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Not Marked To Market – FMCG

Gross margin CAKE: Who ate it and who passed it

6th September 2016

Gross margin CAKE: Who ate it and who passed it FMCG Sector

Market data

BSE SENSEX 28,532

NIFTY 8,810

Date Sep 06, 2016

‘In a world that's changing so quickly, the biggest risk you can take is not taking any risk.' – Peter Thiel’s advice to Mark

Zuckerberg

Investing in innovation for the future (product, process, people etc) and focusing on the immediate goal of profit maximisation have

been conflicting, competing and sometimes confusing objectives for the managements in general. And the same challenge gets

magnified for the listed companies as they have to walk on a tight rope of quarterly guidance and evaluation. Amidst this complexity,

Indian listed FMCG companies have overall done well to balance these objectives on a longer term period. However, managing the

incessant market expectation of steady or improving profitability vs experimenting and investing for future have largely remained

binary goals.

Against this backdrop, the great plunge in crude oil prices from July 2014 ($~115 per barrel) slumping to a ten-year low of less than

$30 per barrel in February 2016 was a huge tailwind for a crude oil net importer like India. And as expected, the deflation in crude oil

jumped to many other facets of commodities. This triggered an unprecedented Gross Margin (GM) bounty for the economy in

general and more so for the sector with strong pricing power like FMCG. This presented a very lucrative opportunity to invest and

experiment as profitability was insured with the GM cushion. As the saying goes, businesses should always take calibrated risk(s)

which even if goes wrong can perhaps hurt their pride but not the well-being and this was/is the best time to accommodate such risks

in P&L.

To put the quantum of bounty in perspective, Spark’s FMCG coverage universe of 11 stocks witnessed delta of ~1.7x and ~1.2x in

Gross Profit and EBIDTA growth over sales growth in FY16. But the ‘deflation’ also brought along a very challenging demand

environment and hence all the companies faced a very difficult choice of reinvesting GM bounty in business or allowing it to trickle

down to maintain earnings momentum. In this chapter of NOT MARKED TO MARKET we have tried to analyse how these

companies utilised the Gross Margin windfall to achieve the twin objectives of near term profitability and identify-invest in the future

growth drivers.

Interestingly, most of our coverage FMCG companies reinvested a chunk of GM bounty to strengthen the future growth

drivers (new geographies, new products, brand extension, etc.). In wake of the fact that increased A&P (Advertisement &

Promotions) spend on the existing portfolio has not been able to rekindle the volume growth much; this is/was perhaps the

best window of opportunity available to identify, experiment and invest behind potential growth drivers.

We note that Marico, Emami and Bajaj Corp witnessed industry high gross margin expansion of ~448bps, ~422bps and

~418bps respectively of which we decipher that ~48%, ~30% and ~49% respectively percolated into EBITDA for these three

companies. Britannia & Manpasand Beverages were the companies that witnessed higher EBITDA margin expansion than

gross margin expansion. We note that Britannia undertook several cost saving initiatives that reflected in ~68% of gross

margin benefits seeping into EBITDA margins. Zydus Wellness witnessed ~159bps gross margin expansion, however A&P

expenses (as a % of sales) increased by ~241bps y-o-y. As against the previous raw material cycle, we witnessed several

players undertaking pro-active price cuts especially in highly penetrated and competitively intense categories as

detergents, soaps & coconut hair oil. Competitive intensity in low penetrated categories and advent of Patanjali did lead to

branding investments across companies increasing as they attempted to cement their brand equity as well as benefit out of

rising ‘Ayurveda/natural/herbal’ trend.

Note – Spark Consumption Desk's NOT MARKED TO MARKET series is a detour from our usual recommendation oriented

research and an endeavour to ‘hopefully’ get some insights on the practical layers of business/industry operations.

Recommendation

CMP

(Rs.)

TP

(Rs.)Reco

BJCOR 408 465 BUY

BRIT 3357 3550 BUY

DABUR 297 322 ADD

DFMF 2055 1576 SELL

HMN 1157 1200 ADD

HUVR 920 942 ADD

ITC 263 278 ADD

JYL 317 322 ADD

MRCO 291 264 REDUCE

ZYWL 880 925 BUY

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Not Marked To Market Series – FMCG

TEJASH SHAH, [email protected] +91 22 4228 8155

GNANA SUNDAR [email protected] +91 44 4344 0062

MADHAV PVR [email protected] +91 44 4344 0061


The Current Crude Oil Price decline has a far-reaching global socio-eco-political impact

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-16

Crude Oil Brent (USD/bbl.)

Saudi Arabia

- Saudi Arabia

needs oil prices to be around

in the longer term

~ - Reserve fund

to withstand lower prices for

some time.

Russia

- Russia loses in

revenues for every dollar fall

in the oil price.

ISIS

- Through

black market sales

-

Undercutting market prices

by selling at a significant

discount

Other OPEC

countries

Alongside Saudi Arabia, Gulf

producers such as the

United Arab Emirates and

Kuwait have also amassed

considerable foreign

currency reserves, which

means that they could run

deficits for several years if

necessary.

Other Opec members such

as Iran, Iraq and Nigeria,

with greater domestic

budgetary demands because

of their large population

sizes in relation to their oil

revenues, have less room for

manoeuvre.

India

- Cost

of India's fuel

subsidies bill to

soften

USA

Transforms itself to

an energy exporter.

Growth in US energy

production, where

gas and oil is

extracted from shale

formations using

hydraulic fracturing

or fracking has

been one of the main

drivers of lower oil

prices.

Source: Forbes news articles, Bloomberg & Spark Capital research


The crude oil deflation triggered correction in many constituents of the RM basket…

58.7 56.8 56.4 57.3

39.2 33.0

0

20

40

60

80

2011 2012 2013 2014 2015 2016

Liquid Paraffin Rs/lt

4047 50 50

3224

0

10

20

30

40

50

60

2011 2012 2013 2014 2015 2016

Th

ousands

LABFS (Rs. Thousand/ KL)

8092

107122

107 102

0

50

100

150

2011 2012 2013 2014 2015 2016

HDPE (Rs/kg)

1.91

1.37 1.361.79 1.65

1.32

0

1

1

2

2

3

2011 2012 2013 2014 2015 2016

Th

ousands

Resin NNS (Rs. Thousand/17kg)

1.551.32

1.51 1.551.24 1.15

0.0

0.5

1.0

1.5

2.0

2011 2012 2013 2014 2015 2016

Th

ousands

LDPE1 (USD/Metric Tonne)

Bajaj Corp, Dabur, MaricoHindustan Unilever,

Jyothy LaboratoriesAll coverage companies

Paints sector FMCG & Paints sectors Consumption Sector as a

whole

167185 171 163

140 138

0

50

100

150

200

2011 2012 2013 2014 2015 2016

Titanium Dioxide (INR/KG)

Source: Bloomberg & Spark Capital research


…and agri commodities also participated in the trend, well almost

5.525.75

5.38 5.47

4.85

5.53

4

5

5

6

6

2011 2012 2013 2014 2015 2016

Th

ousands

Palm Oil (Rs. Thousand/Quintal)

6.144.27

5.45

9.938.50

5.59

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016

Th

ousands

COPRA (Rs. Thousand/100KG)

2.913.31 3.25 3.16

2.69

3.57

0.0

1.0

2.0

3.0

4.0

2011 2012 2013 2014 2015 2016

Th

ousands

Sugar (Rs. Thousand/Quintal)

54

2733 38 33 36

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2011 2012 2013 2014 2015 2016

Milk (Rs/LT)

5.90

6.74

6.196.36

6.156.38

5.0

5.5

6.0

6.5

7.0

2011 2012 2013 2014 2015 2016

Th

ousands

RICE BRAN(Rs. Thousand/10KG)

1.211.38

1.58 1.59 1.61 1.72

0.0

0.5

1.0

1.5

2.0

2011 2012 2013 2014 2015 2016

Th

ousands

Wheat (Rs.thousand/ Quintal)

Hindustan

Unilever,

Jyothy

Laboratories,

Zydus

Wellness,

DFM foods

Marico, Dabur

Hindustan

Unilever, ITC,

Britannia,

Dabur,

Manpasand

Beverages

Marico,

Dabur,

Bajaj Corp

ITC,

Britannia,

DFM foods

Britannia, ITC

Source:

Bloomberg &

Spark Capital

research

Source: Bloomberg & Spark Capital research


Gross margins made new highs

Lower commodity prices resulted in all time high gross margins…

Spark FMCG coverage universe, Numbers in IGAAP. Source: Company Annual Reports

Also illustrated by highest ever gross profit delta to sales…


50.3%

53.4%

51.5%

54.0%53.4%

52.0%52.6%

53.6% 53.4%

55.8%

47.0%

48.0%

49.0%

50.0%

51.0%

52.0%

53.0%

54.0%

55.0%

56.0%

57.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross Margin (%)

1.1 1.21.3

1.2

0.7 0.8

1.31.4

1.1

1.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross Profit growth delta to sales

…however EBITDA margin expansion was fairly limited


…however not so for EBITDA growth.


