Soaps and Detergents Sector Report_170912

7/29/2019 Soaps and Detergents Sector Report_170912

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Emkay

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torReport

Emkay Global Financial Services Ltd. 1

Soaps and Detergents

Ear to the ground

September 17, 2012

Pritesh Chheda

[email protected]

+91-22-66121273

Harsh Mehta

[email protected]

+91 22 6624 2479

In order to delve into the reasons for the resilient growth witnessed by the

highly penetrated laundry and soaps category and assess its future

prospects, we conducted an extensive survey covering the entire supply

chain. We did a 360 degree survey, wherein we met/spoke to sales

managers and distributors of soaps and detergent companies across

regions. This was also done with the intention of demystifying the

inconsistency between research firms estimation for market growth and

that reported by leading companies.n Volume grow th remains res i l i en t in b randed S& D cat egory bu t

va lue grow th to modera t e ow ing to cap on fu r ther p ri ce h ikes

and base e f fec t k ick ing in . Grow th c ou ld normal ize to 16-17%

in laundry ca t egory and 10-12% in soaps ca t egory

n Branded p layers ga ined share a t the expense o f smal l /f r inge

reg iona l p layers . S ign i f i can t p resence o f reg iona l p layers s t i l l

ex is ts (p layers w i t h s t rong brand reca l l ) , bu t any inc rem enta l

share ga in w ou ld be a t h igher assoc ia ted c os ts

n Southern and Eastern Ind ia have rec e ived su f f i c ien t ra in fa l l ,

thereby dea lers /sa les managers f rom South and Eas t w ere

fa i r l y conf ident o f l im i ted impac t o f de f i c ien t monsoon.

Whereas , Nor th and West w ere unab le to guess the course o f

g r o w t h

n Laundry : New produc t launc hes w i l l d r i ve h igher ad spends .

Renew ed v igor w i t nessed in T ide natura ls . How ever , no t m uch

change w i tnessed in market share d i f fe rent ia l be tw een HULand P&G. Also, Ghadi deterg ents hav e deepened thei r

penet ra t ion in Maharasht ra

n Soaps: Lux and Rexona are w i tness ing de-grow th and los ing

out t o Santoor and Godre j No.1 . HUL p lans to re focus on

Rexona and Lux - in i t ia te t rade prom ot ions . Godre j Consumer

reac t i va t ed Cin tho l por t fo l io and a lso launched rosewat er and

a lmo nd var iant i n Godrej No. 1 soap

n On a pos i t i ve no te , soaps and laundry ca t egory i s no t

w i tness ing dow nt rad ing l i ke persona l p roduc t ca t egory

n Posi t i ve in S& D category i s o f fse t by negat ives brew ing in PP

cat egory - earning upgrades for c ompa nies l ike HUL and GCPL

un l i ke ly

n We might have underes t imat ed the c onsumer buoyancy (or b i t

ear ly ) as consumer demand cont inues to be robus t un t i l

August 2012. We in t end t o repeat t h is ex erc ise in Oc t ober

(around fest ive season)

n Unt i l then, re ta in negat ive b ias as va lua t ions do not o f fe r

com for t and earn ings upgrades un l i ke ly . We m ain ta in HOLD

rat ing on HUL and GCPL w i th pr i ce t arget s of Rs415/Share and

Rs580/Share respect ive ly


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Soaps and Detergents Sector Report

Emkay Research September 17, 2012 2

Growth momentum to continue; However, incremental price hikes to

become difficult

Branded S&D category is growing at a brisk pace with laundry segment witnessing robust

value growth of 20-25% (double digit volume growth) and soaps segment growing at 15%

(5% volume growth). National players are likely to sustain their volume growth momentum

given the significant presence of regional players (market share gains). Also, new product

pipeline could aid growth momentum. However, as base effect kicks in and further pricehikes become difficult, value growth might subside to normalized levels of 16-17% in

laundry business and 10-12% in soaps business.

