Extensive Report on FMCG Industry

Submitted by

Anisha Joshi

MBA2015-17/000243

Under the guidance of

Rinki Batra
Manager, Financial Research
Dion Global Solutions, Noida

Sri Sri University

CUTTACK -754006
7th July, 2016
 Certificate of Approval

The following Summer Internship Report titled “Extensive Report on FMCG Industry” is hereby approved as
a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a
prerequisite for the award of Master of Business Administration for which it has been submitted.

It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made,
opinion expressed or conclusion drawn therein but approve the Summer Internship Report only for the purpose
it is submitted.

Summer Internship Report Examination Committee for evaluation of Summer Internship Report

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Name: Anisha Joshi

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 Acknowledgement
A successful project is a combined effort of all the people who are directly or indirectly associated with
it.Therefore, I would like to take the opportunity to thank everyone who has directly or indirectly contributed in
the development of this work and has influenced my thinking, behaviour, analytical approach and point of view
throughout the tenure of this project.

I express my sincere gratitude towards, Dr.Srinivas Subbarao Pasumarti, Vice Chancellor of Sri Sri University,
for unconditional support and guidance towards approaching this summer training at Dion Global, Noida.

I extend my sincere gratitude towards, my Organizational Guide, Mrs. Rinki Batra, Manager of the Research
Team at Dion Global, for giving me a well thought out and comprehensive guideline to work on this project
titled as “Extensive Report on FMCG Sector”, which had so many dimensions to explore and learn from. I feel
grateful for the opportunity to work with the Research Team, under your guidance.

I am thankful to Rohit Joshi, Senior Analyst at Dion Global for his constant support and timely inputs on the
Industrial methods, being used.

I also extend my appreciation towards the other analysts, at Dion Global, who through various discussions,
helped me to better understand the Industry and the market dynamics.

I would also like to thank, my Institutional Guide, Prof. Binodgopal Mukherjee for his valuable inputs
throughout the tenure of this project.
 Executive Summary
This project titled as “Extensive Report on FMCG Sector”, focuses on understanding the FMCG Industry, its
growth drivers, Industry Trends, examining the growth rate and finding the true value of stocks of two FMCG
companies, namely – Nestle India and Dabur. Based on the valuations done, Buy or Sell has been
recommended. This report is based on the rationale developed from the Annual report of companies, transcripts
of the conference calls with the Management, Investor presentation of the companies, Interviews of the MD of
the companies and collected data from various sources like Capitaline and ibef.org.

P/E multiples methodology has been used here to arrive at the true value of the stock.

Introduction to the Industry

Fast-moving consumer goods (FMCG) or consumer packaged goods (CPG) are products that are sold quickly
and at relatively low cost. Examples include non-durable goods such as soft drinks, toiletries, over-the-counter
drugs, processed foods and many other consumables. In contrast, durable goods or major appliances such as
kitchen appliances are generally replaced over a period of several years. FMCG have a short shelf life, either as
a result of high consumer demand or because the product deteriorates rapidly.

FMCG is the fourth largest sector in the Indian economy. Household and Personal Care is the leading segment,
accounting for 50% of the overall market .Healthcare(32%) and Food & Beverages(18%) comes next in terms of
market share.

Growing awareness, easier access and changing lifestyles have been the key growth drivers for the sector.

Project Objectives:

1. To understand the industry dynamics of FMCG sector – Market size, CAGR, macro-economic factors
affecting it, rural and urban sector growth and their growth drivers
2. FMCG companies under the purview
3. Using financial modelling, predict the valuation ratios and hence arrive at the decision – buy/hold for
four FMCG companies. I have selected two companies one the basis of value growth and one company
on the basis of volume growth.

Scope of the project:

The valuation method used in this project is the one which is widely accepted in the industry, as a method to
value the FMCG companies. The assumptions made are as per the information derived from the annual reports,
con calls, interviews of the MD. They are in consensus with the industry analysts and in sync with the widely
prevalent trends in the FMCG companies. Practically, the analysts extend this method and the financial model to
get more accurate assumptions with the help of the Management of respective firms for which the valuation is
being done. The discussion with the Management provides a more accurate set of values and provides the basis
for the assumptions used for projections in this model. The same method, can be used to predict the true values
of stocks of FMCG sector companies by the Research Wings of Investment Banks, Sell side Equity Analysts of
the brokerage firms, etc.

Method Used:

In reality, the most popular price multiples are earnings multiples. The price-to-earnings (P/E) ratio, which is
equal to a company’s market price per share divided by its earnings per share (EPS), is the most widely used
earnings multiple. It provides an indication of how much investors are willing to pay for a company’s earnings.
In this project I have taken two companies – Dabur and Nestle India, to show the implementation of the P/E
ratio multiple method to do the valuation of the firm.
The whole valuation method can be summarized as:

1. Find the historical data and quote the same into the relevant Financial Model
2. Predict the gross sales for FY2017 and FY2018 ( Done in Revenue sheet)
3. Prepare the Common Size Metrics(assumed value of each line item as a percentage of Net Sales)
4. Compute the relevant ratios and analyse the operating activities, financial leverage and Return on
Equity and ROCE. Also compute the EPS on the basis of historical data and assumptions.
5. P/E(x) depends on company to company. Hence, using the relevant multiple, find the True Value of the
share, which is equal to EPS * P/E multiple.
6. Give the recommendation on the basis of comparison between the CMP and the true value –
BUY/SELL/HOLD.

