Consumer Staples & Discretionary - ICICI Securities

Please refer to important disclosures at the end of this report

Equity Research March 25, 2020

BSE Sensex: 28536

ICICI Securities Limited is the author and distributor of this report

Sector update

Consumer Staples & Discretionary

Bolt-on acquisitions – Balance Sheet to drive value creation in 2020-2030

Research Analysts:

Manoj Menon [email protected]

+91 22 6637 7209

Vismaya Agarwal, CFA vismaya.agarwal @icicisecurities.com

+91 22 2277 7632

Karan Bhuwania [email protected]

+91 22 6637 7351

INDIA

Value creation in India consumer staples over the past 20 years has largely been

driven by strong P&L performance and rarely by the balance sheet. We believe

that this construct is likely to see substantial changes in 2020–2030 as staples

companies start utilising their strong balance sheets to grow through bolt-on

acquisitions. The current operating environment enables new players to

demonstrate the proof of concept, thereby presenting a large acquirer with an

opportunity to accelerate growth through its superior distribution reach and

higher resources availability. HUL (rated BUY) is already implementing this

template of bolt-ons. We chronicle Unilever and P&G global’s bolt-on growth story

over 50 years.

The era of bolt-ons are here: We believe that India consumer is likely to see

substantial changes in growth construct over the next decade. We expect large

players to use their balance sheet strengths (no debt, negative or low working

capital, etc.) to fuel growth – case in point being HUL’s acquisitions of Indulekha,

Aditya Milk, GSK Consumer’s brands and VWash.

New brands have demonstrated proof of concept: The operating environment for

new brands has become easier driven by (1) availability of contract manufacturing,

(2) digital communication enabling micro-targeting the consumers, (3) rising share of

modern retail and ecommerce and (4) increased accessibility to venture capital

funding. The new template, in our opinion, will revolve around acquiring these small

brands that have shown the proof of concept and expanding them through acquirer’s

superior distribution reach and higher resources availability.

Global FMCG’s bolt-on acquisitions: Globally, acquisitions have been an integral

part of growth strategy in FMCG. We note (figure 3) sizable acquisitions by Unilever

in the early 1900s and numerous later (1970–2000). HUL had its decade of

acquisitions (1990-1999) adding brands like Kissan, Lakmé, Kwality etc. Even P&G

had a similar journey (figure 4), acquiring 17 companies over 1984–2009. The

strategy of bolt-on acquisitions continues even today – Unilever has acquired 29

companies since 2015 with a total investment of ~EUR10bn.

Indian FMCG’ value creation, historically led by P&L, could change now:

Barring a few exceptions where value creation was led by strong balance sheet

metric improvement (Emami, GSK Consumer), Indian FMCG’s value creation over

the past 15 years (+20% market capitalisation CAGR over Mar-05 – Mar-20) has

been primarily driven by consistently strong earnings growth (+14% CAGR over the

same period). Godrej Consumer Products (GCPL) is a case in point – which

witnessed 24% market capitalisation CAGR over the past 15 years, driven by 21%

earnings CAGR despite some deterioration in balance sheet ratios (RoCE and

working capital). We believe that given the current economic slowdown, the

construct is likely to shift towards balance sheet led value creation.

Consumer Staples & Discretionary, March 25, 2020 ICICI Securities

2

The era of bolt-ons are here

We believe that the Indian consumption space is likely to see substantial changes in

growth construct over the next decade. We expect large players to utilise their balance

sheet strengths (no debt, negative or low working capital, etc.) to fuel growth. The new

template will revolve around acquiring small brands that have demonstrated the proof

of concept and expanding them through the acquirer’s superior distribution reach and

higher resources availability.

What has changed?

We note that in recent years, there are numerous instances of Indian entrepreneurs

identifying consumer needs, building the right product / service offering and reaching a

meaningful scale. These brands have succeeded in offering a differentiated product

proposition and have gained a share of the consumer’s shopping basket which has

traditionally been dominated by the larger players.

Apart from the right product, we believe that the industry landscape is changing

towards lower barriers to entry driven by:

Availability of contract manufacturing

Digital communication enabling micro-targeting the consumers and thereby

reducing the need for ATL (above-the-line) spend

Rising share of modern retail and ecommerce (at 10% of total FMCG market)

enabling new entrants a meaningful reach even without entering the general trade

channel

Increased accessibility to venture capital funding

Bolt-on acquisitions

We believe that the large staples players will incrementally focus on bolt-on

acquisitions of brands with a differentiated offering, providing them with an entry into

either a new category or a new region.

We are already witnessing the start of this phenomenon, with HUL’s recent

acquisitions of Adityaa Milk Ice creams, Indulekha herbal hair oil and now VWash.

