Godrej Consumer Products Ltd (GCPL)

Godrej Consumer Products Ltd (GCPL) BUY CMP: Rs.280.00 Date: 17 th November, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) 15.21 20.65 19.78 NPM (%) 12.40 15.03 14.21 ROE (%) 30.56 37.20 30.53 ROCE (%) 30.68 41.98 35.54 P/BV(x) 6.00 7.97 5.54 P/E(x) 19.70 21.43 18.14 EV/EBDITA(x) 2.38 19.49 20.35 Debt-Equity(x) 0.11 0.14 0.10 Key Data: Sector FMCG Face Value Rs.1.0 52 wk. High/Low Rs.304.00/110.00 Volume (2 wk. Avg.) 34300 BSE Code 532424 Target Price: Rs.330.00 Market Cap.:Rs.71960.00mn. SYNOPSIS Godrej Consumer Products is a major player in the Indian FMCG market with leadership in personal, hair, household and fabric care segments. With a strong growth in the domestic business, an enhanced product portfolio after the acquisition of the stake in GSL and the possibility of more acquisitions in the future. The company s decision to hold back price increases on its soaps portfolio in recent months may now stand it in good stead amid the slowdown. The company s focus on mass-market brands and strong rural presence, may record stronger growth. GCPL has a low tax base with 65% of its sales coming from excise free and tax free zones. V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com The top line and bottom-line of the company are expected to grow at a CAGR of 36.31% and 35.57% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

Table of Content Content Page No. 1. Investment Highlights 03 2. Company Profile 09 3. Peer Group Comparison 18 4. Key Concerns 18 5. Financials 19 6. Charts & Graph 22 7. Outlook and Conclusion 24 8. Industry Overview 25 2

Investment Highlights Results Update (Q2 FY10) For the quarter ended on September 30, 2009 (Consolidated) the company has registered a 65.61% (YOY) growth in the net sales and stood at Rs.5765.30 mn from Rs.3481.20 mn of the corresponding period of the previous year. Operating profits witnessed a rise of 194.43% at Rs.1258.10 million as against Rs.427.30 million clocked in corresponding quarter last year. The operating profit margins have expanded in Q2FY10 to 21.82% as against 12.27% for the previous quarter last year. During the Q2FY10 net profit stood at Rs.930.00 million as against Rs.347.30 million in Q2FY09. Similarly, net profit margins climbed at 16.13% in the quarter considered as against 9.98% in Q2FY09. EPS for Q2FY10 stood at Rs.3.61 up by 169.40% from the same period last year. Quarterly Results Consolidated(Rs in mn) As at Q2FY09 Q2FY10 %Change Net Sales 3481.20 5765.30 65.61 Net Profit 347.30 930.00 167.78 Basic EPS 1.34 3.61 169.40 3

Margins (%): Operating Profit Margins (OPM %) Net Profit Margins (NPM %) 4

HI* & Others 24% By Products 1% Soaps 41% Liq. Dets 1% Toileteries 19% Hair Colour 14% Segment wise performance a) Soaps Toilet soap sales grew 28% to Rs2.3b, led by robust volume growth of 16%. GCPL s growth in toilet soaps exceeded the industry growth rate (~12%), resulting in market share gains of 130bp (10.9% in September from 9.6% in March). This is the highest share GCPL has ever had in the toilet soap market. Godrej No1 is a Rs5b brand and the third largest selling soap in India with volume and value leadership in Punjab, Haryana and Himachal Pradesh. During the quarter, GCPL extended its leadership in one of the biggest markets, Uttar Pradesh. It leads by volume in Delhi and Gujarat. Our channel check indicates continued traction in the flagship brand Godrej No1 in parts of North and West India despite an increase in trade margins by market leader, Hindustan Unilever. We believe an enhanced distribution network and the value-for-money proposition will enable Godrej No1 to keep growing faster than its peers. During the quarter, GCPL launched Cinthol Regular in a low-priced SKU (Rs6/unit). Hair Colorants Hair color reported sales growth of 47% (~35% volume led), outpacing the industry growth of 19%. GCPL s market share increased 100bp to 34.7% in September. 5

