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Strictly Private and ConfidentialIndian Consumer Goods: Resilience continues Abneesh Roy                        Harsh Meht...
Key trends in Q3FY12 Volume spurs : Volume for 12 out of 13 companies in line or better than expectations; positive surpri...
Outlook for coming quarters: Upbeat Volume: To remain healthy as penetration levels and per capita usage will remain attra...
Some unanswered questions…… Is it trend reversal of slowdown in ad spends: Some consumer companies like Dabur, Marico, GSK...
Risks Currency: Further MTM impact will depend on how the INR moves from INR53 (Dec end). Hike in excise tax, reduction in...
Valuation snapshot and top picks                                                                                          ...
A detailed analysis of trends
Trend 1: Volume spur on Consumer pack continues to surprise positively in terms of volume growth despite several price hik...
Trend 1: Volume spur on (Contd…)                     Revenues (INR mn)                                       Q3FY12       ...
Trend 2: Ad spend under control; some revival Four out of 13 companies have cut ad spending on an absolute basis to reduce...
Trend 3: Strain on gross margin; worst likely behind Gross margins have declined for 12 out of 21 companies (dipped for 15...
Trend 4: EBITDA margin dips, but a few manage better EBITDA margin of 12 out of 21 companies declined (declined for 14 out...
Trend 5: Pricing power continues    Quality of sales growth was better with balanced blend of price and volume growth.    ...
Trend 6: Pace of new launches picks up      Q3FY12 saw launches of several new products and categories by HUL, ITC, GCPL, ...
Trend 7: International sales growth robust for most players      Companies reported robust growth in international busines...
Annexure
Rural focus bolsters volume Rural India remains a major focus area for all companies. Rural consumption market stood at ~U...
Key raw material: Price trend                  Palm Oil                  Palm Oil                               4,800     ...
Key raw material: Price trend and Edelweiss commodity index       LLP                                                     ...
DisclaimerThis document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and ...
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Edelweiss consumer goods -_sector_update-feb-12-edel

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Retail in India 2012

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Transcript of "Edelweiss consumer goods -_sector_update-feb-12-edel"

  1. 1. Strictly Private and ConfidentialIndian Consumer Goods: Resilience continues Abneesh Roy Harsh Mehta +91-22-6620 3141 +91-22-4063 5543 abneesh.roy@edelcap.com harsh.mehta@edelcap.com February 2012
  2. 2. Key trends in Q3FY12 Volume spurs : Volume for 12 out of 13 companies in line or better than expectations; positive surprises: Asian Paints, Marico and Dabur. This is in sharp contrast to many media and street Q3FY12 forecasts of a sharp slowdown in rural demand and inventory pile up. Ad spend remain soft, but some pick up: Six companies (out of 13) cut it in terms of % of sales (v/s. 10 out of 13 in Q2FY12). Four trimmed ad spends on absolute basis. Strain on gross margin persist: Gross margins of 12 companies (out of 21) dipped significantly ( i ifi tl (except GCPL, Marico, N tl E t GCPL M i Nestle, Emami, B it i Britannia, Agro Tech and cigarette i A T h d i tt companies). EBIDTA margin dips: EBITDA margin of 12 (out of 21) companies declined, though much lower than gross margin (Dabur, USL, Zydus Wellness, Pidilite and Bajaj Corp saw a high decline) (Dabur USL Wellness decline). Pricing power rises: Majority took calibrated price hikes. Quality of sales growth was better with balanced blend of price and volume growth. N New launches pick up pace: C l h i k Companies are persisting with i i i i i h innovations and product launches i d d l h across segments, and pace seen improving from the previous quarter. International businesses continue to bloom: In most cases, businesses reported healthy growth despite global economic pressures Emami disappointed in Africa Dabur in Turkey. pressures. Africa, Turkey Q3FY12 results | Hits: GCPL, Marico, Colgate, Asian Paints, Dabur. Flops: USL. Top picks: Dabur, Marico, GCPL and ITC. 2
  3. 3. Outlook for coming quarters: Upbeat Volume: To remain healthy as penetration levels and per capita usage will remain attractive for years to come. Both rural and urban India to drive demand. Ad spend: To see a slow revival. Gross margin: Gross margin pressure likely peaked out. Coming quarters likely to see expansion in gross margins, part of which will be ploughed back into ad spends. India growing much faster than world average: In Dec quarter Indian volume growth quarter, continues to be much faster than the rest of the world, justifying premium multiples. • Colgate India reported ~15% YoY volume growth v/s parent company’s 4.0%. • HUL reported 9 % YoY volume growth against parent company’s 0.1%. d 9.1% l h ’ 0 % • Coca-Cola India reported a healthy 20% YoY volume growth v/s 3% for parent company. Packaging law: The new packaging legislation could impact categories like biscuits, detergents, tea, coffee and soaps, which in turn could affect affordability and thereby overall sales. Budget: Tax-free slabs are expected to be raised, which will aid consumption. 3