Further share gain from regional players to be an expensive affair

Study revealed that unorganized small/fringe players (Nirma, Breeze, Dyna, etc) have lost

market share. However, there are still several regional players having significant size

(Venus, Champo), presence and brand recall. Hence, incremental market share gain at

the expense of these regional players achievable only with higher associated costs.

Exhibit 1:

Source: Company, Emkay ResearchToo soon to talk about deficient monsoon; confident of maintaining growth

momentum

Deficient monsoon can have a significant impact on rural income (agri-related income).

Rural India, in the past two years, has been in the forefront of FMCG growth story and

hence, weak rain can put pressure on growth. The drought of 2002, when the monsoon

deficiency was 19.2%, may be a precedent to assess the impact on growth. During that

year, growth in private final consumption expenditure, in real terms, was just 2.9% yoy.

Thats a far cry from consumption growth in recent years, which has been much higher. In

2010-11, despite high inflation, high interest rates and the slowdown in GDP growth,

private consumption growth was 5.5%.

Most of sales managers and distributors indicated that there has been no impact on the

demand till date due to deficient monsoon. Also, Southern and Eastern India has witnessed

sufficient rainfall, thereby rural demand is not expected to deteriorate in those regions.

Also, with gradual pick-up in rainfall in Western and Northern India, the situation has

improved drastically.Volume growth the key; A&P spends to continue

On a broad brush basis, companies have maintained their A&P spends. However in certain

regions, especially the Northern belt, where there is some impact on consumer demand,

companies have intensified their A&P spends.

Laundry category

In laundry, new product launches will drive higher ad spends. We are witnessing renewed vigor in Tide Natural (mass end detergent powder; INR

49/kg or INR10/190gm).

Trade initiatives have led to stock outs for Tide sachet (INR. 1). Ghadi has deepened penetration in Maharashtra at price point INR 45/kg and is trying

to gain market share by offering higher trade margins.


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Exhibit 2:

Source: Companies, Emkay ResearchSoaps category

In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor (inSouthern India) and Godrej No.1 (in Western and Central India).

HUL plans to refocus on Rexona and Lux - initiate trade promotions, which can revivetheir growth in soaps business especially in mass end.

Godrej Consumer to continue its growth momentum in personal wash category. It hasreactivated Cinthol portfolio and also launched rosewater and almond variant in Godrej

No. 1 soap.

Exhibit 3:

Source: Companies, Emkay ResearchMarket share gain for national players is visible

National players are gaining share at the expense of smaller regional players.

Laundry category

Not much change witnessed in market share differential between HUL and P&G. Entry of Ghadi in Maharashtra has created some ripples in the laundry market.

Soaps category

In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor (inSouthern India) and Godrej No.1 (in Western and Central India).

Dove continues to enjoy strong brand loyalty and thereby, witness resilient growth and

market share gain.Brand loyalty a suspect in soaps; However, Dove glides through

Consumers remain brand agnostic to soaps business. Thereby persistent brand activation

and competitive pricing is required. In the recent months, mass brands Lux and Rexonahave seen significant exodus to other brands especially Santoor (southern India) and

Godrej No.1 (Western and central India). This can be attributed to aggressive trade

promotions. Moreover, Santoor and Godrej No.1 primarily sell in bundle packs which are


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more economical to consumer. Thereby, HUL might have witnessed lower volume growth

of ~5% in soaps category in Q1FY13 (as against ~10% in laundry business). However,

Dove is one of the few brands which continues to enjoy strong brand loyalty and thereby

will continue to see resilient growth.

Exhibit 4:

Source: Company, Emkay Research

Consumer trading down; more apparent in personal products

We witnessed certain pockets of downtrading. However, it was more pronounced in

categories like toothbrush and shampoos.

