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• Big conversion opportunity. Low per capita consumption, rising income
levels, changes in consumption patterns and demographic changes (younger
population and more working women) should drive significant growth for
packaged foods category in India. Entry of new players and growing scale of
modern retailing would further facilitate introduction of more products and
higher impulse purchases. Packaged food consumption at 1.4% of GDP is well
below 2-3% for other emerging markets.
• Lifestyle changes are becoming more pronounced and are influencing
demand for packaged foods. Affordability, convenience, taste, quality and health
benefits are becoming key considerations for increasingly busier and affluent
consumers. Growth in modern distribution/cold chain, packaging innovation
provides platform for packaged food companies to capitalize on these trends.
• Competition seems more focused on innovation than discounting, which is a
key positive for the sector. Innovation has been a substantial driver for revenue
growth and we expect this pace to increase further as companies count on rising
income levels and consumer uptrading. In order to garner higher market share
and sustain robust growth rates, new product launches have picked up a
substantial pace over the past 2-3 years. Maggi (Nestle), Horlicks (GSK), Knorr
(HUL), and Saffola (Marico), are the key umbrella brands that have successfully
extended to new categories. Companies are expanding the universe of
opportunity by adopting new users and usage occasions.
• Margin expansion opportunity still exists. Commodity inflation remains a
challenge (particularly for packaging). However, we see more pricing power
(relative to HPC space), premiumisation across food segments and a benign
agri-commodity price outlook as positive margin drivers. Aided by better
volume and SG&A leverage, we expect EBITDA margins to expand by 30-
40bps for Nestle India and GSK Consumer in CY11E.
• GSK Consumer (OW) and Nestle India (N) are the preferred plays on the
strong growth potential for packaged food industry in India. They have strong
franchises and would be key beneficiaries from any softening in agriculture
commodity prices. We estimate 21-22% EPS CAGR for them over CY10-12E,
which is amongst the highest in our coverage universe and expect these stocks to
sustain premium valuations. ITC (OW) and HUL (UW) also have exposure to
packaged foods with 9% and 5% of respective revenue contribution. Other plays
in this segment are Britannia (NR), Pepsico India, Cadbury India, GCMMF,
Heinz India, Agro Tech Foods (NR) and Venkys India (NR).
Plays on packaged food space
GSK Consumer (OW) and Nestle India (N) are the preferred plays on the strong
growth potential for packaged food industry in India. They have strong franchises
and have registered strong revenue growth in recent years. Over past four quarters on
an average GSK Consumer and Nestle India have reported 21% and 22% revenue
growth respectively on the back of high (mid-teens) volume growth. On earnings
front growth has been equally impressive with GSK Consumer and Nestle India
registering 29% and 21% EPS growth in CY10, respectively.
The consistent performance in terms of revenue and earnings growth makes us
confident about these companies management and strategy for growth. Their
performance has been reflected in the recent upward share price run. GSK Consumer
and Nestle India have run up by 15-20% over the past six months, outperforming the
Sensex by 20-25%. We expect the outperformance to continue as earnings growth
remains strong in coming quarters. Key growth catalysts would be robust volume
growth across high growth categories, supported by healthy margins and continuous
product innovation. Success of new products could further add to growth.
We estimate 21-22% EPS CAGR for GSK Consumer and Nestle India over CY10-
12E, which is amongst the highest in our coverage universe and expect these stocks
to sustain premium valuations. We have an OW rating on GSK Consumer given
reasonable valuations and healthy earnings growth outlook. While we remain
positive on Nestle India’s long term growth potential, we think the current valuation
of 35x CY11E P/E could constrain stock performance in the near term and hence we
have a Neutral rating on the stock. Compared to Nestle India, GSK Consumer is
trading at c35% discount on 2011 P/E for nearly similar earnings growth profile.
ITC (OW) and HUL (UW) also have some exposure to packaged foods with 9% and
5% of respective revenue contribution. Other plays in this segment are Britannia
(NR), Pepsico India, Cadbury India, GCMMF, Heinz India, Agro Tech Foods (NR)
and Venkys India (NR).
Drivers for packaged food demand
Income factor: Rising income levels are accompanied by change in food
consumption habits as consumers upgrade to more value added products and demand
a wide variety to choose from. Convenience, Variety, Quality, Health benefits are
becoming increasingly important considerations while making a purchase decision.
Double income households (with more working women) have also enhanced
purchasing power for packaged foods, which are more expensive.
Lifestyle factor: Fast changing lifestyles are leading to higher offtake of packaged
food. Given rising urbanization, growing number of nuclear families, more working
women (the key decision maker for household budget on food spends) and busier
working schedules for many, acceptance of packaged food is rising due to
convenience factor. These coupled with access to more amenities like refrigerators
and microwave ovens have aided the growth for packaged foods.
Availability factor: With increasing penetration of modern retail and cold chain
storages, frozen and canned foods are finding more shelf space. Increased marketing
and advertising initiatives by processed foods companies is helping change
consumer's mindset about quality of packaged food (vs freshly prepared food) and
spurring consumer trials.
Large growth opportunities in packaged foods space
Marked by low penetration levels and dominated by unorganized players, the Indian
processed foods market holds substantial potential for organized players like Nestle
India, GSK Consumer and Britannia Industries whose products enjoy strong brand
equity across various food categories. Significant changes on demand side such as
urbanization, rising income levels, need for convenience and on supply side such as
improving supply (cold) chain infrastructure, growing modern retail penetration and
entry of more players is fuelling growth for the packaged food industry in India.