Conclusions:

It is worth noting that on the basis of this work, we can say how events like late winter arrivals or early monsoon
arrival, Nepal Unrest, Safety concerns over food items raised by the media, change of senior management
personnel, or the prevalent Business Impacting factors like the macro economic conditions, the consumer
confidence, Supply chain and distribution networks or the changing Govt. policies like inclusion of OROP, 7 th
pay commission or the increased FDI in retail – all have an impact on the top line and the bottom line of the
FMCG sector. The Gross Margins in case of both the firms are seen to be hovering around 50%. The EBITDA
margins are close to 20%. The PAT Margins are in the range of 10%-14%. Hence, in general we can say that the
FMCG sector displays fairly constant margins. However the return ratios and the valuation ratios do show a
company specific trend, which is further explained in the report.

The valuation rating for Dabur comes out to be “HOLD” with a P/E(x) of 32 and for “Nestle India” the rating
comes out to be “BUY” with a P/E(x) of 49, on the basis of CMP on 5th July, 2016.
 Table of Contents
1. Introduction
1.1 Market Size
1.2 The Indian Economy
1.3 Government Initiatives impacting the sector
1.4 Advantages for the Indian FMCG
1.5 Outlook on the FMCG sector
2. Growth Drivers
2.1 Urban sector
2.2 Rural sector
3. Porters five principles model
4. Notable Trends in the FMCG Sector
5. The changing trends for Indian FMCG companies
6. Individual Company Analysis
6.1 Dabur
6.1.1 Introduction the company
6.1.2 Relevant graphs to depict the trends of revenue, EBITDA, PAT
etc.
6.1.3 Valuation
6.2 Nestle India
6.2.1 Introduction the company
6.2.2 Relevant graphs to depict the trends of revenue, EBITDA, PAT
etc.
6.2.3 Valuation
 1. Introduction

1.1 Market Size

The FMCG sector has grown at an annual average of about 11 per cent over the last decade. The overall
FMCG market is expected to increase at (CAGR) of 20.6 per cent to touch US$ 103.7 billion during 2016-
2020, with the rural FMCG market anticipated to increase at a CAGR of 18.1 per cent to reach US$ 100
billion during 2015-2025. The overall rural FMCG consumption stands at USD18.92 billion in 2015.
India’s middle income population estimated to reach 267 million by 2016 from 160 million in 2011. Rural
India’s per capita disposable income is estimated to rise to USD631 in 2020 from USD516 in 2015.

Total consumption expenditure to reach nearly USD3600 billion by 2020 from USD1411 billion in 2014.
The rural FMCG market expected to increase at a CAGR of 18.1 per cent to USD100 billion during 2015–
25. The overall rural FMCG consumption stands at USD18.92 billion in 2015. The modern retail market is
expected to grow from USD60 billion to USD180 billion during 2015-2020. India’s middle income
population estimated to reach 267 million by 2016 from 160 million in 2011. Rural India’s per capita
disposable income is estimated to rise to USD631 in 2020 from USD516 in 2015.

Note: The above data is taken from Emami Reports, Dabur Reports, AC Nielsen, McKinsey Global Institute
(MGI) titled The Bird of Gold, TechSci Research, World Bank data.

Figure 1.1 Classification of the FMCG Industry

FMCG

USD 49 billion in FY16

Food & beverages Health Care Household & personal care

18% 32% 50%

Health beverages, staples/cereals, Oral care, hair care, skin care,

bakery products, snacks, cosmetics/deodorants,
chocolates, ice cream, perfumes, feminine hygiene
tea/coffee/soft drinks, processed and paper products, Fabric
OTC products and ethicals wash, household cleaners
fruits and vegetables, dairy
products, and branded flour

Favourable demographics and rise in income level to boost FMCG market in the years ahead

The FMCG sector in India generated revenues worth USD 47.3 billion in 2015.Over 2007-16, the sector is
expected to post CAGR of 11.9 percent in revenues. In 2016, revenues for FMCG sector is expected to reach
USD 49billion.
 Figure 1.2 Trends in FMCG revenues over the years (USD billion)

103.7

44.9 47.3 49
34.8 36.8
30.2
21.3 24.2
17.8

1.2 The Indian Economy

The trend of slowdown in global growth continued during the year FY2015-16. The below par performance of
global economy was reflected in a continued growth deceleration in most emerging and developing economies,
driven by low commodity prices, weaker capital inflows and subdued global trade. Against this global backdrop,
the growth in India stayed fairly resilient. India was the fastest growing large economy with a stable currency
that performed better than most other emerging market currencies. The domestic macro-economic conditions
also remained stable. A significant drop in commodity costs led by crude oil and other interventions resulted in
lower consumer inflation which allowed easing of interest rates in the economy. However, a second consecutive
year of drought and a low increase in support prices have led to a sharply slower growing rural economy
compared to earlier years. Consumer spending remained muted and this was reflected in moderate growth rates
across FMCG categories. Given the backdrop of a slowing market, a volatile input cost environment and
heightened competitive intensity, the operating environment for the FMCG Companies during the year
continued to be challenging.