The robust hair color growth is due to the base effect (6% de-growth in 2QFY09) and rising sales of Nupur in rural India (led by expanded distribution). The brand accounts for 12% of GCPL s hair color category sales. We believe the division will sustain ~20% volume growth subsequently. GCPL is well placed to capitalize on increased demand for hair color due to its presence across price points ranging from Nupur Mehendi to hair color powders and creambased products. International business GCPL s international business grew 21.7% to Rs1.1b with a sharp improvement in profitability (adjusted PAT up 187% YoY at Rs110m). The UK business (Keyline) grew 13% in rupee terms (19% in GBP terms), led by an encouraging response to the Cuticura Hand Hygeine range due to swine flu fears. Adjusted PAT grew 227% to Rs81m. Rapidol sales were higher by 38% at Rs166m (up 25% in ZAR terms); PAT grew 66% to Rs25m. Kinky sales grew 45% YoY to Rs185m and adjusted PAT was Rs28m. Godrej Netherlands B.V. (Consolidated) Comprises performance of Godrej Netherlands BV,Godrej Consumer Products (UK) Limited, Keyline Brands Limited & Inecto Manufacturing Limited) Revenues for the quarter improved by 13% from Rs.633mn (GBP 7.7 million) to Rs.713 mn (GBP 9.1 million).pat increased 227% to Rs.81mn. On a GBP basis, PAT for the quarter stood at GBP 1.1 million compared to GBP 0.4 million, in Q2FY 2008-09 with growth of 175% Encouraging performance across all brands aided by the Cuticura Hand Hygiene range which has received strong demand on the back of swine flu fears. Rapidol Pty Ltd. Sales for the quarter were 38% higher at Rs.166mn compared to Rs.120mn (ZAR 26.6 million as compared to ZAR 21.2 million) in the same quarter of the previous year. PAT for the quarter was Rs.25mn compared to Rs.15mn (ZAR 3.9 million compared to ZAR 2.5 million) in Q2 FY2008-09. The Inecto Powder Hair Colors (PHC) range has been well accepted. Renew Hair Colors marketed and distributed by Rapidol in South Africa for GCPL continues to do well. Kinky Group (Proprietary) Ltd. (Kinky) Sales for the quarter were 45% higher at Rs.185mn compared to Rs.128mn (ZAR 29.5 million as compared to ZAR 22.5 million) in the same quarter of the previous year. Kinky sells a variety of products which include hair braids, hair pieces, wigs and wefted pieces along with hair accessories like styling gels, hair sprays and oil free shampoo. 6

Godrej Global Mideast FZE (GGME) Sales for the quarter were AED 3.2 million and on a rupee basis it was Rs.43 mn compared to Rs.29mn. Godrej Sara Lee (GSL) 2QFY10 was the first quarter of inclusion of Godrej Sara Lee financials in GCPL. Godrej Sara Lee (GSL) reported 2QFY10 sales of Rs2.8b and adjusted PAT of Rs440m. (Proportionate share of Rs1.4b and Rs216m, respectively). Sales grew 12% in 1HFY10 and adjusted PAT grew 29%. GSL reported consolidated sales of Rs7.7b and adjusted PAT of Rs1.04b in FY09. The management indicated that Sara Lee brands (15% of GSL sales) were unlikely to be discontinued immediately in case Sara Lee s global operation were bought, as GSL had paid license fees under the agreement. The acquisition of stake in Godrej Sara Lee is positive for GCPL as it expands its product portfolio and scale of operations significantly. ICRA reaffirms `LAA` & `A1+` ratings Credit rating agency, ICRA has reaffirmed the LAA rating assigned to Rs 60 million Long Term Fund based and Rs 100 million Long Term Non-Fund based bank facilities of Godrej Consumer Products (GCPL). Dividend Declared The company has declared a second interim dividend @ Re 1/- per share (100% on the shares of the face value of Re 1/- each) for the financial year 2009-10. Looks at overseas acquisitions The company is looking to make acquisitions in big emerging markets including China, South Africa and Brazil and would consider raising debt or selling equity to institutional investors to fund the purchases. Sara Lee to exit home and personal care portfolio Sara Lee Corporation (Sara Lee) has announced its intentions of exiting the homecare and personal care business and concentrate on its core food and beverage business globally. In line with this strategy the company has agreed to accept the offer of Euro 1.275 billion from Unilever to acquire its global body care and European detergent businesses that had a turnover of Euro 750 million in FY2009. 7

Sara Lee is also actively looking to divest the remainder of its household business, which includes air care, shoe care, insecticides and non-european cleaning brands. It has already been approached by prospective buyers for these brands. Planning to acquire stake in SCA Hygiene The company already has a 50 per cent stake in the JV Company Sweden's SCA Hygiene Products. Now it is planning to acquire remaining 50 per cent stake SCA Hygiene Products. Through this will gain access to world-class technology for manufacture of paper based absorbent hygiene products and will also enable them introduce world renowned brands in the Indian market. Rights issue at Rs.123 The company recently concluded its rights issue in the ration of 1:7 at Rs123 per share and garnered Rs4bn of which only Rs1.2bn was spent on the Kinky acquisition. We believe that the company could explore international acquisitions in the hair care segment going forward. Falling input cost The company s fortunes appear set to reverse now, with a steep correction in palm oil prices and signs of downtrading in staple FMCGs in the recent December quarter. Lower demand from the biofuel segment and expectations of worldwide recession has triggered a collapse in palm oil product prices over the past six months. Even after the commodity rally in January, palm oil prices now hover at less than half the levels seen at the March 2008 peak. Godrej Consumer s profit margins are more sensitive to input costs than most of its peers. Given its focus on high- TFM (total fatty matter) soaps, Godrej has a much higher raw material component in its cost structure than rivals. Two, as the company makes forward purchases of inputs, Godrej Consumer continued to grapple with margin pressures until December as it consumed its internal inventories. The company is well-placed to lock into inputs at much cheaper prices now. Godrej s operating profit margins may see a strong recovery from the current quarter. Expand rural market The company s initiatives to expand rural market presence and its conservative pricing strategies will also help its brands deliver, even if urban discretionary spends slow down. While the limited portfolio does remain a concern, the company has made efforts to broad base this with the launch of variants such as Godrej No.1 Strawberry and Walnut, Cinthol Deo and Expert Hair Colour in powder form. The acquisition of an overseas subsidiary has also given Godrej an entry point into high-margin hygiene market with the brand, Snuggy. 8

