-operating items 71 95 200 200 200
EBT 14,452 15,835 16,904 19,392 22,570
As a % of Sales 19.3% 19.1% 18.8% 19.3% 19.6%
Taxes (4,264) (4,847) (5,071) (5,818) (6,771)
Tax Rate 29.5% 30.6% 30.0% 30.0% 30.0%
Minorities 0 0 0 0 0
Post Tax exceptionals (573) (327) 0 0 0
Net Income 9,616 10,661 11,833 13,575 15,799
Per Share Data (INR)
Shares Outstanding (in mn) 96 96.4 96.4 96.4 96.4
Dividends 4,649 4,668 4,733 6,109 7,900

11.6% over CY12-15E
(compares with 17.9% over
the last five years)

A gradual reduction in interest
expense is likely as debt
reduces

Earnings CAGR of 14%
expected over CY12-15E

Dividend payout ratio expected
to gradually go up

17 October 2013 227
FIGURE 505
Nestle India balance sheet


Balance Sheet (Rs mn) CY11 CY12 CY13E CY14E CY15E
Assets
Cash & Securities 2,272 2,370 5,627 9,071 15,854
Trade Receivables 1,154 876 950 1,061 1,218
Inventories 7,340 7,456 8,040 8,987 10,309
Others 2,137 4,200 4,200 4,200 4,200
Intangible Assets - - - - -
Total Assets 44,018 51,639 56,363 61,862 71,471
Liabilities
Short-Term Debt 2,459 2 2 2 2
Trade Payables 4,808 5,394 5,581 6,238 7,156
Other Payables 5,789 7,251 5,630 5,630 5,630
Long-Term Debt 7,250 10,450 7,450 3,450 2,450
Provisions 10,972 10,558 10,558 10,558 10,558
Others - - 1,993 1,993 1,993
Minority Interests - - - - -
Share Capital 964 964 964 964 964

We expect the cash balance to
improve over the next three
years (CY12-15E) due to
limited capital expenditure in
the near term

Debt expected to go down by
Rs8bn over the next three
years (CY12-15E)

17 October 2013 228
FIGURE 506
Nestle India cash flow statement


Cash Flow (Rs mn) CY11 CY12 CY13E CY14E CY15E
Depreciation & Amortization 1,533 2,772 3,467 3,783 4,137
Receivables, (Increase) Decrease (521) 279 (74) (112) (156)
Inventories, (Increase) Decrease (1,581) (115) (584) (947) (1,323)
Payables, (Decrease) Increase (2,721) 586 187 657 918
Others 4,131 1,825 (1,421) 200 200
Interest paid (51) (266) (470) (335) (155)
Interest received 200 215 190 450 726
Acquisitions (5) 32 0 0 0
Free Cash Flow (3,976) 7,223 8,932 12,177 13,892
ST Debt (Decrease) Increase 2,279 (2,276) 0 0 0
LT Debt (Decrease) Increase 6,374 2,871 (3,000) (4,000) (1,000)
Dividends (5,408) (5,426) (4,668) (4,733) (6,109)
Share Issue / Repurchase 0 0 0 0 0
Others 450 (2,293) 1,993 0 0
Cash From Financing Activities 3,695 (7,125) (5,675) (8,733) (7,109)
Cash Flow, Inclusive of Finance (281) 98 3,257 3,444 6,784
Others 0 0 0 0 0
Increases (Decreases) in Cash (281) 98 3,257 3,444 6,784

We forecast operating free
cash flow CAGR of 6.6% over
CY12-15E

Interest paid likely to go down
as debt reduces over time;
increase in interest received
reflects the increasing cash on
its balance sheet

17 October 2013 229
APPENDIX
APPENDIX

17 October 2013 230
GLOBAL VALUATION SHEETS
FIGURE 507
US Food (Neutral) valuation comparison

Notes: Prices as of the market close on 14 October 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. For full disclosures on each covered
company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com.

Pot. Up /
Ticker Rating Currency Current 12-mth TP Downside Sales EBITDA EPS P/E
EV/
EBITDA
P/BV ROE 3-yr PEG
B&G Foods BGS EW USD 37 35 -5% 9% 11% 13% 20.5 11.4 4.5 23% 1.6
Campbell Soup CPB EW USD 41 43 5% 6% 7% 5% 15.9 9.9 6.1 49% 2.9
ConAgra Foods CAG OW USD 31 38 23% 8% 14% 13% 13.2 8.8 1.1 11% 1.0
Diamond Foods Inc. DMND EW USD 22 20 -8% -3% 10% -22% - 11.3 1.7 1% NA
General Mills GIS OW USD 48 51 5% 5% 6% 8% 16.4 10.6 5.1 30% 2.1
Hain Celestial HAIN OW USD 78 85 9% 17% 23% 22% 25.6 14.6 2.8 12% 1.2
Hillshire Brands HSH EW USD 32 33 2% 1% 5% 8% 19.4 4.7 17.8 67% 2.6
Kellogg Co K EW USD 61 60 -1% 4% 4% 6% 14.9 10.7 6.5 45% 2.4
Kraft Foods Group Inc. KRFT OW USD 52 60 15% 1% 11% 10% 15.6 9.8 9.9 63% 1.6
McCormick & Co MKC EW USD 66 65 -2% 5% 6% 7% 19.3 12.6 4.4 24% 2.7
Mondelez International Inc. MDLZ OW USD 31 35 13% 4% 6% 11% 17.9 11.1 1.5 9% 1.6
Pinnacle Foods., Inc. PF OW USD 27 29 9% 3% 8% 20% 15.1 9.2 1.8 13% 0.8
The Hershey Company HSY EW USD 94 99 5% 7% 9% 12% 22.4 12.4 10.3 54% 1.8
The J.M. Smucker Company SJM EW USD 107 108 1% 3% 6% 10% 18.2 10.3 2.0 12% 1.8
TreeHouse Foods THS OW USD 70 83 18% 6% 11% 14% 18.7 8.2 1.5 9% 1.4
Group Average 6% 5% 9% 9% 18.1 10.4 5.1 28% 1.8
US Food
(CY12-15E CAGR) CY14E Price
17 October 2013 231
FIGURE 508
US Cosmetics & HPC (Positive) valuation comparison

Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Avon Products AVP EW USD 21 22 6% 2% 15% 20% 16.7 8.5 4.6 28% 0.8
Church & Dwight Co., Inc. CHD EW USD 61 61 -1% 6% 10% 12% 19.8 11.5 3.5 18% 1.7
Clorox Co CLX UW USD 84 79 -6% 3% 4% 6% 18.6 10.0 30.4 163% 3.0
Colgate-Palmolive CL OW USD 61 65 6% 4% 7% 9% 19.7 12.5 26.7 136% 2.2
International Flavors &
Fragrances
IFF OW USD 81 93 15% 4% 10% 11% 16.5 10.1 3.9 24% 1.5
Jarden Corporation JAH OW USD 49 57 17% 11% 18% 19% 12.4 5.9 2.0 16% 0.7
Kimberly-Clark KMB UW USD 97 90 -7% 1% 4% 7% 16.2 9.6 6.5 40% 2.4
Newell Rubbermaid NWL OW USD 28 30 8% 3% 7% 9% 14 8.9 3.6 26% 1.5
Procter & Gamble PG EW USD 78 83 6% 3% 3% 6% 18.5 13.1 3.2 17% 3.0
The Este Lauder Companies EL OW USD 71 76 7% 6% 11% 13% 24.3 13.5 8.0 33% 1.8
Group Average 5% 4% 9% 11% 17.7 10.4 9.2 50% 1.9
US Cosmetics & HPC
17 October 2013 232

FIGURE 509
US Beverages & Tobacco (Positive) valuation comparison


Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Altria Group Inc. MO EW USD 36 34 -4% 1% 4% 8% 13.7 9.7 15.8 141% 1.6
Beam, Inc. BEAM OW USD 68 75 10% 6% 9% 11% 22.8 14.6 2.1 10% 2.0
Brown-Forman Corp. BF.B UW USD 70 70 -0% 6% 11% 12% 23 15.0 7.4 40% 1.9
Coca-Cola Enterprises CCE EW USD 41 43 5% 4% 4% 13% 14.1 10.9 6.7 36% 1.1
Cott Corp COT EW USD 8 9 17% -2% 2% 8% 15.4 5.2 1.2 8% 1.9
Dr Pepper Snapple Group
Inc.
DPS EW USD 44 45 2% 2% 1% 5% 13.7 8.6 4.1 29% 2.6
PepsiCo Inc PEP OW USD 81 87 8% 4% 6% 7% 17.4 10.6 1.6 32% 2.5
Philip Morris International
Inc.
PM OW USD 85 98 15% 3% 4% 8% 14.4 10.6 na na na
Reynolds American RAI EW USD 51 44 -13% 0% 4% 7% 14.9 10.0 5.9 39% 2.1
The Coca-Cola Company KO OW USD 38 46 22% 2% 4% 6% 17.2 14.0 4.8 29% 2.8
Group Average 6% 3% 5% 9% 16.7 10.9 5.5 40% 2.1
US Beverages & Tobacco
17 October 2013 233
FIGURE 510
Japan Food, Beverages & Tobacco (Neutral) valuation comparison


Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Ajinomoto Co., Inc. 2802.T OW JPY 1,338 1,660 24% 4% 7% 11% 14.9 5.1 1.3 9% 1.4
Asahi Group Holdings, Ltd. 2502.T OW JPY 2,767 2,540 -8% 3% 2% 13% 17.6 8.6 1.6 9% 1.4
Calbee Inc. 2229.T EW JPY 2,628 2,670 2% 8% 15% 20% 25.5 - 3.3 13% 1.3
Coca-Cola West Co., Ltd. 2579.T EW JPY 1,949 1,770 -9% 3% 6% 15% 24.7 4.3 0.8 3% 1.6
ITO EN 2593.T EW JPY 2,228 2,190 -2% 2% -1% 4% 22.7 4.4 2.1 10% 5.4
Japan Tobacco Inc. 2914.T OW JPY 3,500 4,050 16% 9% 18% 25% 11.6 7.0 2.7 23% 0.5
Kikkoman Corp. 2801.T EW JPY 1,690 1,560 -8% 6% 5% 12% 24.5 10.9 1.7 7% 2.1
Kirin Holdings Co., Ltd. 2503.T UW JPY 1,425 1,260 -12% 1% 1% 8% 22.6 4.4 1.4 6% 2.9
Nippon Meat Packers, Inc. 2282.T EW JPY 1,368 1,440 5% 2% 8% 10% 15.5 5.9 0.9 6% 1.6
Nissin Foods Holdings Co.,
Ltd.
2897.T UW JPY 3,990 3,640 -9% 2% 1% -1% 25.9 9.2 1.3 5% -
Toyo Suisan Kaisha Ltd. 2875.T OW JPY 2,935 3,830 30% 3% 3% 9% 14.2 4.6 1.3 10% 1.6
Yakult Honsha Co., Ltd. 2267.T EW JPY 4,830 3,570 -26% 7% 12% 17% 37.7 15.3 2.9 8% 2.3
Group Average 0% 4% 7% 12% 21.5 7.2 1.8 9% 2.0
Japan Food, Beverages &
Tobacco
(FY13-16E CAGR) FY15E Price
17 October 2013 234
FIGURE 511
European Food (Neutral) valuation comparison

FIGURE 512
European HPC (Neutral) valuation comparison


Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Associated British Foods plc ABF.L OW GBp 1,963 2,100 7% 6% 7% 10% 19.1 9.4 2.1 13% 2.0
Danone DANO.PA EW EUR 53 57 7% 5% 5% 4% 17.2 10.4 2.3 14% 4.1
Glanbia Plc. GL9.I OW EUR 9 11 19% 6% 9% 10% 15.4 11.8 3.5 25% 1.5
Kerry Group Plc. KYGa.I OW EUR 43 50 16% 3% 9% 11% 15.6 10.7 2.7 20% 1.5
Nestle SA NESN.VX OW CHF 62 73 18% 5% 7% 6% 17.1 10.0 2.7 18% 2.7
Suedzucker AG SZUG.DE UW EUR 22 25 13% 4% 2% 5% 9.5 6.1 1.3 15% 1.9
Group Average 13% 5% 6% 8% 15.7 9.7 2.4 17% 2.3
European Food
Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Beiersdorf AG BEIG.DE UW EUR 69 58 -15% 4% 7% 10% 26.8 12.7 3.8 16% 2.6
Henkel HNKG_p.DE OW EUR 73 83 13% 3% 7% 9% 16.6 9.2 2.6 18% 1.9
L'Oreal OREP.PA OW EUR 123 144 17% 5% 7% 7% 22.5 12.6 3.1 15% 3.3
Reckitt Benckiser RB.L EW GBP 43 44 1% 3% 1% 1% 16.7 12.6 4.4 30% 17.5
Svenska Cellulosa AB SCAb.ST OW SEK 159 200 25% 5% 8% 7% 14.8 8.4 1.7 12% 2.1
Unilever NV UNc.AS OW EUR 28 35 27% 3% 6% 6% 16.4 11.2 4.0 27% 2.7
Unilever PLC ULVR.L OW GBp 2,383 2,900 22% 3% 6% 6% 16.6 11.3 4.0 27% 2.7
Group Average 13% 4% 6% 7% 18.6 11.2 3.4 21% 4.7
European HPC
17 October 2013 235
FIGURE 513
European Beverages & Tobacco (Neutral) valuation comparison


Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
A.G. Barr PLC BAG.L EW GBp 521.0 575.0 10% 4% 7% 10% 19.6 13.4 3.8 24% 2.0
Anadolu Efes AEFES.IS EW TRY 24 24 -2% 24% 23% 11% 20.4 7.8 1.6 7% 1.9
Anheuser-Busch InBev NV ABI.BR EW EUR 72 77 7% 8% 10% 9% 18.9 12.2 2.8 16% 2.2
British American Tobacco
plc
BATS.L OW GBp 3,232 3,950 22% 2% 3% 7% 14.1 9.7 7.8 55% 2.1
Britvic Plc BVIC.L EW GBp 578 560 -3% 4% 13% 20% 14.5 9.3 12.9 164% 0.7
Carlsberg AS-B CARLb.CO EW DKK 563 590 5% 3% 6% 11% 13.2 7.3 1.1 9% 1.2
COCA-COLA HBC AG CCH.L OW GBP 17 20 16% 2% 8% 15% 20 9.1 2.2 12% 1.4
Coca-Cola Icecek AS CCOLA.IS OW TRY 55 63 15% 21% 25% 24% 24.4 14.1 5.6 27% 1.0
Davide Campari-Milano SpA CPRI.MI UW EUR 6 6 -13% 8% 6% 7% 19.4 11.4 2.2 12% 2.6
Diageo DGE.L OW GBP 20 23 15% 8% 7% 9% 17.7 14.3 5.8 39% 2.0
Heineken NV HEIN.AS UW EUR 50 49 -3% 4% 7% 8% 15.6 8.1 2.1 15% 1.9
Imperial Tobacco Group PLC IMT.L EW GBp 2,211 2,600 18% 1% 2% 5% 10.2 9.4 3.6 34% 2.1
Lanson-BCC LAN.PA EW EUR 31 39 23% 4% 12% 15% 9.6 12.5 0.9 11% 0.6
Laurent-Perrier Group LPER.PA EW EUR 65 70 7% 2% 4% 8% 16.1 12.6 1.2 8% 2.1
Pernod-Ricard SA PERP.PA OW EUR 89 103 16% 3% 5% 8% 17.5 13.0 1.9 12% 2.2
Remy Cointreau RCOP.PA EW EUR 75 86 15% 8% 13% 16% 22.7 13.4 3.4 16% 1.4
SABMiller SAB.L EW GBP 30 36 20% 3% 5% 8% 18.9 11.0 2.7 15% 2.4
Vranken-Pommery
Monopole SA
VRKP.PA EW EUR 21 23 8% 3% 10% 16% 15.5 15.9 0.5 4% NA
Group Average 10% 6% 9% 11% 17.1 11.4 3.5 27% 1.8
European Beverages &
Tobacco
17 October 2013 236

FIGURE 514
Asia ex-Japan Staples (Neutral) valuation comparison


Pot. Up /
EV/
EBITDA
P/BV ROE 3-yr PEG
Ajisen (China) Holdings
Limited
0538.HK OW HKD 8.0 8.6 8% 10% 31% 42% 25.1 10.7 2.7 11% 0.6
China Mengniu Dairy Co.,
Ltd.
2319.HK EW HKD 35.5 29.5 -17% 17% 17% 21% 25.4 12.1 3.3 14% 1.2
China Resources Enterprise,
Ltd.
0291.HK EW HKD 25.5 24.0 -6% 13% -1% 23% 27.2 7.5 1.4 4% 1.2
Giant Manufacturing Co.,
Ltd.
9921.TW OW TWD 210.5 238.3 13% 11% 12% 15% 19.4 13.8 4.2 23% 1.3
Ginko International Co., Ltd. 8406.TWO EW TWD 536.0 560.0 4% 30% 29% 29% 25.8 20.7 6.5 28% 0.9
Hengan International Group
Co., Ltd.
1044.HK OW HKD 91.9 97.0 6% 16% 16% 16% 23.6 18.1 6.4 28% 1.5
Hop Hing Group Holdings
Ltd.
0047.HK EW HKD 0.3 0.4 12% 15% 7% 14% 20.3 10.2 6.6 39% 1.5
KT&G Corp. 033780.KS EW KRW 76,900.0 82,000.0 7% 2% 5% 8% 11 5.9 1.7 17% 1.5
Merida Industry Co., Ltd. 9914.TW OW TWD 231.0 243.7 5% 15% 16% 18% 19.9 19.7 5.7 31% 1.1
St. Shine Optical Co., Ltd. 1565.TWO EW TWD 843.0 822.0 -2% 22% 23% 24% 22.6 17.7 11.2 55% 0.9
Sun Art Retail Group
Limited
6808.HK EW HKD 11.7 11.1 -5% 16% 16% 16% 27.4 14.1 4.0 15% 1.7
Tingyi Holdings Corp. 0322.HK EW HKD 19.7 19.0 -4% 14% 9% 13% 25.7 80.5 4.6 19% 1.9
Tsingtao Brewery Co., Ltd. 0168.HK UW HKD 59.9 43.0 -28% 11% 15% 13% 28.3 13.9 4.1 17% 2.1
Uni-President Enterprises
Corp.
1216.TW EW TWD 55.1 57.1 4% 5% 14% 4% 20 82.6 3.0 15% 5.0
Want Want China Holdings
Ltd.
0151.HK OW HKD 11.8 13.3 12% 18% 20% 33% 24.2 16.2 10.2 45% 0.7
Group Average 1% 14% 15% 19% 23.1 22.9 5.0 24% 1.6
Asia ex Japan Staples
17 October 2013 237
India Consumer coverage current valuation statistics

FIGURE 515
India Consumer one-year forward PE (x) valuation comparison and historical statistics