Market research firms way off the mark in their findings

Leading market research firm and FMCG companies are in sharp disagreement over

performance of the categories. In the April-June quarter of 2012, sales growth in value

terms of some of India's biggest fast-moving consumer goods companies is higher than

research firms growth estimate for the FMCG market and category growth. Such a

difference can be attributed to ignoring / underestimating trade channels like Canteen

Services Department (CSD), Modern Trades (MT) and institutional sales. CSD can easily

qualify as India's largest retailer with some 3,500 outlets across the country.

Volume growth to continue; however, further earnings upgrades unlikely

The study revealed that volume growth in S&D continues to be resilient. However, as

further price hikes become difficult, value growth might subside to normalized levels of 16-

17% in laundry business and 10-12% in soaps business. This is merely 1-2% higher than

our assumption and inline with streets estimates. Further, downtrading was evinced in PP

as against S&D category. Hence, further earning upgrades for companies like HUL and

GCPL is unlikely - positive in S&D category is offset by negatives brewing in PP category.

Outlook - would wait till October to see if unfavorable macro condition and

delayed monsoon impacts demand

We might have underestimated the consumer buoyancy (or bit early) as consumer demandcontinues to be robust. However, we would re-evaluate our negative stance on demand

only post October (festive season begins) when we plan to repeat this exercise to evaluate

impact of unfavorable macro condition and delayed monsoon on consumer demand if any.

Until then, we retain earnings estimates and negative bias on HUL and GCPL . We have a

HOLD rating on HUL and GCPL with price targets of Rs415/Share and Rs580/Share

respectively.


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Annexure

Given below are sample interviews from each category (supply chain as well as

geographical) of our 360 degree survey, in order to provide a feel of the viewpoint of

each region and intermediary. We have classified each of these sample interviews

on a region and intermediary basis. For eg- Sales manager, AP would mean an

interview with the sales manager of an FMCG company to assess the groundrealities in AP region.

Sample Interview 1: Sales manager, Northern IndiaQ) With the Indian economy weakening, what is your view on overall consumer

demand?

Ans. The company continues to see resilient volume growth in the region and no

evident sign of slowdown. There is no marked change in the pace of premiumization

Q) Please throw light on the competitive landscape in the detergent (and S&D in

general) business across other brands

Ans. Competitive intensity is very high. However, the companys detergent brand is aleader in the region, unlike pan-India. The company plans to enhance profitability by

managing costs and also taking one more price hike to offset new packaging norms.

Also, the competitor (national leader) is aggressively trying to acquire clients with

increased trade promotions, better display and not going for price hike in its mid-

segment detergent brand.

Q) From where is volume growth coming?

Ans. Smaller/unorganized players are losing market share on account of launch of

lower priced SKU, thereby reducing the price differential. And with superior

communication, visibility, promotions and value proposal, consumers switch to

branded products.

Q) If the entire volume growth is coming at the cost of fringe players, then when do

you think the situation will turn on its head? Any indication that market share

gain momentum is reducing?

Ans. As significant chunk of unbranded/unorganised players still exist, future volume

growth is achievable (however, with higher associated costs).

Q) Do you think FMCG companies have to spend incrementally more on ad and

promotions to sustain volumes?

Ans. Yes. However, the companys policy is to increase efficiency i.e. rather than

increasing distribution and ad spends, the company would like to increase usage of

the existing consumers rather than acquiring new ones.

Q) Your region predominantly falls in the agricultural belt. Do you see deficient

monsoon impacting volume growth going ahead.

Ans. No impact witnessed till date. Impact on volume if any, only after February next

year. Distributor inventory provides us with some level of confidence.

Q) Any indications from the top management about the entry into much awaited

consumer category?

Ans. Globally, there has been a change in strategy with more focus on existing line of

business and profitability. Thereby, entry into new category in such a tough macro-

environment looks unlikely. Also, very strong global player is present in the category

and entering would involve large brand investment.


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Sample Interview 2: Distributor, Tier 2 city MaharashtraQ) With Indian economy weakening, what is your view on overall consumer

demand?

Ans. Region more impacted by deficient rainfall then economy at large, as the region

is highly dependent on agriculture.