20.3%

25.6%

19.4%

21.9% 21.6% 21.9% 22.7%24.2% 24.3% 25.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EBITDA Margin (%)

0.2

1.1

0.8

1.6

0.60.7

1.5

1.21.3

1.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EBITDA growth delta to sales


Gross margin and EBITDA margin expansion visible across majority of the companies

Gross margin y-o-y expansion ranged from ~200bps to as high as ~450bps for the companies under coverage…

Increase in BPS, Numbers in IGAAP. Source: Company Annual Reports & Spark Capital research

49.4%

60.5%52.5%

64.8%

45.6%

61.6%

48.7%

70.3%

41.8% 40.3%

52.7%52.2%62.4%

55.1%

69.0%

50.1%

65.8%

51.5%

71.9%

41.5% 42.4%

55.6%

HUL ITC Dabur Emami Marico Bajaj Corp Jyothy labs Zydus Wellness ManpasandBeV

Britannia DFM foods

FY15 FY16

280 192 261 422 448 419 279 159 -28 211 295BPS

…similarly, majority of companies witnessed heathy operating margin expansion ranging from ~100bps to ~314bps

Increase in BPS, Numbers in IGAAP. Source: Company Annual Reports & Spark Capital research

99 70 116 170 215 248 177 -34 201 314 148BPS

16.9%

37.3%

16.8%

24.4%

15.2%

29.1%

12.7%

21.5%17.8%

11.0% 10.6%

17.9%

38.0%

18.0%

26.1%

17.3%

31.6%

14.4%

21.2% 19.8%

14.1% 12.1%

HUL ITC Dabur Emami Marico Bajaj Corp Jyothy labs Zydus Wellness ManpasandBeverages

Britannia DFM foods

FY15 FY16


Not all companies utilized the gross margin benefits similar, a few invested behind operational overheads while a few let it pass by to margins

Numbers in IGAAP. Source: Company Annual Reports & Spark Capital research

PLOTTING THE GAINS

HINDUSTAN UNILEVER

ITC

DABUR

EMAMI

MARICO

BAJAJ CORP

JYOTHY LABS

ZYDUS WELLNESS

MANPASAND BEVERAGES

BRITANNIA

DFM FOODS

-100bps

-50bps

0bps

50bps

100bps

150bps

200bps

250bps

300bps

350bps

-100bps 0bps 100bps 200bps 300bps 400bps 500bps

FY

16 V

s F

Y1

5 E

BIT

DA

Ma

rgin

Exp

an

sio

n d

elta

(in

bps)

FY16 Vs FY15 GROSS Margin Expansion delta (in bps)

Companies that

witnessed robust

EBITDA margin

expansion and

gross margin

expansion

Companies that

ploughed back

significant gross

margin expansion

into operational

overheads


Summary across companies (Click on company name for detailed analysis)

FY16 Gross

Margin/ Expansion

FY16 EBITDA

Margin/ Expansion

A&P as % of sales

increase/decrease

(YoY)

BAJAJ CORP ~65.8% / ~419bps ~31.6% / ~248bps ~73bps ~24%^ ~49%

BRITANNIA ~42.4% / ~211bps ~14.1% / ~314bps ~21bps ~10% ~68%

DABUR ~55.1% / ~261bps ~18.0% / ~116bps ~ 33bps ~16% ~35%

DFM FOODS ~55.6% / ~295bps ~12.1% / ~148bps ~301bps ~100%* 0%

EMAMI ~69.0% / ~422bps ~26.1% / ~170bps ~255bps ~60% ~30%

HINDUSTAN UNILEVER ~52.2% / ~280bps ~17.9% / ~99bps ~151bps ~53% ~35%

JYOTHY LABORATORIES ~51.5% / ~279bps ~14.4% / ~177bps ~30bps ~11% ~68%

MANPASAND BEVERAGES ~41.5% / (~28bps) ~19.8% / ~201bps ~(387bps) NA NA

MARICO 50.1% / ~448bps ~17.3% / ~215bps ~148bps ~33% ~48%

ZYDUS WELLNESS 71.9% / ~159bps ~21.2% / (~34bps) ~241bps ~100% 0%

GM expansion flow

into A&P

GM expansion flow

into EBITDA

^ - Includes selling overheads, * toys promotional expenses, Numbers in IGAAP. Source: Company filings & Spark Capital Research


EBITDA margin growth to gross profit growth marginally higher…


1.4x

0.9x

0.3x

1.3x

0.5x

1.1x 1.1x1.2x 1.3x

0.8x

1.0x

0.2x

0.8x 0.9x

FY10 FY11 FY12 FY13 FY14 FY15 FY16

EBITDA growth Delta to gross profit growth PAT growth Delta to gross profit growth

Bajaj Corp – Gross margin expansion has led to all time high EBITDA margins

Bajaj Corp (BJCOR) delivered its highest ever margin expansion in its listed history led by lower Light Liquid Paraffin (LLP) prices


…despite operating expenses rising to an all time high of ~34.2%


1.8x

0.6x0.8x

1.3x 1.4x

1.1x

2.2x

2.5x

0.5x

0.2x

1.7x

0.7x

1.3x

2.6x

2.3x

0.8x0.7x

1.4x

0.3x

1.0x

2.0x


Gross Profit growth delta to sales growth EBITDA growth delta to sales growth PAT growth delta to sales growth

26.1%

27.3%26.1%

28.9%29.0% 32.2% 32.5%

34.2%

49.7%

60.4%56.4%

53.5%57.5%

60.0% 61.6%65.8%

23.6%

33.0%30.3%

24.6%28.5% 27.8% 29.1%

31.6%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Difference (%) Gross Margin (%) EBITDA Margin (%)



With down trading being prevalent in Almond Drops Hair Oil (ADHO), sales promotions and selling overheads expense increased…


…despite the increase, 49% of gross margins percolated to EBITDA


Proportion of sales promotion higher as a % of A&P


61.6% 61.6%

419bps 103bps 64bps46bps

42bps

248bps

Gross Margin(FY15)

Gross Margin(FY16)

Sales Promotion Employee Cost Selling overheads Cost savings EBITDA

103bps

64bps

46bps

SalesPromotion

EmployeeCost

Other SellingOverheads

-76bps

-11bps

-5bps

Advertisement Freight Cash Discount

29.1%

31.6%

FY15 FY16

EBITDA margin (%)

248

bps

Sales Promotion,

24.6%

Employee Cost, 15.3%

Selling overheads,

11.1%

EBITDA 49.0%

YoY increase/decrease (as % of sales)


Volume – Price mix Promotions Advertisements

BJCOR did not have to affect any price cuts,

price growth slow-down majorly on account

of consumer’s down-trading to lower SKU

packs.

Advertisements were however reduced as we

decipher that in weak consumption climate,

additional spending on advertisements does

not yield required returns.

Schemes and promotions to channel as well

as consumers increased significantly as

BJCOR attempted to sustain volume growth

momentum despite spending slowdown.