Current pricing as of close on 14 October 2013

FIGURE 516
India Consumer historical trading range for one-year forward P/E

Current pricing as of close on 14 October 2013

Dabur GCPL HUL ITC Nestle Coverage Sensex
Current 25.6 25.7 34.5 26.0 36.2 29.6 15.2
5yr 24.4 23.1 26.9 23.6 31.8 26.0 14.2
10yr 22.7 20.8 25.2 21.1 27.3 23.4 14.9
15yr 22.1 19.2 29.1 19.9 27.5 23.6 17.0
20yr 20.5 19.2 32.8 20.3 29.9 24.5 19.6
5yr 5% 11% 28% 10% 14% 14% 7%
10yr 13% 24% 37% 23% 32% 26% 2%
15yr 16% 34% 18% 30% 32% 26% -11%
20yr 25% 34% 5% 28% 21% 21% -22%
Current 68% 69% 127% 71% 138% 95%
5yr 74% 65% 94% 69% 127% 89%
10yr 54% 42% 73% 44% 87% 60%
15yr 38% 33% 77% 26% 73% 49%
20yr 20% 33% 75% 16% 65% 41%
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Dabur GCPL HUL ITC Nestle Coverage Sensex
5yr 21.1 18.6 22.1 20.1 27.1 25.2 12.1
10yr 18.3 16.1 20.3 16.7 21.2 22.7 12.7
15yr 15.5 13.8 18.5 14.6 20.6 21.4 10.0
20yr 13.7 13.8 20.5 15.1 21.4 21.6 11.1
5yr 27.6 27.6 31.7 27.0 36.5 26.7 16.3
10yr 27.0 25.4 30.2 25.5 33.5 24.2 17.1
15yr 28.7 24.7 39.7 25.3 34.3 25.7 23.9
20yr 27.3 24.7 45.1 25.5 38.3 27.5 28.0
5yr 3.3 4.5 4.8 3.5 4.7 0.7 2.1
10yr 4.4 4.6 4.9 4.4 6.2 0.8 2.2
15yr 6.6 5.5 10.6 5.4 6.8 2.1 6.9
20yr 6.8 5.5 12.3 5.2 8.5 2.9 8.5
Stdev
Historical Trading Ranges
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17 October 2013 238
European Food Industry View: NEUTRAL
Nestle SA (NESN.VX) Stock Rating: OVERWEIGHT

Income statement (CHFmn) 2012A 2013E 2014E 2015E CAGR Price (14-Oct-2013) CHF 61.65
Price Target CHF 73.00
Why Overweight? We expect a rebound in Zone AOA,
gradual improvement in the US, resilience in Europe
and improvement in FCF generation to support
positive earnings momentum and a steady re-rating
for Nestl over the next 12 months.

Upside case CHF 80.00
Our upside case would be predicated on reinvigorated
volumes in North America (26% sales) and a return
to double-digit organic sales in Zone AOA to drive
group organic growth closer to 7%. In addition,
resumed share buy-backs would support a high-
single digit premium over peers.

Downside case CHF 55.00
Organic growth at or below the low end of its 5-6%
target range and a lack of re-investment of cash into
the business, plus reduced flexibility from input cost
pressures, could drive a de-rating back towards its
historical average closer to ~15x PE.



Revenue 89,721 93,571 96,740 102,689 4.6%
EBITDA (adj) 16,614 17,781 18,746 20,135 6.6%
EBIT (adj) 13,464 14,187 14,899 16,087 6.1%
Pre-tax income (adj) 12,808 13,747 14,429 15,629 6.9%
Net income (adj) 10,353 10,888 11,474 12,440 6.3%
EPS (adj) (CHF) 3.25 3.41 3.59 3.90 6.2%
Diluted shares (mn) 3,186 3,192 3,192 3,192 0.1%
DPS (CHF) 2.05 2.10 2.17 2.32 4.2%

EBITDA (adj) margin (%) 18.5 19.0 19.4 19.6 19.1
EBIT (adj) margin (%) 15.0 15.2 15.4 15.7 15.3
Pre-tax (adj) margin (%) 14.3 14.7 14.9 15.2 14.8
Net (adj) margin (%) 11.5 11.6 11.9 12.1 11.8
ROA (%) 8.8 8.2 8.4 8.9 8.6
ROE (%) 18.2 17.8 17.6 17.7 17.8
ROCE (%) 12.7 11.9 11.8 12.1 12.1

Balance sheet and cash flow (CHFmn) CAGR
Intangible fixed assets 45,314 45,038 44,787 44,569 -0.6%
Total assets 125,651 129,240 132,373 135,842 2.6%
Net debt/(funds) 18,120 16,257 13,458 9,981 -18.0%
Cash flow from financing -14 -8,246 -9,272 -10,386 N/A
Free cash flow 9,735 8,405 9,485 10,359 2.1%

P/E (adj) (x) 19.0 18.1 17.1 15.8 17.5
EV/sales (x) 2.1 2.0 1.9 1.8 2.0
EV/EBITDA (adj) (x) 11.5 10.7 10.0 9.1 10.3
EV/EBIT (adj) (x) 14.2 13.4 12.5 11.4 12.9
FCF yield (%) 5.0 4.3 4.8 5.3 4.8
P/BV (x) 3.1 2.9 2.7 2.5 2.8
Dividend yield (%) 3.3 3.4 3.5 3.8 3.5
Interest cover (x) 19.1 19.8 22.6 28.6 22.5
Net debt/EBITDA (adj) (x) 1.1 0.9 0.7 0.5 0.8

Selected operating metrics
Organic growth (%) 5.9 4.7 5.9 6.1
Volume growth (%) 3.1 3.2 4.4 4.6
Price growth (%) 2.8 1.5 1.5 1.5
Working capital/sales (%) 8.4 7.9 7.4 6.9

Note: FY End Dec

Value
Quality
Sentiment
Low High
17 October 2013 239
European HPC Industry View: NEUTRAL
Unilever NV (UNc.AS) Stock Rating: OVERWEIGHT

Income statement (mn) 2012A 2013E 2014E 2015E CAGR Price (14-Oct-2013) EUR 27.61
Price Target EUR 35.00
Why Overweight? Unilever is transforming from a
food into an HPC company, which leaves it faster
growing and enjoying greater operational gearing,
which may merit rating expansion.

Upside case EUR 42.00
Our upside case would include a recovery in EM FX,
accelerating sales growth at Unilever accompanied
by greater operational gearing than we anticipate
dropping through to operating profit.