Figure 1.3 The real GDP growth rate

10.30%
8.50%
7.40% 7.60% 7.90%
6.60% 6.90%
5.10%

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017E

The recovery in growth in 2015 – 16 has been lacklustre. However it is expected to strengthen in the coming
year in 2016 – 17 due to a number of factors such as boost in demand from the implementation of 7th Pay
recommendations and OROP. After two consecutive years of below average monsoon, expectations have been
built for a normal monsoon season which will further strengthen the rural demand driving the GDP growth. RBI
has acknowledged the underlying stress for liquidity in the system and addressed the same in the monetary
policy.
The dark clouds have finally lifted and the Indian economy with the projected GDP growth of 7.9% appears to
be a bright spot. The FDI inflows have increased; India is expanding in terms of bilateral trade policies and is
acknowledged as an emerging super power. According to an update of its World Economic Outlook by the
International Monetary Fund (IMF), India is set to become the fastest growing economy, ahead of China, in next
couple of years.

Also, according to the Neilson Global Survey of Consumer Confidence Index, India has scored the highest
rating, among 63 countries. This is definitely, a good news for the Consumer Goods segment businesses.

A revival is expected to happen in the Consumer Demand, in the near to medium term and is driven by the
combination of two or more of the following factors:

 Disposable household income revival due to sustained low inflation and gradual increase in the job
creation with the policies leading to a further opening of the Indian Economy.
 Revival in discretionary consumer demand due to translation of positive sentiments around economic
growth into retail consumer spends
  Growing demand for the e-commerce due to convenience factor and a whooping number of internet
users
 Growth of Modern Trade and enhanced brand visibility and availability
 Increasing demand for premium products in the Urban Markets
 Increasing penetration and rising consumption among the rural consumers
 Evolving consumer lifestyle and greater awareness of brands leading from unorganized to organized

1.3 Government Initiatives impacting the sector

Recent initiatives such as proposed implementation of GST should work for the benefit of organized sector by
developing a common Indian market and reducing the cascading effect on the cost of goods and services. In
addition the Swachh Bharat campaign is likely to lead to greater demand for health and hygiene related
products. Similarly, implementation of the Model Shop Act, which allows shops to be now open 24@7 will
provide a big boost to the FMCG sector. Continuity of MNREGA, newer schemes to boost rural farm yields,
investment in infrastructure, and creation of National Agricultural mission to ensure better prices for both
farmers and consumers, all these initiatives are expected to help the rural growth story improve. This coupled
with direct transfer of subsidy into beneficiaries’ bank accounts, will have a favourable impact on disposable
incomes and boost FMCG growth in rural areas. The long-term government agenda of investing in infrastructure
as well as building smart cities should be favourable for FMCG sector. Overall the FMCG sector is expected to
gain momentum with increasing economic activity, rise in income levels, favourable demographics, increase in
working population and lower inflation cycle. While the long term prospects remain intact, the FMCG industry
is also changing fast with technological advancement, changes in consumption patterns, emergence of newer
channels such as e-commerce and increasing salience of organized retail. E-commerce for instance is growing
very fast and offers immense opportunities. The emergence of local intra-city online vendors who operate within
a few kilometres distance and have low cost operating models is posing new challenges to retailers as well as
manufacturers. In addition digital /web based marketing and communication is becoming an important channel
to connect with younger consumers. In fact the emergence of the new age consumers who are extremely
demanding, discerning and not shy of spending is throwing up a whole lot of challenges as well as opportunities
which need to be recognized and factored into plans and strategies to be future ready.

The government has also enabled 51 per cent FDI in multi-brand retail and 100 per cent in single-brand retail so
as to attract more foreign investment into the country.

With the demand for skilled labour growing among Indian industries, the government plans to train 500 million
people by 2022 and is also encouraging private players and entrepreneurs to invest in the venture. Many
governments, corporate and educational organisations are working towards providing training and education to
create a skilled workforce.

In the Union Budget 2016, the government has announced various tax sops and duty cuts for intermediary
products to help increase local manufacturing and reduce import dependency.

1.4 Advantages for the Indian FMCG

Indian consumer segment is broadly segregated into urban and rural markets, and is attracting marketers from
across the world. The sector comprises of a huge middle class, relatively large affluent class and a small
economically disadvantaged class, with spending anticipated to more than double by 2025.

India remained the leader among all nations in the global consumer confidence index with a score of 131 points
for the quarter ending December 2015, followed by the Philippines (117), Indonesia (115) and Thailand (114).
Consumer confidence in India has remained high for nine consecutive quarters. Further, in the discretionary
spending and savings category, nearly three out of every five respondents from India indicated the next 12
months as being good to buy, thus ensuring once again that India leads the global top 10 countries for this
parameter during the quarter.

Global corporations view India as one of the key markets from where future growth is likely to emerge. The
growth in India’s consumer market would be primarily driven by a favourable population composition and
increasing disposable incomes. A recent study by the McKinsey Global Institute (MGI) suggests that if India
continues to grow at the current pace, average household incomes will triple over the next two decades, making
the country the world’s fifth-largest consumer economy by 2025, up from the current 12th position.