With overall demand remaining lacklustre, pressure to sustain volume growth momentum did result in higher promotional spends

Numbers in IGAAP. Source: Company filings & Spark Capital research


13%

1%

-6%

4%

9%

21%

23%

12%

8%

3%

-5%

3%

6%

7%

9%

10%

9%

5%

2%

2%

2%

1%

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Volume growth (%) Price/Mix Increase

0.20.2 0.3

0.5

0.7

0.9

1.0

6%7%

6%

8%

10%11%

12%

0%

2%

4%

6%

8%

10%

12%

14%

0.0

0.2

0.4

0.6

0.8

1.0

1.2


Rs.b

n

Schemes & Sales Promotion Expenses % of sales

192164

378418

464

583550

7%

5%

8%

7% 7%7%

6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

100

200

300

400

500

600

700


Advertisement (Rs.mn) % of sales



New Product and Packaging Development

Development of 20ml ADHO in Flow wraps packing

Improvement in AHO formulation by incorporating of UV-

Absorber

Modification of face wash formulation, added small sized

beads in Neem & all skin face wash

Successfully formulated the base oil for new products with

21 new herbs; perfume under development

Introduction of light weight bottle for different ADHO SKUs,

successfully launched after transit trials.

ADVERISMENTS: Badminton star Ms.Saina Nehwal

was signed for promoting NoMarks

Sales & Distribution

The brand has entered

2,36,295 new outlets during

the Financial year 2015-16. Out

of this more than 1.8 lakh

outlets have been added in the

rural areas alone.

Supply Chain/ Manufacturing

Steps are taken to optimize

inventory holding

and improve service levels

especially for Modern Trade

and International Business

In the process of linking our

field force through

handheld devices. This project

should be in place by the

end of this Financial Year.

Currently ~25% of our

direct distributors are already

linked to our central server

through the Distributor

Management System (DMS).

Steps are taken to bring more

automation in planning and

procurement through

introduction of e-auctions and

enhanced features of current

ERP system.

Value engineering

initiatives are planned for FY

16 to bring fundamental

change in cost base without

impacting consumer value

proposition

We have invested in building

capacities for sachet, small

packs coupled with

automation in AHDO, Amla,

Nomarks lines to increase

productivity and reduce cost.

Investment has been made in

warehousing facilities for

effective material handling and

control.

Excerpts from ARFY16, Management’s Earnings Call Commentary, Published information


Aided by benign the RM cycle and the persistent cost saving initiatives, BRIT continued its margin expansion streak in FY16 as well


0.5x

1.5x0.9x

0.5x 0.7x1.2x 1.5x 1.5x

1.1x1.6x

-1.0x

3.3x

0.1x

-2.8x

1.4x 1.6x

2.8x

4.2x

2.8x

4.0x

-0.7x

2.4x

-0.8x-0.4x

0.1x

2.6x 2.4x

4.5x

3.5x 3.7x

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16


Britannia: Gross margin cycle + cost saving initiatives = Superior operating performance

EBITDA growth has been far superior to gross profit growth…


…as several operational overheads have been curtailed


29.9%30.4% 31.0%

31.6% 29.2% 29.9% 30.8%30.6% 29.3%

28.3%

36.1%39.2% 38.3%

36.4%34.3% 35.6%

37.6%39.7% 40.3%

42.4%

6.2%8.8% 7.4%

4.8% 5.1% 5.7% 6.8%9.1%

11.0%14.1%



0.2x

-6.1x

2.1x1.3x

1.9x2.7x 2.4x 2.6x

-0.9x -0.9x

0.1x

2.1x1.6x

2.9x 3.1x2.4x

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16




Britannia aided by lower raw material prices and cost saving initiatives has been one of the companies where EBITDA growth outgrew gross profit


Off the gross margin pie, we understand ~68% percolated to EBITDA


Conversion charges and carriage expenses continue to be rationalized


40.3% 40.3%

211bps21bps

34bps

75bps

83bps

314bps

G.Margin (FY15) G.Margin (FY16) A&P Employee Cost Conversioncharges

Other Costsavings

EBITDA Margin(FY16)

34bps

21bps14bps

EmployeeCost

A&P Miscellaneous

-75bps

-47bps-32bps

Conversioncharges

Carriage Power andfuel

11.0%

14.1%

FY15 FY16

EBITDA margin (%)

314

bps

A&P, 10%

Employee Cost, 16%

Miscellaneous expenses, 6%

EBITDA, 68%



Price Cuts Promotions Product Innovation

Britannia did not undertake any significant

price cut except for a few additional

grammage offerings during 2HFY16.

R&D expenses significantly higher due to the

capital expenditure on the new R&D facility in

Bangalore.

A&P focus remained high in FY16 as BRIT

continued indulging in Cricket and Bollywood

events throughout the year

Britannia largely did not have to undertake price cuts as no disruptive competition emerged, A&P slightly increased while capital R&D expenses increased



1.0%

3.0%

3.0%

10.0%

6.0%

8.0%

8.0%

10.0%

12.0%

11.0%

10.0%

8.3%

12.0%

7.0%

6.0%

5.0%

6.0%

6.0%

6.0%

3.0%

0.0%

-1.0%

-2.0%

0.8%

-5.0% 0.0% 5.0% 10.0% 15.0%

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Volume growth (%) Price Increase

4693

65 83 100

167

438

0.1%

0.2%

0.1%0.1% 0.1%

0.2%

0.5%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0


R&D expenses (Rs.mn) % of sales

3.03.3

4.2

5.36.0

6.5

7.4

7.9%

7.2%

7.6%

8.6%8.7%

8.3%

8.5%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

0

1

2

3

4

5

6

7

8


Rs.b

n

A&P (Rs.bn) % of sales



Brand

Building

Product

Innovation

Distribution

expansion

‘During the year, your Company focused on product innovation, brand building and distribution to grow faster than the market’

Re-staged our brands during

the year to bring excitement in

the category

Company is building futuristic

capacity and capability in R&D and

has built 55,000 sq ft of state-of-art

R&D centre at Bidadi in Bangalore.

This centre has world class

analytical capability, organoleptic

lab, culinary centre and advanced

bench top and pilot plant capability.

Celebrity Endorsements

Your Company took huge strides in

digital media with large digital

activations

Created strong presence in the minds

of consumers with blockbuster

activations

~200k outlets added in

FY16 @ 1.3 mn outlets;

Narrowed the gap with

nearest competitor by 0.4

mn outlets since 2013

Driving our rural growth

agenda. Growing in high

double digits with 8,000+

distributors

Driving Sales Efficacy

through hand held devices.

No. of Salesmen with PDAs

– 50% increase from March

Focusing on expansion of

Route to Market Strategy.

Split Route - Implemented

in 100+ towns

EX

TE

NS

ION

S

Excerpts from ARFY16, Management’s Earnings Calls Commentary(ies), Published information


EBITDA and PAT margins outgrew gross profit growth…


Dabur too sustained its margin expansion streak for the third consecutive year, relying on gross margin savings


1.1x

0.7x

1.8x

0.8x 0.7x

1.3x1.1x 1.1x

1.7x

1.1x

0.8x

1.7x

1.1x

0.5x0.7x

1.2x 1.3x

1.9x

1.2x

0.9x

1.3x

0.7x

0.4x

1.2x1.3x

1.6x

2.2x

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16


1.0x1.2x

0.9x

1.4x

0.7x0.5x

1.0x1.1x 1.2x

1.1x

1.3x

0.7x0.8x

0.6x

0.9x

1.2x

1.4x1.3x



Dabur – FY16, A Year of ‘BArBA’ric disruption in business and operation !

…despite other operating expenses rising to an all time high ~37%.


32.0% 32.6% 30.8%35.7% 33.5%

32.5% 35.0% 35.6% 35.7%37.1%

48.8% 49.7%47.4%

54.3% 52.5%49.3% 51.1% 51.9% 52.5%

55.1%

16.8% 17.1% 16.6%18.6% 19.0%

16.8% 16.0% 16.4% 16.8% 18.0%




Advent of Patanjali and Nepal Strike has led to A&P and freight expenses respectively increasing in FY16, Salaries were also higher in FY16


Off the total~261bps gross margin gain, ~35% percolated into EBITDA


Salaries, A&P and General charges witnessed the highest outgo in FY16


52.5% 52.5%

261bps 59bps33bps

42bps 11bps 116bps

G.Margin (FY15) G.Margin (FY16) Employee Cost A&P General Charges Other Costs EBITDA Margin(FY16)

59bps

33bps

42bps

Employee Cost A&P GeneralCharges

-14bps

-3bps -3bps

Power andFuel

Travel andConveyance

Rent

16.8%

18.0%

FY15 FY16

EBITDA margin

116

bps

Employee Cost, 22.6%

A&P, 16.1%

Other Expenses,

26.0% EBITDA, 35.3%





3QFY16 revenues were disrupted due to

foods business being affected by Nepal shut

down, Pricing power shrunk as the year

progressed.