Downside case EUR 26.00
Our downside case would include a further
detereoration in key emerging markets. marked
increase in competitive intensity accompanied by
sustained commodity price inflation and enduring
economic weakness in key markets such as India and
Brazil.



Revenue 51,324 50,831 52,738 55,690 2.8%
EBITDA (adj) 8,261 8,403 9,013 9,813 5.9%
EBIT (adj) 7,062 7,129 7,606 8,303 5.5%
Net income (adj) 4,567 4,579 4,922 5,464 6.2%
EPS (adj) () 1.57 1.57 1.69 1.87 6.2%
DPS () 0.97 1.08 1.10 1.22 7.8%

EBIT (adj) margin (%) 13.8 14.0 14.4 14.9 14.3
Net (adj) margin (%) 8.9 9.0 9.3 9.8 9.3
ROA (%) 11.1 11.4 11.7 12.3 11.6
ROE (%) 32.0 30.2 27.5 27.0 29.2
ROCE (%) 17.8 17.4 17.3 18.0 17.6

Balance sheet and cash flow (mn) CAGR
Cash and equivalents 2,465 996 1,974 3,087 7.8%
Total assets 46,166 48,057 50,081 52,512 4.4%
Net debt/(funds) 7,355 8,824 7,846 6,733 -2.9%
Free cash flow 4,364 4,040 4,609 5,040 4.9%

P/E (adj) (x) 17.6 17.6 16.4 14.7 16.6
EV/sales (x) 2.0 2.0 1.9 1.8 1.9
EV/EBITDA (adj) (x) 12.3 12.2 11.2 10.1 11.5
EV/EBIT (adj) (x) 14.4 14.4 13.3 11.9 13.5
Equity FCF yield (%) 5.1 4.5 5.2 5.8 5.1
P/BV (x) 5.3 4.5 4.0 3.5 4.3
Dividend yield (%) 3.5 3.9 4.0 4.4 4.0
Interest cover (x) 18.1 17.0 16.9 21.2 18.3

Organic growth (%) 4.2 4.7 5.6 5.9
Volume growth (%) 2.2 2.5 3.3 3.7
Price growth (%) 2.0 2.2 2.3 2.3
Working capital/sales (%) -5.4 -5.7 -6.0 -6.2

Note: FY End Dec

Value
Quality
Sentiment
Low High
17 October 2013 240
European HPC Industry View: NEUTRAL
Unilever PLC (ULVR.L) Stock Rating: OVERWEIGHT

Income statement (mn) 2012A 2013E 2014E 2015E CAGR Price (14-Oct-2013) GBp 2,383.0
Price Target GBp 2,900.0
Why Overweight? Unilever is transforming from a
food into an HPC company, which leaves it faster
growing and enjoying greater operational gearing,
which may merit rating expansion.

Upside case GBp 3,500.0
Our upside case would include accelerating sales
growth at Unilever accompanied by greater
operational gearing than we anticipate dropping
through to operating profit.

Downside case GBp 2,200.0
Our downside case would include a marked increase
in competitive intensity accompanied by sustained
commodity price inflation and enduring economic
weakness in key markets such as India and Brazil.



Revenue 51,324 50,835 52,748 55,700 2.8%
EBITDA (adj) 8,261 8,403 9,014 9,815 5.9%
EBIT (adj) 7,062 7,130 7,607 8,305 5.6%
Net income (adj) 4,567 4,580 4,924 5,465 6.2%
EPS (adj) () 1.57 1.57 1.69 1.87 6.2%
DPS () 0.97 1.08 1.10 1.22 7.8%

EBIT (adj) margin (%) 13.8 14.0 14.4 14.9 14.3
Net (adj) margin (%) 8.9 9.0 9.3 9.8 9.3
ROA (%) 11.1 11.4 11.7 12.3 11.6
ROE (%) 32.0 30.2 27.5 27.0 29.2
ROCE (%) 17.8 17.4 17.3 18.0 17.6

Cash and equivalents 2,465 996 1,975 3,088 7.8%
Total assets 46,166 48,058 50,084 52,516 4.4%
Net debt/(funds) 7,355 8,824 7,845 6,732 -2.9%
Free cash flow 4,364 4,041 4,610 5,041 4.9%

P/E (adj) (x) 17.9 17.9 16.6 15.0 16.9
EV/sales (x) 2.0 2.0 1.9 1.8 1.9
EV/EBITDA (adj) (x) 12.5 12.4 11.3 10.2 11.6
EV/EBIT (adj) (x) 14.6 14.6 13.4 12.1 13.7
Equity FCF yield (%) 5.0 4.4 5.1 5.7 5.1
P/BV (x) 5.4 4.6 4.0 3.6 4.4
Dividend yield (%) 3.5 3.8 3.9 4.3 3.9
Interest cover (x) 18.1 17.0 16.9 21.2 18.3

Organic growth (%) 4.2 4.7 5.6 5.9
Volume growth (%) 2.2 2.5 3.3 3.7
Price growth (%) 2.0 2.2 2.3 2.3
Working capital/sales (%) -5.4 -5.7 -6.0 -6.2

Note: FY End Dec

Value
Quality
Sentiment
Low High
17 October 2013 241
European Beverages & Tobacco Industry View: NEUTRAL
British American Tobacco plc (BATS.L) Stock Rating: OVERWEIGHT

Income statement (mn) 2012A 2013E 2014E 2015E CAGR Price (14-Oct-2013) GBp 3,232.0
Price Target GBp 3,950.0
Why Overweight? Although Plain Packaging is a risk,
we estimate a limited earnings dilution and share
price impact. We view its PE rating as sustainable.
BATs emerging market skew (limited WEUR
exposure) and the further price/mix driven upside to
EPS from Brazil and Russia in the coming year.

Upside case GBp 4,200.0
Assumes a step-up in organic margin expansion
driven by on-going greater price leverage and higher
cost savings, prompting a re-rating of the shares to
peak multiples of c.17x.

Downside case GBp 3,000.0
Assumes the widespread roll-out of Plain Packaging
legislation and other regulations and a reduction in
cash return metric. This prompts a de-rating to a 3-
year average PE for the industry of c.12.5x.