While popularity of packaged foods is growing in urban markets, this trend is being
increasingly mirrored now in rural India as well.
We believe the sustainability of processed foods growth would also be supported by
low priced SKUs, which help addressing a much larger customer base. There has
been a marked improvement in penetration rates in existing markets and there is
significant opportunity in extending this to tier 3 and tier 4 cities. In urban markets,
modern retail, which is growing at a fast pace, is a positive for impulse buying and
national brands.
We are witnessing significant capacity expansion by leading players in packaged
foods space in order to meet growing demand. We believe companies have just
scratched the surface so far in terms of penetrating this sector and outlook for both
volumes and mix changes remains exciting.
As per government estimates, the processed foods market size is likely to double
from the current levels by FY2015. The share of value-added products in overall
processed foods consumption is likely to go up from 40% currently to 50% over a
similar period, and branded manufacturers would be a key beneficiary of this shift.
Packaged foods (estimated at US$22bn) is amongst the fastest growing consumption
segments in India with 2005-10 CAGR of 14%. While per capita packaged food
consumption in India has doubled over the last six years, India still lags other
emerging markets by a wide margin in terms of consumption. Packaged foods sales
as % of GDP at 1.4% is much below 2-4% for other markets. The fastest growing
sub-categories among packaged foods category include dairy, confectionery, instant
noodles and icecream.
Emerging trends
New categories are morphing
Indian consumer is ready to experiment and is being flooded with various choices
across many food categories. Taste, affordability, nutrition and convenience are
compelling drivers for emergence of new food categories like Value Added Dairy
products, Frozen Ready to Eat Food, Non-vegetarian processed foods, Meal Makers
and meal accompaniments. Time constraints today are shrinking the size of Indian
kitchens and this is leading to rising consumption of ready to eat/cook food.
Britannia Industries’ recent launch of ready-to-make instant breakfasts (including
pohas, multi-grains porridges, upmas and oats) is an attempt to offer a healthy meal
option to consumers that is easy and quick to prepare. Similarly companies are
increasingly targeting mid-day and snack meals to expand their food business. Instant
noodles is a classic example of a well accepted substitute for a short meal and has
been amongst the fastest growing food category at 15-20%. Nestle India’s Maggi is a
very popular noodles brand and its success has attracted more players like Hindustan
Unilever (Knorr Soupy), ITC (Yippee) and GSK Consumer (Foodles) to enter this
category.
Dairy is one of the most promising foods segment in India and there has been a spurt
in value added dairy products offerings which are finding lot of favor with
consumers. We can see new products/variants across basic categories like milk,
butter, cheese, yoghurt etc.
Value for money is a very strong driver across segments
Till recently, most FMCG companies only introduced smaller packs of their leading
brands to tap the mass urban and rural markets. For e.g. we have seen introduction of
many Rs2/5/10 SKUs of host of packaged food products be it biscuits, chocolates,
noodles, chips, breakfast cereals etc. However now companies are increasingly
introducing new products meant for the low income consumers considering key
aspects like product need and affordability. Nestle India has launched two new
affordable products – Maggi Masala-ae-Magic (taste enhancer at Rs2) and Maggi
Rasile Chow (gravy noodles at Rs4) targeting the semi-urban and rural markets
particularly. Cadbury India introduced Dairy Milk Shots, priced at Rs2 and Rs5 per
pack, to drive volume sales for the company in smaller towns.
Small packs provide consumers option to experiment with new products without
spending much particularly for low to medium value items like food and beverages.
Kellogg’s introduction of Rs10 pack for cornflakes is an attempt to bring lower
socio-economic groups into the underpenetrated breakfast cereal category.
Growing price segmentation, product customization
Manufacturers are increasingly expanding their product portfolio to target different
consumer sections (per income levels). As a result more price segmentation is now
visible across brands as companies target to cover a wider customer base. Product
customization is underway to meet local taste and cultural preferences e.g. flavored
cereals, vegetarian options, noodles variants, Basmati rice flakes etc.
While companies are introducing specific products for the mass segment, at the same
time they are looking to capture the premiumisation trend which is also catching up
in packaged food segment as in other FMCG categories. Aspiration and affluence are
spurring introduction of premium versions of mass-market products. For e.g. in
biscuits category we now have higher price SKUs like Britannia’s Pure Magic, ITC’s
Dark fantasy and Parle’s Milano. Within chocolates while market leader Cadbury has
over last two years expanded its premium portfolio with launch of Cadbury Silk and
Cadbury Bournville, influx of foreign brands like Lindt, Hershey’s, Mars is also
rising.
Importantly we are noticing that global players are adapting their products to appeal
to Indian tastes. Pepsi Fritolay's has been a prominent follower of this and has
introduced some very successful products for the Indian palate – Kurkure (snacks
with Indian seasonings), Nimbooz ready to drink product (a play on India's traditional
lemonade drink), Aliva (baked cracker with Indian seasonings).
Rapidly growing organised retail provides an excellent
distribution platform
Clearly modern retail chains provide a great platform to allow availability of more
choices to the consumer and packaged foods category is benefiting immensely from
this. Increased display space in store promotions & consumption trials and better
consumer experience further aid sales.