Company Profile Godrej Consumer Products Ltd.(GCPL) is a major player in the Indian FMCG market with leadership in personal, hair, household and fabric care segments. The company employs 950 people and has three state-of-the-art manufacturing facilities at Malanpur (M.P.) Guwahati (Assam) and Baddi ( H.P.).Their focus is on providing their customers with innovative, value for money solutions for meeting their daily needs and improving the quality of their life. This is achieved through the brands the company markets. They are among the largest marketer of toilet soaps in the country with leading brands such as CINTHOL, FAIRGLOW, GODREJ NO 1. Their FAIRGLOW brand, India's first Fairness soap, has created marketing history as one of the most successful innovations. product range from Godrej Renew Coloursoft Liquid Hair Colours, Godrej Liquid & Powder Hair Dyes to Godrej Kesh Kala oil, Nupur based Hair Dyes. They are also the preferred supplier for contract manufacturing of toilet soaps for some of the most well-known brands in the country. Business Area The company operates in two divisions Soaps and personal care. The company is the market leader in hair colours and liquid detergents. GCPL has 9.7% market share in toilet soaps with Cinthol, Fairglow and No.1 as its key brands. Godrej No.1 has emerged as the largest selling grade one soap in India. 9

1. Personal care Personal care contributes to 35% of topline and 67% to PBIT of the company. The business comprises hair care, liquid detergent and toiletries. Hair care contributes 68% to personal care sales and is the backbone of this business with the potential to grow topline in high double digits. Liquid Detergents are a slow growth area. GCPL is a fringe player in high ngrowth potential toiletries, which comprises shaving creams, deodorants, talcum powder and diapers. a. Hair Colours The company has introduced Godrej Renew Powder Hair Colour. It is a fi rst of its kind in the hair colour segment. Godrej Renew Powder Hair Colour is an aqua based, conditioning powder hair colour enriched with the herbal nourishment of henna and hibiscus. Henna protects the hair and hibiscus provides nourishment. The powder hair colour is ammonia free and hence is safe to use. This product is available in Burgundy, Auburn Red, Natural Dark Brown and Natural Black colours at a price of Rs. 20 per sachet in a carton pack containing three sachets of powder colour. This product was introduced in four states across India. GCPL s other offerings in this category Godrej Permanent Liquid Hair Dye, Godrej ColourSoft Hair Colour, Godrej Kesh Kala Oil, Godrej Nupur Mehendi, Godrej Kali Mehendi and Anoop showed encouraging performance. At GCPL, theyhave spent years researching hair colour solutions. With such experience, as well as understanding of the hair colouring needs of men and women they strive to develop products and solutions, which are safe and easy to use. Their brands are associated with trust and are used by millions of consumers on a daily basis. With the upper end of the hair colour market growing at a faster rate than the general hair colour market they feel that the repositioning of Renew will give them a strong growth potential in the premium colour segment. Going forward, with the introduction of aggressive marketing strategies for their new products, they will continue to introduce products and expand their existing product portfolio. b. Fabric care This product category contributes 7% of GCPL s total sales and 8% of the Company s branded sales. The lead brand Ezee is the largest selling liquid detergent in India. Ezee possesses a Woolmark authentication that indicates that the product is ideally suited to wash all woollen materials. Considerable research and consumer study led to the introduction of the product. With a present positioning of a woollen care product, Ezee sales are seasonal in nature. The Company however is seized of this fact and is planning to expand the range to cater to other fine fabrics as well. Ezee was accorded a distinctive status, that of a Superbrand by the Superbrands Council, UK. Ezee is the only premium fabric care brand to be awarded Super Brand status. Ezee liquid detergent has been designed specifically for special clothes and delicate garments like woollens, silks, baby clothes, premium cottons, etc. It has ph neutral formulation which prevents shrinkage and colour fading. Ezee does not contain any harsh chemicals like soda and hence washes clothes gently. 10

c. Toiletries GCPL offers shaving cream, talcum powder and deo spray under this category. Shaving creams GCPL s Deluxe range in shaving cream continues to do well in this category. The 7 gm travel pack tube, available for Rs. 5 is the key driver of growth. Talcum powder Cinthol Deo Talc was relaunched during the year in attractive new packaging. It is available in four variants namely Sport, Classic, Smooth and Fresh and Cologne. The talc s deo formula controls body odour and its ultra scent technology provides long lasting fragrance. Godrej No.1 talc is available in two variants, Jasmine and Lavender. The talcs are available in 100 gm and 300 gm packs, priced at Rs. 19 and Rs. 39 respectively. Deo spray The company launched the new Cinthol Deo Spray in four variants namely Sport, Cologne, Musk and Classic. The spray is available in an attractive packaging with a powerful combination of fragrance and protection against body odour. 11