Revenue 15,190 15,329 15,410 16,052 1.9%
EBITDA (adj) 6,093 6,230 6,323 6,662 3.0%
EBIT (adj) 5,681 5,831 5,959 6,282 3.4%
Net income (adj) 4,044 4,155 4,271 4,529 3.8%
EPS (adj) (GBp) 205.2 217.4 229.3 250.3 6.9%
Diluted shares (mn) 1,949 1,911 1,863 1,809 -2.4%
DPS (GBp) 134.90 141.30 149.05 162.71 6.4%

EBIT (adj) margin (%) 37.4 38.0 38.7 39.1 38.3
Net (adj) margin (%) 26.6 27.1 27.7 28.2 27.4
ROA (%) 14.5 14.8 15.1 15.7 15.0
ROE (%) 47.7 53.4 55.2 58.7 53.8
ROCE (%) 20.5 21.1 21.7 23.0 21.6

Intangible assets 11,710 11,633 11,633 11,633 -0.2%
Cash and equivalents 2,081 1,605 1,128 629 -32.9%
Total assets 27,327 27,500 27,782 28,019 0.8%
Net debt/(funds) 8,473 9,054 9,531 10,030 5.8%
Cash flow from investing -400 -602 -577 -545 N/A
Capital expenditure -664 -628 -601 -562 N/A
Free cash flow 3,012 3,750 3,843 4,000 9.9%

P/E (adj) (x) 15.8 14.9 14.1 12.9 14.4
EV/sales (x) 4.0 4.0 4.0 3.8 3.9
EV/EBITDA (adj) (x) 9.9 9.7 9.7 9.3 9.6
EV/EBIT (adj) (x) 10.6 10.4 10.3 9.8 10.3
FCF yield (%) 4.8 6.1 6.4 6.8 6.0
P/BV (x) 8.1 8.0 7.8 7.5 7.8
Dividend yield (%) 4.2 4.4 4.6 5.0 4.5

Organic growth (%) 3.6 4.6 4.1 4.2
Tax rate (%) 31 31 30 30
Capex/sales (%) 4.4 4.1 3.9 3.5

Note: FY End Dec

Value
Quality
Sentiment
Low High
17 October 2013 242
Valuation Methodology and Risks
Dabur India Ltd. (DABUR IN / DABU.NS)
Valuation Methodology: We value Dabur using one-year forward P/E as our primary methodology. We believe the stock is likely to re-rate to the
high end of its trading range given its relatively more resilient portfolio, improving cash returns and ROE as operating leverage plays out. As such,
we apply a target P/E multiple of 30x, in-line with its coverage peers and at a 15% premium to its historical average which we believe is justified
given Dabur's reliable growth outlook, to FY15E EPS which imputes a 12-month price target of Rs199.
Risks which May Impede the Achievement of the Barclays Research Price Target: Downside risks to our investment thesis and price target on
Dabur include: 1) strong recovery in the broader Indian equity market and liquidity flows from defensives to cyclicals; 2) commodity pricing
pressure on GM; 3) rural growth decline and traction on 'Project Double' stalling; and 4) lack of International business margin improvement.
Godrej Consumer Products Ltd. (GCPL IN / GOCP.NS)
Valuation Methodology: We value GCPL using one-year forward P/E as our primary methodology and also compare it with other key growth
and earnings multiples as a cross check. Our target P/E multiple of 28x is set at a 10% discount to the peer average to reflect GCPL's weaker
cash returns profile, which we apply to our FY15E EPS to impute a 12-month price target of Rs901.
GCPL include: 1) heightened competition in the household insecticide segment; and 2) international market volatility, including currency and
socio-political changes. Upside risks include: 1) better operating leverage; and 2) cross selling of products in International markets.
Hindustan Unilever Ltd. (HUVR IN / HLL.NS)
Valuation Methodology: We value HUL using one-year forward P/E as the primary methodology, cross-checked with EV/EBITDA, PEG and other
metrics. We set our target P/E multiple at 30x, in-line with the Indian consumer sector average and at a 10% discount to its 20-year historical
average of 32.8x, justified in our view by the muted growth outlook versus peers over the next three years, which we then apply to our FY15E
EPS to impute a 12-month price target of Rs521.
Risks which May Impede the Achievement of the Barclays Research Price Target: Upside risks to our investment thesis and price target on HUL
include: 1) a sharp recovery in staples and discretionary spending on the back of a solid recovery in the economy; 2) stronger-than-expected
traction in rural areas (c40% of HUL profits come from this segment); 3) moderation of pricing pressures in the Soaps and Skin Care segments;
and 4) pickup in premiumisation trends in the Personal Products segment.
ITC Ltd. (ITC IN / ITC.NS)
Valuation Methodology: Our 12-month price target of Rs409 uses sum-of-the-parts as our primary methodology given ITC's multiple business
segments. We use P/E to value all segments except 'FMCG Others' (Cigarettes at 28x FY15E, reflecting long-term positive volume growth
outlook, pricing advantage and ITC's dominant market position; Hotels at 15x FY15E, in-line with comparable peers; Agri & Commodities and
Paperboards & Packaging at 15x FY15E, a c50% discount to Cigarettes to reflect the lower returns profile). 'FMCG Others' is in a significant phase
of investment and has yet to generate sustainable earnings, hence we use a P/S multiple of 3.5x FY15E, a 20% discount to our FMCG coverage
group (reflecting ITC's relatively younger business).
Risks which May Impede the Achievement of the Barclays Research Price Target: Downside risks to our investment thesis and price target
include: 1) adverse tobacco industry regulations, as the Cigarettes segment contributes 81% of ITC's operating profits; 2) strong recovery in
broader Indian equity market and liquidity flows from defensives to cyclicals; and 3) any delay in FMCG & Hotel business profitability due to
macro slowdown or increased competition.
Nestle India Ltd. (NEST IN / NEST.NS)
Valuation Methodology: We value Nestle India using one-year forward P/E as the primary methodology, cross-checked with EV/EBITDA, three-
year PEG and other metrics. We set our target P/E multiple at 30x, on par with its 20-year historical average in view of its modest
revenue/earnings CAGR versus peers over CY12-15E, applied to CY14E EPS and imputing a 12-month price target of Rs4,224.
Risks which May Impede the Achievement of the Barclays Research Price Target: Upside risks to our investment thesis and price target for
Nestle India include: 1) a sharp spike in discretionary segments such as chocolates, milk and milk foods on the back of a solid recovery in the
Indian economy; 2) weaker pressure from competition in beverages than we currently anticipate; 3) the launch of global Nestle S.A. products in
India; and 4) lower-than-anticipated royalties, which could pose upside risk to our margin estimates.
Source: Barclays Research.