Product innovation were also robust through

the year led by several brand extensions and

category expansion initiatives.

Promotions though were at a all time high as

Dabur made sure to leverage the maximum

out of the emerging ‘natural/herbal’ trend.

Distribution also hiked in FY16 with several

new distribution oriented projects.

Though Dabur did not have to take much price cuts, pricing power waned with the advent of Patanjali, new launches were prominent through the year


10.7%

9.0%

9.2%

8.3%

8.7%

7.4%

8.1%

8.1%

5.0%

-2.5%

7.0%

4.0%

-3.0%

-0.2%

4.8%

2.4%

1.9%

4.6%

4.1%

3.5%

3.5%

1.5%

-3.5%

-5.0% 0.0% 5.0% 10.0% 15.0%

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17


4.9 5.36.6

8.4

10.011.2

12.4

15%

13%

12%

14%14% 14%

15%

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

14.5%

15.5%

0

2

4

6

8

10

12

14


Rs.b

n


71 7051 42

216 223

266

0.2%

0.2%

0.1%

0.1%

0.3%

0.3%

0.3%

0.0%

0.1%

0.1%

0.2%

0.2%

0.3%

0.3%

0.4%

0.0

50.0

100.0

150.0

200.0

250.0

300.0





Existing Brand New Brand

Present

Market

New Market

Honey

Squeezy

Real VOLO‐Sparkling Fruit

Beverage

Real Activ 100%

Mixed Fruit &

Mosambi

Real Wellnezz-

Jamun

Dabur-Baby

Massage Oil

Hajmola

Yoodley

Honey

Fruit

Spreads

Amla Men

Hair Tonic

Pudin Hara

Antacid

Vatika Shampoo

-Black Olive

Vatika

Naturals

Damage

repair leave

on cream

Dermoviva

Baby Range –

Powder & soap

FEM

diamond

Dermoviva face

wash – Rose,

Apricot, Neem

Dermovia

baby wipes

Variants in

Homemade

Glucose Aam

Panna

Dabur looked to further

strengthen its foods

portfolio by exciting new

launches in spreads and Honey squeezy variants.

Dabur undertook plethora of new launches in complementing categories, leveraging their brand strength. Though several were largely category

extensions, we note that Dabur has in FY16 attempted to remain relevant to its historical ‘Ayurveda/Herbal’ proposition through its launches too. We

note that launches were pre-dominantly urban centric indicating that Dabur continues to back urban consumption revival theme largely.

We believe the dermoviva

brand has been cross

pollinated from their

Turkish ‘Hobi’ business,

we note this provides an

entry into the lucrative

baby personal care segment for Dabur India.




High decibel customer activations in FY16…. …supported by continued network expansion

• Villages Covered: 3,800

• Consumers Reached: 1mn

• Retail Outlets Covered: 33,870

Activation Description: Dabur rolled out a mega rural retail initiative Goonj

during the year. This retail activation programme covered villages in Uttar

Pradesh, Bihar, Madhya Pradesh and Chhattisgarh, where availability of the

Dabur range visibilty and coverage of retail outlets were improved and specially

tailored consumer engagement programmes were implemented

• Cities Covered: 10

• Colleges Covered: 100

• Total Participants: 11,000

Campaign Description: Dabur’s facial bleach brand, Fem Fairness Naturals,

conducted a mega model hunt Fem Miss North India Princess 2015 that sought

to discover new modelling talents from the small towns in North India. The 12

finalists, selected after several rounds of shortlisting and auditions, underwent a

special grooming programme for 14 days

• Units Covered: 500

• Devotees reached: 10,000

Activation Description: Dabur spread the message of oral hygiene among

millions of devotees congregating at the Nashik Kumbh using a unique

Toothpaste dispenser. The first-of-its-kind toothpaste dispensers was installed at

nearly 500 homestays, dharamshalas, vishram grihs within a 5-km radius of the

mela. On the lines of the liquid soap dispensers found in most 5-Star hotels

across the country, these toothpaste dispensers, being the first of its kind, were

a big draw among the rural audience and helped generate huge trials for the

brand.

Project 50/50: Steps were taken to enhance quality of market interface

and improve sales efficiencies by segregating the grocery channel teams

for wholesale & retail separately as these two segments of trade have

completely different servicing requirements.

Project Core: Has improved availability of Dabur’s product range in the

Chemists channel. Besides being critical retail points, Chemists also act

as advisors to consumers seeking solutions to treat moderate and non-

critical health problems hence influencing purchase of OTC products in a

big way.

Project Double Update: This network is being streamlined and

consolidated for enhancing the efficiency and productivity of the rural field

force and infrastructure already deployed in the rural markets.

Emerging Opportunities: Dabur increased on focus on expert channels

like Salons, Healthcare Professionals and even Key Opinion Leaders or

Influencers as part of our efforts to drive deeper into the consumer mind

space.

Medical Marketing: In FY16 Dabur launched a new initiative, Project

LEAD (Leveraging through Empowered Anchoring and Detailing). As a

part of this initiative, the company is focusing on enhancing our coverage

of doctors, both Ayurvedic and Allopathic. Doctor advocacy is expected

be the key to demand generation, and a medical detailing team has been

put in place for the same. This project was initially rolled out in three

states, i.e. Uttar Pradesh, West Bengal and Maharashtra. Dabur is

currently planning to extend it to Bihar, Rajasthan, Madhya Pradesh,

Karnataka and Andhra Pradesh.




Discounting for toys in gross profits, lower wheat and vegetable oil prices led to gross profit, EBITDA and PAT increasing ~1.2x, 1.5x and 2.4x

respectively over sales


0.8x 0.9x1.2x

0.5x

2.1x

1.2x1.5x

0.8x

0.2x0.5x

3.6x

1.5x1.5x

0.6x

-1.2x

2.4x

5.4x

2.4x

FY11 FY12 FY13 FY14 FY15 FY16


DFM foods – Reach expansion spree endures; ‘Toy Story’ continues

Operating profit growth slightly higher as several expenses were curtailed


Majority of gross margin benefit was invested in ‘Toys’ promotions.


39.0% 37.5% 42.5%39.5%

42.1%43.5%

51.4%49.3%

51.8%48.1%

52.7%55.6%

12.4% 11.8%9.3% 8.6%

10.6% 12.1%



1.9x

1.0x

0.1x0.9x

1.8x1.3x

1.9x

0.7x

-1.0x

4.7x

2.6x2.0x




Toys and delivery expenses increased the highest in FY16


337bps

41bps7bps

Toys Deliveryexpenses

Commission


DFM invested all of its gross margin benefits into its promotional ‘Toys’ offerings, other cost savings enabled EBITDA margins expansion


With TOYS promotions on the rise, minimal EBITDA flow through


52.7%

55.6%

290bps

337bps

49bps 41bps50bps 54bps

147bps

G.Margin(FY15)

G.Margin(FY16)

Toys Employee Cost Power and fuel A&P Others EBITDA Margin(FY16)

-36bps

-49bps

-41bps

Selling &Marketing

EmployeeCost

Power andfuel

10.6%

12.1%

FY15 FY16

Ebitda Margin (%)

Toys100%

EBITDA0%

147

bps



Selling and marketing expenses on the lower trend…


Salaries and wages as a % of sales marginally lower…


…delivery expenses though on the higher trend as expansion endures


…compensated by increase in ‘toys’ promotional offerings



42.653.8

66.9

104.6125.9 118.8

146.0

5.9%

4.5%3.9%

4.6%4.8%

4.1%3.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0


Selling & Marketing (Rs.mn) % of sales

342286

387

652

15.2%

10.8%

13.4%

16.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

100

200

300

400

500

600

700

FY13 FY14 FY15 FY16

Toys (Rs.mn) % of sales

59 76

128

185230

262

333

8.1%

6.3%

7.5%8.2%

8.7% 9.0%

8.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0

50

100

150

200

250

300

350


Salaries & Wages (Rs.mn) % of sales

32 6099

153196

224

318

4.4%5.0%

5.8%

6.8%

7.5%7.8%

8.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

50

100

150

200

250

300

350


Delivery Expenses (Rs.mn) % of sales



Sales & Distribution initiatives

Continued investment in the organizational capacity of

the business.