Adityaa Milk provides HUL with learnings about the low cost operating models for ice

creams, access to key innovations that can be potentially transferred to the Kwality

Wall’s portfolio, as well as has a good presence in certain parts of southern India.

Indulekha on the other hand helped the company strengthen its naturals portfolio and

has already grown 4x in its three years since acquisition (~Rs4bn revenues now).

VWash’s acquisition is an opportunity for HUL to gain market leadership in a

completely new category with scope for market development.

There is also the acquisition of GSK Consumer Healthcare that marks HUL’s entry into

the healthy food drinks category. HUL is also in the process of acquiring Dinshaw’s

Dairy business, as per media articles (link).

https://www.vccircle.com/nurturing-restaurateurs-better-than-buying-a-chain-social-caf-owner-riyaaz-amlani


3

Similarly, for ITC, the acquisition of the Nimyle brand in 2018 provided it an entry into

the floor cleaner category that is currently dominated by Reckitt Benkiser’s Lizol.

Male grooming has been a popular category growing in importance with rising

consumer demand. The category saw various acquisitions / investments – (1) Marico

acquired 43% stake in Beardo, (2) Emami acquired 30% stake in The Man Company,

(3) Wipro Consumer Care acquired Ustraa and (4) Colgate Palmolive (US) acquired

stake in Bombay Shaving Company. These acquisitions provide the incumbents with

significant learnings in the digital / ecommerce space, as well as give them entry into

the much-coveted male grooming space. This trend is visible even globally, where

Unilever Plc had acquired the Dollar Shave Club in late 2016.

Figure 1: Recent acquisitions

Brand Company Investors Announcement date

Food & Beverages

Adityaa Milk Ice Creams Vijaykant Dairy & Food Products HUL Aug-18 GSK Consumer Healthcare GlaxoSmithKline Consumer Healthcare HUL Dec-18

Health & Personal Care

Nimyle ITC Jun-18 VWash Glenmark Pharma HUL Mar-20 Indulekha Mosons Group HUL Dec-15 Bombay Shaving Company Visage Lines Personal Care Colgate Global Aug-18 Beardo Zed Lifestyle Marico (45% stake) Mar-17 Ustra Happily Unmarried Wipro Consumer Nov-17 The Man Company Helios Lifestyle Emami (30% stake) Dec-17

Source: Company data, I-Sec research

New brands have shown proof of concept – potential targets

New brands are differentiating themselves to cater to the increasing consumer

demand towards naturals and wellness products. Brands like Paper Boat (from Hector

Beverages) and Raw Pressery (from Rakyan Beverages) have benefitted from the

naturals offering, while Too Yum (from Guiltfree Industries) brought the healthier

proposition to snacking while claiming to maintain the taste.

We also note similar health / naturals trend in Home and Personal Care category as

well with fairly strong success witnessed by Forest Essentials, WOW, Mcaffeine etc.

Figure 2: List of new players having shown proof of concept

Brand Company Investors Revenue (Rs mn)

Valuation/ Funding (Rs mn)

Food & Beverages

Epigamia Drums Food International Danone is invested 200 1,800

Bira91 B9 Beverages Sequoia and Sofina 5,700 12,000

Teabox Teaxpress Pvt. Ltd RB Investments 400 500

Raw Pressery Rakyan Beverages Sequoia Capital, Saama Capital and DSG Consumer Partners 170 700

Paper Boat Hector Beverages A91 Partners 630 2,100

Too Yum Guiltfree Industries (CESC)

1,800 Mojo Bar Pure Snacks Pvt. Ltd.

10

iD Foods ID Fresh Food (India) Pvt. Ltd. Premji Invest 4,000 6,000

Veeba Foods Veeba Food Services Pvt. Ltd. Saama Capital and Verlinvest 1,000 6,500

Yoga Bars Sproutlife Foods Pvt. Ltd.

400 120

Health & Personal

Care

Forest essential Forest Essentials India Puig 1,800 Fit and glow -

WoW Brand Fit & Glow Health Care Pvt. Ltd. 1,420

Mcaffeine

Clutch of angel investors from Mumbai 70 30

Distribution

Peerless

Unilever Udaan Hiveloop Technology Pvt. Ltd. ST Global, Lightspeed 700 70,000



4

Global FMCG’s bolt-on acquisitions history

Globally, acquisitions have been a key driver for large FMCG companies to create a

diverse portfolio of brands. Unilever’s acquisitions started in early 1900s with Pears

(1917) and Wall’s (1922). The company later entered into a spree of acquisitions in

late 1900s, scripting 10 large acquisitions over 1971 – 2000. Even Hindustan Unilever

(HUL) has had a decade of acquisitions earlier (1990-1999) adding brands like Kissan,

Lakmé, Kwality etc. to its portfolio (see figure 3).

