Food Initiation It's Just Started: Sector Update

SectorUpdate
Industry: FMCG
FMCG
FoodInitiationItsjuststarted
Gautam Duggad (gautamduggad@plindia.com) +91-22-66322233
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FMCG
CONTENTS
PageNo GlaxoSmithKline Consumer Products ......................................................................... 7 Nestle India ............................................................................................................... 24
(AllpricesasonMay7,2012)
May 07, 2012

FMCG
FoodInitiation Its juststarted
May07,2012 Gautam Duggad gautamduggad@plindia.com +91-22-66322233
Underpenetrationoffersstronggrowthvisibility: Penetration of processed and packaged branded food categories continue to remain low, both in urban as well as rural geographies, despite high teens CAGR in past five years. Consequently, the growth visibility still remains high vis--vis HPC space. Consumption spends on Foods is expected to triple by CY20 and reach US$ 900bn. Favorable underlying macro drivers: Rising affluence driven by higher disposable income, younger demographics, increasing awareness of health and hygiene factors, continued urbanization and rising proportion of working women constitute some of the key catalysts which will drive the growth in Branded Foods space. Initiate on Nestle and GSK Consumer: We initiate coverage on two of the largest Processed Foods players, Nestle and GSK Consumer with an Accumulate and Buy rating with target prices of Rs3,200 and Rs5,015, an upside of 18% and 9.6%, respectively. Unparalleled dominance in the core categories, strong pricing power and robust balance sheet as well as cash flow metrics underline our positive investment hypothesis for both Nestle and GSK Consumer. Notwithstanding the premium valuations, especially on near term valuation metrics, we expect the structural bias for high quality growth stories with distinct and sustainable competitive advantages to drive the medium and long term returns.
Exhibit1: Company Nestle India GSK Consumer Products Hindustan Unilever ITC Dabur India Marico Colgate Palmolive Asian Paints Godrej Consumer Products United Spirits ValuationSummary CMP(Rs) 4,576 2,702 430 236 108 177 1,124 3,644 553 714 TP(Rs) 5,015 3,200 406 270 120 190 860 3,500 575 800 Upside Rating 9.6% 18.4% 14.2% 11.5% 7.3% -4.0% 4.0% 12.0% Acc BUY BUY Acc Acc BUY BUY Acc P/E(x) FY12E FY13E FY14E 43.3 32.0 35.0 30.5 29.0 33.3 34.1 38.6 32.4 24.1 38.1 26.6 30.7 25.4 25.5 27.3 29.8 30.2 25.2 20.5 31.2 22.5 26.5 21.6 21.0 22.9 25.9 25.2 21.2 15.3 EPS(Rs) 86.8 105.7 120.1 146.7 71.3 9.9 6.5 3.3 4.3 29.6 85.5 14.9 27.2 84.5 101.6 120.0 12.3 7.7 3.7 5.3 33.0 17.1 29.6 14.0 9.3 4.2 6.5 37.8 22.0 34.9 16.2 11.0 5.1 7.7 43.3 26.1 46.7 EPSCAGR 17.8% 19.2% 15.0% 18.9% 17.5% 20.8% 23.7% 23.5% 25.6% RoE FY11 95.0% 32.2% 79.3% 32.4% 48.9% 33.4% 42.1% 35.9% 8.6% FY11 FY12E FY13E FY14E FY1214E
-5.6% Reduce
-23.5% Reduce
14.6% 112.8%
94.4 120.8 144.4
Source:CompanyData,PLResearch
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
SectorUpdate
Food segment continues to outperform HPC categories: Foods sector, which contribute ~45% of Indian FMCG industry, continues to outperform the HPC (Home & Personal Care) category helped by favorable underlying macro catalysts as well as increasing focus and investments of the players. Bigger pie also precludes the internecine competitive battles which, has been the hallmark of HPC space in the past three years.
FMCG
Exhibit2: ConsumptionexpenditureonFoodexpectedtogrow11%CAGR
1,000 900 800 700 600 500 400 300 200 100 0 895
(US$bn)
328 135
CY2000
CY2010
CY2020
Source:Industry,NSSO,PLResearch Exhibit3: ProportionofAspiringandAffluentHouseholdssettoincrease

Strugglers Urban Aspirers 100% 8% 80% 60% 40% 20% 0% CY10 CY20 50% 28% Small Town Next Billion Traditional Affluent 2% 4% 6% 6% 24% Large Town Next Billion Professional Affluent Rural Aspirers
10%
8% 5% 13% 6% 30%
Source:BCG,NCAER,PLResearch Exhibit4: Incomeclassificationbycategory Category Professional Affluent Traditional Affluent Urban Aspirers Large Town Next Billion Small Town Next Billion Strugglers Source:BCG,PLResearch Incomeperannum(US$) >18,500 >18,500 7,400-18,500 3,300-7,400 3,300-7,400 <3,300
May 07, 2012

FMCG
Exhibit5:
ProportionofavgmonthlyhouseholdspendonFood&Groceries
Home & Personal Care Meat Packaged Food Dairy Vegetables & Fruits Staples
100% 80% 60% 40% 20% 0% 31% 18% 16% 13% 9% 13% 29% 16% 16% 14% 12% 13% 32% 18% 15% 13% 9% 13% Urban Aspirers 32% 17% 16% 13% 9% 13% Large Town Next Billion 29% 19% 16% 13% 10% 13% Small Town Next Billion 29% 18% 16% 13% 9% 15% Strugglers
Professional Affluent Traditional Affluent
Source:BCG,PLResearch Exhibit6: FoodcategorySpendas%ofincome

50% 42% 40% 30% 20% 20% 10% 0% Strugglers Small Town Large Town Next Billion Next Billion Urban Aspirers Traditional Professional Affluent Affluent 17% 35% 37% 31%
Source:BCG,PLResearch
May 07, 2012

FMCG
COMPANIES
May 07, 2012

GlaxoSmithKlineConsumerProducts
HorlicksisthesecretofGSKsenergy
Rating Price Target Price Implied Upside Sensex Nifty (PricesasonMay07,2012) Tradingdata Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Majorshareholders Promoters Foreign Domestic Inst. Public & Other StockPerformance (%) 1M 6M Absolute (1.6) 5.6 Relative 1.7 9.3 HowwedifferfromConsensus EPS(Rs) PL Cons. 2012 101.6 99.7 2013 120.0 116.2
BUY Rs2,702 Rs3,200 18.4% 16,913 5,114
113.6 42.1 67.8 43.16% 15.50% 16.53% 24.81% 12M 19.4 28.1 %Diff. 1.9 3.3
NonMFD business remains a mixed bag: GSKs attempts to diversify the revenue basket have not yielded spectacular gains so far. While Biscuits has remained confined to niche categories (<2% market share), GSK had to withdraw its Nutribar offering after it failed to gain traction. Similarly its foray into Noodles segment hasnt built scale. Recently, leveraging the equity of Horlicks, it entered into Rs 2bn Oats category which is growing at 25% per annum. While there are many examples of successful umbrella branding (Colgate, Amul) we reckon stretching the equity of Horlicks runs the risk of diluting its core proposition. Successful execution and scale up are key parameters to monitor. Non-MFD bucket remains insignificant as yet (6% of sales) to impact the overall business either ways. Initiate with BUY; 19% EPS CAGR for CY1114e: We expect GSK to register steady 17.5 % sales growth driven by MFD business. We are building in marginal 40bps expansion in op margins as we expect GSK to pass input cost inflation to consumers. GSK has been re-rated in the last 3 years owing to its healthy volume growth in MFD segment and preference for safe havens in risk-averse market. We value GSK at a rolling forward 12 month P/E of 25x to arrive at our May13 target price of Rs3200, an upside of 18%. Spike in input costs, rising competition in core MFD category and failure of new launches are key risks
Keyfinancials(Y/eDecember) Revenues (Rs m) Growth(%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth(%) Net DPS (Rs) Profitability&Valuation EBITDAmargin(%) RoE(%) RoCE(%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Netdividendyield(%) Source:CompanyData;PLResearch 2010 23,800 19.8 4,506 2,998 71.3 28.8 50.0 2010 18.9 32.2 32.3 4.8 25.2 37.9 11.8 1.9 2011 27,798 16.8 5,193 3,552 84.5 18.5 35.0 2011 18.7 33.8 34.0 4.1 21.8 32.0 9.9 1.3 2012E 32,633 17.4 6,141 4,275 101.6 20.3 45.7 2012E 18.8 34.3 34.5 3.5 18.4 26.6 8.4 1.7 2013E 38,565 18.2 7,274 5,046 120.0 18.0 54.0 2013E 18.9 34.4 34.6 2.9 15.6 22.5 7.2 2.0
PricePerformance(RIC:GLSM.BO,BB:SKBIN)
(Rs) 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Jul-11 Sep-11 May-11 Jan-12 May-12 Nov-11 Mar-12
Source:Bloomberg
CompanyReport
DominantpositioningincoreMFDbusiness: GSK enjoys dominant market share of ~70% (55% for Horlicks) in its core MFD business (category size of ~Rs35bn) which is under-penetrated (22% penetration, 11% in rural) driven by strong brand equity of Horlicks as well as growing awareness for Health and Nutrition products which in-turn is catalysed by rising disposable income. We expect GSK to witness 9-10% volume cagr in MFD driven by distribution expansion, increased penetration in rural markets and GSKs successful sub-segmentation strategy which is driving the premiumisation in core business.
GlaxoSmithKline Consumer Products
InvestmentArgument
HorlicksisthesecretofGSKsenergy
GSK enjoys dominant market positioning in the Rs35bn MFD segment, with a market share of ~70% (55% for Horlicks, 13% Boost). MFD forms the bulk of GSKs revenues with ~95% salience. MFD category is under-penetrated with 22% overall penetration (11% in rural, 40% in urban) and expected to perform well on the back of favourable macro factors like rising disposable income, growing health awareness leading to rising demand for health and nutrition foods and rising urbanisation. We expect GSK to capitalize on its incumbent leadership position and benefit from the increased MFD spending.
Exhibit1: GSKcontrols70%ofMFDmarket
Viva Maltova 1% 2% Others 3%
Exhibit2: MFDsegmentdominatesrevenuemixdisproportionately
Biscuits 4% Noodles 1% Others 1%
Complan 11%
Bournvita 16%
Horlicks 54%
Boost 13%
MFD 94.0%
Source:CompanyData,PLResearch Exhibit3: LowMFDpenetrationoffersgrowthvisibility
Source:CompanyData,PLResearch Exhibit4: VolumegrowthinMFD