For e.g. it is aiding growth for frozen ready to eat food category. With increasing
freezer space, this nascent category will expand accordingly. Also adoption of
modern refrigeration/cold chain infrastructure will support faster growth for
processed non-vegetarian products and vegetable/fruits. Further new entrants get a
quick access to distribute their products in key cities and towns via modern retail
chains.
Private labels gaining ground
An offshoot of growing scale of organized retail is rising penetration of private
labels. Our recent visits to modern retail stores indicate that retailers’ shelf stock is
changing fast as private label offerings are on an uptrend. Private Labels are well
established in the staples segment and increasingly they are penetrating more
packaged food products (noodles, ketchups, snacks, biscuits, soups) now.
leading brands with similar SKU size offering and appearance (Fig 15), perhaps
indicating to the consumer that they are paying less for a comparable product.
Retailers further leverage shelf presence and higher promotions to attract value
conscious customers.
In case of Pantaloon’s Food Bazaar, share of private labels is the highest in food
products with 10-20% category share. Discounts to category leaders range from 10-
30%.
Table 5: Pantaloon - Private Brands share in FMCG category in Food Bazaar
Category Private Label (share of category sales)
Staples (Wheat Flour, Honey, Oil) 8-12%
Snacks (Chips, cookies) 15-20%
Noodles 5-7%
Other processed foods (Jams, sauces) 8-10%
Juices 25-30%
Source: J.P. Morgan estimates, Company
Health and Wellness is the new buzz word
Rising health consciousness has led to emergence of health focused foods across subsegments
like snacks, wheat flour, butter, noodles etc. This segment will likely
witness significant activity as demand for health food is on an uptrend. Rising
awareness and income levels and fast paced lifestyles are spurring the need for health
snacks. These products command higher pricing and benefit margin profile for the
manufacturers too. Players are seeking health positioning across categories like
instant noodles, breakfast cereals, fruit based beverages, biscuits and even snacks.
Besides health foods, energy drinks/bars are also finding favor with the young
generation. The popular energy drinks in the Indian market are Phantom, Red Bull,
Gatorade and Cloud 9. GSK Consumer recently launched global sports drink brand
Lucozade in the country.
Key launches based on health platform
Company Products on health & wellness platform
Hindustan Unilever Knorr soups
Knorr Noodles
Nestle India Maggi soups
Maggi Vegetable Atta Noodles
Maggi Multigrainz noodles
Kit Kat Lite
ITC Benne Vita Flaxseed Biscuits
Marie Light biscuits
Aashirvaad Atta with Multigrains
Britannia Nutri Choice biscuits
Amul Probiotic Ice-creams, Probiotic Lassi and Curd
Reduced Salt Butter
Dabur Real Activ (no sugar) juice
Pepsico Quaker Oats breakfast cereal
Alive - low fat and roasted snack biscuit
Lay's chips with 40% less saturated fat, zero trans fats and no added MSG
Parle Agro Hippo- a baked snack
Parle Products Monaco Smart Chips
Zydus Cadila Sugar Free sweetner
Sugar Free D’lite– a low calorie healthy drink
Nutralite– cholesterol-free butter
Cadbury Dairy Milk Lite
Perk Glucose
Marico Saffola Arise
United Spirits McDowell’s No 1 Diet Mate whisky
Romanov Diet Vodka
Kellogg Special K cereal for weight management
GSK Consumer Horlicks Nutribar
Source: Company, J.P. Morgan
Snacking habits gaining prominence – Keep Munching
One category that is gaining wide acceptance across age groups is Snacks growing at
healthy pace of 15-20% p.a. Food companies are actively launching new products,
flavors, pack sizes to make people consume more ‘On the go’ food. Indian snacks
market size is around Rs36bn with nearly half of it being organized. Potato based
snacks dominate the organised snacks space with Pepsi Fritolays and ITC being the
prominent players in this category. India’s annual per capita snack food consumption
is just 500gm. Young consumers, wider product availability, affordable pricing (Rs5
and Rs10 are standard price points) and higher disposable income will drive
consumption of impulse products in our view.
Multinationals stepping up investments in
India
Many global food majors have announced plans to accelerate investments in India to
leverage on favorable demographic and macroeconomic trends. While most of these
companies have targeted the urban rich India as a starting point, few like Nestle and
Pepsico Fritolays have successfully penetrated the mid and low income groups as
well.
Nestle India is looking to invest considerably in brownfield and greenfield expansion
over the next 2-3 years. Robust demand trends for its product portfolio and current
high capacity utilization rates for existing plants are driving this aggressive
expansion at their end. Over the last three years the company has made capital
investments of Rs6.5bn and will have invested over Rs4.5bn in CY2010, and they
see further acceleration in 2011 and beyond. GSK Consumer is also looking to build
capacities on its existing plants and has earmarked capex of cRs2bn over CY10-11
for the same.
Potential capital investments for expansion of some of the existing plants* over 2-3
years by Nestle India
Rs bn
Rs bn
Samalkha 6.5
Nanjangud 4.0
Ponda 5.0
Bicholim 1.5
Source: Company reports. * - Please note this is not exhaustive list and excludes investments in other existing plants and investments
for Greenfield expansion.
Hindustan Unilever is also looking to build its scale in processed foods space in a big
way. Expanding its portfolio from just sauces and jams under Kissan brand and ice
creams to soups, noodles and ready to cook meals under Knorr brand has helped the
company to step up its growth rates considerably in this category. Heinz is also
diversifying its product base and expanding distribution reach which has led to 20%
revenue CAGR for the company over FY06-10.