  4. 4. Some unanswered questions…… Is it trend reversal of slowdown in ad spends: Some consumer companies like Dabur, Marico, GSK sharply stepped up ad spends in Dec quarter. Laggards in margins like soaps & detergents and biscuits posted sharp recovery in margins. Is it sustainable? Marked increase in action in toothpaste segment. Is P&G finally entering toothpaste in India? Are margins in personal care set for a structural downtrend? Has India stepped up usage of hair oils as seen in strong volume g g growth by all hair oil companies? y p 4
  5. 5. Risks Currency: Further MTM impact will depend on how the INR moves from INR53 (Dec end). Hike in excise tax, reduction in fiscal benefits. Slowdown in rural growth due t low food i fl ti Sl d i l th d to l f d inflation and cut back in govt. spends. d tb ki t d Slowdown in discretionary items in urban areas. Increase in ad spends, entry of new players. p , y p y Difficulty in price hikes in lower SKUs, new packaging norms. 5
  6. 6. Valuation snapshot and top picks  Div yield  CAGRCompany Market Mcap Diluted EPS (INR) P/E( x) EV/EBITDA(x) ROE (%) (%)  (%)  Price (INR) (INR bn) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11E FY12E FY13E FY13E FY11‐13EFMCGAsian Paints               3,027 290 87.9 96.1 110.4 34.4 31.5 27.4 21.5 19.7 16.8 43.3 38.5 37.2 1.7 12.0Colgate                1,004 137 29.6 32.2 37.8    33.9    31.2    26.6 25.1 22.7 18.8 113.4 113.9 111.7 2.7 13.0Dabur                    103 180 3.3 3.6 4.3    31.8    28.9    23.8 24.0 20.5 16.8 51.2 42.3 40.3 1.5 15.6Emami                   380 58 15.1 17.2 20.1 25.2 22.2 18.9 22.7 20.0 15.9 34.8 36.3 39.0 1.9 15.3GlaxoSmithKline Co                2,616 110 71.3 84.5 106.9    36.7    31.0    24.5 23.0 19.4 15.0 32.8 34.6 36.2 1.6 22.5Godrej Consumer                     435 141 14.9 16.4 20.5    29.2    26.5    21.3 24.8 20.0 16.3 35.9 27.6 28.4 1.6 17.2Hindustan Unilever                    392 847 9.8 12.0 14.0    39.9    32.6    28.0 34.7 26.8 22.8 79.8 83.6 77.2 2.2 19.4ITC                   203 1580 6.6 7.9 9.0 30.6 25.6 22.4 19.8 17.3 15.1 33.2 35.9 37.2 2.7 16.8Marico                    163 100 4.7 5.2 6.5    34.9    31.3    25.1 25.5 21.2 16.9 30.3 30.5 29.6 0.6 17.9Nestle*                4,412 425 88.7 106.2 129.9    49.7    41.5    34.0 33.7 27.1 21.7 119.1 101.5 92.6 1.8 21.0United Spirits p                   676 88 35.1 30.6 38.6 19.2 22.1 17.5 12.2 11.7 10.3 11.6 9.0 10.6 1.7 4.8United Breweries#                    461 121       6.4       7.1    11.2    72.0    64.9    41.3     30.4     24.4     17.3    15.0    15.6    18.1             0.2 32.0Pidilite#                    145 77       6.4       7.3       9.7    22.7    19.8    15.0     16.7     15.3     12.5    31.2    28.4    28.1             1.8 23.1Britannia#                    519 63    10.4    16.0    20.4    49.8    32.4    25.4     30.6     20.1     16.0    40.5    43.9    52.6             2.0 40.1FMCG ‐ Mean 36.4x 31.5x 25.1x 24.6x 20.6x 17.0x 53.2 50.3 49.1 1.8 19.3FMCG ‐ Mean (market cap wtd average) 35.0x 29.8x 25.4x 25.2x 21.1x 17.8x 56.3 55.3 53.3 2.2 17.2FMCG ‐ Mean (ex‐Nestle) 31.6x 28.3x 23.5x 23.3x 19.9x 16.5x 46.6 45.2 44.7 1.8 16.0 Prices on Prices on 14 Feb 12 14‐Feb‐12 * CY numbers CY numbers # Bloomberg estimates Based on our analysis, our top picks currently are Marico, ITC, Dabur and GCPL . Source: Company, Edelweiss research 6
  7. 7. A detailed analysis of trends
  8. 8. Trend 1: Volume spur on Consumer pack continues to surprise positively in terms of volume growth despite several price hikes, with 12 out hikes of 13 companies posting volume growth in line/better than expectations. Asian Paints surprised with ~10% volume growth (on high base) despite a slowdown in discretionary spend. Colgate reported a healthy ~15% volume growth in the toothpaste category, better than Dabur’s 3%, while oral care growth was muted for HUL HUL. Dabur’s domestic volume growth rebounded to ~8% YoY and shampoos posted a strong volume growth at 35% YoY in Q3FY12 v/s 16% YoY in Q2FY12. GSK’s Q4CY11 volumes grew 11% YoY led by 16% YoY volume growth in Horlicks. ITC’s cigarette volume growth slowed down largely due to base effect. Volume growth Y‐o‐Y Q3FY12 (%) vs. expectations Colgate‐toothpaste Colgate toothpaste                                                                        15 0 15.0 Colgate‐toothbrush ~13‐14 Asian Paints                                                                           10.0 Emami*                                                                           10.0 Godrej Consumer ‐ Soap*                                                                           19.0 Hindustan