2. Soaps GCPL continues to be the second largest toilet soap player in India with a market share of 9.7% compared to 9.1% in the previous year. GCPL increased the prices of its toilet soaps during July 07 and December 07 due to a rise in prices of inedible vegetable oil prices. This price increase was well received by the consumers and did not affect GCPL s volumes in this segment. This category presently comprises 63.8% of your Company s sales. GCPL unleashed 24-hour confi dence with the relaunch of its fl agship brand Cinthol in a new range of soaps, talcs and deo sprays. Cinthol Regular and Fresh soaps was also relaunched in an attractive new packaging. Cinthol Deo soap provides confi dence and protection for energetic lifestyles. Its active deo formula controls body odour and its ultra scent technology provides long lasting fragrance. The Cinthol Deo soap is available in Cologne, Classic and Sport variants. Cinthol Regular has a deodorant formula with TCC, a special ingredient and has been recommended by specialists for fresh looking skin. On the back of extensive research and their vast experience of over 56 years in this category they believe that this new range will do exceptionally well.this relaunch was carried out through a 360-degree campaign including outdoor visibility, modern retail activation and internet marketing initiatives along with television, print and cinema promotions. The brand has a new ambassador, Hrithik Roshan, the popular Bollywood star, whose profi le as a youth icon is in sync with the brand. Cinthol is available across the country in all types of outlets. Godrej No. 1 continues to be the largest selling Grade 1 soap in the country. During the year, GCPL introduced the Godrej No. 1 Papaya and Lotus variant. Papaya is widely recognized as an elixir for the skin. It deep cleanses the skin and removes dead skin cells. Lotus has an aura of divinity around it. Papaya and Lotus gives the consumer new looking skin with a divine fragrance. Godrej No. 1 is now available in seven variants namely Rose, Natural, Jasmine, Ayurvedic, Sandal, Lavender and Papaya and Lotus. All the variants are available in 75 gm, 100 gm and 125 gm packs and continue to do well. During the year, Godrej No. 1 continued to maintain its leadership position in Uttaranchal, Punjab, Himachal Pradesh and Chandigarh. Godrej FairGlow soap contains Natural Oxy-G that makes one fairer by reducing the dark melanin without changing the skin s natural balance. FairGlow soap was India s fi rst fairness soap and is the largest selling fairness soap. It is a quality Grade 1 product and has a pleasant fragrance. During the year, they introduced a 100 gm variant in certain soap brands. In the future, they plan to expand their product offerings and introduce new and exciting products for the consumer. 12

Company Brands or Products Soaps: 13

Toiletries: Hair care: 14

House hold care: Keyline: 15

Rapidol: SCA Hygiene: Subsidiaries: 1. Keyline Brands Ltd Keyline brands continue to receive an encouraging response from the consumers. Cuticura s hand hygiene - range is a market leader in UK. They increased their ad spend for the Cuticura brand and launched their first television campaign during the year. Further, they relaunched the Cuticura skin range and the Nulon range of Keyline brands. Akey highlight during the year was the acquisition of two hair care brands Touch of Silver and Henara by Keyline. Touch of Silver provides a selection of specially formulated products, which care for grey, white and blonde hair. It counteracts any tendency towards yellowing, fading or dullness in grey or white hair. The range consists of shampoo, conditioner and shine spray, conditioning styling mousse and a fi rm hold hairspray. Henara is a comprehensive hair care range with formulations that are henna based to naturally care for coloured hair. The range consists of shampoos, conditioners, treatment wax and shine enhancers. The shampoos and conditioners are available in red, golden and dark variants. The acquisition of Touch of Silver and Henara brands will enable Keyline to enhance its product portfolio and gain access to an already established consumer base of these products. 16