The relatively new players in processed foods space include likes of Kraft Foods
(which post acquisition of Cadbury has a ready distribution network in place to
leverage on) and Danone (which is foraying on its own after breaking up with
Britannia locally). Both these companies are leaders in packaged foods space
globally and would be key players to watch out for in medium term. Cadbury India
(subsidiary of Kraft Foods) recently announced its foray in biscuits segment through
the launch of Oreo brand from the global portfolio of its parent. It is looking to
manufacture the products locally and introduce it at affordable and popular price
points. It will use Cadbury’s ready wide distribution network to market and sell the
product in order to garner higher share of fast growing premium biscuit market.
While likes of Pepsico and Coca-Cola have been quite successful in terms of scaling
up both their product portfolio and distribution reach in India, Kellogg has seen step
up in sales over past couple of years post new SKU introductions and growing
penetration of modern retailing which supports sales for breakfast cereals. Kellogg’s
India business has grown fourfold in the last five years; and management believes it
is going to grow again at the similar rates over the next five years.
Raw Materials
Where are commodity prices now?
The main agricultural commodities used as raw material by F&B companies we
cover in India are palm oil, wheat/flour, sugar, milk and tea. Over past six months,
most of these commodities have seen a 8-30% Y/Y price increase (refer Table
below). However, over the last month or so the prices have been stabilising and some
like palm and wheat have started to even moderate. Yet another significant direct
cost for all these companies are packaging costs. Packaging costs are crucial for most
of these companies and are largely a function of oil prices (petrochemical derivatives
and energy costs), and paper (packaging). There are no indicators yet on a
meaningful decline in these commodity prices, but any decline could add
considerably to earnings surprise on the upside to FY12 earnings
Commodity price outlook
Palm Oil: JPM plantation team is cautious on palm oil price prospects in 2H11.
They believe that CPO prices would peak in 1Q11 and thereafter would weaken.
They believe that due to the low output season and ‘La Nina’ weather impact, prices
are likely to stay near these high levels through 1Q11. Beyond this, prices are likely
to weaken as demand destruction/substitution is likely to take effect mainly by 2H11,
with an expected upturn in the yield cycle by then, which would raise output. JPM’s
crude palm oil price forecast is M$3,400/t in 2011E and M$3,200/t in 2012E (current
price is M$3370/t).
Wheat – USDA outlook: India is set to harvest its fourth consecutive record wheat
crop on record planting and favorable growing conditions. USDA forecasts 2011
wheat production to increase to a record 83 mn tons from 29.3 mn hectares compared
to 80.8 mn tons from 28.2 mn hectares in 2010. The domestic market is largely
insulated from the global price movement as exports of wheat have been banned
since 2007. Market prices during the MY 2011/12 are expected to remain steady in a
narrow range on sufficient domestic supplies and expected continuation of the export
ban as per USDA.
Rice – USDA outlook: Rice prices in the domestic market have eased in MY
2010/11 due to the improved domestic production and higher off-take of government
rice stocks due to food inflation concerns. Like wheat, domestic market prices are
largely insulated from the global price movements as exports of non-basmati rice
exports continue to remain banned. With sufficient domestic production and
relatively large government stocks, market prices are expected to remain steady.
Milk: Milk prices have seen an increase of 15-20% over past year led by strong
demand for dairy products. Our discussions with company management's indicate
that milk prices will likely remain sticky at the elevated levels, though yoy increase
will be lower in 2011 when compared to 2010. Indian government has recently
banned export of milk powder to keep prices of milk under check.
Crude Oil: The escalation of tension in the Middle East, coupled with a less-thanclear
supply response from OPEC, has injected considerable volatility into the oil
market. JPM’s annual price forecast of $104/bbl for 2011 represents what we
consider is the most likely path for oil market developments. While JPM envisage
spot Brent prices easing over the balance of the first half of the year, there remains a
smaller but significant chance that we may yet see prices move towards $180/bbl if
supply disruptions increase. To be clear, JPM’s central forecast assumes that supply
problems will be limited to Libya, that OPEC will supply additional oil, and that
demand for precautionary inventories will moderate over time from their crisis-levels
of today.
Expect price hikes and likely moderation in RM costs to
support margins
There is no doubt in our mind that large companies have pricing power and they will
exercise it to mitigate cost push. We have already seen Nestle India and GSK
Consumer undertaking significant price hikes to protect gross margins. Nestle has
resorted to aggressive price hikes in recent quarters (2.3% in Q110, 5.3% in Q210
and 6.6% in Q310) to mitigate cost pressures and appears confident about
maintaining operating margins. Similarly GSK Consumer undertook 5-6% price hike
in Nov’10 to mitigate input cost push.
In recent Q4CY10 earnings, Nestle India reported 60bp y/y expansion in gross
margins after witnessing decline in prior four quarters. While raw material inflation
remains a significant challenge, we believe price increases and better SG&A leverage
will help mitigate cost pressures going forward. We believe further product mix
enhancement should help sustain margins for Nestle India at current levels.
In our recent discussions with GSK Consumer, management noted that malt prices
are on an upmove (15%+) and milk prices continue to remain firm, with overall input
cost index likely to be up around 8-9% y/y in CY11E. Since raw materials account
for 37% of sales, we believe an annual 5-6% price hike should be able to neutralize
the 12-15% cost inflation comfortably and help sustain stable gross margins for the
company. However we choose to be conservative and have built in 40bp gross
margin contraction in CY11E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Big conversion opportunity. Low per capita consumption, rising income
levels, changes in consumption patterns and demographic changes (younger
population and more working women) should drive significant growth for
packaged foods category in India. Entry of new players and growing scale of
modern retailing would further facilitate introduction of more products and
higher impulse purchases. Packaged food consumption at 1.4% of GDP is well
below 2-3% for other emerging markets.