Unilever                                                                          9.1 ITC ‐ cigs                                                                              5.0 Marico                                                                           20.0 United Breweries                                                                             5.0 Dabur (domestic)                                                                             8.0 USL                                                                             1.0 Tata Global Beverages ~3‐4 GSK Consumer                                                                           11.0 Bajaj Corp                                                                           20.5 Coca‐Cola India                                                                           20.0 Unilever PLC (Parent)                                                                             0.1 Colgate‐Palmolive Co (Parent)                                                                          4.0 Source: Company, Edelweiss research * Domestic nos. 8
  9. 9. Trend 1: Volume spur on (Contd…) Revenues (INR mn) Q3FY12 Q3FY11 growth (%) Hindustan Unilever                               59,376                              51,277                                   15.8 ITC                              61,954                              54,243                                   14.2 Asian Paints                              25,605                              20,996                                   22.0 Dabur                            14,527 ,                            10,800 ,                                34.5 Colgate                                6,898                                5,766                                   19.6 Godrej Consumer                               13,441                                9,888                                   35.9 Marico                              10,578                                8,177                                   29.4 Emami                                4,573                                4,060                                   12.6 USL                              19,539                              19,601                                   (0.3) Nestle                            19,547                            16,710                                17.0 Agro Tech                                 1,816                                1,956                                   (7.2) GSK Consumer                                6,248                                5,242                                   19.2 Britannia Industries                              12,491                              10,834                                   15.3 Godfrey Phillips                                4,821                                4,247                                   13.5 VST Industries VST Industries                              1 701 1,701                              1 387 1,387                                22 7 22.7 Zydus Wellness                                    755                                    909                                 (16.9) Berger Paints                                7,823                                6,201                                   26.2 Kansai Nerolac                                6,655                                5,601                                   18.8 Pidilite                             7,680.5                             6,593.2                                       16 Tata Global Beverages Tata Global Beverages                            18,018                            16,060                                12.2 Bajaj Corp                                1,125                                    862                                   30.6 Source: Company, Edelweiss research HUL reported a robust 9.1% volume growth (high base of 13% in Q3FY11); double-digit sales growth across segments though most segments disappointed, except soaps and detergents. USL’s 1% volume growth disappointed due to issues in Tamil Nadu (volume loss of 1.5mn cases) and West Bengal (volume drop of 48% YoY for industry). Emami’s 10% volume growth on back of market share gains in a few categories. 9
  10. 10. Trend 2: Ad spend under control; some revival Four out of 13 companies have cut ad spending on an absolute basis to reduce pressure on margins (v/s three out of 13 in Q2FY12). Six have cut ad spending in terms of % of sales, indicating a revival in ad spending (v/s 10 out of 13 in Q2FY12). In our view, some companies like Dabur have upped the ante in ad spend in order to regain market share and view achieve higher volume growth. A&P  YoY Growth (%) Change in bps YoY Dabur                                                                          46.9                                                       114 Godrej Consumer*                                                                          1.4                                                    (284) Marico                                                                          48.6                                                       164 Emami                                                                             1.8                                                       (187) USL                                                                          11.7                                                       119 Agro Tech                                                                          (47.2)                                                       (401) GSK Consumer GSK Consumer                                                                        27 1 27.1                                                     113 Hindustan Unilever                                                                           (7.1)                                                       (287) Colgate                                                                         (10.9)                                                       (533) Zydus Wellness                                                                           (4.3)                                                       118 Tata Global Beverages                                                                          22.3                                                       156 Britannia Industries Britannia Industries                                                                        17.4                                                       13 Godfrey Phillips                                                                           (0.2)                                                       (208) Source: Company, Edelweiss research * Domestic nos. Marico saw an increase in ad spends primarily largely due to new brand launches. HUL’s reduction in ad spends helped the company expand its EBITDA margin. GCPL’s A&P spends in Q3FY12 were almost stable on an absolute basis due to fewer launches. GSK’s high A&P spends was due to heavy promotional spends for the launch of oats and relaunch of Boost which is primarily a one off The company expects A&P spends to be ~15‐16% of sales one‐off. ~15 16% sales. 10
  11. 11. Trend 3: Strain on gross margin; worst likely behind Gross margins have declined for 12 out of 21 companies (dipped for 15 companies out of 21 in Q2FY12) due to G i h d li d f t f i (di df i t f i d t severe raw material inflation. Cigarette companies saw margin expansion due to high pricing power and benign raw materials. Calibrated price hikes and superior product mix helped GCPL, Marico, Emami, Nestle and Britannia expand gross margin by 20bps, 114bps 203bps, 220bps and 300bps, respectively. Agro Tech’s focus on improving margins helped the company improve gross margins by 589bps. Most players are focused on growing volume rather than gross margin. Gross margins Q3FY12 Q3FY11 Change in bps YoY Hindustan Unilever                         48.2                          49.9                         (169) ITC ‐ cigs*                            31.7                            29.3                            240 Asian Paints                            39.4                            40.3                             (90) Dabur                         49 4 49.4                          51 9 51.9                         (248) Colgate                            61.6                            62.5                             (90) Godrej Consumer                             53.5                            53.3                               20 Marico                            48.5                            47.3                            114 Emami                            62.4                            60.3                            203 USL                         39.1                          41.0                         ((190) ) Nestle                            54.6                            52.4                            220 Agro Tech                             30.0                            24.2                            589 GSK Consumer                            65.7                            66.0                             (24) Britannia Industries                            36.7                            33.7                            300 Godfrey Phillips                            63.7                            61.5                            219 VST Industries                         54.8                          53.5                          138 Zydus Wellness                            61.9                            62.9                             (97) Berger Paints                            35.6                            36.5                             (89) Kansai Nerolac                            33.0                            33.7                             (68) Pidilite                            42.9                            45.9                           (297) Tata Global Beverages Tata Global Beverages                         58 0 58.0                          58 9 58.9                           (99) Bajaj Corp                            54.3                            56.4                           (210) Source: Company, Edelweiss research * Cigarette business EBIT margins 11