2. Rapidol (Pty.) Ltd. Rapidol s Inecto brand continues to do well. Inecto has over the years built-up a proud heritage and huge reputation as being the tried and trusted formulation, providing safe and affordable hair colorants to consumers in South Africa and the African continent. Inecto is available across seven brands namely Famous Originals, Colour Range, Plus, Plus Highlights, Henna, Powder Hair Colour and Colour Care. Inecto was relaunched in an attractive new packing during the year. Inecto Plus introduced by Rapidol during the last quarter of the previous year continues to witness an encouraging performance. During the year, Inecto Plus which is available in seven variants received listing in several supermarket chains, a refl ection of its superior quality and customer acceptance. Inecto Plus Highlights was introduced during the year in two colours namely Blonde/Brown and Red. Inecto Highlights is a specially formulated non-drip colour crème. Inecto Henna continues to do well. Inecto Henna is an ammonia free powder hair colour with Henna and Hibiscus available in four colours namely Burgundy, Auburn Red, Natural Black and Dark Brown. Rapidol began sourcing Inecto Powder Hair Colour and Henna from GCPL India. Expanding its reach in the East and West African continent, Rapidol introduced its products in Kenya and Ghana. 3. Kinky Group (Pty.) Ltd. GCPL completed the acquisition of 100% stake in the Kinky Group (Proprietary) Ltd., South Africa (Kinky). Kinky is a leader in the South African hair business and offers a variety of products, which include hair, hair braids, hair pieces, wigs and wefted pieces. Kinky also offers hair accessories like styling gels, hair sprays and oil free shampoo. All Kinky products are manufactured at plants located in South Africa at Johannesburg and Durban and final products are sold through Cash n Carry outlets and Kinky owned stores. This acquisition was our second in Africa after Rapidol and will enable us expand our presence further in the African continent. Further, Kinky products add to the portfolio of hair products offered to consumers and are also used by the hairdressers and salons which helps the Rapidol business in hair care as a cross SBU synergy by gaining insights in consumer trends. Kinky products offer good potential for roll out into the rest of Africa as presently they are sold only in South Africa. 4. Godrej Global Mideast FZE The company acquired Godrej Global Mideast FZE (GGME), which was a 100% subsidiary of Godrej International Ltd. GGME was established in Sharjah in November 1997, with the objective of distributing Godrej Consumer Products Ltd. soaps, hair colours and toiletries in UAE and other GCC (Gulf Co-operation Council) countries. Through this acquisition, they will continue to enjoy the following benefits: 17

Access to GGME s strong distribution network Obtain better insights into consumer needs and preferences Leverage GGME s distribution network to introduce Peer Group Comparison Name of the company CMP(R.s) (As on Nov 17, 2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Godrej Consumer 280.00 71960.00 6.74 41.54 12.69 400.00 HUL 274.50 598656.50 9.09 30.20 29.05 750.00 Dabur India 165.65 143413.70 4.58 36.17 19.42 175.00 Marico Ltd 104.85 63872.4 2.82 31.18 17.36 65.50 Key Concerns Fluctuation of foreign exchange rates. Extreme inflation and labour shortage. Political unrest in countries. Competition from other players. Cost of raw material and other inputs. Change in supplier and distributor Relationships. Change in government and tax laws. Seasonality and weather conditions. Economy slowdown 18

Financials Results update Profit & Loss Account 12 Months Ended on March 31st (Consolidated) Value(Rs. in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Income 11,025.70 13,966.40 22,340.43 27,925.53 Other Income 40.3 50.6 411.16 493.39 Total Income 11,066.00 14,017.00 22,751.58 28,418.92 Expenditure -8,880.70-11892.50-18,138.19-22,896.14 Operating Profit 2,185.30 2,124.50 4,613.39 5,522.78 Interest -128.7 159.9-114.36-126.36 Gross Profit 2,056.60 2,284.40 4,499.03 5,396.42 Depreciation -181.7-192.3-301.26-436.83 Profit before Tax 1,874.90 2,092.10 4,197.77 4,959.59 Tax -282.5-366.00-839.55-991.92 Profit after Tax 1,592.40 1,726.10 3,358.22 3,967.67 E.Items - 6.4 Net profit 1,592.40 1,732.50 3,358.22 3,967.67 Equity Capital 225.8 257.00 257.00 257.00 Reserves 1,491.60 5,411.50 8,769.72 12,737.39 Face Value 1.00 1.00 1.00 1.00 Total No. of Shares 225.8 257.00 257.00 257.00 EPS(Rs) 7.05 6.74 13.07 15.44 19

Quarterly ended Profit & Loss Account (Consolidated) Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E Description 3m 3m 3m 3m Net Income 3,427.10 4,396.20 5,765.30 6,053.57 Other Income 7.4 93.7 129.40 148.81 Total Income 3,434.50 4,489.90 5,894.70 6,202.38 Expenditure -2,765.80-3,524.30-4,636.60-4,876.75 Operating Profit 668.7 965.6 1,258.10 1,325.62 Interest 59.6-37.7-26.10-24.56 Gross profit 728.3 927.9 1,232.00 1,301.06 Depreciation -40.4-51.9-67.60-87.88 Profit before Tax 687.9 876 1,164.40 1,213.18 Tax -100.7-179.2-234.40-242.64 PAT 587.2 696.8 930.00 970.55 E.Items 6.4-0.00 0.00 Net Profit 593.6 696.8 930.00 970.55 Equity Capital 257 257 257.00 257.00 Face Value 1.00 1.00 1.00 1.00 EPS(Rs) 2.31 2.71 3.62 3.78 20

Key Ratios Particulars FY09 FY10E FY11E Equity Capital (Rs.mn.) 257.00 257.00 257.00 EBDITA Margin (%) 15.21% 20.65% 19.78% Net Profit Margin (%) 12.40% 15.03% 14.21% P/E (x) 19.70 21.43 18.14 ROE (%) 30.56% 37.20% 30.53% ROCE (%) 30.68% 41.98% 35.54% EV/EBDITA(x) 2.38 19.49 20.35 Book Value (Rs.) 22.06 35.12 50.56 P/BV (x) 6.02 7.97 5.54 Debt-Equity ratio(x) 0.11 0.14 0.10 21