• Lifestyle changes are becoming more pronounced and are influencing
demand for packaged foods. Affordability, convenience, taste, quality and health
benefits are becoming key considerations for increasingly busier and affluent
consumers. Growth in modern distribution/cold chain, packaging innovation
provides platform for packaged food companies to capitalize on these trends.
• Competition seems more focused on innovation than discounting, which is a
key positive for the sector. Innovation has been a substantial driver for revenue
growth and we expect this pace to increase further as companies count on rising
income levels and consumer uptrading. In order to garner higher market share
and sustain robust growth rates, new product launches have picked up a
substantial pace over the past 2-3 years. Maggi (Nestle), Horlicks (GSK), Knorr
(HUL), and Saffola (Marico), are the key umbrella brands that have successfully
extended to new categories. Companies are expanding the universe of
opportunity by adopting new users and usage occasions.
• Margin expansion opportunity still exists. Commodity inflation remains a
challenge (particularly for packaging). However, we see more pricing power
(relative to HPC space), premiumisation across food segments and a benign
agri-commodity price outlook as positive margin drivers. Aided by better
volume and SG&A leverage, we expect EBITDA margins to expand by 30-
40bps for Nestle India and GSK Consumer in CY11E.
• GSK Consumer (OW) and Nestle India (N) are the preferred plays on the
strong growth potential for packaged food industry in India. They have strong
franchises and would be key beneficiaries from any softening in agriculture
commodity prices. We estimate 21-22% EPS CAGR for them over CY10-12E,
which is amongst the highest in our coverage universe and expect these stocks to
sustain premium valuations. ITC (OW) and HUL (UW) also have exposure to
packaged foods with 9% and 5% of respective revenue contribution. Other plays
in this segment are Britannia (NR), Pepsico India, Cadbury India, GCMMF,
Heinz India, Agro Tech Foods (NR) and Venkys India (NR).
Plays on packaged food space
GSK Consumer (OW) and Nestle India (N) are the preferred plays on the strong
growth potential for packaged food industry in India. They have strong franchises
and have registered strong revenue growth in recent years. Over past four quarters on
an average GSK Consumer and Nestle India have reported 21% and 22% revenue
growth respectively on the back of high (mid-teens) volume growth. On earnings
front growth has been equally impressive with GSK Consumer and Nestle India
registering 29% and 21% EPS growth in CY10, respectively.
The consistent performance in terms of revenue and earnings growth makes us
confident about these companies management and strategy for growth. Their
performance has been reflected in the recent upward share price run. GSK Consumer
and Nestle India have run up by 15-20% over the past six months, outperforming the
Sensex by 20-25%. We expect the outperformance to continue as earnings growth
remains strong in coming quarters. Key growth catalysts would be robust volume
growth across high growth categories, supported by healthy margins and continuous
product innovation. Success of new products could further add to growth.
We estimate 21-22% EPS CAGR for GSK Consumer and Nestle India over CY10-
12E, which is amongst the highest in our coverage universe and expect these stocks
to sustain premium valuations. We have an OW rating on GSK Consumer given
reasonable valuations and healthy earnings growth outlook. While we remain
positive on Nestle India’s long term growth potential, we think the current valuation
of 35x CY11E P/E could constrain stock performance in the near term and hence we
have a Neutral rating on the stock. Compared to Nestle India, GSK Consumer is
trading at c35% discount on 2011 P/E for nearly similar earnings growth profile.
ITC (OW) and HUL (UW) also have some exposure to packaged foods with 9% and
5% of respective revenue contribution. Other plays in this segment are Britannia
(NR), Pepsico India, Cadbury India, GCMMF, Heinz India, Agro Tech Foods (NR)
and Venkys India (NR).
Drivers for packaged food demand
Income factor: Rising income levels are accompanied by change in food
consumption habits as consumers upgrade to more value added products and demand
a wide variety to choose from. Convenience, Variety, Quality, Health benefits are
becoming increasingly important considerations while making a purchase decision.
Double income households (with more working women) have also enhanced
purchasing power for packaged foods, which are more expensive.
Lifestyle factor: Fast changing lifestyles are leading to higher offtake of packaged
food. Given rising urbanization, growing number of nuclear families, more working
women (the key decision maker for household budget on food spends) and busier
working schedules for many, acceptance of packaged food is rising due to
convenience factor. These coupled with access to more amenities like refrigerators
and microwave ovens have aided the growth for packaged foods.
Availability factor: With increasing penetration of modern retail and cold chain
storages, frozen and canned foods are finding more shelf space. Increased marketing
and advertising initiatives by processed foods companies is helping change
consumer's mindset about quality of packaged food (vs freshly prepared food) and
spurring consumer trials.
Large growth opportunities in packaged foods space
Marked by low penetration levels and dominated by unorganized players, the Indian
processed foods market holds substantial potential for organized players like Nestle
India, GSK Consumer and Britannia Industries whose products enjoy strong brand
equity across various food categories. Significant changes on demand side such as
urbanization, rising income levels, need for convenience and on supply side such as
improving supply (cold) chain infrastructure, growing modern retail penetration and
entry of more players is fuelling growth for the packaged food industry in India.