  12. 12. Trend 4: EBITDA margin dips, but a few manage better EBITDA margin of 12 out of 21 companies declined (declined for 14 out of 21 companies in Q2FY12). However, fall Q2FY12) However in EBITDA margin is much lower than fall in gross margin in most cases. EBITDA margin of most companies declined primarily on account of raw material inflation. However, a dip in EBITDA margin was cushioned by moderation in ad spending. , p g y p g HUL, ITC, Colgate, GCPL, Emami, Nestle, Agro Tech, Britannia and VST have managed margins well. Low margin segments did well. HUL’s S&D margins expanded for three consecutive quarters (7.5% in Q4FY11 to 9.2% in Q1FY12 to 12.4% in Q2FY12 to 13.5% in Q3FY12). Britannia’s margins too expanded by 130bps YoY. EBITDA margins Q3FY12 Q3FY11 Change in bps YoY Hindustan Unilever                            16.3                            14.1                            221 ITC                            37.6                            36.3                            130 Asian Paints                            15.5                            16.4                             (90) Dabur                         15.8                          19.9                         (407) Colgate                            21.6                            16.1                            550 Godrej Consumer                             19.7                            16.8                            290 Marico                            11.5                            12.2                             (68) Emami                            25.8                            25.1                               69 USL                           9 6 9.6                          14 1 14.1                         (450) Nestle                            21.1                            19.7                            140 Agro Tech                               8.5                            (1.3)                            977 GSK Consumer                            13.5                            14.3                             (78) Britannia Industries                              6.7                             5.4                            130 Godfrey Phillips Godfrey Phillips                         14.5                          14.7                           (21) VST Industries                            32.6                            29.8                            281 Zydus Wellness                            28.2                            30.9                           (272) Berger Paints                            10.1                            11.0                             (91) Kansai Nerolac                            12.1                            12.3                             (16) Pidilite                            14.9                            17.3                           (235) Tata Global Beverages                         10.0                          11.5                         (142) Bajaj Corp                            25.5                            30.2                           (473) Source: Company, Edelweiss research 12
  13. 13. Trend 5: Pricing power continues Quality of sales growth was better with balanced blend of price and volume growth. Most companies have taken calibrated price hikes, but not completely to the extent of rise in commodity prices. Hence, EBITDA margins have contracted. However, empirically, it has been observed that with deflation in raw material, companies seldom roll back prices completely, which could lead to margin expansion. Also, they roll back prices with a lag.Price hike Product wise price hike Company Price hike (%) Category Price hike (%) Marico                                  9.3 Marico Asian Paints                               12.0 Consumer Products Business (India)                               22.0 Colgate‐toothbrush ~3‐4 Parachute Coconut Oil (Rigid packs)                               27.0 Dabur (domestic)                               8.0 Coconut Oil                              30.0 Hindustan Unilever                                  6.7 Value Added Hair Oils                               20.0 ITC ‐ cig ~6 Saffola                               14.0 USL                               12.0 Dabur (domestic) Tata Global Beverages ~3‐4 Shampoos                              (31.0) Bajaj Corp Bajaj Corp                            10 1 10.1 Toothpaste                              4 11.4 11 GSK Consumer                                  8.0 GCPLSource: Company, Edelweiss research Soaps                               12.0 GSK Consumer Biscuits                               14.0 Colgate Toothbrush ~3‐4 Source: Company, Edelweiss research 13