According to a report by Boston Consulting Group (BCG) and the Confederation of Indian Industry (CII),
India’s robust economic growth and rising household incomes would increase consumer spending to US$ 3.6
trillion by 2020. The maximum consumer spending is likely to occur in food, housing, consumer durables,
transport and communication sectors. The report further stated that India's share of global consumption would
expand more than twice to 5.8 per cent by 2020.

The factors in favour of Indian FMCG sector:

Growing demand:

 Rising incomes and growing youth population have been key growth drivers of the sector. Brand
consciousness has also aided demand
 First Time Modern Trade Shoppers spend is estimated to triple to USD1 billion by 2015
 Tier II/III cities are witnessing faster growth in modern trade

Attractive opportunities:

 Low penetration levels in rural market offers room for growth

 Exports is another growth segment
 Disposable income in rural India has increased due to the direct cash transfer scheme
 Growing demand for premium products

Higher investments:

 Modern retail share is expected to triple its growth from USD60 billion in 2015 to USD180 billion in
2020
 Many players are expanding into new geographies and categories
 Increased FDI in FMCG sector

Policy support:

 Investment approval of up to 100 percent foreign equity in single brand retail and 51 percent in multi-
brand retail.
 Initiatives like Food Security Bill and direct cash transfer subsidies reach about 40 percent of
households in India
 The minimum capitalisation for foreign FMCG companies to invest in India is USD100million

1.5 Outlook on the FMCG Sector

According to a recently published TechSci Research report, "India Food Services Market Forecast &
Opportunities, 2020", the food services market in India is expected to expand at a CAGR of over 12 per cent
through 2020, primarily driven by increasing disposable income, changing lifestyle, and changing tastes and
preferences of consumers. Another major factor propelling the demand for food services in India is the growing
youth population, primarily in the country’s urban regions. India has a large base of young consumers who form
the majority of the workforce and, due to time constraints, barely get time for cooking.
India's e-commerce market is expected to reach US$ 220 billion in terms of gross merchandise value (GMV)
and 530 million shoppers by 2025, led by faster speeds on reliable telecom networks, faster adoption of online
services and better variety as well as convenience, as per a report by Bank of America Merrill Lynch (BofA-
ML).
According to the report titled "India Machine-to-Machine (M2M) Modules Market Opportunities & Forecast,
2020", the M2M modules market in India is expected to exceed US$ 4.4 billion by 2020. The market research
firm stated that over the last few years, India has become one of the fastest growing markets for M2M modules
in Asia-Pacific (APAC).
Research firm Nielsen projected that rural India’s FMCG market will surpass the US$ 100 billion mark by 2025.
Online portals are expected to play a key role for companies trying to enter the hinterlands. The Internet has
contributed in a big way, facilitating a cheaper and more convenient means to increase a company’s reach.

2. Growth Drivers
Figure 2.1 Growth Drivers of India’s FMCG sector

Growth of Rising
incomes
modern driving
trade purchases

Govt.
reforms to Greater
encorage awareness
FDI and about
improve products
market and brands
sentiments

Desire to New
experiment
with Product
brands launches

Evolving Growing
consumer rural
lifestyles market

Increasing Strong
consumer distribution
demand channel

Long term growth drivers for FMCG Sector:

 Consumption
 Function of urbanisation, rising income, changing preference.
 Had decelerated in past 18 months hit by high inflation & moderation in income
growth.
 Consumption is huge growth driver given construct of India and low per capita
consumption of the country.

 Penetration
 Penetration has aided growth when consumption-led growth was weak.
 Increasing rural reach & focus on modern channels driving penetration-led growth.
  Remains a pivotal factor to long term sustainable growth in FMCG sector.

 Premiumisation
 Rising incomes, changing preference of middle class & company focus on innovation is
driving Premiumisation.
 Premium products have grown well in Tier 2/3 towns & rural India, where income growth
in last 2-3 years was healthy.
 Premiumisation led growth is at its best in a high GDP, high income & steady inflation
growth scenario.

 Un-organised to Organised
 Rising urbanization trends, preference towards branded products and increasing income
have been driving rapid shift from un-organised to organised market.
 Many categories still face intense competition in regional markets.
 Higher income, aggressive branding & better quality products are luring customers to
shift from un-organized to organized market.

 Change in Distribution Landscape

 Companies have expanded their distribution channel beyond the traditional channel of
mom & pop stores and direct distribution in urban areas.
 These channels are likely to drive the next leg of growth in the industry
 Favourable demographics & penetration has resulted in increased focus on channels like
chemist trade, modern trade and direct reach in rural areas.

In other terms we can also say that the demand in the FMCG sector is governed by the factors like GDP growth,
Population growth, disposable income growth, income levels, lifestyle changes, etc. On the other hand the
supply is affected by the type of players (organized v/s unorganized) and the type of products (branded v/s
unbranded). The major expenses of an FMCG firm are purchase of raw material and marketing & advertising.