Commissioning of the brownfield expansion at the

Greater Noida facility in December 2015. This added

capacity of 5000 MT per annum thereby taking the total

capacity available to 25308 MT per annum.

Rationalization of the various pack sizes of the

namkeen portfolio.

Initiation of the 2nd brownfield at Greater Noida for

adding further capacity of 10,000 MT per annum at an

approximate cost of Rs. 75 crores. This would be

financed by a combination of internal accruals and

debt.


Implementation of innovation in the marketing efforts of the Company. This was instrumental in delivering the sales growth during the year.

Consolidating the sales and distribution operations in the existing geographies.

Commencement of sales and distribution in the 3 metro cities of the South Zone.

Supply chain and Manufacturing

initiatives


0.2x

2.7x

1.0x

2.1x

0.3x

1.2x0.9x

1.7x

0.9x1.0x

0.3x

2.2x

-0.2x

2.6x

2.1x1.8x

0.9x

1.7x

0.8x0.4x



Despite enjoying significant margin benefits from a prolonged downturn in Mentha Oil prices, Emami has let minimal seep into EBITDA margins


1.8x1.4x

1.1x 1.2x

0.5x0.9x

1.1x

2.2x

1.2x1.4x

0.3x

3.7x

1.1x

2.5x

0.2x

1.0x 1.0x

3.8x

1.0x1.5x

0.5x

3.1x

-0.2x

3.2x

1.1x

1.5x

1.0x

3.8x

0.9x0.6x



Emami – Creating additional growth levers to shed off the ‘SEASONAL’ tag

EBITDA growth lower than gross profit growth in the past 2 years…


…as brand investments behind new innovations have been on the rise


43.7%42.4% 42.9%

39.7%37.7% 36.5% 37.5%

38.4% 40.5%43.0%

56.5% 58.8% 59.8%63.3%

58.0% 56.9% 57.9%62.6% 64.8%

69.1%

12.8%16.4% 16.8%

23.6%20.3% 20.4% 20.4%

24.2% 24.4% 26.1%





Emami launched organic and in-organic growth drivers in FY16, which we believe has been backed up with significant brand spends


A&P costs Increased by ~35%...


…of which, new brands accounted for nearly ~28%


64.8% 64.8%

420bps

255bps41bps

47bps

171bps

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

69.0%

70.0%

G.Margin (FY15) G.Margin (FY16) A&P Employee Cost Other Cost savings EBITDA Margin delta(FY16)

255bps

41bps

3bps

A&P Employee Cost Others

-26bps

-10bps

-6bps

Freight &Forwarding

Power and fuel Legal andProfessional

Fees

24.4%

26.1%

FY15 FY16

EBITDA Margin (%)

171

bps

A&P, 60.2%

Employee Cost, 9.6%

, 0

EBITDA, 30.2%

, 0




Emami having to face minimal competitive

intensity in majority of its core categories

could afford to sustain volume growth

despite undertaking minimal pricing actions.

Organic innovations introduced over the past

18-24 months contributing to ~6-7% of overall

revenues is a testament to Emami’s new

investments paying off.

Though not all new launches were

successful, Emami continued to invest

behind brands of the gross margin benefits

that accrued to them

Emami has been one of the few players who had to undertake minimal price cut during FY16, majority of revenues driven through new innovations



13%

10%

10%

14%

15%

1%

7%

6%

7%

8%

8%

7%

5%

6%

2%

3%

2%

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

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17


22 2

3 3

4

5

19%

18%

16%16%

15%

18%

20%

5.5%

7.5%

9.5%

11.5%

13.5%

15.5%

17.5%

19.5%

21.5%

0

1

2

3

4

5

6


Rs.b

n


17 13 13

244

163

217 222

0.2%0.1% 0.1%

1.4%

0.9%

1.0%

0.8%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

0.0

50.0

100.0

150.0

200.0

250.0

300.0





Power BrandAdvertising & Promotion

initiativesExcerpts from FY16 AR

A new campaign featuring Amitabh Bachchan

and Kangana Ranaut in 2015-16 highlighted

unique multipurpose benefits of BoroPlus. The

brand’s 360º campaign went viral over the

internet.

BoroPlus Antiseptic Cream continued its market leadership with a market

share (volume) of 76.9%.

Emami launched BoroPlus Cocoa Soft Lotion infused with the goodness

of chocolate

Emami evolved BoroPlus from just a winter product to a comprehensive

skin solution.

Conducting an on-the-spot massage

campaign and offering free foot massages

and champi to devotees at the Kumbh Mela

and the Vitthal Festival Like in addition to

distributing free samples

Navratna Oil increased its market share (volume) by 30 bps at 60.5% in

FY16

Brand extension Cool Talcum Powder gained market share (volume) by

20 bps at 25.2% in FY16.

Product range was extended by introducing Navratna Almond Cool Oil

Emami also launched dedicated website

Zandu (www.zanduayurveda.com) promoting

ayurvedic health and wellness and enhancing

the brand reach.

The Zandu Ayurvedic healthcare range grew by 27% led by Zandu

Pancharistha.

ZANDU NITYAM CHURNA Introduced in a user-friendly tablet form in May

2015.

The key lay in deciding the right language and

channel of communication for specific

products. Fair and Handsome was promoted

through television commercials

Fair & Handsome enjoyed the leadership in men’s fairness cream

segment with a market share (by volume) of 64.6% in FY16

Kaajal came in a dibbi so the Company

wondered why it should not provide balm in a

dibbi as well. It launched Mentho Plus in an

easy-to-carry dibbi.

Balms (Zandu Balm and Mentho Plus) continued their market leadership

with a market share (by volume) of 55.2%




In addition to increased penetration in the country… …HMN IN also increased efficiency of existing network

HMN IN invested Rs.~1.5bn in new launches in FY16 Vs Rs.880mn spent in FY15 thereby creating new growth drivers…

Engaged McKinsey to Improve sales force effectiveness

Embarked on high impact projects Migration to HANA, sales force

automation, business analytics, among others

In the general trade segment, measures like range selling, coverage

optimisation, retailer loyalty and capability building programmes ensured

last-mile reach and enhanced sales force excellence.

In the modern trade segment, best-in-class practices were incorporated

and the whole setup was revamped. End-to-end engagement was

reinvigorated across all national retail chains.

Launched brand extensions

catering to new markets......in addition to catering to

existing target segment

HMN IN during FY16 launched new

brands catering to new markets

Emami increased direct retail reach to more than 6.4 lac outlets.

Enhanced indirect retail reach to 4.2 million outlets.

Increased its direct coverage to 13,300 villages with a population less

than 50,000.

The Company aims to enhance its direct distribution network by 0.2mn

outlets over the years to come.