17 October 2013 243
ANALYST(S) CERTIFICATION(S):
In relation to our respective sections, we, Balaji Prasad, M.D., Simon Hales, Liam Rowley and Iain Simpson, hereby certify (1) that the views
expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this
research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views
expressed in this research report.
The POINT Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firms POINT quantitative model and Barclays
hereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm's
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

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The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total
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These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE
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The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental
analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ
from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or
otherwise.
Primary Stocks (Ticker, Date, Price)
Dabur India Ltd. (DABU.NS, 14-Oct-2013, INR 169.30), Overweight/Neutral, D/J/K/L/M
Godrej Consumer Products Ltd. (GOCP.NS, 14-Oct-2013, INR 826.50), Equal Weight/Neutral, J
Hindustan Unilever Ltd. (HLL.NS, 14-Oct-2013, INR 598.05), Underweight/Neutral, D/J/K/L/M
ITC Ltd. (ITC.NS, 14-Oct-2013, INR 339.50), Overweight/Neutral, J
Nestle India Ltd. (NEST.NS, 14-Oct-2013, INR 5095.30), Underweight/Neutral, J
Materially Mentioned Stocks (Ticker, Date, Price)
British American Tobacco (BATS.L, 14-Oct-2013, GBp 3232.0), Overweight/Neutral, A/C/D/J/K/L/M/N
Nestle SA (NESN.VX, 14-Oct-2013, CHF 61.65), Overweight/Neutral, A/C/D/J/K/L/M/N
Unilever NV (UNc.AS, 14-Oct-2013, EUR 27.61), Overweight/Neutral, C/J/K/M/N
Other Material Conflicts: The Corporate and Investment Banking division of Barclays is providing investment banking services to Hormel Foods
Corp. in its announced acquisition of the Skippy brand from Unilever plc.
Unilever PLC (ULVR.L, 14-Oct-2013, GBp 2383.0), Overweight/Neutral, C/D/J/K/L/M/N
Other Material Conflicts: The Corporate and Investment Banking division of Barclays is providing investment banking services to Hormel Foods
Corp. in its announced acquisition of the Skippy brand from Unilever plc.

Other Material Conflicts
The Corporate and Investment Banking division of Barclays is providing investment banking services to CVC Capital Partners in relation to their
potential acquisition of the European business operations of Campbell Soup Company. The ratings, price targets and estimates on Campbell Soup
Company do not incorporate this potential transaction.

Disclosure Legend:
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B: An employee of Barclays Bank PLC and/or an affiliate is a director of this issuer.
C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by this issuer or one of its affiliates.
17 October 2013 244
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Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below)
relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage
universe").
In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or
Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors
should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-
month investment horizon.
Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to
comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division
of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company.
Industry View
Positive - industry coverage universe fundamentals/valuations are improving.
Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
Negative - industry coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "industry coverage universe":
Dabur India Ltd. (DABU.NS) Godrej Consumer Products Ltd. (GOCP.NS) Hindustan Unilever Ltd. (HLL.NS)
Ajisen (China) Holdings Ltd. (0538.HK) China Mengniu Dairy Co., Ltd. (2319.HK) China Resources Enterprise, Ltd. (0291.HK)
17 October 2013 245
Giant Manufacturing (9921.TW) Ginko International (8406.TWO) Hengan International Group Co., Ltd. (1044.HK)
Hop Hing Group Holdings (0047.HK) ITC Ltd. (ITC.NS) KT&G (033780.KS)
Merida Industry (9914.TW) Nestle India Ltd. (NEST.NS) St. Shine Optical (1565.TWO)
Sun Art Retail Group (6808.HK) Tingyi Holdings Corp. (0322.HK) Tsingtao Brewery Co., Ltd. (0168.HK)
Uni-President Enterprises (1216.TW) Want Want China Holdings Ltd. (0151.HK)
European Beverages & Tobacco
A.G. Barr PLC (BAG.L) Anadolu Efes (AEFES.IS) Anheuser-Busch InBev NV (ABI.BR)
British American Tobacco (BATS.L) Britvic Plc (BVIC.L) C&C Group (GCC.I)
Carlsberg AS-B (CARLb.CO) COCA-COLA HBC A.G. (CCH.L) Coca-Cola Icecek AS (CCOLA.IS)
Davide Campari-Milano SpA (CPRI.MI) Diageo PLC (DGE.L) Heineken NV (HEIN.AS)
Imperial Tobacco (IMT.L) Lanson-BCC (LAN.PA) Laurent-Perrier (LPER.PA)
Pernod-Ricard SA (PERP.PA) Remy Cointreau (RCOP.PA) SABMiller PLC (SAB.L)
Vranken-Pommery Monopole (VRKP.PA)
European Food
Associated British Foods (ABF.L) Danone (DANO.PA) Glanbia Plc. (GL9.I)
Kerry Group Plc. (KYGa.I) Nestle SA (NESN.VX) Suedzucker AG (SZUG.DE)
European HPC
Beiersdorf AG (BEIG.DE) Henkel (HNKG_p.DE) L'Oreal (OREP.PA)
Reckitt Benckiser (RB.L) Svenska Cellulosa AB (SCAb.ST) Unilever NV (UNc.AS)
Unilever PLC (ULVR.L)

Distribution of Ratings:
Barclays Equity Research has 2458 companies under coverage.
44% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% of
companies with this rating are investment banking clients of the Firm.
39% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of
14% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 41% of
Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price
target over the same 12-month period.
Guide to the POINT Quantitative Equity Scores:
The POINT Quantitative Equity Scores (POINT Scores) are based on consensus historical data and are independent of the Barclays fundamental
analysts views. Each score is composed of a number of standard industry metrics.
A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow.
A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability.
A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions.
These scores are valid as of the date of this report. To view the latest scores, which are updated monthly, click here.
For a more detailed description of the underlying methodology for each score, please click here.
Barclays offices involved in the production of equity research:
London
Barclays Bank PLC (Barclays, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Securities Japan Limited (BSJL, Tokyo)
So Paulo
17 October 2013 246
Banco Barclays S.A. (BBSA, So Paulo)
Hong Kong
Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCCI, Toronto)
Johannesburg
Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)
Mexico City
Barclays Bank Mexico, S.A. (BBMX, Mexico City)
Taiwan
Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)
Seoul
Barclays Capital Securities Limited (BCSL, Seoul)
Mumbai
Barclays Securities (India) Private Limited (BSIPL, Mumbai)
Singapore
Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