Charts A) Net sales & PAT Chart B) EV/EBITDA chart 22

C) P/E Chart D) Debt-Equity ratio chart 23

1 Year Comparative Graph GODREJ BSE SENSEX Outlook and Conclusion At the current market price of the stock Rs.280, the stock trades at a P/E of 21.43 x and 18.14x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs.13.07 and Rs.15..44 for the earnings of FY10E and FY11E respectively. The top line and bottom-line of the company are expected to growth a CAGR of 36.31% and 35.57% respectively over FY08 to FY11E. On the basis of EV/EBDITA, the stock trades at 19.49 x and 20.35 x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 7.97 x for FY10E and 5.54 x for FY11E. GCPL will aggressively drive growth across all its businesses. The expanded manufacturing capacities will enable it cater to improving demand as well as enhance efficiencies. The company s focus on mass-market brands and strong rural presence, may record stronger growth. The company is well-placed to lock into inputs at much cheaper prices now. Godrej s operating profit margins may see a strong recovery from the current quarter. With a strong growth in the domestic business, an enhanced product portfolio after the acquisition of the stake in GSL and the possibility of more acquisitions in the future, GCPL remains strong company in the fast moving consumer goods sector. 24

The company s decision to hold back price increases on its soaps portfolio in recent months may now stand it in good stead amid the slowdown. GCPL has a low tax base with 65% of its sales coming from excise free and tax free zones. Market growth accelerating in both soaps and Hair Dyes/Colors segments and growth likely to sustain with market share gains in soaps and overall category growth in Hair Dyes/Color. The company is looking to make acquisitions in big emerging markets including China, South Africa and Brazil and would consider raising debt or selling equity to institutional investors to fund the purchases. We recommend to BUY this stock with a target price of Rs.330.00 for medium to long term. Industry Overview The size of the Indian fast-moving consumer goods (FMCG) sector is close to Rs 600 bn. The northern and the western regions of the country account for more than half of the market for consumer goods. Barring the fastest-growing personal care segment, no other product segment has seen the entry of so many players. In the past decade, the personal care industry has witnessed a consumer boom. This has been due to liberalization, urbanization, and an increase in the disposable incomes, and altered lifestyles, especially a heightened level of awareness among the rural community, consequent to the onslaught of satellite television. Furthermore, the boom has also been fuelled by the reduction of excise duties, dereservation from the small-scale sector and the concerted efforts of personal care companies to woo the burgeoning affluent segment of the middle class through product and packaging innovations. Unlike in the past, when domestic companies were not perceived as competitive vis-à-vis multinational corporations (MNCs), the scenario is gradually changing, with some domestic companies, like Nirma Marico and Jyothi Labs, standing up to their MNC counterparts. Also, competition amongst the MNCs has intensified, leading to shrinkage of margins. The personal and home care segment has very low entry barriers of technology and capital requirements. This attracts new players and has resulted in intensifying competition. Despite this, the strong distribution networks and heavy investments needed for brand building remain key deterrents to new players. Low margins and high volumes characterize the industry. While the level of disposable incomes determines the overall sector growth, the market has already been segmented and subsegmented. Companies have launched products at a number of price points to drive up volumes. New products are being launched in niche segments, and old products re-launched. 25

Brand equity drives the customer s purchase decisions, and is the key to gaining market share. Also, competitive pressures have hiked the advertising budgets of most players. Besides, a profusion of promotional schemes are being offered. Most players, including Hindustan Lever Ltd (HLL), are struggling to maintain top line growth, despite the heavy advertising and sales promotion (ASP) expenditure. A lower price differential between the organized and the unorganized sectors from reducing excise duties allows the former to grow at the expense of the latter. The organized sector also has a superior distribution reach. Although most of the product categories are still in the growth phase, a few broad categories, like detergents, have reached a mature phase only in the urban market. According to industry sources, the affluent segment in the rural sector is growing at a faster rate than the urban one. For the past three years, the organized sector has been focusing on the rural markets, which are perceived to drive growth in the industry and which, to a very large extent, are dominated by unorganized players. Role of the Rural Economy Rural India accounts for over 70 per cent of the country s population. With urban markets saturated for most categories, it has become imperative for all players to increase their penetration levels in rural markets. There has been a rapid expansion of the consumer majors distribution networks into the rural regions. Companies like HLL and Colgate-Palmolive (C-P) have made sustained efforts through various programmes like Operation Bharat (HLL) and Operation Jagruti (C-P) to make inroads into the rural economy, in order to drive growth.for the past three or four years, the bottom lines of most of the companies have improved due, on the one hand, to reduced excise duties and, on the other, to declining commodity and raw material prices. Besides, companies introduced cost rationalization measures, which helped them improve their operating margins. Reasonably high operating margins are necessary, in order to sustain the high ad-spends. However, stabilized commodity prices may put pressure on the margins in the future. With increasing competition, the players have had to absorb a lot of price cuts to boost volumes. In the past one year, however, the industry has been reeling under a demand crunch. Pricing The Indian consumer is very price sensitive. In the personal care sector, branding allows companies to partially pass on the cost increases to the customers. Most players have introduced products with mass-market pricing, so as to build volumes. The increased promotional activity that is taking place amongst players has relegated brand loyalty to the backseat. Moreover, the increased competition has restricted not only growth rates, but also the ability to absorb frequent price increases, thus benefiting the consumer. With the rise in disposable incomes of consumers, players in the premium-product categories will be able to increase volumes. 26