While popularity of packaged foods is growing in urban markets, this trend is being
increasingly mirrored now in rural India as well.
We believe the sustainability of processed foods growth would also be supported by
low priced SKUs, which help addressing a much larger customer base. There has
been a marked improvement in penetration rates in existing markets and there is
significant opportunity in extending this to tier 3 and tier 4 cities. In urban markets,
modern retail, which is growing at a fast pace, is a positive for impulse buying and
national brands.
We are witnessing significant capacity expansion by leading players in packaged
foods space in order to meet growing demand. We believe companies have just
scratched the surface so far in terms of penetrating this sector and outlook for both
volumes and mix changes remains exciting.
As per government estimates, the processed foods market size is likely to double
from the current levels by FY2015. The share of value-added products in overall
processed foods consumption is likely to go up from 40% currently to 50% over a
similar period, and branded manufacturers would be a key beneficiary of this shift.
Packaged foods (estimated at US$22bn) is amongst the fastest growing consumption
segments in India with 2005-10 CAGR of 14%. While per capita packaged food
consumption in India has doubled over the last six years, India still lags other
emerging markets by a wide margin in terms of consumption. Packaged foods sales
as % of GDP at 1.4% is much below 2-4% for other markets. The fastest growing
sub-categories among packaged foods category include dairy, confectionery, instant
noodles and icecream.
Emerging trends
New categories are morphing
Indian consumer is ready to experiment and is being flooded with various choices
across many food categories. Taste, affordability, nutrition and convenience are
compelling drivers for emergence of new food categories like Value Added Dairy
products, Frozen Ready to Eat Food, Non-vegetarian processed foods, Meal Makers
and meal accompaniments. Time constraints today are shrinking the size of Indian
kitchens and this is leading to rising consumption of ready to eat/cook food.
Britannia Industries’ recent launch of ready-to-make instant breakfasts (including
pohas, multi-grains porridges, upmas and oats) is an attempt to offer a healthy meal
option to consumers that is easy and quick to prepare. Similarly companies are
increasingly targeting mid-day and snack meals to expand their food business. Instant
noodles is a classic example of a well accepted substitute for a short meal and has
been amongst the fastest growing food category at 15-20%. Nestle India’s Maggi is a
very popular noodles brand and its success has attracted more players like Hindustan
Unilever (Knorr Soupy), ITC (Yippee) and GSK Consumer (Foodles) to enter this
category.
Dairy is one of the most promising foods segment in India and there has been a spurt
in value added dairy products offerings which are finding lot of favor with
consumers. We can see new products/variants across basic categories like milk,
butter, cheese, yoghurt etc.
Value for money is a very strong driver across segments
Till recently, most FMCG companies only introduced smaller packs of their leading
brands to tap the mass urban and rural markets. For e.g. we have seen introduction of
many Rs2/5/10 SKUs of host of packaged food products be it biscuits, chocolates,
noodles, chips, breakfast cereals etc. However now companies are increasingly
introducing new products meant for the low income consumers considering key
aspects like product need and affordability. Nestle India has launched two new
affordable products – Maggi Masala-ae-Magic (taste enhancer at Rs2) and Maggi
Rasile Chow (gravy noodles at Rs4) targeting the semi-urban and rural markets
particularly. Cadbury India introduced Dairy Milk Shots, priced at Rs2 and Rs5 per
pack, to drive volume sales for the company in smaller towns.
Small packs provide consumers option to experiment with new products without
spending much particularly for low to medium value items like food and beverages.
Kellogg’s introduction of Rs10 pack for cornflakes is an attempt to bring lower
socio-economic groups into the underpenetrated breakfast cereal category.
Growing price segmentation, product customization
Manufacturers are increasingly expanding their product portfolio to target different
consumer sections (per income levels). As a result more price segmentation is now
visible across brands as companies target to cover a wider customer base. Product
customization is underway to meet local taste and cultural preferences e.g. flavored
cereals, vegetarian options, noodles variants, Basmati rice flakes etc.
While companies are introducing specific products for the mass segment, at the same
time they are looking to capture the premiumisation trend which is also catching up
in packaged food segment as in other FMCG categories. Aspiration and affluence are
spurring introduction of premium versions of mass-market products. For e.g. in
biscuits category we now have higher price SKUs like Britannia’s Pure Magic, ITC’s
Dark fantasy and Parle’s Milano. Within chocolates while market leader Cadbury has
over last two years expanded its premium portfolio with launch of Cadbury Silk and
Cadbury Bournville, influx of foreign brands like Lindt, Hershey’s, Mars is also
rising.
Importantly we are noticing that global players are adapting their products to appeal
to Indian tastes. Pepsi Fritolay's has been a prominent follower of this and has
introduced some very successful products for the Indian palate – Kurkure (snacks
with Indian seasonings), Nimbooz ready to drink product (a play on India's traditional
lemonade drink), Aliva (baked cracker with Indian seasonings).
Rapidly growing organised retail provides an excellent
distribution platform
Clearly modern retail chains provide a great platform to allow availability of more
choices to the consumer and packaged foods category is benefiting immensely from
this. Increased display space in store promotions & consumption trials and better
consumer experience further aid sales.