20.0% 17.1% 13.3% 9.1% 7.1% 9.1% 10.0% 10.5% 10.5% 10.0% 9.0%
45% 35% 25% 15% 5% Rural All India 11% 22%
40%
17.0% 14.0% 11.0% 8.0% 5.0%

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
Urban
May 07, 2012

CY14E
KeystrengthsandgrowthdriversforGSKsMFDsegment
Apart from the well documented favourable macro factors (rising middle class, urbanisation, young demographics and increased media exposure), following are the key growth drivers for GSKs MFD business: Portfoliostrength;subsegmentationapproachcaterstovarietyofconsumers: GSK has a broad basket of offerings under its Horlicks (mega) brand which caters to a specific consumer segment. This sub-segmentation approach has enhanced Horlicks brand equity and helped GSK in driving premiumisation, in our view. For example, GSKs offering Horlicks Gold (available at a 30% premium to base variant) is contributing 3% of Horlicks sales. GSK has launched several variants under the Horlicks brand Mother,Women,Junior,Lite,Gold to drive its penetration over the years. Success of GSKs sub-segmentation strategy is reflected in the rising salience of its value-added variants from 16% in 2007 to 23% in 2011.
Exhibit5: Newvariantsnowform23%ofHorlickssales
Base 100% 80% 60% 40% 20% 0% 2007 2011 Base 73% 84% 77% 16% Extension and new formats 23% Junior 10% Chocolate 7%
Exhibit6: Horlicksrevenuesplit
Women 3% Gold Mother 2% 3% Lite 2%
Source:CompanyData,PLResearch Exhibit7:
BarringBiscuits,NonMFDportfoliosperformancehasnotshownexpectedtraction
May 07, 2012

Exhibit8:
Subsegmentationatplay
Competition has tried and failed: Given the attractiveness of the MFD category, GSKs competitors have tried making inroads in the category but have largely remained unsuccessful. Nestle entered the category with Milo in 1997 but withdrew in 2007 as it failed to gain critical mass. HUL also forayed in the segment in 2008 through Amaze Brain Food but did not extend after test launch in three southern states. It has again entered the market with Kissan Nutrismart (currently in test launch) but is priced at premium v/s Horlicks. Dabur has also been present in the market since 2007 (Chyawan Junior) but its a differentiated offering with Chyawanprash as the base. Amul has recently entered the malted beverage space with its offering Amul Pro. So far, despite deep pockets and distribution reach of its competitors, GSK managed to retain its leadership status. This, in our view, underscores the strong brand equity of Horlicks.
Exhibit9: Competitionhasntposedachallengeasyet Competitor Nestle HUL Dabur Amul Brand Milo Amaze Amul Pro Year 1997 2007 2012 Remarks Withdrawn in 2008 Withdrawn in 2009 Launched to leverage equity of Chyawanprash Launched at a discount to MNC brands
Chyawan Junior 2007
Source:CompanyData,PLResearch Exhibit10: Lowunitskusforruralpenetration
May 07, 2012

10
Exhibit11: PricepointsofGSKandotherbrandsintheMFDandMilkAdditivesspace Company Brand Horlicks Horlicks Horlicks Chocolate Horlicks Chocolate Horlicks Gold GSK Horlicks Women's Horlicks Mother's Horlicks Lite Horlicks Junior 123 Horlicks Junior 123 Horlicks Junior 456 Boost GSK Bournvita 5 Star Magic Kraft Complan Kesar Badam Complan Pista Badam Complan Pro Growth Natural Complan Pro Growth Chocolate Complan Chocolate (container) Heinz Complan For Growth Complan For Growth Caramel Complan for Growth Kesar Badam Complan For Growth (Mango, Strawberry) Complan For Growth Chocolate Complan Nutrigro (Strawberry) Complan Nutrigro (Badam Kheer, Premium Chocolate) Complan Nutrigro Source:CompanyData,PLResearch 175 175 200 200 200 500 500 400 500 +50(free) 1000 175 175 400 108 112 89 109 117 173 198 218 210 416 102 108 213 0.617 0.640 0.445 0.545 0.585 0.346 0.396 0.545 0.382 0.416 0.583 0.617 0.533 Bournvita (Oreo Biscuits worth Rs48 free) Bournvita (plastic container) Bournvita (plastic container) Bournvita (plastic container) Bournvita (pouch) Bournvita Little Champs Bournvita Little Champs 500 1000 500 200 1000 80 200 500 163 295 171 81 305 25 105 205 0.326 0.295 0.342 0.405 0.305 0.313 0.525 0.410 Boost EnVita Boost EnVita Boost EnVita 450 180 450 750 162 75 156 240 0.360 0.417 0.347 0.320 Grammage 200 1000 500 1000 500 330 500 500 200 500 500 Price(Rs) 80 300 158 285 200 180 260 190 90 180 190 Price/Gm 0.400 0.300 0.316 0.285 0.400 0.545 0.520 0.380 0.450 0.360 0.380
May 07, 2012

11
Exhibit12: PricepointsofGSKandotherbrandsintheMFDandMilkAdditivesspace Company Abbott Pedia Sure Vanilla Abbott Pedia Sure Premium Chocolate Pedia Sure Vanilla Pedia Sure Premium Chocolate Abbott Protinex Protinex Wockhardt Protinex Mama Protinex Diabetes Cure Protinex Junior ZydusWellness Acti Life 300 145 0.483 200 400 200 200 400 179 333 189 178 349 0.895 0.833 0.945 0.890 0.873 Mama's Best (Vanilla, Chocolate) Glucernaa for Diabetes 400 400 299 550 0.748 1.375 400 400 900 900 459 469 884 889 1.148 1.173 0.982 0.988 Brand Ensure Ensure Ensure Gold Grammage 400 1000 400 Price(Rs) 398 792 415 Price/Gm 0.995 0.792 1.038
Source:Industry,PLResearch
South & East captured, North and West the final frontiers: We dont expect meaningful change in regional balance. GSK derives nearly 90% of its revenues from South and East region. Preference for white beverages, given the milk deficiency in those regions, is a key factor behind this. Essentially, MFD is divided into two segments, with White comprising nearly 75% and Brown accounts for the rest. GSK is present in Brown segment through its Boost and Maltova brands. White MFD is used as a milk substitute in those markets. North and West have a good milk supply chain precluding the need for substitutes. Bulk of the 20k outlet addition during 1QCY12 has happened in North and West.
May 07, 2012

12
Exhibit13: South&Eastdominatestheregionalmix
North Exports 6% West 6% 4% South 45%
Exhibit14: Regionwisemarketshare
100% 80% 60% 40% 34% 23% 78% 75%
East 38%
20% 0% East South North West
Even its market share in North and West are much lower at 34% and 23% visavis 75% and 78% in South and East, respectively. Penetration levels are quite low at 10% in North and West v/s 45% in South. While we dont expect regional balance to change meaningfully in the near term, GSK, nonetheless, has a strong opportunity to increase its presence in these markets. Increased distribution reach and emphasis on price point skus can aid GSK in expanding the shares in those markets.
Distributionexpansion
GSKs current direct reach of 0.7m outlets has a lot of scope for expansion. Its total distribution reach of 1.5m outlets compares unfavourably with the likes of Nestle and Britannia (4-5m). It has recently restructured its distribution structure with reduction in direct distributors from 2000 to 500, while Sub-stockists were doubled to 4000. It plans to increase the reach by adding 50-60k outlets per year. Expanding reach in rural markets, which currently contributes 27% of sales, will also help drive penetration for GSK. Most of GKSs peers have gained significantly by expanding rural presence in recent years (HUVR, MRCO, NEST, GCPL etc). Importantly, penetration in rural markets remains at 10% for MFD category, hence, offering enough headroom for GSK to expand its presence.
NonMFDsegment
Mixedbagasyet;longwaytogobeforeitattainscriticalmass In order to reduce dependence on Horlicks and MFD segment, GSK has entered various nutritional and processed food categories like Biscuits, Instant Noodles, Sports Drink, Cereal Bars, Glucose and Oats.
May 07, 2012

