August 17, 2011 Mumbai

Major FMCG players to continue acquisitions to fuel growth

Credit quality unlikely to be affected CRISIL believes that the major players in Indias fast-moving consumer goods (FMCG) industry will continue to pursue acquisitions over the medium term, given the significant scope for expansion in under-penetrated product segments and geographies, and the intensifying competitive pressures in the domestic market. Homegrown players will continue to scout for small to medium-sized acquisitions, mostly in the highly populated developing nations, where the targets are attractively priced. The Indian subsidiaries of global FMCG majors may, however, pursue domestic targets; the size and cost of acquisition targets are unlikely to be constraining factors for these players, given their robust credit profiles and sizeable financial flexibility. CRISIL believes that the major players will maintain stable credit quality over the medium term, given their strong business and financial risk profiles, and the expected prudent funding of acquisitions. The FMCG sectors growth prospects remain healthy, supported by its immunity to economic downturns. Indias FMCG players made 13 major acquisitions in 2010 (refers to calendar year, January 1 to December 31), at an estimated cost of more than Rs.50 billion. Most of these acquisitions were global, and helped the acquirers expand their international businesses, particularly in markets such as Africa, Latin America, and South (including South-East) Asia. The domestic acquisition targets appear to be priced significantly higher than those abroad, owing to the large number of takers in India, including the strong global players. For the homegrown players, outbound acquisitions are not only more attractive in terms of valuations, but also profitable, and offer quick payback. Says Nagarajan Narasimhan, Director, CRISIL Ratings, The overseas acquisitions by CRISIL-rated FMCG players, such as Dabur India Ltd and Marico Ltd in the recent past, have strengthened the acquirers business risk profiles by enhancing their product offerings and geographical reach. Moreover, prudent funding of acquisitions has helped the acquiring companies maintain stable financial risk profiles and credit quality. For the global FMCG majors, India remains an attractive market, with its growing economy, large population that offers considerable scope for additional geographic penetration, particularly in the rural areas, and low per-capita consumption. Adds Mr. Narasimhan, The Indian subsidiaries of global majors have maintained healthy credit quality despite large acquisitions or capital-spending, driven by their strong cash flows and support from the parent. Moderation in growth in their home markets may drive the global players to expand their presence in India. CRISIL has ratings outstanding on nine FMCG majors, including three subsidiaries of global companies. The median rating of CRISILs FMCG portfolio is in the high-safety (CRISIL AA) category, reflecting the players robust business risk profiles, comfortable capital structure, and healthy liquidity. Says Anuj Sethi, Head, CRISIL Ratings, Despite some large acquisitions, CRISIL-rated FMCG players maintain a comfortable gearing, averaging between 0.6 and 0.9 times, backed by strong operating cash flows. CRISIL, therefore, believes that these players will maintain healthy credit risk profiles, even as they continue to scout for fresh acquisitions. CRISIL believes that the homegrown FMCG players may prefer small or medium-ticket acquisitions over large, debtfunded ones in the near term, given the current profitability pressures resulting from volatile commodity prices and rising interest rates.
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Recent acquisitions by FMCG players Acquirer Month

Dabur India Ltd (rated CRISIL AAA/Stable/CRISIL A1+) Marico Ltd (CRISIL AA/Positive/CRISIL A1+) Reckitt Benckiser Group Plc Godrej Consumer Products Ltd November 2010 July 2010 November 2008 February 2011 May 2010 December 2010 June 2011 December 2010

Company acquired
Namaste Laboratories (US) Hobi Kozmetik (Turkey) Fem Care Pharma Ltd (India) International Consumer Products Corp (Vietnam) Derma Rx (Singapore) Paras Pharmaceuticals Ltd (India) Darling Group Holdings (Africa; 51 per cent stake) Naturesse Consumer Care Products Ltd (brand Swastik) and Essence Consumer Care Products Ltd (brand Genteel) (India) Argencos (Argentina) Issue Group (Argentina) Tura (Nigeria) Megasari Group (Indonesia) Kinky Group (South Africa) Henkel India Ltd (65.87 per cent stake) Garden Namkeens Pvt Ltd (India) Zandu Pharmaceutical Works Ltd (India)

Jyothy Laboratories Ltd CavinKare Pvt Ltd (CRISIL A+/Stable/CRISIL A1) Emami Ltd

July 2010 June 2010 June 2010 May 2010 April 2008 June 2011 August 2009 November 2008

August 17, 2011

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Media Contacts Mitu Samar Head, Communications and Brand Management CRISIL Limited Tel: +91-22- 3342 1838 Mobile No: +91- 9820061934 E-mail: msamar@crisil.com Tanuja Abhinandan Communications and Brand Management CRISIL Limited Tel: +91-22-3342 1818 Email: tabhinandan@crisil.com

Analytical Contacts Nagarajan Narasimhan Director - CRISIL Ratings Tel: +91-22-3342 3350 Email:nnarasimhan@crisil.com Anuj Sethi Head - CRISIL Ratings Tel: +91-44-6656 3108 Email: ansethi@crisil.com

CRISIL Rating Desk Tel: +91-22-3342 3047/3342 3064 Email:CRISILratingdesk@crisil.com

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August 17, 2011

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