Procter & Gamble (P&G) also went through a similar strategy, acquiring 17 sizable

companies over 1984 – 2009 (see figure 4).

The strategy of bolt-on acquisitions continues for some global FMCG players even

today. We note that Unilever has acquired 29 companies since 2015 with a total

investment of ~EUR10bn over the period.

Figure 3: Unilever and HUL – Bolt-on acquisition history

Year Acquisition of brands by Unilever / HUL

1917 Pears

1922 Wall's

1943 Batchelors

1971 Lipton

1973 Frigo ice cream

1978 National Starch

1984 PG Tips (Brooke Bond)

1986 Chesebrough Pond's

1989 Cosmetics with Calvin Klein and Elizabeth Arden

1992 Kothari General Foods (Instant Coffee) acquired by Brooke Bond

1993 Breyers ice cream

1993 Kissan from UB Group

1993 Dollops Ice Cream from Cadbury India

1994 Kimberly-Clark (US) getting it access to Huggies and Kotex

1995 Milkfood (Kwality)

1997 Kibon (Brazil)

1998 Lakme

2000 Bestfoods

2000 Knorr

2007 Buavita vitality drinks (Indonesia) and Inmarko ice cream (Russia)

2010 Alberto Culver (TRESemme)

Source: Company data, I-Sec research *Acquisitions by HUL highlighted in blue


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Figure 4: P&G – Bolt-on acquisition history

Year Acquisition of brands by P&G

1963 Folger's Coffee

1984 Gillette acquires Oral B

1985 Vicks, Pantene, Oil of Olay

1989 Noxell, Cover Girl, Navy fragrance

1990 Old Spice

1991 Max Factor

1994 Giorgio Beverly Hills

1996 Baby Fresh (US baby wipes brand)

1996 Gillette acquires Duracell

1997 Tambrands

2001 Clairol (hair colour)

2001 Joy Perfume by Jean Patou, Lacoste

2003 Wella

2005 Gillette

2005 Dolce & Gabbana

2008 Nioxin

2009 Zirh

2009 Art of Shaving

2018 Merck's consumer health business



6

Indian consumer staples value creation has historically been led by P&L

Indian consumer staples companies had witnessed significant value creation over the

past 15 years, with 20% market capitalisation CAGR over Mar-05 – Mar-20.

This performance has been primarily driven by consistently strong 14% 15-year CAGR

earnings expansion for the sector over the same period.

Figure 5: Consumer staples: earnings CAGR (FY04-19)

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Source: Company data, I-Sec research ^10-year CAGR for Bajaj Consumer and Jyothy Labs

Figure 6: Consumer staples sector P/E expansion

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Figure 7: Consumer staples – Gross margin Figure 8: Consumer staples – EBITDA margin

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We note that barring a few cases, this valuation expansion has been driven by strong

Profit & Loss performance and not by the Balance Sheet improvement.

Godrej Consumer Products (GCPL) is a case in point. The company witnessed 24%

market capitalisation CAGR over Mar-05 – Mar-20, led by 21% earnings CAGR and

despite significant deterioration in balance sheet ratios (RoCE and working capital).

Figure 9: GCPL – RoCE Figure 10: GCPL – Working capital

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Exceptions to the above trend have been Emami and GSK Consumer Healthcare

(GSK CH). Emami’s 20% market capitalisation CAGR over Mar-05 – Mar-20 was

driven by 22% earnings CAGR over the same period but was also supported by RoCE

expansion and significant improvement in working capital (see figures 11-12).

Similarly, balance sheet improvement in GSK CH drove value creation. The

company’s working capital improved by c.40 days and RoCE expanded by 12ppt over

FY04-19 as the company implemented new policies under the leadership of Zubair

Ahmed (CEO) and Ramakrishnan Subramanian (CFO). This resulted in market

capitalisation CAGR of 23% over the same period (Mar-05 – Mar-20) ahead of

earnings CAGR of 20%.