Fabric wash Market The fabric wash market has three segments, laundry bars, synthetic detergents and powders. The 3-mn tonne market, valued at Rs 45 bn, is amongst the world's largest, after China and USA. Laundry soaps accounts for 20 per cent of the total volumes and 15 per cent of the value.consumer preferences have been changing in the past few years. In the urban markets, people prefer to use washing powder and detergents, instead of bars, on account of convenience of usage, increased purchasing power, aggressive advertising and increased penetration of washing machines. The demand for detergents has been growing at an annualized growth rate of 10-11 per cent in the past five years, while the laundry bar market has witnessed a negative growth. In the fabric wash market, the rural growth is at a higher rate of 13-14 per cent, compared to the urban growth rate of 8-9 per cent. The major players in the detergent market are HLL (Surf), Nirma (Nirma Super, Nima), Proctor & Gamble (Ariel, Gain, Tide) and Henkel-Spic (Henko), with the rest of the market being fragmented amongst a large number of players. Fabric Wash Segment: Market Shares Personal wash Market The Indian soap industry is a mature market, which is valued at Rs 45 bn, and can be classified into popular and premium categories. While the growth rate for the overall personal wash market is only 7-8 per cent, premium and middle-end soaps are growing at a rate of 10 per cent. Positioning of the product is very important in this market. The leading players in this market are HLL (Lux, Lifebuoy, Breeze, Rexona), Nirma (Nima), Godrej Soaps (Cinthol, FairGlow, Shikakai, Nikhar), and Reckitt & Colman (Dettol). The rest of the market is highly fragmented, with companies having strong presence in select segments or a regional presence only. Brand loyalty is very low, except at the premium end. Key factors to success are distribution (in rural markets) and advertising (in urban markets). 27

Personal Wash Segment: Market Shares Oral care The oral care market, which is growing at 4 per cent per annum, is valued at Rs. 16 bn, with toothpaste accounting for 60 per cent or Rs 9.5 bn and toothpowder, 23 per cent or Rs 3.7 bn. The market for toothbrushes is valued at Rs 2.8 bn and has been growing at 15 per cent per annum. Only 47 per cent of the Indian population are estimated to use toothpaste, while 23 per cent use toothpowder and the remainder use neither. Colgate-Palmolive (C-P) is the leader in the toothpaste market, with HLL, the main competitor, catching up fast. HLL has aggressively chased market share at the expense of C-P, through new launches, brand extensions and re-launches. Its diverse product portfolio gives it the ability to sustain promotional expenditure. C-P, which reacted rather late to the challenge thrown by HLL, has adopted the twin strategies of new product launches and re-launches in the mainstay oral care segment, and new launches in the personal care segment as well, in order to reduce over dependence on the oral care segment. In the toothpowder market, C-P, which has strong brand equity, is again the leader, followed by Dabur. To further increase the penetration in this market, it recently re-launched Colgate Super Shakti in small pouches. The battle is now being played in the low-price or economy segment, where HLL, with Aim, and C-P, with Colgate Cibaca Top, are trying to capture a larger slice of the rural market. Toothpaste Market Shares 28

Skin care and cosmetics This segment, which is valued at Rs 12 bn, includes cold creams, lotions, moisturizers, cleansers, talcum powders, deodorants, lipsticks, nail enamels, etc. The major segment, fairness cream, estimated to be worth Rs 5 bn, is dominated by HLL (Fair and Lovely), with a 70 per cent market share. CavinKare (Fairever) has cornered a 15 per cent share, while Emami (Emami Naturally Fair) has a 6 per cent share. Godrej Soaps is a new entrant, with its FairGlow fairness cream. However, the market is restricted to the urban areas, with the rural penetration being 20 per cent. In this market, sachets currently contribute between 10-15 per cent of the sales. The shaving cream market, estimated to be worth Rs 1.09 bn, is dominated by C-P, Gillette India and Godrej Soaps. The skin care market has seen the entry of a number of international brands, like Oriflame, Avon and Aviance. The herbal-based products are also quite popular in this market. In the colour cosmetics segment, the major players are HLL (with Lakme, Tips & Toes), L'Oreal, Oriflame and Revlon. The market size is very small, as far as volumes are concerned, but with the high-income group growing, this market should have sizeable volumes in the next few years. Hair care Hair care accounts for 20 per cent of the personal care market and includes a variety of branded and unbranded products like hair oils, shampoos, creams, conditioners hair dyes, etc. Coconut Oil The coconut hair oil market covers 72 per cent of the hair oil market. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the leading players. However, HLL, with its Nihar brand, is catching up through the acquisition route (having acquired the Cococare brand). HLL is also extending its Sunsilk brand to hair oils. Marico has consolidated its position by acquiring the Oil of Malabar brand, which has a 2 per cent market share. The market for branded coconut oil has been growing at the rate of 5-7 per cent per annum over the last few years and was valued at approximately Rs 8 bn out of the total market size of Rs 15 bn or 30,000 tonnes. This market has been witnessing a shift in usage patterns in both urban and rural markets. Even the rural market, which is a traditional user of unbranded loose oil (market size: Rs 7 bn) is expected to gradually shift to packaged and branded hair oil, in order to avoid adulteration. Coconut oil is a very low value-added product, compared to shampoos, gels and creams. The price of copra, the key raw material, determines the price of the final product. The cyclical nature of the industry compels manufacturers to take price revisions in line with the raw material price changes. 29