There has been marginal decline in volume growth but still volume growth is resilient

at 6% for laundry business. Most volume comes from mass market products viz.

Wheel, Tide Naturals, Nirma (80%). Rin, Surf and Ariel contribute remaining. People

are not moving to unbranded players or downtrading.

Q) Competitive landscape in the detergent (and S&D in general) business across

other brands

Ans. P&G not very strong in the region. Ghadi has recently entered the market and

has priced its product at a premium to Wheel with no special offer running for any of its

laundry products.


Ans. Nirma and other unbranded players have lost market share to the tune of 20%.


you think will the situation turn on its head? Any indication that market share


Ans. As significant chunk of unbranded/unorganized players still exist (20-25%), future

volume growth achievable.

Q) Do you think deficient monsoon will impact volume growth going ahead.

Ans. Yes. However, volume growth unlikely to fall below 3-4%.

Q) Can you share the inventory level

Ans. The inventory is at normal level.


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Sample Interview 3: Sales Manager, Tamil Nadu

Q) With the Indian economy weakening, what is the sense of overall consumer

demand?

Ans. The company continues to see resilient volume growth (12%) in the region and

no evident sign of slowdown. Smaller unorganized players are losing market share.

However, further client acquisition will require incremental costs.


other brands

Ans. We face competition from major national player and other large domestic players.

However, our being the market leader in laundry in this region helps. It is unlikely that

these large local players will succumb to national player and thereby gaining market

share will become incrementally difficult.


Ans. Smaller/unorganized player are losing market share on account of launch of

lower priced SKUs, thereby reducing the price differential and aiding consumer switch

to branded products.




Ans. Market share gain to become incrementally difficult as large regional players are

unlikely to relent easily as they have decent brand presence in the region.



Ans. Yes.

Q) Do you see deficient monsoon impacting volume growth going ahead.

Ans. Rainfall deficiency is not significant in the region. Also, no impact witnessed till

date. However, going by past experience, there might some impact to the volume

growth.


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Sample Interview 4: Multi branded distributor, Rural Maharashtra

Q) With Indian economy weakening, what is the sense of overall consumer

demand?

Ans. Laundry business and soaps category is maintaining its growth trajectory.

Laundry business is witnessing robust value growth of 20-25% and soaps businessgrowth is pegged at 15%. Most of the growth is price led.

The volume growth achieved is primarily at the expense of small local players.

However, incrementally, it becomes difficult to take market share from local players

having significant size. There has been some downtrading happening but not

significant in laundry and soaps category.

The companies might not be able to take price hikes in immediate future, thereby

value growth might be impacted and it may come down to the range of 15-16% for

laundry and 10-12% for Soaps.


other brands

Ans. Competition is fierce with entry of Ghadi, which has been successful in taking

market share from both P&G and HUL due to extensive trade promotions. HUL is the

leader in this region and to maintain its dominance has initiated promotions in Rin

detergents. However, HUL regularly comes up with such promotional activities.

In soaps, ayurvedic soaps are losing out to perfumed soaps.


Ans. Bundle pack major volume driver. Santoor, Venus (Ghadis soap brand) and

Godrej No. 1 have gained market share and witnessed good volume growth. In soaps,

ayurvedic soaps are losing out to perfumed soaps.




Ans. Market share gain to slow down.



Ans. Yes.

Q) Your region predominantly falls in agricultural belt. Do you see deficientmonsoon impacting volume growth going ahead.

Ans. The consumers still have spending power and in past few days, have witnessed

some rains, which have given relief to the consumer. No impact witnessed till date.

However, going by the past experience there might be some impact to the volume

growth and also, we may witness downtrading.


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Sample Interview 5: Sales manager, MetroQ) With Indian economy weakening, what is the sense of overall consumer

demand?

Ans. The company continues to see resilient volume growth in soaps (18-20%)in the

region and no evident sign of slowdown.

Smaller unorganized players (Dyna, Breeze) are losing market share in urban area.

Also, high growth in rural India continues to remain growth driver.