2.1 Urban Sector

The urban segment is the largest contributor to the sector, accounting for around 65 percent of total revenue and
had a market size of around USD 20.74 billion in 2015. Semi urban and rural segments are growing at a rapid
pace; they currently account for 35 percent of revenues.

Figure 2.2 Urban/rural industry break-up (2015)

35%
USD47.3
Urban
billion,
FY2015 Rural

65%
 2.1 Rural Sector

In the last few years, the FMCG market has grown at a faster pace in rural India compared with urban India.
FMCG products account for 50 percent of total rural spending. In 2015, rural India accounted for more than 40
percent of the total FMCG market.

Total rural income, which is currently at around USD 572 billion, is projected to reach USD 1.8 trillion by
FY21.India’s rural per capita disposable income is estimated to increase at a CAGR of 4.4 percent to USD 631
by 2020.As income levels are rising, there is also a clear up trend in the share of non-food expenditure in rural
India.

The Fast Moving Consumer Goods (FMCG) sector in rural and semi-urban India is estimated to cross USD 20
billion by 2018 and USD 100 billion by 2025.The rural FMCG market is anticipated to expand at a CAGR of
17.41 percent to USD 100 billion during 2009–25.Rural FMCG market accounts for 35 percent of FMCG
market in India

Amongst the leading retailers, Dabur generates over 40-45 percent of its domestic revenue from rural sales.
HUL rural revenue accounts for 45 percent of its overall sales while other companies earn 30-35% of their total
revenues from the rural India.

3. Porters five forces model

In 1979, a Harvard Business School professor named Michael E. Porter developed a qualitative framework for
understanding the competitive forces companies face. He listed five factors, or forces, commonly known as
Porter’s Five Forces, which include the threat of substitute products, competitive rivalry, the threat of new
entrants, the bargaining power of suppliers and the bargaining power of customers.

1. Competitive Rivalry

 Private label brands by retailers are priced at a discount to mainframe brands limits competition for the
weak brands
 Highly fragmented industry as more MNCs are entering

2. Threat of New Entrants

 Huge investments in setting up distribution network and promoting brands

 Spending on advertisements is aggressive

3. Substitute Products

 Presence of multiple brands

 Narrow product differentiation under many brands
 Price war

4. Bargaining Power of Suppliers

 Big FMCG companies are able to dictate the prices through local sourcing from a fragmented
group of key commodity suppliers

5. Bargaining Power of Customers

 Low switching cost induces the customers’ product shift

 Influence of marketing strategies
 Availability of same or similar alternatives
 Figure 3.1 Porters Five forces

Threats of
new entrants
(Medium)

Bargaining Competitive Substitute

power of Rivalry Products
customers
(high)
(hight) (HIGH)

Bargaining
power of
suppliers
(Low)

4. Notable Trends in the FMCG Sector

 Consolidation
Indian FMCG companies are consolidating their existing business portfolios which is leading to
divestments, mergers and acquisitions.

 Product innovation
Several companies have started innovating or customising their existing product portfolios for new
consumer segments. In2015,’Honitus’ from Dabur performed well because of its unique non
drowsy property.

 Premiumisation
Despite the slowdown, consumers are willing to buy premium goods at higher prices in the space
of convenience, health and wellness.

 Product customisation
Consumers have started demanding customised products specifically tailored to their individual
tastes and needs. The trend toward mass-customisation of products is expected to intensify further.

 Brand consciousness
Consumers are becoming more brand conscious and prefer lifestyle and premium range products
given their increasing disposable income. Companies are required to continuously focus on
innovation and customer engagement to strengthen their brand appealing market.
  Expanding horizons
A number of companies are exploring the business potential of overseas markets and several
regional markets. In2015,Godrej Consumer Products Ltd acquired 40 percent takes in Cosmetica
Nacional a South America based company.

 Backward integration
Backward integration is becoming the preferred strategy for increasing profit margins, securing
capacity and sources of supply.

 Focus on rural market

Companies are now focusing on the rural markets egment which is growing at a rapid pace and
contributes about 50 percent to the total FMCG market. Companies like Dabur are trying to
increase its penetration in rural areas to generate more revenues from rural India.

 Third-party manufacturing
This approach has helped FMCG companies focus on front end marketing. Reservation of several
items for SSI as well as additional tax incentives have made third party manufacturing a popular
route for many big players.

 Expanding distribution
Companies are now focused on improving their distribution networks to expand their reach in rural
India. ITC one of the leading FMCG company in India is trying to reduce its lead time by making
its distribution channel more efficient and aiming to reach the retail outlets directly from
manufacturing facility.

 Rising importance of smaller-sized packs

Companies are increasingly introducing smaller stock keeping units at reduced prices.
This helps them to sustain margins, maintain volumes from price-conscious customers
and expand their consumer base.

5. The changing trends for Indian FMCG companies

The big Indian FMCG companies like Dabur, HUL, ITC, Marico, etc. have wide distribution networks and
leverage from the increased penetration levels, shift in the consumer behaviour from the unorganized to the
organized sector, rural consumption and easy access to the consumer through various channels both Online &
offline.