  14. 14. Trend 6: Pace of new launches picks up Q3FY12 saw launches of several new products and categories by HUL, ITC, GCPL, Dabur, Marico and Colgate.New products and innovationsCompany New Product LaunchHUL Lux Handwash, AXE Shower gels, Dove body lotions range Clinic Plus conditioners, Sunsilk Keratinology Bru Gold – 100% coffee  Surf Excel Quickwash and Pepsodent G relaunchedDabur Dabur Almond Hair Oil New variants of Hajmola launchedGCPL HIT extra power electric mosquito repellant in Indonesia Touch of Silver Intensive Conditioner and Cuticura Vitamin E Night and Day cream in UKMarico Two new variants of Saffola Arise: long grain and basmati Parachute Advansed Body Lotion, Saffola Masala OatsColgate Colgate 360° Sonic Power and Colgate ZigZag Anti‐Germ toothbrushes Colgate Barbie and Colgate Spiderman (toothbrush and toothpaste in kids segment)ITC Vivel Clear 3 in 1 soap Di Wills range of hair care treatment in three variants Fiama Di Wills Face and Body Talc in select marketsGSK ConsumerGSK C Launched Horlicks Oats and relaunched Boost L h d H li k O t d l h dB tBritannia NutriChoice Multigrain Thins, NutriChoice Multigrain Rosty, 50‐50 SnackuitsSource: Company, Edelweiss research 14
  15. 15. Trend 7: International sales growth robust for most players Companies reported robust growth in international business despite global economic pressure. Marico’s international business was~23% of the Group’s turnover in FY11 and grew 16% YoY (organic) in Q3FY12. Dabur’s organic growth in international business was a robust 37.8% despite political disturbances in Middle East. GCPL’s international margins expanded on back of strong performance in Indonesia and Africa. Emami’s international business declined primarily due to slowdown in Africa; however, growth in other regions remained intact (Middle East: 50% YoY and GCC: 40% YoY growth). Companies are also planning introduction of a few international products in India. International businessCompany Growth (%) Company International sales as % of total revenueAsian Paints Flat HUL                                                                                       1.0Dabur*                                                                                                   37.8 Emami                                                                                      14.0Godrej Consumer*                                                                                                30.0 Dabur                                                                                   20.0Marico*                                                                                                   16.0 GCPL                                                                                       33.0Emami                                                                                                   (7.0) Marico                                                                                      24.0 Source: Company, Edelweiss research * Organic growth Note: FY11 data 15
  16. 16. Annexure
  17. 17. Rural focus bolsters volume Rural India remains a major focus area for all companies. Rural consumption market stood at ~USD190bn in 2010 and is expected to triple to USD600bn in next 10 years. Companies are increasingly focusing on rural expansion with specific products and direct distribution distribution. Most companies have rural growth outstripping urban growth. Emami’s rural sales contribution has been consistently increasing and is 50% of total sales as of Q3FY12. Dabur does not see a slowdown in rural areas which contributes a little more than 50% to sales. The company has a massive extension plan to increase its direct reach in rural India. For Marico, rural growth outpaced urban (rural sales contribute 40% to total Parachute sales). % of sales Rural Urban Dabur                                        50.0                      50.0 Emami                                        50.0                      50.0 Bajaj Corp                                        36.0                      64.0 Source: Company, Edelweiss research 17
  18. 18. Key raw material: Price trend Palm Oil Palm Oil 4,800 4,000 3,200 (INR) 2,400 1,600 , 800 Feb‐02 Feb‐03 Feb‐04 Feb‐05 Feb‐06 Feb‐07 Feb‐08 Feb‐09 Feb‐10 Feb‐11 Feb‐12 Copra 7,500  6,500  5,500  (INR/Qtl) 4,500  3,500  2,500  ‐06 ‐07 ‐08 ‐09 ‐10 ‐11 ‐12 Feb‐ Feb‐ Feb‐ Feb‐ Feb‐ Feb‐ Feb‐ Source: Company, Edelweiss research 18
  19. 19. Key raw material: Price trend and Edelweiss commodity index LLP Packaging 70 90 LLP price have increased further HDPE prices have not increased  62 84(Liquid Paraffin INR/lt) g) (HDPE INR/kg 54 78 46 72 38 66 30 60 Dec‐10 Dec‐11 Aug‐10 Aug‐11 Oct‐10 Oct‐11 Apr‐10 Apr‐11 Feb‐10 Feb‐11 Jun‐10 Jun‐11 Dec‐10 Dec‐11 Aug‐10 Oct‐10 Aug‐11 Oct‐11 Apr‐10 Apr‐11 Feb‐10 Feb‐11 Jun‐10 Jun‐11 Commodity Index 155 60.0  139 40.0  123 20.0  107 0.0  RM pressure 91 softeneing (20.0) (20 0) 75 (40.0) Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11 Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jul‐07 Jul‐08 Jul‐09 Jul‐10 Jul‐11 Y‐o‐Y Inflation  (RHS) Edelweiss RMP weighted price Index Source: Company, Edelweiss research 19
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