Hindustan Unilever – Pro-active price cuts, high marketing activations and focussed market development

Hindustan Unilever (HUVR) Gross profit, EBITDA and PAT grew at ~2.5x, ~2.6x and ~1.5x delta to revenues in FY16, highest ever in 10 years


1.1x1.0x

0.6x

1.0x

0.7x

1.2x1.4x

1.1x

2.5x

1.5x

0.9x

0.3x0.4x

1.7x

1.4x1.6x 1.5x

2.6x

1.2x

0.9x

1.2x

0.1x

1.6x 1.6x1.4x

0.4x

1.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x



However, unlike FY12, gross profit growth did not percolate to EBITDA


1.3x

0.9x

0.5x 0.4x

2.6x

1.1x 1.1x

1.4x

1.0x1.1x0.9x

1.9x

0.1x

2.5x

1.4x

1.1x

0.3x0.6x



As other expenses increased ~190bps y-o-y


33.2% 33.1% 33.4%34.8% 35.6% 31.8% 32.3% 32.9% 32.5%

34.3%

46.2% 46.8% 46.5%49.3% 49.1%

46.7% 47.8% 49.1% 49.4%52.2%

13.0% 13.7% 13.1% 14.5% 13.5% 14.9% 15.6% 16.2% 16.9% 17.9%


Gross Margin EBITDA Margin



To prevent the misfortunes of 2012, Hindustan Unilever (HUVR) was one of the first to cut prices and affect heightened advertisement spends


Off the gross margin benefits, we decipher that ~35% percolated to EBITDA


16.9%

17.9%

FY15 FY16

EBITDA Margin

99

bps

…and 54% percolated into A&P investments


151bps

37bps 44bps

A&P Royalty Miscellaneous

-21bps

-15bps -15bps

EmployeeCost

Power/fuel Processingcharges

49.41% 49.41%

274bps

151bps

37bps

13bps

99bps

Gross Margin (FY15) Gross Margin (FY16) A&P Royalty Others EBITDA

A&P Investments,

53%

Royalty, 12%

, (0)

EBITDA, 35%




Price cuts were widely prevalent in the

DETERGENTS and SOAPS category where

penetration and competitive intensity is high.

Market activations also were visible.

Deriving expertise from the parent, notable

launches were made in HAIR CARE, COLOR

COSMETICS, COFFEE and PACKAGED FOOD

segments.

Promotions were widely visible in SKIN

CARE, ORAL CARE, DEODORANTS,

NATURAL & AYURVEDA, ICE CREAM and

TEA segments.

5%

4%

6%

7%

6%

5%

2%

-4%

-5%

-6%

-3%

0%

5%

5%

3%

6%

5%

3%

6%

6%

7%

6%

4%

4%

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Price/Mix increase (%) Volume Growth (%)

13 15

2224

28 27

3337

39

46

10%

10%

11%

14%14%

12%

12%

13%12%

14%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

5

10

15

20

25

30

35

40

45

50

FY

06

FY

07

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

Rs.b

n

Advertising and sales promotionA&P (% of sales)

1 1 12

3 34

5

8

9

0.6% 0.6%0.6%

0.9%

1.3%1.3%1.5%

1.9%

2.3%

2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

1

2

3

4

5

6

7

8

9

10

FY

06

FY

07

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

Rs.b

n

Royalty % of sales

HUVR being present across several categories, we believe judicious choices were made between undertaking price cuts, activating promotions and

launching new products on the basis of penetration, competitive intensity and the HUVR’S market leadership.




Category Excerpts from FY16 annual reportPrice Cuts/

Promotions

Product

innovations

Promotions/

Market

development

Detergents

With the fall in crude oil prices, the category witnessed

significant media and competitive intensity during the year. To

remain competitive in the market, the Company took the lead in

passing the benefits of decline in commodity costs to

consumers, while also investing to develop new segments

Soaps

The year saw a significant reduction in raw material prices for

the Soaps category. Your Company acted proactively to take

decisive pricing actions resulting in growing volumes ahead of

the market.

Skin Care

Your Company continued to invest for competitive growth in its

core categories and build the segments of the future. Skin Care

category grew well in a soft market

Oral Care

The year was challenging for Oral Care which saw high

competitive and promotional intensity. Your Company also

continued to invest in building oral health and hygiene

Hair care

Your Company continued to deploy innovations and impactful

campaigns on its core brands while leading market

development in the emerging conditioners segment.




Category Excerpts from FY16 annual reportPrice Cuts/

PromotionsProduct innovations

Promotions/ Market

development

Color Cosmetics

Lakmé continues to drive premiumisation by upgrading

users through long lasting 9 to 5 platform, and bringing

the global make-up trends to India under the Absolute

platform.

Tea

3 Roses has driven premiumization and strengthened its

leadership position in South India. Your Company

continued to grow the Green Tea category during the

year on the back of sustained market development and

achieved value market leadership in the Green Tea

segment

Coffee

The brand continued its pioneering task of consistently

driving penetration of instant coffee in the South through

innovative sampling methods and a compelling

proposition.

Ice Cream

With improved distribution, the brands were made more

accessible for consumers. The Impulse portfolio

continues to grow faster with improved brand equity

across Cornetto and Paddle pop.

Packaged food

The segment delivered a strong turnover growth and

profitability during the year, as your Company continued

to drive growth in both topline and bottomline, while

continuing to invest in building this business.




1.4x 1.4x 1.2x

-1.4x

0.4x

1.8x

1.0x

0.2x

2.3x

1.1x 1.2x 1.3x

-0.8x -1.0x

0.3x

2.2x

0.4x

2.8x



Jyothy Labs enjoying the benefits of lower Liner Alkyl Benzene (LAB) and packaging costs, enjoyed significant gross margin expansion


2.4x3.2x

1.1x1.9x

0.8x1.3x 1.0x 1.2x

1.7x

3.3x

4.4x

1.4x

-2.7x

0.3x

2.2x

1.0x0.3x

4.0x

2.5x

3.7x

1.4x

-1.5x-0.8x

0.3x

2.3x

0.5x

4.7x



Jyothy labs – Operating margins driven by gross margin expansion

Gross margins further directly seeped into EBITDA margins…


…leading to 6 year high operating margins in FY16.


33.6%35.2%

31.6% 31.4% 36.2%35.5% 35.4% 35.7% 37.9%

38.1%

49.1%52.7%

45.1% 46.8%48.9%

45.3% 47.2% 47.5% 48.7%51.5%

15.5% 17.4%13.5% 15.4%

12.7%9.8% 11.8% 11.9% 10.8%

13.4%





Despite price cuts being affected in detergents category, overall gross margins expanded by a healthy ~280bps y-o-y


Off the gross margin benefits, ~68% trickled to EBITDA


Among the cost heads, A&P and conversion charges witnessed uptick


48.7% 48.7%

280bps

30bps

42bps 17bps

70bps

261bps

G.Margin (FY15) G.Margin (FY16) A&P Conversioncharges

Employee cost Others EBITDA Margin(FY16)

30bps

42bps

17bps

A&P Conversioncharges

Employee cost

-32bps

-83bps

-1bps

Power ESOP Legal andprofessional

fees

10.8%

13.4%

FY15 FY16

EBITDA margin (%)

261

bps

A&P, 11%

Conversion charges, 15%

Employee cost, 6%

EBITDA, 68%




Price cuts were prominent in the ‘Henko’

brand as HUVR and P&G undertook severe

price cuts to sustain market share in the

detergents portfolio

Product innovation had improved in FY16,

illustrated by several category extensions

beings launched in FY16

With several new celebrities signed, other

brands witnessed good marketing

investments.

Jyothy Labs did undertake price cut in the detergents portfolio to remain competitive, but A&P investments higher as several celebrities were signed



8.0%

9.0%

10.0%

8.7%

5.6%

9.0%

8.9%

13.7%

10.2%

7.8%

7.2%

3.7%

2.6%

-0.7%

-0.9%

-1.3%

-1.3%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17


0.40.6

0.71.0

1.4

1.82.0

7%

9%

8%

9%

11%

12%12%

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

0

1

1

2

2

3


Rs.b

n


1.72.8

1.52.4

4.9 5.3

15.0

0.0%

0.0%

0.0%0.0%

0.0%0.0%

0.1%

0.0%

0.0%

0.0%

0.0%

0.0%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0






Purchase & Supply Chain Initiatives

• Proactive Planning & better Inventory management resulted in improvement in WC

• Introduction of transport module for service level enhancement and better control

• Achieved savings in RM/PM cost by entering into long term contract

• Initiated better focus on channel wise service level to ensure minimal stock outs

Manufacturing and R&D

• Capacity expansion initiated for key product portfolio

• Appointed National Safety Manager to improve SHEQ across all factories

• Invested in R&D facility to support innovations in packaging and product

Information Technology

• Will be live on SAP S4 HANA by April 1, 2017

• Connect Phase II to capture Third Party Costing

• Distribution Management System initiated for rollout across India at all Super

Distributors Point

Sales Capabilities

• Priority Outlets – ~7000 outlets, contributing to ~25% of sales has grown by ~25%

in FY16. Shopper Led Activity for Off take generation - Increase in Share of shelf in

Priority Outlets

• Driving Efficiencies through better information guided planning - DMS Package

Roll out. Nearly 259 Super stockiest who cater to 4286 Sub Stockiest.