13
Using the equity of Horlicks as the umbrella brand, GSK launched products in aforementioned new categories over the last 4-5 years (Horlicks Foodles, Horlicks Nutribar,HorlicksChillDood,HorlicksBiscuits,HorlicksOats,HorlicksGlaxoseD etc)
Exhibit15: NonMFDsegmentstillhasalongwaytogo
Malted Foods 100% 80% 4.1% 3.5% Biscuits and snacks 3.5% 4.4% Others 5.6% 6.8%
96.0%
95.3%
96.0%
95.0%
94.0%
40% 20% 0%
CY06
CY07
CY08
CY09
CY10
CY11
Performance of the diversification basket has not been impressive as yet and has failed to attain critical mass in any of the non-MFD categories. While we acknowledge its early days for some of the categories (Oats, Glucose, Sports drink), but even for categories like Biscuits and Noodles, it has not gained meaningful market share. Out of the five categories, we reckon Biscuit is relatively better placed for GSK. However, it remains confined to niche positioning and controls less than 1% of market. That said, it has delivered 30% growth in CY11 and continued the momentum in 1QCY12 with a 31% growth with volumes growing at ~20%. Leveraging the brand equity of Horlicks in allied nutritional categories seems to be a step in right direction. However, stretching the equity too far runs the risk of diluting the core proposition. Given the extremely low salience of these categories (~6%) in GSKs scheme of things, we dont see any meaningful impact of success or otherwise of non-MFD categories in the near term. However, consistent failure to build scale/market share in such categories will be viewed negatively by investors, in our view and hence, have implications for GSKs medium term valuation multiples.
May 07, 2012

93.0%
60%
14
We discuss below our thoughts on non-MFD categories of GSK: Biscuits: It is one of the largest FMCG category, with ~Rs13k crore market size. It is widely penetrated (90% plus) but consumption patterns still offers opportunity (1.8kg per capita consumption v/s 5.5kg in South East Asian economies.) GSKs Biscuits revenues have grown at a CAGR of ~30% in CY07-11. In CY11, it has registered 30% growth in Biscuits and carrying the momentum forward in CY12 with 1QCY12 Biscuit sales growing 31%. GSKs presence is limited to the Milk segment though it has tried innovation through Corn Flake variants too. We forecast ~20% CAGR sales growth for Biscuits. GSKs strategy of building niches will help it maintain margins/profitability but will restrict the possibility of gaining meaningful market shares. Noodles: GSK entered Instant Noodles category (~Rs20bn) in Q4CY09 and quickly garnered ~3% market share within 12 months of launch. Differentiated product positioning (higher nutritional value, vitamin-packet health maker sachet) helped in gaining consumer trails. However, market share has stagnated after that. Management attributes it to capacity issues from third-party manufacturer like IndoNissan. However, in our view, ITCs entry in the segment through Yippee and consequent aggressive trade promotion prevented Foodles from gaining further shares. Yippee now commands ~10% market share. We note that GSK is in the process of re-configuring the existing supply chain. Ready-to-eat convenience food is poised for strong growth due to favourable macro factors and GSKs success in this category can help act as major catalyst for revenue performance. Nutribar, Chill Dood: Nutribar was positioned as a healthy snack between meals. These products were withdrawn pertaining to various issues e.g. low consumer traction, manufacturing-related issues. We reckon these products were ahead of time and may see a re-entry in revamped format and strategy later. Oats: GSK has recently entered the breakfast market with Horlicks Oats. Oats is Rs2bn category, growing at 25% pa. While its early days, our channel checks suggest initial response has been good. GSK has introduced Horlicks Oats in four Southern States and is now the third largest player in those markets behind Quaker and Saffola, with 12% market share. Lucozade and Boost: Lucozade is aimed at capturing share in a fast growing energy drinks market, valued at Rs1.5bn. GSK also entered ~Rs6bn Glucose segment with BoostGlucose in South, North and West markets and GlaxoseD in East. Overall, in the non-MFD space, GSKs performance is a mixed bag, with Biscuits putting relatively better show driven by niche positioning. Rest of the categories are small in terms of revenue and salience and will need to be nurtured before they gain critical mass and start contributing to the overall revenue growth. Noodles, Oats and Glucose offer decent upside, given the changing food habits.
May 07, 2012

15
We expect the proportion of Non-MFD segments to move from 6.8% in CY11 to 7.5% in CY14e. UpsideinBusinessAuxiliaryincomefromdistributingparentsOTCvariants GSK distributes/markets OTC brands of its parent e.g. Iodex, Crocin, Eno, Breathe Right and Sensodyne for a commission which is booked as business auxiliary income. This contributes ~15% of GSKs EBITDA. Managements intends to introduce new brands under this arrangement from its parents portfolio. We expect this segment income to grow at 15% cagr in CY11-14e (34% growth in 1QCY12).
Exhibit16: Businessauxiliaryincomebenefittingfromparentswideningportfolio
Business Auxiliary income 1200 1000 800 600 400 200 0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E 2.1% 1.9% 1.7% As a % of sales (RHS) 2.7% 2.5% 2.3%
Q1CY12Resulthighlights Revenue growth stood at 14.5% driven by 7% volume growth. Adjusted for CSD, which stopped orders post Feb, volume growth is 9.5%. CSD contributes 8% of GSKs revenues and has de-grown 30% in volumes for 1QCY12. Horlicks and Boost volumes posted 9.4% and 2.1% growth respectively. Reported gross margins were down 250bps YoY and QoQ. It is primarily owing to inventory draw dawn pertaining to finished goods (Rs780mn) related to planned plant maintenance activities. Adjusted for it, gross margin would have contracted 30bps, per management. However, it has no impact on EBITDA number. Other income up 41% driven by better yields and 34% growth in business auxiliary income from parent. PAT grew 19% to Rs1.32bn as tax rate for the quarter was down 120bps.
May 07, 2012

16
Financials
Expectsteady17%salesgrowthinCY1114E
We expect GSK to register steady 17% sales CAGR in CY11-14e, driven by healthy 9.5%-10.5% volume growth in the core MFD segment. Low penetration and distribution expansion should drive the volume growth, in our view. Given its pricing power and market share leadership in the segment, we expect GSK to deliver a realisation growth of 6-7%.
Exhibit17: SteadygrowthintheheadlineP&Litems
Sales growth 35.0% EBITDA growth PAT growth
17.4% 18.3% 20.3%
19.8% 20.0%
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
28.8%
16.8% 15.2% 18.5%
CY10
CY11
CY12E
CY13E
GSKs pricing power is visible in its ability to maintain operating margins in a tight 18.5-19.5% band for the last three years, notwithstanding the input cost inflation in the past two years. GSKs key raw materials Milk, SMP, Barley and Packaging ingredients were on an uptrend. We model for ~8-10% inflation in RM index and expect GSK to neutralise the same by price hikes. We model for a gross margin expansion of a sedate 40bps over the next three years.
May 07, 2012

16.6% 18.4% 18.6%

CY14E
18.2% 18.4% 18.0%
17
Exhibit18: Weexpect40bpsexpansioninopmarginsoverCY1114e
EBITDA Margins 19.2% 19.1% 19.0% 18.9% 18.8% 18.7% 18.6% 18.5% 18.4% CY09 CY10 CY11 CY12E CY13E CY14E 61.0% 60.5% 62.5% 62.0% 61.5% Gross margins (RHS) 63.5% 63.0%
We dont expect GSK to enter many new categories; it will rather consolidate the existing non-MFD presence, in our view, given the lower than expected success of Nutribar and Foodles. Hence, we dont see a spike in ad-spends. Ad-spends to sales ratio has risen from 12-13% band to 15-16% in the last three years. This is primarily to support new launches in Biscuits, Noodles etc. We model flat ad-spends for the next two years and expect a healthy 19% earnings CAGR for next three years.
Cashrichbalancesheet;robustFCFgeneration
GSK has a net cash balance sheet with cash on the books of Rs10.8bn, translating to Rs256 per share. We expect GSK to generate FCF of Rs 16bn over CY11-CY14e. GSKs cash conversion ability is unparalleled with the FCF to PAT conversion ratio averaging 1.23x since CY07.
Exhibit19: Robustcashrichbalancesheet
Cash and investments 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 CY09 CY10 CY11 CY12E CY13E CY14E Net working capital (RHS) 0 (500) (1,000) (1,500) (2,000)
May 07, 2012