Brand loyalty is a suspect in soaps business, thereby constant focus and competitive

pricing is required. Dove is one of the few brands which continues to enjoy strong

brand loyalty and thereby, will continue to see resilient growth.

There is no marked change in the pace of premiumization

Q) Competitive landscape in the Soaps (and S&D in general) business across other

brands

Ans. Brand loyalty is a suspect in soaps business, thereby constant focus andcompetitive pricing is required. Dove is one of the few brands, which continues to

enjoy strong brand loyalty.


Ans. Smaller unorganized players (Dyna, Breeze) are losing market share in urban

area. Also, high growth in rural India continues to remain growth driver.




Ans. In urban region, growth is expected to normalize. However, rural regions willcontinue to witness robust growth. Bundle packs in soaps are major volume driver.



Ans. Yes.

Q) Can you share about the inventory level

Ans. Inventory is below the normalized level.


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Sample Interview 6: Distributor, Gujarat


demand?

Ans. Laundry business is maintaining its growth trajectory. Laundry business is

witnessing robust value growth of 22%.

The volume growth achieved is primarily at the expense of Henko, Mr. White loosing

share. Also, Tide Natural (mass brand which competes with Wheel of HUL) has aided

growth.

Local players are strong in this territory and also of late, there has been some

downtrading happening but not significant in laundry and soaps category.


other brands

Ans. Competition is fierce with HUL and P&G having almost equal market share. Local

players like Nirma are strong and continue to dominate mass category. Due to

distribution glitch in Henko and Mr. White, there has been gain by P&G and HUL.


Ans. The volume growth achieved is primarily at the expense of Henko, Mr. White

loosing share.



Ans. Yes.

Q) Do you deficient monsoon impacting volume growth going ahead?

Ans. No impact witnessed till date. However, going by the past experience,there might

some impact on volume growth and also, we may witness downtrading. Villages to be

more impacted. Other categories like shampoo, toothbrush are largely feeling the

brunt of downtrading.

Q) Can you share about the inventory level

Ans. Inventory level is normal at retail level. However, a bit above normal at distributor

level.


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Sample Interview 7: Sales manager, AP


demand?

Ans. Laundry business and soaps category is maintaining its growth trajectory.

Laundry business is witnessing robust value growth of 20-25% (double digit volumegrowth) and soaps business growth is pegged at 15% (5% volume growth).

In laundry business, the volume growth is primarily achieved at the expense of small

local players and new launches. In soaps category, Santoor is gaining share from

HULs Lux and Rexona.

No downtrading happening in laundry and soaps category.


other brands

Ans. Laundry: HUL is market leader with Surf and Rin dominating the laundry

business. HUL has been successful in taking market share from local players. P&G isalso witnessing robust growth in the region. However, we not deterred and are

confident of sustaining market share.

In soaps, Lux and Rexona are witnessing de-growth and losing out to Santoor.

Santoors market share gain is attributed to significant trade promotions. HUL plans to

refocus on Rexona and initiate trade promotions, which can revive their fortunes and

be growth driver in soaps business especially in mass end. Dove is doing exceedingly

well.


Ans. Laundry: Smaller/unorganized players are losing market share.

In soaps, bundle packs in soaps are major volume driver. Santoor in South and Godrej

No. 1 in West and central India have gained market share and witnessed good volume

growth.




Ans. Laundry: New product pipeline to drive growth in future. Also, do not expect

volume growth to decline below 10%.

Soaps: Plan to refocus on Rexona and initiate trade promotions which can revive their

fortunes and be growth driver in soaps business especially in mass end.



Ans. Yes. Increase in trade promotion in Rexona is on the cards.

Q) Will deficient monsoon impact volume growth going ahead?

Ans. Our region has received normal rainfall. So, no impact.

Q) Can you share the inventory level

Ans. Inventory level is below normal at distributor level i.e. no inventory pile up.


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DISCLAIMER:Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliatesare participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may

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research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market

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