• Direct Rural footprint increased - 42,200 Rural Outlets added in year 2015-16 over

2014-15

Company Innovation A&P campaigns

Ujala

Henko

Price Discounting

Pril

Exo

Maxo

Margo

JYL launches were primarily category extensions

https://www.youtube.com/watch?v=SzKK_HxQUXo


EBITDA though witnessed better growth…


Gross profit margin expansion fairly limited despite lower sugar prices due to higher Mango prices


1.1x

0.6x

1.7x

1.3x1.6x

-0.3x

2.0x

1.3x

FY13 FY14 FY15 FY16


0.9x

1.4x

1.0x 1.0x1.0x0.8x

1.8x

1.3x1.5x

-0.4x

2.1x

1.3x

FY13 FY14 FY15 FY16


Manpasand Beverages – Robust growth supported by cost saving initiatives

…other operating expenses declined ~230bps


22.3% 26.0% 24.0% 21.7%

38.4%41.5% 41.8% 41.5%

16.1% 15.5%17.8%

19.8%

FY13 FY14 FY15 FY16




Investments were made more on branding as Manpasand undertakes the ‘Push to Pull’ journey


Branding expenses were significantly higher compensated by reduced spending in promotions and trade commissions


41.8% 41.5%

-28bps

-267bps

442bps

212bps

115bps 43bps201bps

G.Margin (FY15) G.Margin (FY16) Branding Promotions Commission Excise Duty Other Cost EBITDA Margin(FY16)

267bps

115bps

32bps

Branding Excise Duty Employee cost

-442bps

-212bps

-28bps

Promotions Commission Sales taxexpenses

17.8%

19.8%

FY15 FY16

EBITDA margin (%)

201

bps



Branding and advertisement expenses on the rise…


Employee remuneration on stable levels


Commission expenses lower on a y-o-y basis


…supporting for the fall in promotional expenses



726 94 87

283

0.8%1.1%

3.2%

2.4%

5.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

50

100

150

200

250

300

FY12 FY13 FY14 FY15 FY16

Branding and Advertisement Expenses (Rs.mn) % of sales

26.5 81.4125.0

331.9

267.43.1% 3.4%

4.2%

9.2%

4.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0


Business promotion expenses (Rs.mn) % of sales

4873 81 91

159

5.7%

3.0%2.8% 2.5% 2.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

20

40

60

80

100

120

140

160

180


Employees' Remuneration and Benefits (Rs.mn) % of sales

1 15

67

91

230.2%

0.6%

2.3%

2.5%

0.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

10

20

30

40

50

60

70

80

90

100


Sales commission ,discount and Fees (Rs.mn) % of sales




During the year, we also developed another healthy product called 'COCO

SIP' -100% Natural Packaged Tender Coconut Water, targeting the huge

untapped coconut drink segment as most of the coconut drink market in

India is catered to by the unorganised players and non- branded products.

There is a huge opportunity for branded packaged coconut drinks like

'COCO SIP' in these urban markets where the young and health conscious

consumers are more geared towards natural beverages. Low in calories,

cholesterol free, more potassium than four bananas, and super hydrating -

these are just a few of the many benefits ascribed to coconut water. It isalso called as 'The Mother Nature's sports drink'

New product

launches

Manpasand has over 200,000 retailers, 2,000 distributors, and more than

200 super stockists. The company plans to expand distribution network in

the near to medium term with significant focus towards South India. The

other new initiative we embarked on was to tie up with organised retail

players as well as various food and beverage outlets such as Metro Cash

& Carry, Aditya Birla Retail, Havmor Ice Cream & Cafe Coffee Day, to

name a few. Manpasand also became the only beverage company to tie

up with global ice cream major Baskin Robbins in India. In the coming

months, the Company is going to forge more such alliances to increase itsurban market

Distribution

initiatives

we started with setting up of a new manufacturing unit near Ambala,

Haryana during the year and the same was under progress as of 31st

March, 2016. Modernisation of Vadodara and Varanasi facilities were also

completed during the year. We are now looking at setting up more

manufacturing facilities; announcement for which will be made soon.

Manufacturing

initiatives


Marico enjoyed significant margin benefits as Copra prices declined sharply in FY16


1.0x 0.8x2.3x

0.7x 0.8x1.9x

-2.1x

0.6x2.5x

1.1x 0.9x2.1x

0.6x 0.6x1.9x

9.9x

0.7x

3.2x1.8x 1.1x

2.1x

-0.1x

1.1x 1.1x

15.4x

0.8x

3.8x



Marico – Price cuts more prominent in a war with unorganised segment

Operating margins expanded in line with gross margin expansion…


…despite other operating expenses growth rising significantly


34.7% 34.4% 32.3%37.0% 35.1% 34.3%

38.3% 32.9%28.6%

32.7%

47.4% 47.3%45.1%

51.1%48.4% 46.4%

51.9%48.8%

43.8%

50.1%

12.8% 12.9% 12.7% 14.1% 13.3% 12.2% 13.6%16.0% 15.2%

17.3%



0.9x 1.0x 0.7x 1.0x

-4.7x

1.1x 1.3x0.9x

-0.2x

1.3x0.6x

-7.3x

1.3x 1.5x





Despite making significant investments across operational cost heads, EBITDA margins expanded by a robust ~215bps, highest in the industry


EBITDA took away ~48% of the gross margin benefits…


…despite significant increase in several cost heads


45.6% 45.6%

448bps 148bps 26bps 32bps 27bps 215bps

G.Margin (FY15) G.Margin (FY16) A&P Employee cost Freight Others EBITDA Margin(FY16)

148bps

26bps 32bps

A&P Employeecost

Freight

-36bps-30bps

-3bps

ContractManufacturing

Rates andtaxes

Conveyance

15.2%

17.3%

FY15 FY16

EBITDA margin (%)

215

bps

A&P, 33.1%

Employee cost, 5.9%

Freight, 7.1%

Others, 5.9%

EBITDA, 48.0%




Price cuts especially in the Parachute rigid

pack variant was prominent as Copra prices

began dropping, we understand that this pro-

active price cut has enabled MRCO sustain

market share in Coconut Hair Oil segment

Innovation in other categories continued this

year as MRCO ventured into Ayurvedic and

Sarso Tel during the year taking on the mass

and premium end of the market.

A&P were on the higher side this year as

several new promotions behind Saffola and

Value Added hair Oil segments were rolled

out in addition to investments in youth

brands

Marico undertook several price cuts especially in the domestic market as competitive intensity with unorganised intensifies in Copra downturn



4.0%

3.0%

6.0%

6.5%

8.0%

5.0%

3.0%

6.0%

5.5%

10.5%

8.4%

8.0%

-2.6%

5.9%

10.5%

21.4%

26.3%

21.4%

13.9%

5.5%

-1.1%

-3.9%

-4.5%

-9.0%

-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Volume growth (%) Price/mix Increase

2

34

66

6

8

9%

11%11%

13%

12%

11%

13%

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

11.5%

12.5%

13.5%

0

1

2

3

4

5

6

7

8

9


Rs.b

n


76

252

72 68

182197

275

0.3%

0.8%

0.2% 0.1%0.4% 0.3% 0.4%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

0.0

50.0

100.0

150.0

200.0

250.0

300.0





New products introduced in FY16…

Source: Company Annual Reports & Spark Capital research

…accompanied by successful campaigns and continued expansion

Source: Company Annual Reports & Spark Capital research

Saffola Masala Oats

launched two new

exciting flavors viz.