18
Exhibit20: PayoutratioisaweaklinkforGSK
90.0% 80.0% 81.8%
Exhibit21: Wedontexpectmuchchangeinreturnratios
RoE Cash as % of capital employed(RHS)
27.9%
27.2%
25.0%
26.8%
70.0% 60.0% 50.0% 40.0% 30.0% CY09 CY10 CY11 CY12E CY13E CY14E 38.0% 48.2% 52.7% 52.7% 52.7%
32.2%
33.8%
34.3%
34.4%
34.7% CY14E
40% 35% 30% 25% 20% 15%
120.0% 100.0% 80.0% 60.0% 40.0%
CY06
CY07
CY08
CY09
CY10
CY11
CY12E
We model for a net capex of Rs2.5bn and Rs1.5bn for CY12e and CY13e, in line with management guidance. Majority of the capex is directed at capacity expansion at Sonepat. First line will commence operations in 3QCY12e and remaining by June13. Despite the strong cash generation, GSKs payout has been conservative, with an average payout ratio of ~32%, excluding special dividend in CY10, when it distributed 70% of PAT to shareholders.
May 07, 2012

CY13E
19
Valuationandoutlook
GSKs valuations have undergone significant re-rating post CY08. This was driven by steady volume growth in core MFD segment, aggressive launches in new categories and preference for safe haven buying in volatile broader market environment. GSKs average 12 month forward P/E for last one, two and three years is 25.2x, 24.6x and 22x, respectively. While we expect GSK to deliver steady earnings CAGR of 18.3 % in CY11-14e, we see very little chances of further re-rating owing to lack of meaningful success in new categories. Dominant positioning in its core business, robust cash generation and expected 18.3% earnings growth underscore our target P/E multiple of 25x. We arrive at a one-year forward target price of Rs3,200, an upside of 18%. Hence, we initiate with a BUY rating. Further re-rating will be predicated on GSK achieving meaningful market share/critical mass in its non-MFD business.
Exhibit22: GlobalPeerValuationComparison Company Name Danone Nestle S.A Kraft Pepsico Coca Cola Kellogg Heinz Price MktCap (Local (US$Bn) Currency) 55 55 39 67 77 50 54 35.1 182.7 69.7 104.6 174.6 18.0 17.3 EPS FY13 3.2 3.3 2.5 4.1 4.1 3.3 3.3 FY14 3.5 3.6 2.8 4.4 4.5 3.6 3.6 FY15 3.9 3.9 3.1 4.8 4.9 3.9 3.8 EPSCAGR EV/EBITDA FY1315 10.5% 8.3% 10.4% 8.7% 9.7% 8.6% 7.1% FY13 11.2 11.5 10.2 10.2 13.7 10.0 10.7 FY14 10.4 10.7 9.5 9.7 12.7 9.2 10.3 PE FY13 17.1 16.7 15.6 16.3 19.0 15.1 16.2 FY14 15.5 15.4 14.1 15.1 17.3 14.0 15.1 P/BV FY13 2.5 2.9 1.9 4.5 5.2 6.3 4.9 FY14 2.4 2.8 1.8 4.4 4.8 5.3 4.3 Sales CAGR FY1315 7.3% 7.1% 3.7% 2.9% 4.8% 7.0% 6.3% RoE FY13 15.0 17.8 12.4 29.5 28.0 60.5 33.0
Source:Bloomberg,PLResearch Exhibit23: OneyearforwardPEBand

3,500 3,000 2,500 2,000 1,500 1,000 500 0 29x 26x 23x 20x 17x 14x 11x 8x
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Source:CompanyData,Bloomberg,PLResearch
May 07, 2012

Jan-12
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
20
Exhibit24: P/EforGlaxoSmithKlineConsumerProductsvsSensex
GlaxoSmithKline Consumer Products 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Sensex
Exhibit25: Premiumvs.Sensexhasexpandedto120%
150.0% 100.0% 50.0% 0.0% -50.0% -100.0%
May-04
May-06
May-08
May-10
May-12
Sep-03
Sep-05
Sep-07
Sep-09
Sep-11
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
May 07, 2012

Jan-12
21
Riskfactors
Risingcommoditycosts: GSK is critically dependent on Milk and Barley. Sharp spike up in these RM items can lead to deterioration in margins, in turn, resulting in lowerthan-expected earnings. Competitive threat in core MFD segment: Entry of new competitor with deep pockets can pose an incremental threat to GSKs dominance in the category. Failure in new product launch: Failure to attain critical mass in new launches can lead to de-rating. Macroslowdown: Slowdown in government spending in rural areas can restrict the penetration of MFD segment in those markets, impacting GSK.
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IncomeStatement(Rsm) Y/eDecember 2010
NetRevenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income ProfitbeforeTax Total Tax ProfitafterTax Ex-Od items / Min. Int. Adj.PAT Avg.SharesO/S(m) EPS(Rs.) 23,800 8,712 15,088 2,297 8,285 4,506 397 26 435 4,518 1,520 2,998 2,998 42.1 71.3
2011
27,798 10,250 17,548 2,584 9,772 5,193 460 35 704 5,403 1,851 3,552 3,552 42.1 84.5
2012E
32,633 12,012 20,621 3,165 11,314 6,141 556 40 842 6,387 2,113 4,275 4,275 42.1 101.6
2013E
38,565 14,413 24,152 3,664 13,215 7,274 698 45 1,010 7,540 2,494 5,046 5,046 42.1 120.0
BalanceSheetAbstract(Rsm) Y/eDecember 2010

Shareholder's Funds Total Debt Other Liabilities TotalLiabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash&Equivalents OtherCurrentAssets CurrentLiabilities Other Assets TotalAssets 9,600 9,600 3,106 9,590 (3,363) 171 4,470 8,004 267 9,600
2011
11,442 11,442 3,718 10,555 (3,230) 242 5,904 9,376 399 11,442
2012E
13,466 13,466 5,661 10,501 (3,096) 521 6,126 9,743 399 13,466
2013E
15,855 15,855 6,463 12,711 (3,718) 458 7,235 11,411 399 15,855
CashFlowAbstract(Rsm) Y/eDecember
C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE
2010
5,192 (2,868) (2,519) (195) 366 171 4,945 4,945
2011
3,818 (1,969) (1,778) 71 171 242 3,572 3,572
2012E
4,675 (2,446) (1,948) 281 242 521 2,476 2,476
2013E
5,947 (3,710) (2,297) (60) 521 458 4,803 4,803
QuarterlyFinancials(Rsm) Y/eDecember Q2CY11

NetRevenue EBITDA %ofrevenue Depr. & Amortization Net Interest Other Income ProfitbeforeTax Total Tax ProfitafterTax Adj.PAT 6,534 985 15.1 113 9 360 1,223 398 825 825
Q3CY11
7,201 1,180 16.4 117 10 476 1,530 499 1,030 1,030
Q4CY11
6,021 616 10.2 121 9 487 973 382 591 591
Q1CY12
8,130 1,617 19.9 119 12 479 1,964 645 1,320 1,320
KeyFinancialMetrics Y/eDecember Growth