On 13 August, 2015 the Bombay high court set aside a ban imposed by the Food Safety and Standards Authority
of India (FSSAI) on sale of Maggi noodles and asked for retesting at three laboratories certified by the National
Accreditation Board for Testing and Calibration Laboratories in Pune, Hyderabad and Punjab. Nestle had
moved the high court following the FSSAI order on 5 June asking the firm to immediately withdraw all nine
variants of Maggi noodles, calling them “unsafe and hazardous” for human consumption. It was interesting to
note how Nestle India, fought back with the Maggie debacle and used the power of Digital marketing to connect
with its customers. The Indian arm of the Swiss packaged-food multinational firm released three short videos on
its official YouTube channel Meri Maggi. The videos were shared on Twitter with the hashtag
#WeMissYouToo, as Nestle India tried to keep the brand alive in consumers’ minds, while it remained off the
shelves. Consequently the first quarter results for the CY2016, for Nestle India, show that it is regaining the
market, although the Maggie issue hit it hard at both the top line and the bottom line.
Also, it is worth noting how the home grown domestic FMCG brands are challenging the MNCs. Patanjali’s
growth is seen critically by the industry analysts. Seeing the competition intensifying, in the Ayurveda segment,
HUL has come up with its Ayush Brand. In the FY 2015-16, the sales of patanjali rose to INR 5,000 crore which
is more than 100% increase compared to its previous year sale of INR 2006 crore. On, the contray, during this
period HUL grew by only 4%. The brand led by Baba Ramdev, is optimistic and is hoping to reach the top line
of INR 10,000 crore by FY2016-17. The target is truly huge, but only time will be the testing parameter.

Domestic firms such as Dabur , Marico and Patanjali seem to be growing faster than bigger multinationals
including Hindustan Unilever and Procter & Gamble in key categories such as toothpaste, shampoo and hair
oils, helped by rising demand for natural, ayurveda and herbal products.

Industry officials quoting data by market researcher Nielsen said Dabur, Marico and Baba Ramdev's Patanjali
Ayurved are increasing their market share in some key consumer categories. Within toothpastes, for example,
while Dabur and Patanjali gained value share between May 2015 and May 2016, consumer goods giant
Hindustan Unilever, which sells Pepsodent and Close Up, dropped share from 22.4% to 20.6%. Category leader
Colgate-Palmolive, however, retained its numbers

Dabur's oral care portfolio includes Babool, Meswak and Red toothpaste and toothpowder — all positioned in
the 'naturals' space. Haridwar-based Patanjali, which saw its share more than double, though on a minuscule
base, sells toothpaste under the brand Dant Kanti.

In the shampoos segment Procter & Gamble, which sells Pantene and Head & Shoulders shampoos, dropped
share from 27.2% to 24.9% in one year to May 2016 while Patanjali's Kesh Kanti more than doubled its share
from 0.8% to 1.8. Marico, which sells Parachute and Hair n Care hair oil brands, saw its value share increase
from 36% to nearly 40% during the same period. Recent months have seen heightened presence of natural and
ayurvedic products at grocery stores across consumer staples. Besides established Indian firms such as Dabur,
Emami and Marico, spiritual gurus such as Baba Ramdev and Sri Sri Ravi Shankar have been selling daily use
products.

In addition to that, Patanjali has modern trade tie ups with Big Bazaar and the likes of Reliance Retail,
Hypercity, Star Bazaar (Tata Group), D-Mart, Spencer Retail, More (Aditya Birla Retail), Apollo Pharmacy,
which allows it to cover over 4500 stores across India. Not to mention now we can order Patanjali products via
e-commerce sites/apps like Amazon, Big Basket, and Grofers. But here's the thing: Modern trade only forms
~10% of the FMCG sales pie, says Vijay Udasi, SVP - sales effectiveness practice at Nielsen India.

And from his interactions with marketers, he concludes that not more than 1% of Indian consumers buy FMCG
through ecommerce. "Traditional trade (meaning the universe of kirana stores) constitutes 90% of the FMCG
business. Especially for a new brand, how rapidly you penetrate traditional trade becomes crucial from a 'make
or break' standpoint," he adds. According to industry estimates, Patanjali products are currently available in 2
lakh traditional retail outlets popularly called as kirana shops. That's 1/30th the presence of Hindustan Unilever
in the kirana universe (over 60 lakh outlets) the market leader in FMCG space who Patanjali has reportedly been
giving sleepless nights to. As for Colgate and Nestle players Baba Ramdev took a direct dig at and threatened to
oust within a year the numbers are 47 lakh and 35 lakh, respectively. Now, we understand it's taken these
players decades to reach these numbers and we should give Patanjali some time to bridge the gap between
demand and supply. But none of these players claimed to 'shut the gate in Colgate' or 'cause the bird in Nestle's
logo to fly away,' all while their loyalists were clamouring for their products. Patanjali did.

It is important to mention that as per Neilson, Availability of the products is the biggest driver of FMCG sales.
30-40% of the consumers shift to a different brand if the favourite product is not available in the store, as per
Nielson report. This highlights the importance of a robust Supply & distribution network, which is one of the
strengths of the Multinational Companies like HUL and Nestle.