17 October 2013 247
Dabur India Ltd. (DABUR IN / DABU.NS)
Stock Rating Industry View
INR 169.30 (14-Oct-2013) OVERWEIGHT NEUTRAL
Rating and Price Target Chart - INR (as of 14-Oct-2013) Currency=INR

Date Closing Price Rating * Price Target
*The rating for this security remained Not Rated with target price INR
199.00 during the relevant period.
Link to Barclays Live for interactive charting

D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Dabur India Ltd. in the past 12 months.
J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Dabur India Ltd..
K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Dabur India Ltd. within the past 12
months.
L: Dabur India Ltd. is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
M: Dabur India Ltd. is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC
Valuation Methodology: We value Dabur using one-year forward P/E as our primary methodology. We believe the stock is likely to re-rate to the
high end of its trading range given its relatively more resilient portfolio, improving cash returns and ROE as operating leverage plays out. As such,
we apply a target P/E multiple of 30x, in-line with its coverage peers and at a 15% premium to its historical average which we believe is justified
given Dabur's reliable growth outlook, to FY15E EPS which imputes a 12-month price target of Rs199.
Dabur include: 1) strong recovery in the broader Indian equity market and liquidity flows from defensives to cyclicals; 2) commodity pricing
pressure on GM; 3) rural growth decline and traction on 'Project Double' stalling; and 4) lack of International business margin improvement.

Closing Price
Jan- 2011 Jul- 2011 Jan- 2012 Jul- 2012 Jan- 2013 Jul- 2013
75
100
125
150
175
17 October 2013 248
Godrej Consumer Products Ltd. (GCPL IN /
GOCP.NS)
INR 826.50 (14-Oct-2013) EQUAL WEIGHT NEUTRAL


J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Godrej Consumer Products Ltd..
Valuation Methodology: We value GCPL using one-year forward P/E as our primary methodology and also compare it with other key growth and
earnings multiples as a cross check. Our target P/E multiple of 28x is set at a 10% discount to the peer average to reflect GCPL's weaker cash
returns profile, which we apply to our FY15E EPS to impute a 12-month price target of Rs901.
GCPL include: 1) heightened competition in the household insecticide segment; and 2) international market volatility, including currency and
socio-political changes. Upside risks include: 1) better operating leverage; and 2) cross selling of products in International markets.

Closing Price
300
400
500
600
700
800
900
1,000
17 October 2013 249
Hindustan Unilever Ltd. (HUVR IN / HLL.NS)
INR 598.05 (14-Oct-2013) UNDERWEIGHT NEUTRAL


D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Hindustan Unilever Ltd. in the past 12
months.
J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Hindustan Unilever Ltd..
K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Hindustan Unilever Ltd. within the past
12 months.
L: Hindustan Unilever Ltd. is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
M: Hindustan Unilever Ltd. is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays
Bank PLC and/or an affiliate.
Valuation Methodology: We value HUL using one-year forward P/E as the primary methodology, cross-checked with EV/EBITDA, PEG and other
metrics. We set our target P/E multiple at 30x, in-line with the Indian consumer sector average and at a 10% discount to its 20-year historical
average of 32.8x, justified in our view by the muted growth outlook versus peers over the next three years, which we then apply to our FY15E EPS
to impute a 12-month price target of Rs521.
Risks which May Impede the Achievement of the Barclays Research Price Target: Upside risks to our investment thesis and price target on HUL
include: 1) a sharp recovery in staples and discretionary spending on the back of a solid recovery in the economy; 2) stronger-than-expected
traction in rural areas (c40% of HUL profits come from this segment); 3) moderation of pricing pressures in the Soaps and Skin Care segments;
and 4) pickup in premiumisation trends in the Personal Products segment.

Closing Price
200
300
400
500
600
700
800
17 October 2013 250
ITC Ltd. (ITC IN / ITC.NS)
INR 339.50 (14-Oct-2013) OVERWEIGHT NEUTRAL


J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of ITC Ltd..
Valuation Methodology: Our 12-month price target of Rs409 uses sum-of-the-parts as our primary methodology given ITC's multiple business
segments. We use P/E to value all segments except 'FMCG Others' (Cigarettes at 28x FY15E, reflecting long-term positive volume growth outlook,
pricing advantage and ITC's dominant market position; Hotels at 15x FY15E, in-line with comparable peers; Agri & Commodities and Paperboards
& Packaging at 15x FY15E, a c50% discount to Cigarettes to reflect the lower returns profile). 'FMCG Others' is in a significant phase of investment
and has yet to generate sustainable earnings, hence we use a P/S multiple of 3.5x FY15E, a 20% discount to our FMCG coverage group (reflecting
ITC's relatively younger business).
Risks which May Impede the Achievement of the Barclays Research Price Target: Downside risks to our investment thesis and price target
include: 1) adverse tobacco industry regulations, as the Cigarettes segment contributes 81% of ITC's operating profits; 2) strong recovery in
broader Indian equity market and liquidity flows from defensives to cyclicals; and 3) any delay in FMCG & Hotel business profitability due to
macro slowdown or increased competition.

Closing Price
150
200
250
300
350
400
17 October 2013 251
Nestle India Ltd. (NEST IN / NEST.NS)
INR 5095.30 (14-Oct-2013) UNDERWEIGHT NEUTRAL


J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Nestle India Ltd..
Valuation Methodology: We value Nestle India using one-year forward P/E as the primary methodology, cross-checked with EV/EBITDA, three-
year PEG and other metrics. We set our target P/E multiple at 30x, on par with its 20-year historical average in view of its modest
revenue/earnings CAGR versus peers over CY12-15E, applied to CY14E EPS and imputing a 12-month price target of Rs4,224.
Risks which May Impede the Achievement of the Barclays Research Price Target: Upside risks to our investment thesis and price target for
Nestle India include: 1) a sharp spike in discretionary segments such as chocolates, milk and milk foods on the back of a solid recovery in the
Indian economy; 2) weaker pressure from competition in beverages than we currently anticipate; 3) the launch of global Nestle S.A. products in
India; and 4) lower-than-anticipated royalties, which could pose upside risk to our margin estimates.

Closing Price
3,000
3,500
4,000
4,500
5,000
5,500
6,000

DISCLAIMER:
This publication has been prepared by the Corporate and Investment Banking division of Barclays Bank PLC and/or one or more of its affiliates (collectively
and each individually, "Barclays"). It has been issued by one or more Barclays legal entities within its Corporate and Investment Banking division as provided
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Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of their respective officers,
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