Revenue (%) EBITDA (%) PAT (%) EPS (%)
2010
19.8 20.0 28.8 28.8
2011
16.8 15.2 18.5 18.5
2012E
17.4 18.3 20.3 20.3
2013E
18.2 18.4 18.0 18.0 18.9 13.1 34.6 34.4 (18) 22.5 7.2 15.6 2.9 33.1 13.4 6.7 95.2
KeyOperatingMetrics Y/eDecember
Sales growth Gross margins EBITDA margins MFD volume growth Source:CompanyData,PLResearch.
2010
19.8 62.2 18.9 13.3
2011
16.8 61.8 18.7 9.0
2012E
17.4 62.0 18.8 10.5
2013E
18.2 61.5 18.9 10.5
Profitability
EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) 18.9 12.6 32.3 32.2
18.7 12.8 34.0 33.8
18.8 13.1 34.5 34.3
BalanceSheet
Net Debt : Equity Net Wrkng Cap. (days) (25)
(52)
(17)
Valuation
PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) 37.9 11.8 25.2 4.8
32.0 9.9 21.8 4.1
26.6 8.4 18.4 3.5
EarningsQuality
Eff. Tax Rate 33.6 Other Inc / PBT 9.6 Eff. Depr. Rate (%) 6.6 FCFE / PAT 164.9 Source:CompanyData,PLResearch.
34.3 13.0 7.2 100.6
33.1 13.2 6.3 57.9
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NestleIndia
Qualitydoesntcomecheap
Rating Price Target Price Implied Upside Sensex Nifty (PricesasonMay07,2012)
Accumulate Rs4,576 Rs5,015 9.6% 16,913 5,114
Creating capacities to meet future demand: In order to fulfil the growing demand for its products, Nestle is currently in an aggressive capacity expansion phase, with an investment of ~Rs22bn over CY11-13e.We expect increased capacities to drive the volumes albeit with a higher near term capital costs. Recentvolumegrowthperformancebelowpar;weexpectrevivalin2HCY12: Nestles recent volume growth, was below par and has raised concerns about its pricing driven growth strategy and justification for expensive valuations which it commands. We expect recovery in volumes in 2HCY12 on the back of increased promotions, expanded capacities and comparable base. Distributionexpansionakeyenabler: Nestle has expanded its coverage at 15% cagr over CY07-11 and now reaches ~4.4mn outlets (40% of universe). We see further scope for expansion, especially in rural markets and expect Nestle to leverage its PPP portfolio to drive rural reach. Initiate with Accumulate: We expect an earnings CAGR of 17% in CY11-13e driven by revenue CAGR of 20% and flat op margins. We arrive at a 12 month forward target price of Rs5000, based on rolling forward P/E of 32x, in line with 3 year average. Nestles premium valuations are well supported by its strong pricing power, leadership position in its core categories and robust capital efficiency ratios. Spike in commodity costs, volume growth deceleration and dilution in pricing power are the key risks to our rating
Keyfinancials(Y/eDecember) Revenues (Rs m) Growth(%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth(%) Net DPS (Rs) Profitability&Valuation EBITDAmargin(%) RoE(%) RoCE(%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Netdividendyield(%) Source:CompanyData;PLResearch 2010 62,736 21.8 12,685 8,370 86.8 20.0 48.5 2010 20.2 116.5 116.6 7.0 34.6 52.7 51.6 1.1 2011 75,146 19.8 15,765 10,188 105.7 21.7 48.5 2011 21.0 95.7 65.9 6.0 28.5 43.3 34.6 1.1 2012E 89,591 19.2 18,788 11,579 120.1 13.7 50.0 2012E 21.0 75.2 47.8 5.0 23.8 38.1 24.4 1.1 2013E 107,926 20.5 23,030 14,143 146.7 22.1 77.0 2013E 21.3 69.1 50.0 4.1 19.3 31.2 19.3 1.7
Tradingdata Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Majorshareholders Promoters Foreign Domestic Inst. Public & Other StockPerformance (%) 1M 6M Absolute (2.4) 4.8 Relative 0.9 8.5 HowwedifferfromConsensus EPS(Rs) PL Cons. 2012 120.1 119.9 2013 146.7 146.2
441.2 96.4 205 62.76% 11.03% 7.81% 18.40% 12M 14.1 22.8 %Diff. 0.2 0.3
PricePerformance(RIC:NEST.BO,BB:NESTIN)
(Rs) 6,000 5,000 4,000 3,000 2,000 1,000 0
Nov-11 Jul-11 Sep-11 Mar-12 Jan-12 May-11 May-12
Source:Bloomberg
CompanyReport
Processedfoodscategoryonstronglongtermfooting: Changing lifestyles and growing urbanisation theme along with rising incomes should drive long term growth in Processed foods which currently forms a mere ~5% share of overall foods industry. Nestle is well placed to capitalise on this long term opportunity given its market leading position in key categories which imparts strong pricing power and its proven ability to consistently outmanoeuvre competition.
Nestle India
InvestmentArguments
ProcessedFoodsextremelyfavourablelongtermdynamics
Processed Foods category is set to reap long-term benefits driven by favourable demographics, rising incomes and changing consumer preferences. Lifestyle changes is expected to drive the consumption of packaged and convenience foods. Rising urbanisation, increasing population of working women and growing influence of modern retail are they key positive catalysts for Processed Foods sector, which at ~US$25bn, is ~5-6% of overall Foods industry. It is expected to grow at 20% plus CAGR in the medium term.
Exhibit1: ProcessedandPackagedFoodsisfractionofoverallFoodsindustry
Packaged Foods 5%
Nestle, Indias largest processed foods player, is the key beneficiary of this favourable underlying shift. Nestles product portfolio comprises Milk Products and Nutrition (44% of sales), Prepared Dishes and Cooking aids (27%), Chocolates & Confectionaries (15%) and Beverages (14%). It enjoys leadership position in all the categories, barring Chocolates, where its No. 2. Over the past 5-6 years, Nestle has benefited from the above mentioned factors and posted revenue CAGR of 20.4% for CY05-11, driven by volume CAGR of 13.8%. This strong performance was essentially driven by new product/category introductions, innovation/renovation and increasing geographical reach.
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Nestle India
Exhibit2: Category
Presenceacrossnicheurbanfocussedcategorieswithdominantmarketpresence Subcategory Milk Yoghurt Dairy Whitener & Ghee Desserts Nutrition milk for Kids Infant food Instant Noodles Pasta Soups Sauces Bhuna Masala Coconut Milk powder Magic Cubes Taste Enhancer Pizza Sauce Milk Dark White Fine Wafer Confectionery Brand Nestle a+, Slim Milk, Creamy Slim Dahi,Acti Plus Probiotic Dahi, Real Fruit Yoghurt,Jeera Raita Everyday Milkmaid Creations Neslac Cerelac, Lactogen, NAN 2 Minute, Dumdaar,Cuppa Mania,Noodletz,Multigrain, Vegetable Atta Maggi Pazzta Healthy Soups,Souper-roni(combo of Soup and Macaroni) Tomato Ketchup, Tomato Sauce, Pichkoo Sauce Gravy dishes, Vegetables, Dal, Ginger Garlic Cooking base Maggi Coconut Milk Powder Maggi Magic cubes (Veg Masala,Chicken) Masala-e-magic Maggi Pizza mazza Nestle Milk Chocolate Dark Chocolate, Dark Chocolate Dry Fruits Nestle Milkybar,Milkybar Choo Nestle Selections Fine Chocolates Kitkat,Munch,Milkybar Crispy Wafer Polo, Polo Hole New Fashion Nescafe Classic My First Cup Instant Coffee Cappuccino Sunrise Sunrise Premium Iced Tea Nestea Leader Recent launch Recent launch Leader Leader Dominant Leader Dominant Leader Marketposition
Milk&InfantNutrition InfantFood PreparedDishesandCookingAids CookingAids ChocolatesandConfectionery Beverages Source:CompanyData,PLResearch
Leader Recent launch
Leader
Nestle has a very well-balanced portfolio, spanning Foods and Beverages categories, which even after strong growth in the recent past , remains under-penetrated and offers an attractive medium-to-long term opportunity for Nestle.
Exhibit3: Category Milk products and Nutrition Prepared Dishes & Cooking aids Chocolates & Confectionery Beverages Source:CompanyData,PLResearch BarringChocolates,itenjoysleadershippositioninginrestofthesegments %contributiontosales Marketposition 44.7% 28.5% 13.9% 12.9% No 1 No 1 No 2 No 1 Keycategories Instant Noodles, Sauce, Pasta, Soup Wafter, Eclairs,Whites Instant Coffee Keybrands Maggi Kitkat, Munch, Bar One Nescafe Baby Foods, Infant Formula,Dairy Whitener Cerelac, Nan, Lactogen
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Nestle India
We discuss below some of the strategies deployed by Nestle which has worked and in our view, should continue to work in the future:
Abilitytooutmanoeuvrethecompetition
Over the years, Nestle has consistently demonstrated its ability to manage/outmanoeuvre the competition. Given the attractive growth profile of Nestles categories, competitors have tried to wrest market shares frequently. However, strong brand equity of Nestles brands and Nestles strategy of frequent innovation/renovation as well as introduction of new product variants has helped maintain the leadership status of Nestle. Recent example being Instant Noodles, where despite entry of deep pocket MNCs and domestic players, Maggis volume growth hasnt suffered.
Creatingcategoriesoffuture;drivinginnovation
Nestle has been ahead of the curve in creating categories of tomorrow (Noodles, Value added Dairy) and tapping the latent consumer demand for such products. Given the rapid change in consumption patterns underpinned by various macro factors its essential to have a portfolio which meets the needs of consumers and preferably stays ahead of such needs. This basically requires strong innovation focus which we believe is one of the key strengths of Nestle. It has consistently tapped the rich heritage and portfolio of its parents to introduce new innovative products/categories in India across Infant Nutrition, Instant Noodles and Chocolates categories.
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Nestle India
Exhibit4:
RecentinnovationsofNestle..
Nestle is in the process of setting up a local R&D centre at Manesar at a capex of Rs2.3bn, which basically reasserts the innovation focus for developing locally relevant offerings. The centre will focus on developing Popularly Positioned Products, which can meet specific needs of consumers belonging to lower income groups, and provide high-quality and nutritional foods at affordable prices. These products are also expected to be sold in other countries.
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Nestle India
AddressingruralmarketsviaLUPportfolio
Nestle has come a long way from being a pure premium products player to a company which has offerings for urban as well as rural consumers alike. This has been made possible through expansion of portfolio at popular price points (Res1, 2, 5, 10). It has helped in driving the volume growth for Nestle and also in recruiting consumer (low price points sometimes act as trials for recruiting new consumers for a category). However, recent actions (defocusing 0.5 Re price point in Chocolates (Eclairs) indicate the disadvantage of PPP i.e. impact on margins. In an environment of rising commodity costs, like now, persisting with lower price points adversely impacts gross margins and can test the patience of management. Nestles preference for profitability will mean abandoning LUP strategy in such times, though on a case-tocase basis.
Exhibit5: LUPportfolio Pricepoint Rs 1 Rs 2 Rs 5 Rs 10 Brand/SKU Nescafe Classic, Milkybar KitKat, Polo, Munch, Nescafe Sunrise Maggi Noodles, KitKat, Munch, Polo, Barone, Everyday Whitener, Nescafe Sunrise Maggi Noodles, KitKat, Barone, Milkybar, Whitener, Nescafe
Distributionexpansionat15%CAGRv/s5%CAGRforindustry
Nestle has consistently increased its distribution reach by adding 0.4-0.5m outlets per annum. Over the last four years, its reach has expanded from 2.3m outlets in CY07 to 3.6m outlets as of October 2011, a CAGR of 15% v/s 5% CAGR of sector. This has been a factor behind 20% plus sales CAGR over CY06-11. We expect the investment behind distribution expansion to continue and see more scope for enhancing rural reach, given lower rural contribution for Nestles sales (~20-25%) vis avis other consumer peers (30%-50%).
Exhibit6: Consistentreachexpansiontodrivemediumtermgrowth
No of outlets (Mn) 4.0 3.58 3.5 3.0 2.57 2.5 2.0 CY07 CY08 CY09 CY10 CY11 2.3 2.87 3.18 Outlet addition during the year (m) (RHS) 0.5 0.4 0.3 0.2 0.1 0
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Nestle India
Rich global heritage of parent; can be tapped for future innovations/newproductintroductions