Indian, home grown FMCG firms, though doing well as of now, have a long way to go.
 6. Individual Company Analysis

6.1 Dabur
6.1.1 Business Overview

As per its Annual Report of FY2015, Dabur is world’s largest Ayurveda and natural products maker Dabur has a
portfolio of over 381 trusted products spread across 21 categories and over 1,000 SKUs. A home grown
consumer company, Dabur is an RnD driven organization with a track record of 130 years. Dabur’s FMCG
portfolio includes five flagship brands with distinct identities:

 Dabur as the master brand for natural health care products

 Vatika for premium personal care
 Hajmola for digestives
 Real for fruit juices and beverages
 Fem for fairness bleaches and skin care products

It is worth noting that in FY2014-15:

 Dabur’s net profit crossed INR 1,000 crore mark.

 Vatika, became 1,000 crore brand, gloabally.
 The sales of brand Real crossed the 1,000 crore mark.
 Amla sales globally reached 1,000 crore mark.
 To reconnect with a larger purpose of the serving scoiety, in FY2014-15, they lauched two new
initiatives – “700 se 7 kadam” and “Brave and beautiful”.

6.1.2 Relevant graphs to depict the trends of revenue, EBITDA, PAT etc.

The revenue along with the Y-o-Y growth rates and expected values for FY2016-18 is as follows:

12000 15%
I 14%
The % depicts Y-O-Y growth.
N 10000 8%
11%
8000 15%
C 16%
6000 29%
R
O 4000
R 2000
E
0
S
FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E

The EPS along with the growth rate is as follows:

Reported EPS (in Rs.)

The % depicts the Y-o_Y growth.
15%
13%
12% 9.16
20% 21%
18% 7.98
13% 7.07
6.32
5.24
3.70 4.38
3.27

FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E

EBITDA margin is a measurement of a company's operating profitability as a percentage of its total
revenue. In case of Dabur it has been fairly constant. After-tax profit margin is a financial
performance ratio, calculated by dividing net profit after taxes by revenue. A company's after-tax
profit margin is important because it tells investors the percentage of money a company actually earns
per unit of revenue.

Operating Efficiency
EBITDA margin PAT margin

18% 18% 18%

17% 17%
16% 16%
14% 15% 15% 14%
13%
12% 12%

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E

Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by
dividing a company's total liabilities by its stockholders' equity. The D/E ratio indicates how
much debt a company is using to finance its assets relative to the amount of value represented in
shareholders' equity. In case of dabur it is very less, indicating that the firm has very less debt,
compared to its net worth.

Debt/equity

0.6 0.6

0.3
0.2 0.2
0.1 0.1

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E

The return on equity ratio (ROE) measures how much the shareholders earned for their investment
in the company. The higher the ratio percentage, the more efficient management is in utilizing its
equity base and the better return is to investors. Widely used by investors, the ROE ratio is an
important measure of a company's earnings performance. The ROE tells common shareholders how
effectively their money is being employed. While highly regarded as a profitability indicator, the ROE
metric does have a recognized weakness. Investors need to be aware that a disproportionate amount of
debt in a company's capital structure would translate into a smaller equity base. Thus, a small amount
of net income (the numerator) could still produce a high ROE off a modest equity base (the
denominator). A high, or low, ROE needs to be interpreted in the context of a company's debt-equity
relationship. The answer to this analytical dilemma can be found by using the return on capital
employed (ROCE) ratio.

Return on capital employed (ROCE) is a financial ratio that measures a company's profitability
and the efficiency with which its capital is employed.

For Dabur, the ROE and ROCE both show an increasing trend towards FY2018E, which is luring for
the investors.

ROE ROCE

41% 40% 39% 37%37%

32% 34% 33%35% 31%
33% 33%
30% 30%

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E

For a company, the ROCE trend over the years is also an important indicator of performance. In
general, investors tend to favour companies with stable and rising ROCE numbers over companies
where ROCE is volatile and bounces around from one year to the next.

6.1.3 Valuation

Demand environment to improve with expectations of better monsoon and uptick in urban
consumption; earnings will no longer get support from margin expansion: Expectations of a better
monsoon and enhanced spending by the government on the rural sector would ease rural distress.
Also, the urban demand (partially driven by the 7th Pay Commission hikes and implementation of
OROP) is expected to improve from FY2017. However, the impact would be more visible in the
second half of FY2017. On the other hand, the raw material prices have started showing an upward
trend and the FMCG companies might not be able to fully pass it on to consumers immediately. The
FMCG companies would have to enhance operating efficiencies to sustain (or improve) margins from
the current levels.

A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in
the future compared to the overall market, as investors are paying more for today's earnings
in anticipation of future earnings growth. Hence, as a generalization, stocks with this
characteristic are considered to be growth stocks. Conversely, a stock with a low P/E ratio
suggests that investors have more modest expectations for its future growth compared to the
market as a whole.

The P/E multiple indicates how much an investor is ready to pay the for each dollar of
earnings per share. Upon multiplying this P/E multiple with the EPS we can get the Target
Price of the stock.
We rate the stock as ‘HOLD’ assigning a target PE of 32x arriving at a target price of INR
293.

6.2 Nestle India

6.2.1 Business Overview

Nestlé has been in India for over 100 years. Understanding people. Making Quality. Building Trust.
Nurturing Relationships.