“Chinese and Italian”

during January 2016

Parachute Gold

Ayurvedic Hair Oil

launched

Bangladesh business

flagship brand ‘Beliphool’

was launched in new PET

pack

Nihar Naturals Sarson

Kesh Tel, a value

added mustard oil

targeting loose

mustard pool was

launched across

markets in North and

parts of East India

Parachute Gold range

of hair oils and creams

in Middle East

launched in FY16

Saffola Active: In 2015, the Brand devised the strategy to leverage ‘portfolio

play’ in Saffola Oils, in order to drive relevance amongst different consumer sets.

A robust brand, media and distribution strategy was implemented for Saffola

Active. It became the face of the Saffola Oil portfolio and successfully drove

relevance amongst the health conscious consumers, through its proposition of -

‘Not just less oil, but the right oil’, which was substantiated through the Claim of

‘Helps reduce Absorption of Fat in Food’. Saffola Active has jump-shifted the

household growth for Saffola by bringing in new consumers to the brand who are

looking for proactive Heart Care. With the implementation of this strategy, the

Saffola oils franchise saw a growth turnaround from 3% in H1 to 13% in H2.

Current Network: Presently 4.6 Million retail outlets are serviced by Marico’s

nationwide distribution network covering more than 20,000 towns reaching over

7.5 Crore households every month.

Parachute Advansed Body Lotion Bangladesh: Parachute Advansed Body

Lotion (PABL) capitalised on the existing brand equity of the mother brand, to

gain entry into the right outlets before the winter season, and ensured visibility

throughout season with displays and point-of-sales materials. Pop-up ads were

aired in most popular TV shows, such as cooking shows and cartoons. It was also

present through Press Ads in leading national dailies to create news of its entry in

market and to drive awareness. The brand ended the year with overachieved

business results, both in Volume and Net Revenue.

X Men for Boss ‘100 Million Idea’ campaign – Vietnam: Capturing the big

insight of Vietnamese young men who want a fast track to success by starting

their business, X-Men for Boss implemented the ‘Empower the future Boss’

activation in June-July 2015. The contestants had to go through 3 rounds: submit

their business ideas, join the training from experts. This activation really

became the hot topic of the town among the youth and also gained good

impact on business and total Boss range

grew 75%.


Zydus Wellness – A&P increased from gross margin cushion as brand equity takes prominence

Zydus Wellness enjoyed significant gross profit growth this quarter on account of decline in palm oil prices…


…however very little percolated to EBITDA margins…


…as their operational costs have risen to an all time high of ~50.7%


1.3x 0.7x

-5.8x

1.5x 1.5x 1.3x2.2x2.0x

1.0x

7.5x

1.7x

-1.8x

0.4x 0.1x

2.2x1.1x

12.0x

2.9x

-0.2x

1.0x 0.6x



42.8% 39.2% 40.9%43.1% 47.2% 48.8% 50.7%

67.8%64.3% 63.8%

68.0% 69.3% 70.3% 71.9%

25.0% 25.0% 22.9% 24.9%22.1% 21.5% 21.2%



1.5x 1.3x

13.0x

1.1x

-1.2x

0.3x 0.1x1.7x 1.4x

-20.7x

1.9x

-0.1x

0.7x 0.3x


EBITDA growth Delta to gross profit growth



On Further analysis, we decipher that significant proportion of gross margin benefit was spent across A&P and salaries


Post the distribution restructuring, we understand that marketing exp..


…have been employed in A&P as ZYWL undertakes to build brands.


241bps

109bps

32bps

A&P Employee cost RepresentativeAllowances

-183bp

s

-48bps -23bps

Othermarketing

Power & fuel Bad debtswritten off

21.5%

21.2%

FY15 FY16

-33

bps

70.3% 70.3%

158bps

241bps

109bps

183bps

24bps -33bps

66.0%

67.0%

68.0%

69.0%

70.0%

71.0%

72.0%

73.0%

G.Margin (FY15) G.Margin (FY16) A&P Employee cost Other marketing Other Costsavings

EBITDA Margin(FY16)

A&P, 100%



3.6

11.210.6

0.1%

0.3%0.2%

0.0%

0.1%

0.1%

0.2%

0.2%

0.3%

0.3%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY14 FY15 FY16

R&D (Rs.mn) % of sales

40.6

68.8 72.084.0 87.0 90.1 96.5

1.5%

2.0%2.1% 2.2% 2.2% 2.1%

2.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0.0

20.0

40.0

60.0

80.0

100.0

120.0


Commission (Rs.mn) growth (%)

Employee remuneration on stable levels


189.2 181.2 167.3 157.7 180.5 197.6 122.7

7.1%

5.4%5.0%

4.1%4.5% 4.7%

2.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

50

100

150

200

250


Other Marketing Expenses (Rs.mn) growth (%)

Branding and advertisement expenses on the rise…


651 592 597776 823 900

1,020

24.3%

17.6% 17.7%

20.0% 20.4%21.3%

23.7%

5.5%

7.5%

9.5%

11.5%

13.5%

15.5%

17.5%

19.5%

21.5%

23.5%

25.5%

0

200

400

600

800

1,000

1,200


A&P (Rs.mn) % of sales

Commission expenses lower on a y-o-y basis


…supporting for the fall in promotional expenses





Sugar Free

New communication for Sugar

Free Gold featuring Parineeti

Chopra focusing on excess

sugar consumption.

Another new area of focus in

2015-16 was in growing the

culinary business for Sugar

Free.

Everyuth

The brand has restaged its Peel

Off packs with new packaging

and benefits. The new

communication focused on

special occasions has helped

turnaround the performance of

Everyuth and hence overall Peel

Off segment.

Focus in 2015-16 was in

establishing the new “Advanced

Walnut Scrub” variant with

television being the primary

medium of building awareness

and generating trial.

Everyuth

Everyuth re-launched its Face

Wash range with fresh, new

and contemporary looking

packaging in March ‘16.

This re-launch will be

supported by communication

across mediums.

Nutralite

Focus was also on metro cities,

which are significant markets

for the category, through

outdoor and press campaigns

supported by distribution

drives.

Distribution Strategy

The Company saw stabilization of

its revamped distribution system

in the later part of the year gone

by. The attrition of

representatives in the field has

also stabilized.

The company rolled out

distribution expansion program

named “EnReach” during the

year, which has resulted into a

significant growth in the direct

coverage. Through this program,

channel wise thrust was provided

to strengthen the brand presence

across general trade, modern

trade and Hotel / Restaurants /

Caterers (HORECA) segments.

The company has launched

program named “Passion” to

enhance the capability of the field

force for superior in-market

execution.

Excerpts from FY16 annual report

Source: Spark Capital Research; FY16 annual report

https://www.youtube.com/watch?v=XBQeMp5-LoY

https://www.youtube.com/watch?v=pYTnujbxIAs

https://www.youtube.com/watch?v=Y5xv7kACfMY


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deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit

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This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.

Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective

directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents

or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or

damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of

or reliance on this report.

Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year

horizon

ADDStock expected to provide positive returns of >5% – <15% over a 1-year

horizonSELL Stock expected to fall >10% over a 1-year horizon


Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Cont’d

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange

Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities

discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne

by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you

if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available

to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material

concerning investment to you under relevant legislation and regulations;

Disclosure of interest statement

ARVND; BJCOR; KEKC; PAG; VIP; AKZO; APNT; BRGR; KNPL;

PIDI; BRIT; DABUR; DFMF; HUVR; ITFL; LOG; HMN; JYL;

MANB; MRCO; KAYA; ZYWL; BATA; TTAN; PCJL; ABFRL;

RLXF; TBZL; TJL; WONH

ITC SII

Analyst financial interest in the company No No No

Group/directors ownership of the subject company covered No Yes No

Investment banking relationship with the company covered No No Yes

Spark Capital’s ownership/any other financial interest in the company covered No No No

Associates of Spark Capital’s ownership more than 1% in the company covered No No No

Any other material conflict of interest at the time of publishing the research report No No No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company

covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

NoNo No

Whether Research Analyst has served as an officer, director or employee of the subject company

coveredNo No No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the

Subject Company;No No No

not marked to market - spark capitalmailers.sparkcapital.in/uploads/consumer/1qfy17/not...not marked...

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