For e.g. it is aiding growth for frozen ready to eat food category. With increasing
freezer space, this nascent category will expand accordingly. Also adoption of
modern refrigeration/cold chain infrastructure will support faster growth for
processed non-vegetarian products and vegetable/fruits. Further new entrants get a
quick access to distribute their products in key cities and towns via modern retail
chains.
Private labels gaining ground
An offshoot of growing scale of organized retail is rising penetration of private
labels. Our recent visits to modern retail stores indicate that retailers’ shelf stock is
changing fast as private label offerings are on an uptrend. Private Labels are well
established in the staples segment and increasingly they are penetrating more
packaged food products (noodles, ketchups, snacks, biscuits, soups) now.
leading brands with similar SKU size offering and appearance (Fig 15), perhaps
indicating to the consumer that they are paying less for a comparable product.
Retailers further leverage shelf presence and higher promotions to attract value
conscious customers.
In case of Pantaloon’s Food Bazaar, share of private labels is the highest in food
products with 10-20% category share. Discounts to category leaders range from 10-
30%.
Table 5: Pantaloon - Private Brands share in FMCG category in Food Bazaar
Category Private Label (share of category sales)
Staples (Wheat Flour, Honey, Oil) 8-12%
Snacks (Chips, cookies) 15-20%
Noodles 5-7%
Other processed foods (Jams, sauces) 8-10%
Juices 25-30%
Source: J.P. Morgan estimates, Company
Health and Wellness is the new buzz word
Rising health consciousness has led to emergence of health focused foods across subsegments
like snacks, wheat flour, butter, noodles etc. This segment will likely
witness significant activity as demand for health food is on an uptrend. Rising
awareness and income levels and fast paced lifestyles are spurring the need for health
snacks. These products command higher pricing and benefit margin profile for the
manufacturers too. Players are seeking health positioning across categories like
instant noodles, breakfast cereals, fruit based beverages, biscuits and even snacks.
Besides health foods, energy drinks/bars are also finding favor with the young
generation. The popular energy drinks in the Indian market are Phantom, Red Bull,
Gatorade and Cloud 9. GSK Consumer recently launched global sports drink brand
Lucozade in the country.
Key launches based on health platform
Company Products on health & wellness platform
Hindustan Unilever Knorr soups
Knorr Noodles
Nestle India Maggi soups
Maggi Vegetable Atta Noodles
Maggi Multigrainz noodles
Kit Kat Lite
ITC Benne Vita Flaxseed Biscuits
Marie Light biscuits
Aashirvaad Atta with Multigrains
Britannia Nutri Choice biscuits
Amul Probiotic Ice-creams, Probiotic Lassi and Curd
Reduced Salt Butter
Dabur Real Activ (no sugar) juice
Pepsico Quaker Oats breakfast cereal
Alive - low fat and roasted snack biscuit
Lay's chips with 40% less saturated fat, zero trans fats and no added MSG
Parle Agro Hippo- a baked snack
Parle Products Monaco Smart Chips
Zydus Cadila Sugar Free sweetner
Sugar Free D’lite– a low calorie healthy drink
Nutralite– cholesterol-free butter
Cadbury Dairy Milk Lite
Perk Glucose
Marico Saffola Arise
United Spirits McDowell’s No 1 Diet Mate whisky
Romanov Diet Vodka
Kellogg Special K cereal for weight management
GSK Consumer Horlicks Nutribar
Source: Company, J.P. Morgan
Snacking habits gaining prominence – Keep Munching
One category that is gaining wide acceptance across age groups is Snacks growing at
healthy pace of 15-20% p.a. Food companies are actively launching new products,
flavors, pack sizes to make people consume more ‘On the go’ food. Indian snacks
market size is around Rs36bn with nearly half of it being organized. Potato based
snacks dominate the organised snacks space with Pepsi Fritolays and ITC being the
prominent players in this category. India’s annual per capita snack food consumption
is just 500gm. Young consumers, wider product availability, affordable pricing (Rs5
and Rs10 are standard price points) and higher disposable income will drive
consumption of impulse products in our view.
Multinationals stepping up investments in
India
Many global food majors have announced plans to accelerate investments in India to
leverage on favorable demographic and macroeconomic trends. While most of these
companies have targeted the urban rich India as a starting point, few like Nestle and
Pepsico Fritolays have successfully penetrated the mid and low income groups as
well.
Nestle India is looking to invest considerably in brownfield and greenfield expansion
over the next 2-3 years. Robust demand trends for its product portfolio and current
high capacity utilization rates for existing plants are driving this aggressive
expansion at their end. Over the last three years the company has made capital
investments of Rs6.5bn and will have invested over Rs4.5bn in CY2010, and they
see further acceleration in 2011 and beyond. GSK Consumer is also looking to build
capacities on its existing plants and has earmarked capex of cRs2bn over CY10-11
for the same.
Potential capital investments for expansion of some of the existing plants* over 2-3
years by Nestle India
Rs bn
Rs bn
Samalkha 6.5
Nanjangud 4.0
Ponda 5.0
Bicholim 1.5
Source: Company reports. * - Please note this is not exhaustive list and excludes investments in other existing plants and investments
for Greenfield expansion.
Hindustan Unilever is also looking to build its scale in processed foods space in a big
way. Expanding its portfolio from just sauces and jams under Kissan brand and ice
creams to soups, noodles and ready to cook meals under Knorr brand has helped the
company to step up its growth rates considerably in this category. Heinz is also
diversifying its product base and expanding distribution reach which has led to 20%
revenue CAGR for the company over FY06-10.