Figure 11: Emami – RoCE Figure 12: Emami – Working capital

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Figure 13: GSK Consumer – RoCE Figure 14: GSK Consumer – Working capital

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Figure 15: Valuation summary

Company CMP (Rs)

TP (Rs)

Upside (%) Rating

PE (x) EV/EBITDA (x) ADTV Market Cap

FY21E FY22E FY21E FY22E (US$ mn) (Rs bn) (US$ bn)

Staples

Bajaj Consumer 120 200 66 BUY 8 7 6 6 0.7 19 0.3 Britannia 2,451 2,600 6 REDUCE 37 33 30 27 17.7 603 8.1 Colgate 1,122 1,400 25 BUY 34 30 22 20 10.7 308 4.2 Dabur 405 520 28 BUY 37 33 35 30 14.3 732 9.9 Emami 155 250 61 BUY 12 11 9 8 2.4 86 1.2 GCPL 471 700 49 BUY 27 24 21 19 12.9 535 7.2 HUL 2,088 2,400 15 BUY 51 44 37 32 50.5 4,175 56.4 ITC 147 220 49 BUY 11 11 8 8 50.5 1,852 25.0 Jyothy Labs 94 150 60 BUY 14 12 11 10 0.8 36 0.5 Marico 248 320 29 BUY 28 26 19 17 11.6 321 4.3 Nestle 14,444 15,000 4 HOLD 63 52 43 37 20.4 1,305 17.6 Discretionary Avenue Supermarts 1,899 2,100 11 HOLD 62 48 41 32 35.4 1,249 16.9 Bata 1,153 1,800 56 BUY 31 27 23 20 14.0 154 2.1 Jubilant Foodworks 1,347 2,000 48 BUY 39 29 16 13 25.2 165 2.2 Page Industries 16,610 27,000 63 BUY 37 30 26 21 11.6 207 2.8 Sheela Foam 1,179 1,700 44 ADD 23 19 14 12 0.2 69 0.9 Titan 881 1,300 48 BUY 40 33 26 21 39.2 826 11.2 United Spirits 466 680 46 BUY 32 26 21 17 21.7 410 5.5 Westlife Development 311 500 61 BUY 48 37 21 17 2.1 48 0.6 Paints Akzo Nobel 1,980 3,100 57 BUY 30 26 20 17 0.9 98 1.3 Asian Paints 1,593 1,800 13 HOLD 45 38 31 26 39.2 1,555 21.0 Berger Paints 450 560 24 HOLD 50 42 32 27 10.3 423 5.7 Kansai Nerolac 328 565 72 ADD 26 22 18 15 2.0 211 2.8


EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY20-22E) (%)

Company FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Revenues EBITDA PAT

Staples Bajaj Consumer 1.6 1.5 2 2 8 7 30 27 32 29 6 3 5 Britannia 4.7 4.2 10 8 33 29 26 25 21 20 10 9 12 Colgate 6.0 5.5 19 20 27 25 62 72 73 85 9 10 11 Dabur 7.2 6.4 10 8 33 30 28 27 21 20 11 14 13 Emami 2.4 2.2 3 3 13 11 26 27 31 34 8 8 6 GCPL 4.6 4.2 6 5 24 22 22 23 17 18 8 10 12 HUL 9.9 8.8 13 13 46 40 43 30 36 26 18 21 24 ITC 3.2 2.9 3 3 10 10 28 32 31 35 9 8 5 Jyothy Labs 1.8 1.6 2 2 12 10 16 17 16 17 9 9 17 Marico 3.9 3.5 9 9 25 23 33 35 31 34 10 10 9 Nestle 9.9 8.6 61 50 55 46 105 106 40 41 13 14 17

Discretionary Avenue Supermarts 3.8 3.0 9 8 51 40 16 17 20 23 26 29 33

Bata 4.0 3.6 6 6 27 24 22 22 25 25 13 15 17 Jubilant Foodworks 3.7 3.2 9 8 21 17 26 29 38 40 16 17 27 Page Industries 5.3 4.5 18 16 33 27 52 55 41 43 15 19 21 Sheela Foam 1.9 1.7 5 4 19 16 24 22 28 26 13 18 19 Titan 3.0 2.6 10 8 34 28 26 27 33 35 16 19 23 United Spirits 3.4 3.1 7 5 26 21 23 23 23 25 9 14 21 Westlife Development 2.6 2.2 6 5 24 20 14 16 15 18 19 26 41 Paints

Akzo Nobel 2.9 2.5 7 6 23 20 23 23 23 23 11 14 13 Asian Paints 6.1 5.3 12 10 38 33 29 28 26 26 14 17 18 Berger Paints 5.7 4.9 12 10 41 35 27 26 23 23 15 20 21 Kansai Nerolac 2.9 2.5 4 4 22 19 17 18 16 18 8 13 14



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Price charts

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8

Ma

r-19

Se

p-1

9

Ma

r-20

(Rs)

200

400

600

800

1,000

Ma

r-17

Se

p-1

7

Ma

r-18

Se

p-1

8

Ma

r-19

Se

p-1

9

Mar-

20

(Rs)

100

200

300

400

500

600

Mar-

17

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Ma

r-20

(Rs)

Source: Bloomberg


11

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