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1 March 2018 Quarter Result Preview Institutional Equities FMCG Sector 6 April 2018 Strong Fundamentals To Support High-teen Growth We expect the companies in our FMCG coverage universe to maintain their growth momentum in 4QFY18 largely on the back of new launches, signs of rural recovery, price reductions post Goods and Services Tax or GST rate cut across categories, early summer and strong focus on marketing activity by FMCG players. We expect our FMCG coverage universe to grow its top-line, EBITDA and net income by 6.3%, 11.5% and 10.6%, respectively on YoY basis. Within the FMCG space, we expect growth from food companies (excluding ITC) to be on the higher side compared to the home and personal care (HPC) space. Overall margin delivery will be fairly good, but food companies are likely to report better margins compared to the HPC space because of relatively moderate food inflation compared to crude oil and other commodity prices relevant in the HPC space. Among our coverage universe, we expect Hindustan Unilever (HUL), Britannia Industries, Nestle India and Jubilant FoodWorks to report robust performance even after setting off the favourable base effect. Food companies expected to outgrow HPC in terms of top-line: We expect the top-line of our coverage universe to grow 6.3% YoY in 4QFY18. Within that, the HPC space is likely to grow 8% and food companies (excluding ITC) are likely to grow 13% YoY. A large portion of this growth will be volume-led driven by strong consumer confidence, revival in rural markets, new launches (HUL Pure Derm, Britannia- Pure Magic Deuce, Gillette Oral B Neem extract, Nestle Munch Nuts etc) and reduction in product prices across categories post GST rate cut. Premiumisation and health are mega trends for consumers and our top buy ideas namely, HUL, Gillette India, Britannia and Nestle India are the biggest beneficiaries and likely to report strong revenue growth for the quarter. In case of ITC, we expect lower revenue growth as a result of pressure on cigarette business volume. In the Quick Service Restaurant or QSR space, we expect Jubilant FoodWorks to report same-store sales growth or SSG-led strong double-digit top-line growth on the back of encouraging consumption trend, favourable base and price cuts for the end consumer post GST rate reduction. Improved margin delivery: We expect margin delivery to be fairly good across consumer companies. We expect our coverage universe to increase EBITDA and net income by 11.5% and 10.6% YoY, respectively. Similar to top-line, food companies (excluding ITC) are expected to report better profitability (EBITDA and PAT growth of 23% and 24%YoY as against 14% and 12%YoY in case of HPC). Raw material prices for food companies are relatively stable. HPC companies are likely to witness the impact of higher crude oil prices. We expect HUL, Britannia, Nestle India and Jubilant FoodWorks to report strong growth on the profitability front. Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com TP CMP Net Sales EBITDA EBITDA margin (%) PAT Company Rating (Rs) (Rs) 4QFY18E YoY(%) QoQ(%) 4QFY18E YoY(%) QoQ(%) 4QFY18E 3QFY18 4QFY17 4QFY18E YoY(%) QoQ(%) Hindustan Unilever 1,700 1,382 Buy 88, , , Gillette India* 8,000 6,575 Buy 5, , , Colgate-Palmolive 1,200 1,091 Acc. 11, , (0.7) , (2.7) Dabur India Acc. 20, , , Emami 1,050 1,110 Sell 6, (16.8) 1, (26.3) ,600^ 9.9 (22.9) Britannia Industries 5,850 5,068 Buy 25, (1.5) 3, (4.1) , (6.6) Nestle India* 9,400 8,384 Buy 27, , , ITC Acc. 1,12, , , (8.4) GSK Consumer 7,300 6,106 Acc. 12, , , Jubilant FoodWorks 2,620 2,335 Buy 7, (6.0) 1, (12.1) (21.1) Our coverage universe 3,17, , , (2.5) *Quarter ended March 2018 is the third quarter for Gillette India and first quarter for Nestle India ^Adjusted PAT ; Source: Nirmal Bang Institutional Equities Research