Nestles parent, Nestle SA, has a wide bouquet of products, covering eight categories which contribute ~US$100bn of revenues annually. It can leverage the expertise of its parent in Foods space and continue to premiumize its local portfolio by launching new products from the global portfolio with suitable alteration to meet local tastes and preferences. Development of R&D facility at Manesar will help in addressing this strategy.
Exhibit7: Parentsportfolio
Currently, Indias contribution to global sales at ~1.5% is miniscule in Nestles scheme of things. However, given the expected 20% plus sales CAGR in the medium term, we see Indian entity becoming ever important as its parent looks to expand emerging markets presence.
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Nestle India
Exhibit8: Enoughscopefortappingintoparentsportfolio Categories Powdered & Liquid Beverages Water Milk Products & Ice Cream Nutrition & Health Care Prepared Dishes & Cooking Aids Confectionery PetCare TotalNestleGlobalSales CY 11 Nestle India Sales (CHF bn) %ofglobalsales Source:CompanyData,PLResearch Sales(BNCHF) 18.2 6.5 16.4 9.7 13.9 9.1 9.8 83.6 1.32 1.58% %contribution 21.8% 7.8% 19.6% 11.6% 16.6% 10.9% 11.7% 100.0%
Buildingcapacitiesforfuture;willpropelvolumegrowth
Nestles confidence in long-term opportunity can be gauged from the magnitude of its capex plans as it corrects the supply-side equation. In order to fulfil the rising demand for its products, Nestle has undertaken an aggressive capex programme. With an investment of ~Rs22bn, Nestle is beefing up its capacities through Brownfield as well as Greenfield expansion across its six plants. For CY11, it had spent Rs17bn and plans to spend another Rs12-13bn over the next 24 months. Major capex is directed towards Chocolates and Prepared Dishes categories where it estimates strong growth, going forward, given the lower penetration. Current growth in Nestle is constrained by capacity and hence, creating supply to meet future demand is absolutely critical from medium term growth viewpoint. This capex is going to more than double its gross block over CY10-12e period and result in doubling of capacity across manufacturing units.
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Nestle India
Exhibit9: Aggressivecapexunderscoresthehugesizeofprize
20.0 Capex (Rs bn) Capex as % of sales (RHS) 25.0% 20.0% 15.0% 10.0 10.0% 5.0 5.0% 0.0% CY08 CY09 CY10 CY11 CY12E CY13E
15.0
0.0
Source:CompanyData,PLResearch Detailsofcapexspentonvariousplants Manufacturingplant PlannedCapex(Rsbnapprox) location Samalkha 6.5 Nanjangud Ponda Gujarat Bicholim Source:CompanyData,PLResearch 4 5 5 1.5
Category Infant formula Instant noodles Chocolates Noodles & Confectionery Cooking aids and prepared dishes
Nestle is funding the capex investments through an ECB of US$450m from its parent. Out of this, Nestle has borrowed US$157mn till March 2012. It has capitalized part of the interest costs and kept the outstanding ECB liability un-hedged. Once the new capacities come on-stream, we expect Nestles volume growth to accelerate, especially in Chocolates, Infant Nutrition and Noodles. It will also hasten the pace of new launches, we believe. Thaliwal unit has already commenced production of Munch and some culinary products. The capex commitment clearly indicates Nestles expectation of future growth in its categories. However, this accelerated investment in capacity building will result in higher capital costs (interest and depreciation) in the near term. Additionally, it will also dilute the return ratios.
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Nestle India
Recent volume growth moderation a concern; expect revival in 2HCY12

Nestles volume growth in 2HCY11 and 1QCY12 was below par, invoking concerns around its pricing driven growth strategy with disproportionate focus on margins. Key investor concern being deceleration in volume growth does not justify its expensive valuations. Volume growth moderation was a consequence of channel and portfolio rationalisation. Specifically it exited low margin Eclairs SKU, stopped milk product supply to CSD, grammage reduction in Chocolates and Instant Noodles and ban on export of milk products. We expect a recover in volumes post 2HCY12e on the back of aggressive consumer and trade promotions, heavy ad-spending and comparable base. As such, we see recent volume headwinds as a one off
Exhibit10: VolumegrowthdeceleratedinCY11
Volume growth 20.0% 15.0% 11.4% 10.0% 5.0% 1.5% 0.0% CY10 1QCY11 2QCY11 3QCY11 4QCY11 7.1% 8.1% 17.6%
Newpackagingnorms;lowimpactforNestle
Ministry of Consumer Affairs, Government of India, has issued a notification (The Legal Metrology (Packaged Commodities) Rules, 2011) which essentially restricts the packaging flexibility for 20 product categories (details on next page) which are specified in the second schedule of the above rule. It will come into effect from July 1, 2012. While the affected parties are appealing / lobbying against the move, if implemented, this will be a negative for Consumer companies, especially for those driving the popular price point strategies (Rs5, Rs10). Consumer companies prefer to keep popular price points untouched while tinkering with grammage content; a successful strategy in driving penetration in rural markets. The government action apparently makes it easier for consumers to compare prices for different brands and make better informed decisions.
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Nestle India
20 categories to come under the new rule: The aforementioned notification covers 20 consumer categories e.g. Baby Foods, Biscuits, Bread, Tea, Coffee, Milk Powder, Rice, Salt, Soap, Paints etc. Some of the HPC categories, where this notification doesnt apply, include key Hair Care categories - Shampoo, Hair Oil, Oral Care - Tooth Paste, Tooth Powder and Skin Care - Fairness Cream etc. For some categories, restriction doesnt apply below certain threshold grammage content e.g. Detergents and Milk Powder below 50gm. Impact on PPP strategy: Over the last 2-3 years, most of the consumer companies have focussed on expanding rural reach (HUVR, SKB, MRCO, GCPL, DABUR etc.) in order to drive penetration-led growth. Popular price point (Rs2, Rs5, Rs10) strategy has been a key catalyst in ensuring this growth, as Indian consumer typically gives more importance to price v/s volume/grammage. In an inflationary scenario, companies typically adjust grammage content instead of hiking prices, especially at lower price points, as price elasticity is higher at such price points. With this new notification, PPP strategy will be rendered void as grammage content cant be altered to non-standard sizes (e.g. 430gm, 720gm etc). This will result in price changes in-turn rendering the popular price points incrementally vacant. Even the often used extra grammage promotional offers will cease to exist, as doing so will lead to non-compliance. This grammage promotion is typically used a) during new launches to drive trials and b) when raw material prices correct, instead of passing the price correction, companies rather offer more grammage content for limited period to drive off-take. Negative, if implemented; will require price adjustments: Overall we believe this notification will adversely impact the price point strategies in an inflationary environment; especially, when expanding the rural distribution reach is the key focus area for most of the sector universe. SpecificImpactonNestle: We dont expect significant impact for Nestle as Baby Food and Milk Powder doesnt have any significant contribution from price point packs. Coffee is the only category where some minimal impact can be seen.
Segmentwisestrategy
MilkProductsandNutrition(44%ofsales) Nestle enjoys significant first-mover advantage in Infant Food segment where advertising is banned. Its brands Cerelac, Nestogen, Nestum, Naan, Lactogen define the category. Growth in Infant formula will be driven by combination of population growth, favourable demographic trends and distribution extension. Rising influence of modern retail is also an enabler. Nestle is also a leader in Dairy Whitener(Everyday) and SweetenedCondensedMilk(Milkmaid).
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Nestle India
Exhibit11: VolumesimpactedinCY11duetochannelcorrectionandbanonexportofSMP
Volume 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E Value Realization
Nestle also has a presence in regular dairy segment viz. Milk, Curd. However, given the fragmented nature of these product categories, pricing power is a casualty. Secondly, procurement of Milk is a challenge as supply chain is highly complex. Nestle currently procures Milk through Milk District Model which basically collects milk from thousands of farmers on a daily basis. However, co-operatives like Amul are better placed in milk procurement. With the expected entry of ITC in dairy segment, competition for procurement will see a further increase. We expect revenue growth of 19.2% CAGR over CY11-13e in this segment driven by volume growth of 12%. Nestle has recently started phasing out low margin channels (Canteen Stores department where debtor days is an issue) and Exports which impacted volume growth during CY11. Restriction of competitive activity in this segment is a key advantage for an incumbent like Nestle.
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Nestle India
PreparedDishesandCookingAids(28%ofsales) Nestle created the Instant Noodles category in mid-80s which today has grown to Rs20bn size. Strong growth in this category has attracted many competitors viz. ITC, GSK and HUL over the last 2-3 years. Before the entry of these players, Nestle was virtually the category and hence, loss in market share was a foregone conclusion. However, Nestle has maintained the strong volume growth trajectory of its iconic Maggi brand through introduction of variants catering to various consumer preferences. Of the new players who entered recently, only ITC has managed a double-digit market share (Sunfeast Yippee), driven by its unparalleled distribution strength, in our view. GSKs Horlicks Foodles is back on the drawing board after gaining initial 3% market share.
Exhibit12: Grammagecorrectionresultedinrelativelysedate15%volumegrowthinCY11
Volume 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E Value Realization
Entry of new players has accelerated the category growth, in turn, helping the category leader. Nestle also benefited in Noodles due to its popular price point strategy (Rs5 and Rs10), especially in rural markets. With the capacity expansion (Nestle has already commissioned the additional Noodle capacity at Nanjangud), we expect the category to deliver ~20% volume growth CAGR for Nestle. It is also present in Soup, Sauces and Pasta. Apart from Soup, where it enjoys No 2 position (Knorr is No 1), Nestle is leader in Sauce and Pasta segment. It is growing in these segments via innovation and new variant introductions. We expect Prepared Dishes to post 27% revenue CAGR over CY11-13e, driven by volume growth of 18% CAGR.
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Nestle India
ChocolatesandConfectionary(14%ofsales) Nestles presence in Chocolates is through niche sub-categories like Wafers and Whites. Overall in Chocolates, it plays second fiddle to Cadbury. Its growth in this category has been driven by focus on distribution expansion in rural markets, popular price point strategy, strong growth in modern trade and introduction of new variants in Kitkat and Munch.
Exhibit13: CappedLUPportfoliotomaintainmargins
Volume 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E Value Realization
Capacity expansion (doubling capacity at Ponda) should drive volume growth in the near term. It has recently launched Selection and Dark chocolates. We expect further new product introductions in this category. Lower volume growth in CY11 is owing to conscious decision of exiting low margin Eclairs segment (Rs0.5 price point). We see limited benefits of this strategy as it will put medium term volume growth at risk to manage the near-term margin pressures. We model for 24.2% revenue growth in CY11-13e driven by a volume CAGR of 15%.
May 07, 2012