The relatively new players in processed foods space include likes of Kraft Foods
(which post acquisition of Cadbury has a ready distribution network in place to
leverage on) and Danone (which is foraying on its own after breaking up with
Britannia locally). Both these companies are leaders in packaged foods space
globally and would be key players to watch out for in medium term. Cadbury India
(subsidiary of Kraft Foods) recently announced its foray in biscuits segment through
the launch of Oreo brand from the global portfolio of its parent. It is looking to
manufacture the products locally and introduce it at affordable and popular price
points. It will use Cadbury’s ready wide distribution network to market and sell the
product in order to garner higher share of fast growing premium biscuit market.
While likes of Pepsico and Coca-Cola have been quite successful in terms of scaling
up both their product portfolio and distribution reach in India, Kellogg has seen step
up in sales over past couple of years post new SKU introductions and growing
penetration of modern retailing which supports sales for breakfast cereals. Kellogg’s
India business has grown fourfold in the last five years; and management believes it
is going to grow again at the similar rates over the next five years.
Raw Materials
Where are commodity prices now?
The main agricultural commodities used as raw material by F&B companies we
cover in India are palm oil, wheat/flour, sugar, milk and tea. Over past six months,
most of these commodities have seen a 8-30% Y/Y price increase (refer Table
below). However, over the last month or so the prices have been stabilising and some
like palm and wheat have started to even moderate. Yet another significant direct
cost for all these companies are packaging costs. Packaging costs are crucial for most
of these companies and are largely a function of oil prices (petrochemical derivatives
and energy costs), and paper (packaging). There are no indicators yet on a
meaningful decline in these commodity prices, but any decline could add
considerably to earnings surprise on the upside to FY12 earnings
Commodity price outlook
Palm Oil: JPM plantation team is cautious on palm oil price prospects in 2H11.
They believe that CPO prices would peak in 1Q11 and thereafter would weaken.
They believe that due to the low output season and ‘La Nina’ weather impact, prices
are likely to stay near these high levels through 1Q11. Beyond this, prices are likely
to weaken as demand destruction/substitution is likely to take effect mainly by 2H11,
with an expected upturn in the yield cycle by then, which would raise output. JPM’s
crude palm oil price forecast is M$3,400/t in 2011E and M$3,200/t in 2012E (current
price is M$3370/t).
Wheat – USDA outlook: India is set to harvest its fourth consecutive record wheat
crop on record planting and favorable growing conditions. USDA forecasts 2011
wheat production to increase to a record 83 mn tons from 29.3 mn hectares compared
to 80.8 mn tons from 28.2 mn hectares in 2010. The domestic market is largely
insulated from the global price movement as exports of wheat have been banned
since 2007. Market prices during the MY 2011/12 are expected to remain steady in a
narrow range on sufficient domestic supplies and expected continuation of the export
ban as per USDA.
Rice – USDA outlook: Rice prices in the domestic market have eased in MY
2010/11 due to the improved domestic production and higher off-take of government
rice stocks due to food inflation concerns. Like wheat, domestic market prices are
largely insulated from the global price movements as exports of non-basmati rice
exports continue to remain banned. With sufficient domestic production and
relatively large government stocks, market prices are expected to remain steady.
Milk: Milk prices have seen an increase of 15-20% over past year led by strong
demand for dairy products. Our discussions with company management's indicate
that milk prices will likely remain sticky at the elevated levels, though yoy increase
will be lower in 2011 when compared to 2010. Indian government has recently
banned export of milk powder to keep prices of milk under check.
Crude Oil: The escalation of tension in the Middle East, coupled with a less-thanclear
supply response from OPEC, has injected considerable volatility into the oil
market. JPM’s annual price forecast of $104/bbl for 2011 represents what we
consider is the most likely path for oil market developments. While JPM envisage
spot Brent prices easing over the balance of the first half of the year, there remains a
smaller but significant chance that we may yet see prices move towards $180/bbl if
supply disruptions increase. To be clear, JPM’s central forecast assumes that supply
problems will be limited to Libya, that OPEC will supply additional oil, and that
demand for precautionary inventories will moderate over time from their crisis-levels
of today.
Expect price hikes and likely moderation in RM costs to
support margins
There is no doubt in our mind that large companies have pricing power and they will
exercise it to mitigate cost push. We have already seen Nestle India and GSK
Consumer undertaking significant price hikes to protect gross margins. Nestle has
resorted to aggressive price hikes in recent quarters (2.3% in Q110, 5.3% in Q210
and 6.6% in Q310) to mitigate cost pressures and appears confident about
maintaining operating margins. Similarly GSK Consumer undertook 5-6% price hike
in Nov’10 to mitigate input cost push.
In recent Q4CY10 earnings, Nestle India reported 60bp y/y expansion in gross
margins after witnessing decline in prior four quarters. While raw material inflation
remains a significant challenge, we believe price increases and better SG&A leverage
will help mitigate cost pressures going forward. We believe further product mix
enhancement should help sustain margins for Nestle India at current levels.
In our recent discussions with GSK Consumer, management noted that malt prices
are on an upmove (15%+) and milk prices continue to remain firm, with overall input
cost index likely to be up around 8-9% y/y in CY11E. Since raw materials account
for 37% of sales, we believe an annual 5-6% price hike should be able to neutralize
the 12-15% cost inflation comfortably and help sustain stable gross margins for the
company. However we choose to be conservative and have built in 40bp gross
margin contraction in CY11E.
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