2 Company-wise highlights Hindustan Unilever: We expect the company to report 7.8% top-line growth (led by mid single-digit volume growth) and earnings growth of 14.2%. All the categories are expected to contribute to this growth. This was the first full quarter after the company cut down product prices across its portfolios. We believe that encouraging response for Lever Ayush, continuing premiumisation trend, its disproportionate share in modern trade channels, growing presence in both mass and premium naturals segments, new launches and signs of rural growth coming back on track could help the company to post strong volume-led growth. On the cost side, its initiatives like Zero-Based Budgeting (ZBB) will continue to bring down the overheads, but there will be some pressure on gross margin because of rising cost of crude oil. Despite the pressure on input prices, we expect operating margin to grow 170bps YoY led by higher share of premium portfolio and cost optimisation measures. Growth in rural markets, growth of naturals portfolio, premiumisation trend and input prices are the key things to watch out for during the earnings presentation. Gillette India: It is to be noted that the base quarter for Gillette India has been extremely strong on both top-line and profitability fronts. Hence, we expect Gillette India to grow its top-line by 3.3% YoY (the growth number seems to be on lower side because the comparable number for the base quarter is not available and also because of the increase in indirect tax which was not there in the base quarter) and operating profit by 7.1% YoY. Grooming business is back on track after the GSTrelated problems were settled. Oral care segment s performance in the past few quarters has also been above par. We expect a similar trend to continue. Historically, the third quarter for Gillette India is the best quarter for grooming business and hence the operating margin for the quarter tends to be high. We expect operating margin to settle at 31.5%for the quarter i.e. improvement of around 110bps over the same quarter a year ago. Growth of grooming category and consumer response for new launches in Oral B are the key things to watch out for during the earnings presentation. Colgate-Palmolive (India): We expect the company to post 9% top-line growth led by volume as a result of price cuts and moderate response for new launches. Operating profit and net income, in our opinion, is expected to grow by around 15% and 16% YoY, respectively, mainly because of the favourable base. Although the top-line growth has not really picked up for the company, its operational efficiency resulted in margin improvement in the past few quarters. We expect a similar trend to continue during the quarter, resulting in margin expansion of around 130bps YoY. There were no new major product launches during the quarter. Growth of naturals portfolio, update on market share, competitive pressure and growth in rural vs. urban markets are the key things to watch out for post earnings. Dabur India: For 4QFY18, we expect Dabur India to report 8% top-line growth and 7.7% earnings growth on YoY basis. The high single-digit growth is partly because of a favourable base and better demand in rural markets. International business growth is likely to be muted. In domestic business, categories like oral care, hair oils and OTC products are expected to post a good performance. We believe that Dabur India does not enjoy premiumisation benefits like in case of Hindustan Unilever and Gillette India, and hence headroom for margin expansion is limited. We expect operating margin to be flat YoY. In our opinion, increase in input costs could be offset by cost rationalisation measures adopted by the company. Growth in rural markets, pace of innovation, distribution initiatives and growth of key brands are the crucial things to be tracked. Emami: Emami is likely to report 9% top-line growth on a favourable base and strong performance of select products because of early summer. Growth in operating profit and net income is largely a function of the base effect. Similar to Dabur India, we don t see any margin lever for the company on lack of innovation. However, for the quarter we expect some improvement in gross margin because of the correction in menthol prices. Growth of key brands, innovation pipeline for the next year and wholesale dependency are the key things to watch out for during the result presentation. 2 FMCG Sector

3 Britannia Industries: We expect the company to continue its growth momentum and post 12.7% top-line growth YoY led by volume (high single-digit) and earnings growth of 16.7%. The base business is likely to grow rapidly and contribute significantly to the top-line. New launch of Pure Magic Deuce during the quarter also received an encouraging consumer response. We expect the company to report operating margin expansion of 137bps YoY led by strong focus on cost optimisation and operating leverage benefits. Growth of overseas business, status of capacity expansion, volume growth of base portfolio and response for new products are the key things to watch out for during the earnings review. Nestle India: In 1QCY18, we expect it to report top-line growth of 12%. We expect all the categories to contribute towards this growth. Recent product launches are likely to boost the top-line of the company. We expect a volume in mid single-digits led by price cuts post GST rate reduction and an overall increase in consumer confidence. On the cost side, we expect the company to optimise the costs and are factoring in operating margin expansion of 124bps YoY. ITC: We expect ITC to report 6% earnings growth and top-line is likely to be flat. Cigarette business, in our opinion, is under pressure. It is to be noted that regulatory challenges for cigarettes remain and there is high uncertainty about growth outlook for the industry because of hanging sword by way of a further increase in taxes. Following the change in accounting treatment, operating margin tends to be on the higher side and that coupled with cost-saving measures we expect the operating margin to be around 36.7% for the quarter. GSK Consumer: We expect GSK Consumer to report top-line and operating profit growth of 10% and 12.2% YoY, respectively, largely because of a favourable base and recent launches in Horlicks supplement value-added portfolio. Post GST rate cut, the company has reduced prices and we expect this will boost consumption to a certain extent. On the cost side, we believe that because of a lot of competition, we don t expect premiumisation-led margin expansion benefits for the market leader. Operating margin will be more or less flat during the quarter compared to the same quarter a year ago. Update on global parent considering the sale of Horlicks brand, growth in rural markets and market share movement are the key things to watch out for during the earnings presentation. Jubilant FoodWorks: We expect Jubilant FoodWorks to report 22% top-line growth led by 18% SSG for the quarter. For the quarter, SSG will be a function of increased footfalls, increased share of online order placement, a favourable base and increase in base prices post GST Council s announcement regarding the non-availability of input tax credit. The company s flagship offerings - Pizza Mania and Everyday Value - are doing exceedingly well. Our channel checks also suggest that the consumer response has been fairly encouraging. On the cost side, we expect similar cost savings that were witnessed in the past couple of quarters. Higher SSG and operating leverage go hand in hand. As a result, we expect robust operating margin expansion of 622bps YoY for the quarter. Guidance on new store opening, capex for next financial year and strategy on Dunkin Donuts are the key things to watch out for during the earnings presentation. 3 FMCG Sector

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