37
Nestle India
Beverages(14%ofsales) Within the beverages segment, it sells Instant Coffee and Nestea. Its the laggard within the overall Nestle portfolio as exports have been de-focussed. Also, certain channels were de-emphasized due to working capital issues. Nonetheless, domestic volumes posted a healthy 10% volume growth. It has re-launched Nescafe in CY11 and has commenced aggressive brand investment spends via celebrity endorsement. It is positioning Coffee as a youth drink, given the changing lifestyle patterns and increased out-of-home coffee consumption.
Exhibit14: ExportsimpactedCY11performance
Volume 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E Value Realization
We estimate 16.4% revenue growth for Beverages in CY11-13e led by ~12% volume CAGR.
May 07, 2012

38
Nestle India
Financials
StrongrevenueandEPSgrowth,dilutioninreturnratios
We expect Nestle to register strong 17.5% EPS CAGR over CY11-13e driven by a) revenue CAGR of 20%, which in turn, is led by Prepared Dishes and Milk products segment and b) flattish operating margins as mix deterioration is neutralized by price hikes.
Exhibit15: Wemodelfor19%revenueCAGRoverCY1113e
Milk products and Nutrition Chocolates & Confectionery Prepared Dishes & Cooking aids Beverages
20.1% 29.2% 26.4% 11.8%
20.7% 24.9% 12.7% 18.8%
30.0% 20.0% 10.0% 0.0%
CY10
CY11
CY12E
Source:CompanyData,PLResearch Exhibit16: Prepareddishestofurtherenhanceitssalience

Milk products and Nutrition Chocolates & Confectionery 100%
19.0% 20.3% 23.5% 25.6% 27.1% 28.1% 29.4% 30.8%
12.6%
Prepared Dishes & Cooking aids Beverages
80% 60% 40%
22.0%
20.5%
19.8%
21.4%
17.9%
15.4%
14.1%
13.9%
44.5%
44.3%
43.7%
43.2%
43.4%
43.5%
43.7%
42.7%
20% 0%
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12E
CY13E
May 07, 2012

41.7%
17.6% 26.3% 23.6% 13.3%

CY13E
13.3%
40.0%
16.6% 24.8% 21.7% 14.4%
39
Nestle India
Exhibit17: Categorywiserevenuesplit(Rsm) Categoryrevenues Milk products and Nutrition Prepared Dishes & Cooking aids Chocolates & Confectionery Beverages Source:CompanyData,PLResearch Exhibit18: Sales growth driven by pricing in CY11; new capacity to help volumes CY12e onwards
Sales growth Volume growth
CY09 23,113 13,350 7,719 8,042
CY10 27,763 17,250 9,759 8,994
CY11 33,510 21,545 10,997 10,684
CY12E 39,783 27,560 13,724 12,556
CY13E 47,620 34,800 16,963 14,484
23.4%
21.9%
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% CY06
24.4%
18.6% 14.9%
13.7%
8.3%
13.8%
CY07
CY08
CY09
CY10
CY11
6.8%
CY12E
19.3% 15.5%
16.9%
17.0%
CY13E
Source:CompanyData,PLResearch Exhibit19: Pricehikesandchannelmiximprovementhelpedmargins

Gross margins 56.0% 54.0% 52.0% 50.0% 48.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E EBITDA margins (RHS) 22.0% 21.0% 20.0% 19.0% 18.0%
May 07, 2012

20.5% 17.6%
19.8%
40
Nestle India
Exhibit20: Expect~20%earningscagroverCY1113e
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E 0.3% 17.1% 13.7% 23.5% 20.0% 21.7% 22.1% 30.7% 31.0%
Inputcostvolatility
Milk and Milk-based raw materials constitute ~45% of Nestles RM basket. Green Coffee, Palm Oil, Sugar and Wheat are the other key raw materials. Milk prices have been inflationary in the recent years. Nestles raw material index has moved up from 100 in CY07 to 136 in CY11 (at the end of September 2011). Post September 2011, Sugar and Coffee prices have moved up 15-20% and Wheat as well as SMP are down ~ 8% and 4%, respectively. In order to maintain its operating margins, Nestle recently exited some of the low margin segments and channels (CSD). In Chocolates, it exited Eclairs segment, while in Beverages and Milk Products, it has rationalized its exports portfolio.
Exhibit21: 5yearinflationinkeyRM(CAGR)
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Milk Green Coffee SMP Sugar Wheat Vegetable Oil 4.7% 9.0% 7.4% 13.2% 13.2% 13.1%
May 07, 2012

41
Nestle India
Exhibit22: Milk
28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
Exhibit23: GreenCoffee
110.0
(Rs/Kg)
(Rs/Kg)
90.0
70.0
50.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
Source:CompanyData,PLResearch Exhibit24: SMP

190.0 170.0
(Rs/Kg)
Source:CompanyData,PLResearch Exhibit25: Sugar

40.0 35.0
(Rs/Kg)
30.0 25.0 20.0 15.0 10.0
150.0 130.0 110.0 90.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
Source:CompanyData,PLResearch Exhibit26: Wheat

18.0 16.0
(Rs/Kg)
Source:CompanyData,PLResearch Exhibit27: VegetableOil

90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
14.0 12.0 10.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E
Given Nestles continued aggressive capex spending plans for CY12e, we expect deterioration in its capital efficiency ratios. However, as the capacity utilisation starts improving CY12e onwards, improvement in RoE/RoCE should follow. Dividend payout should also see decline in CY12e and CY13e. We expect it to hover around 60% mark.
May 07, 2012