As such, sourcing of raw material is the key to competitiveness. Despite this and the fact that raw material prices have bottomed out, value growth will be difficult to come by because of the low retail prices prevailing in the industry. Value-added Hair Oils The consumption of heavy oils, like coconut oil, is declining in the urban market, especially amongst the younger generation, because of a declining usage frequency and a shift to value-added hair oils, a category estimated to be growing at 20 per cent per annum. Thus, the players have started catering to the shifting urban preferences by offering products in the value-added hair oils segment. In the premium hair oil market, the players includes Marico (Hair & Care, Parachute Lite), Dabur (Vatika) and Dey Chemicals (Keo Karpin). Shampoos The shampoos market is still in its infancy. The per capita consumption of shampoos in India is only 25 ml, compared to the international level of 383 ml. It is an Rs 7.5 bn or 29,000-tonne market, growing at 10 per cent per annum. HLL (Sunsilk, Clinic), Beauty Cosmetics (Nyle, Chik) and P&G (Pantene, Head & Shoulders) are the leading players. Unlike in the developed markets, in the Indian market, especially in the rural areas, shampoos are still used only occasionally.leading companies like HLL and P&G are, however, trying to change the consumer mindset. Their efforts are being helped, in part, by the spread of media and satellite channels, which are building aspiration levels of the target user groups. As part of their growth strategy, players have launched products that target specific needs. This has led to the rise of segments like anti-dandruff shampoos and anti-lice shampoos in recent years. The anti-dandruff segment is valued at Rs 1 bn and is growing at 15 per cent. The major players are HLL (with Clinic), with a 75 per cent share, and P&G (Head & Shoulders), with a 25 per cent share. Dabur has recently entered this market with its herbal-based product, Dabur Vatika. Consumer preferences, especially in urban areas, are gradually shifting towards herbal products. Hair Dyes The hair dye market is worth Rs 2 bn and growing at 30 per cent per annum. The growth is driven by the fact that a lot of women have started looking for specialized products. Powder hair dyes, liquid hair dyes, and hair colour, and oil-based hair dyes are the major categories of the market. Godrej Soaps is the market leader, with a 40.4 per cent share. Other Segments Other small segments include hair creams, hair wash powders, hair soaps and hair styling gels, where volumes are still very low. 30

Feminine Hygiene The Rs 2 bn market is dominated by P&G (Whisper), with a 45 per cent market share, Johnson and Johnson (Stayfree), with a 40 per cent share, and the latest entrant, Kimberly Clark Lever (Kotex). These are premium products with an urban penetration level of 20 per cent. While the market faced a negative growth last year, it got a boost from the withdrawal of excise duties. However, growth continues to be flat. Deodorants A major offshoot of the cosmetics market is the Rs 750 mn deodorant market, which is expected to grow at 40 per cent annually. The organized segment is dominated by HLL, which has a 74 per cent market share with its Rexona, Axe, Denim and Impulse brands in different categories targeting different segments. Cleaners / Repellants The cleaner market includes products like floor cleaners, air, phenyl and toilet cleaners, and is estimated to be growing at 20 per cent per annum. The key players are HLL, Reckitt & Colman India (RCI), Henkel Spic, Bayer India and Balsara Hygiene. The estimated market for insecticides and repellants is around Rs 8 bn, which is growing at 15 per cent annually. It includes mosquito coils, mats and other insecticide products. The leading players are Godrej Sara Lee (Goodknight), which has a 38.1 per cent share followed by RCI (Mortein), with a 23.5 per cent market share. Godrej Sara Lee is the world's largest manufacturer of mosquito mats, with an all-india market share of 66 per cent. The organized sector is trying to increase penetration levels by higher brand visibility. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 31

Firstcall India Equity Research: Email info@firstcallindia.com B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai 400 071 Tel.: 022-2527 2510/2527 6077/25276089 Telefax: 022-25276089 E-mail: info@firstcallindiaequity.com www.firstcallindiaequity.com 32