Nestlé’s relationship with India began in 1912. It was then importing and selling its brands as finished products
in the Indian market. After independence in 1947, India gave voice and defined its economic policies. Nestlé
responded to India’s aspiration for growth.

In 1961 Nestlé set up its first factory in Moga, Punjab. Over the years it has continued investing in India, setting
up more factories and expanding existing ones. Nestlé activities in India have facilitated direct and indirect
employment and provides livelihood to lakhs of people including farmers, suppliers of packaged materials,
services and other goods. Nestlé has all along followed stringent quality standards and has continuously
transferred its expertise and technology to suppliers, to help them upgrade quality to meet these standards.

The year gone by has been extremely challenging for the Company. The impact of the MAGGI
Noodles crisis was immense not only for the Company but also for the extensive eco-system that is
dependent on it.

“Net Sales” for the CY 2015 decreased by 17.2% largely due to the impact of MAGGI Noodles
issue. “Net Domestic Sales” decreased by 18.3%. Net Sales worth 3,034.0 million were reversed
during the year in relation to MAGGI Noodles stock withdrawn from trade partners and market.
“Export Sales” decreased by 1.3% impacted by MAGGI Noodles issue and lower coffee exports
partially offset by export of milk and nutrition products.

However, Maggie has regained 50% market share and the management is optimistic that it will regain
the position it occupied earlier. Also, the management is keen on expanding the product portfolio,
rather than just focussing on a single product “Maggie”. Nestle India has come up with new product
launches and has already re-launched Maggie. The management still believes that it provides healthy
and high quality products, in the Food segment. It will be focussing on market penetration and
product expansion with lot of focus on changing consumer behaviours, RnD and innovation.

6.2.2 Relevant graphs to depict the trends of revenue, EBITDA, PAT etc.

Revenue Trends show the impact caused by the Maggie debacle:

CY2011 CY2012 CY2013 CY2014 CY2015 CY2016E CY2017E CY2018E

Net
Sales(INR 7,491 8,302 9,062 9,806 8,123 9,430 11,594 14,214
Crores)
 Net Sales(INR Crores)

The % depicts Y-o-Y growth. 23%

23%
9% 8% 16%
11% -17%

CY2011 CY2012 CY2013 CY2014 CY2015 CY2016E CY2017E CY2018E

EBITDA YoY EBIT YoY Adj. PAT YoY

47% 51%
37% 35%
35%
29%
20%
14%
11% 8%
7%
3% 4% 5% 7%
-26% -1%

CY2012 CY2013 CY2014 CY2015 CY2016E CY2017E CY2018E

-10%
-15%
-23%
-29%

As it is evident from the EBITDA margins, EBIT margins and PAT margins, above, the Maggie debacle will
cause a lingering pain to Nestle for the CY2016, as well. It is expected to finally gain the momentum towards
CY2017. Here, it was worth noting that the gross margins which purely depict the efficiency of the management
to produce each unit of product, have remained stable and hover around 50%.

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share
of common stock. Earnings per share serve as an indicator of a company's profitability. As expected
from the above explanation, the EPS too dips in the CY2015-16, due to the huge loss which Nestle incurred due
to the Maggie Crisis.

Adj. EPS

35%

3% 7% 51%
-10%
-29%

CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018

The Debt/equity ratio depicts that Nestle India is debt free company. The D/E ratio for the years is:
 CY12 CY13 CY14 CY15 CY16E CY17E CY18E
Debt/equity 0.8 0.6 0.5 0.0 0.0 0.0 0.0

The firm has successfully shown its operating efficiencies, despite an unavoidable event.

ROE and ROCE are important to study the returns of shareholders. The impact of Maggie debacle which was
an unprecedented and unexpected event in the history of Nestle, can be seen impacting the return to
shareholders as well. The same is obvious from the graph shown below, which shows a dip in the returns for
CY2016 and again the returns increase with the passing time.

ROE ROCE
76%
70%
62% 60%
53%53% 56%
52%
45% 46%
40% 41%
30% 27%

CY2012 CY2013 CY2014 CY2015 CY2016 CY2017 CY2018

6.2.3 Valuation

The stock is rated as ‘BUY’ assigning a forward P/E of 49x arriving at a target price of Rs.7,773
which implies potential upside of ~18.99% .
 List of Figures with other information
1. Figure 1.1 : Source: Dabur, TechSci Research , Notes: OTC is over the counter products; ethicals are a
range of pharma products, * As on September 2015
2. Figure 1.2 : Source: Booz & Company, Dabur, AC Nielsen, TechSci Research, Note: F –Forecast
3. Figure 1.3 : Source: CSO, RBI, Ministry of Finance, E- expected
4. Figure 2.1 : Made from my own viewpoint developed from various reports and articles
5. Figure 2.2: Source: Emami, TechSci Research
6. Figure 3.1: Porters Five forces

References
 http://www.nielsen.com/
 http://www.dabur.com/
 https://www.nestle.in/
 http://www.ibef.org/
 https://www.edelweiss.in
 http://www.emkayglobal.com/
 http://profit.ndtv.com/news
 http://economictimes.indiatimes.com/articleshow
 http://businessworld.in
 http://brandequity.economictimes.indiatimes.com/news/business-of-brands