(Rs/Kg)
42
Nestle India
Valuations
Nestle has outperformed the FMCG index as well as broader markets over the last 56 years. It outperformed BSE FMCG by 11.5% CAGR and Sensex by 20.5% CAGR, respectively over CY05-11. This outperformance is driven by consistent earnings growth of ~20% (earnings CAGR of 19% for CY05-11) and continued dominance in its core business categories. Outperformance over CY08/9-11 is more pronounced (outperformance of 36% CAGR vs. Sensex and 13.6% vs. BSE FMCG), given the volatile broader market conditions, leading to flight for safety trade. Nestles robust balance sheet with best in class return ratios, healthy free cash flows and consistent dividend payout, coupled with high quality management also helped in an environment where defensives were widely sought after. At current price, it trades at CY12e and CY13 P/E of 38.2x and 31.3x, respectively. Current P/E is at a premium of ~ 15% to its 3-year average. Thanks to outperformance in a risk-averse market, Nestles premium to sensex has expanded to 162% vs 3 year average of 110%. We value the stock at 32x one-year forward EPS and arrive at a target price of Rs5,015, an upside of 9.8%. Our target P/E is based on 3 year average. . Attractive category dynamics of Nestle benign competition in mainstay Infant Nutrition business, strong market positioning in growing categories and healthy pricing power offers good earnings visibility. Despite the favourable long term category characteristics, competition, as yet had limited success in categories like Instant Noodles. We forecast earnings CAGR of 17.5% for CY11-13e, which we believe, can help sustain the premium valuations. Nestles efforts to build supply for future via aggressive capex investments is a medium term positive and will help drive volume growth.
Exhibit28: OneyearforwardPEBand
6,000 5,000 4,000 3,000 2,000 1,000 0 40x 36x 32x 28x 24x 20x 16x 12x
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
May 07, 2012

Jan-12
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
43
Nestle India
Exhibit29: P/EforNestlevsSensex
50.0 40.0 30.0 20.0 10.0 0.0 Nestle India Sensex
Exhibit30: Premiumvs.Sensexhasexpandedto160%
250.0% 200.0% 150.0% 100.0% 50.0% 0.0% -50.0%
May-04
May-06
May-08
May-10
May-12
Sep-03
Sep-05
Sep-07
Sep-09
Sep-11
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Risks
Spike in input costs, dilution in pricing power and improvement in broader markets which reduces the preference for defensive stocks constitute the key risk factors to our rating.
May 07, 2012

Jan-12
44
Nestle India
IncomeStatement(Rsm) Y/eDecember 2010
NetRevenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income ProfitbeforeTax Total Tax ProfitafterTax Ex-Od items / Min. Int. Adj.PAT Avg.SharesO/S(m) EPS(Rs.) 62,736 30,556 32,181 4,585 14,911 12,685 1,278 11 54 11,451 3,264 8,187 (184) 8,370 96.4 86.8
2011
75,146 35,894 39,252 5,680 17,807 15,765 1,533 51 (301) 13,879 4,264 9,615 (573) 10,188 96.4 105.7
2012E
89,591 42,746 46,845 6,501 21,557 18,788 2,144 374 (335) 15,935 4,963 10,972 (607) 11,579 96.4 120.1
2013E
107,926 51,373 56,553 7,775 25,748 23,030 2,841 330 (322) 19,536 6,061 13,475 (667) 14,143 96.4 146.7
BalanceSheetAbstract(Rsm) Y/eDecember 2010

Shareholder's Funds Total Debt Other Liabilities TotalLiabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash&Equivalents OtherCurrentAssets CurrentLiabilities Other Assets TotalAssets 8,554 333 8,887 13,616 1,507 (6,236) 2,553 7,907 16,696 8,887
2011
12,740 9,709 435 22,883 29,944 1,344 (8,404) 2,272 10,458 21,135 22,883
2012E
18,072 9,000 584 27,656 34,917 1,600 (8,862) 2,888 12,729 24,479 27,655
2013E
22,861 7,500 826 31,187 38,814 1,800 (9,427) 4,033 15,505 28,965 31,187
CashFlowAbstract(Rsm) Y/eDecember
C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE
2010
10,748 (4,306) (5,445) 997 1,556 2,553 9,084 9,084
2011
13,054 (17,509) 4,175 (281) 2,553 2,272 6,634 16,342
2012E
14,339 (7,373) (6,349) 616 2,272 2,888 (123) (832)
2013E
18,268 (6,938) (10,071) 1,259 2,888 4,033 12,147 10,647
QuarterlyFinancials(Rsm) Y/eDecember Q2CY11

NetRevenue EBITDA %ofrevenue Depr. & Amortization Net Interest Other Income ProfitbeforeTax Total Tax ProfitafterTax Adj.PAT 17,631 3,445 19.5 367 6 80 3,094 956 2,138 2,138
Q3CY11
19,631 4,103 20.9 394 12 121 3,746 1,134 2,612 2,612
Q4CY11
19,547 4,127 21.1 446 33 181 3,560 1,148 2,412 2,412
Q1CY12
20,475 4,572 22.3 528 23 136 4,029 1,272 2,757 2,757
KeyFinancialMetrics Y/eDecember Growth

Revenue (%) EBITDA (%) PAT (%) EPS (%)
2010
21.8 20.2 20.0 20.0
2011
19.8 24.3 21.7 21.7
2012E
19.2 19.2 13.7 13.7
2013E
20.5 22.6 22.1 22.1 21.3 13.1 50.0 69.1 0.2 (20) 31.2 19.3 19.3 4.1 31.0 1.7 6.0 75.3
KeyOperatingMetrics Y/eDecember
2010
2011
6.8 20.7 19.3
2012E
15.5 20.8 20.5
2013E
17.6 21.2 21.3
Volume growth 17.0 EBITDA margins 20.0 Sales growth 19.8 Source:CompanyData,PLResearch.
Profitability
EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) 20.2 13.3 116.6 116.5
21.0 13.6 65.9 95.7
21.0 12.9 47.8 75.2
BalanceSheet
Net Debt : Equity Net Wrkng Cap. (days) (0.3) (17)
0.6 (21)
0.3 (28)
Valuation
PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) 52.7 51.6 34.6 7.0
43.3 34.6 28.5 6.0
38.1 24.4 23.8 5.0
EarningsQuality
Eff. Tax Rate 28.5 Other Inc / PBT 2.0 Eff. Depr. Rate (%) 6.9 FCFE / PAT 108.5 Source:CompanyData,PLResearch.
30.7 1.9 6.0 160.4
31.1 1.6 5.3 (7.2)
May 07, 2012

45
Nestle India
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May 07, 2012

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Nestle India
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47
Nestle India
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 RatingDistributionofResearchCoverage
60%
54.0%
%ofTotalCoverage
50% 40% 30% 20% 10% 0% BUY Accumulate Reduce
21.3%
23.3%
1.3% Sell
Accumulate Sell TradingSell UnderReview(UR) : : : : Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly
PLsRecommendationNomenclature
BUY Reduce TradingBuy NotRated(NR) : : : :
Over 15% Outperformance to Sensex over 12-months Underperformance to Sensex over 12-months Over 10% absolute upside in 1-month No specific call on the stock
This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.
May 07, 2012

48

Food Initiation It's Just Started: Sector Update

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Food Initiation It's Just Started: Sector Update

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SectorUpdate

Gautam Duggad (gautamduggad@plindia.com) +91-22-66322233

May 07, 2012

94.4 120.8 144.4

Source:Industry,NSSO,PLResearch Exhibit3: ProportionofAspiringandAffluentHouseholdssettoincrease

May 07, 2012

Professional Affluent Traditional Affluent

Source:BCG,PLResearch Exhibit6: FoodcategorySpendas%ofincome

May 07, 2012

May 07, 2012

BUY Rs2,702 Rs3,200 18.4% 16,913 5,114

GlaxoSmithKline Consumer Products

Source:CompanyData,PLResearch Exhibit3: LowMFDpenetrationoffersgrowthvisibility

Source:CompanyData,PLResearch Exhibit4: VolumegrowthinMFD

45% 35% 25% 15% 5% Rural All India 11% 22%

17.0% 14.0% 11.0% 8.0% 5.0%

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

Chyawan Junior 2007

Source:CompanyData,PLResearch Exhibit10: Lowunitskusforruralpenetration

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

20% 0% East South North West

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

17.4% 18.3% 20.3%

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

16.8% 15.2% 18.5%

May 07, 2012

16.6% 18.4% 18.6%

18.2% 18.4% 18.0%

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

40% 35% 30% 25% 20% 15%

120.0% 100.0% 80.0% 60.0% 40.0%

May 07, 2012

GlaxoSmithKline Consumer Products

Source:Bloomberg,PLResearch Exhibit23: OneyearforwardPEBand

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

May 07, 2012

GlaxoSmithKline Consumer Products

BalanceSheetAbstract(Rsm) Y/eDecember 2010

QuarterlyFinancials(Rsm) Y/eDecember Q2CY11

KeyFinancialMetrics Y/eDecember Growth

18.7 12.8 34.0 33.8

18.8 13.1 34.5 34.3