1. Imperial College Business School
Imperial College London
Private Equity Growth Investing in India
Consumer Staples (FMCG) – Food and Beverage industry
by
Mr. Miraj Patel
CID: 00998853

2. 1
Synopsis
Private equity is gaining much popularity within the financial world and more and
more funds are coming to the fore. The private equity business model is different to
banks as they focus more on growth through value creation compared to interest
income. The aim of this report is to primarily understand what private equity means,
the stages in private equity, valuation techniques, the difference to venture capital
and to then come up with a growth-investing proposal within the food and beverage
sub-sector of the consumer staples FMCG industry in India. To arrive at this
proposal, a thorough historical analysis of the Indian economy and consumption
levels its carried out and then followed by the understanding of the potential for
economic and consumption growth, key drivers of this growth, the trends shaping
the FMCG industry and the determinants for success within the FMCG industry.
After successful analysis and blending this analysis with the base lying concepts of
economics, strategy and finance, Nestle India is chosen as the best company to
invest in over the next 5 year horizon. A complete financial analysis of the company
with its projected growth is also depicted through this report.

3. 2
Index
Chapter
No.
Topic Page
number
Acknowledgement 3
1 An Introduction to Private Equity 4
1.1 What is private equity? 4
1.2 A private equity fund 4
1.3 Objectives of a private equity investment 5
1.4 Differences between venture capital, growth capital and
late stage capital
5
1.5 Valuation methods in private equity. 6
2 The India Chapter 9
2.1 The Indian economy: a brief 9
2.2 The consumption story 10
2.3 Consumption downward spiral 10
2.4 The potential for revival 12
2.5 New government initiative: an attempt to revive 12
3 The Indian consumer staples (FMCG) industry 14
3.1 The industry overview 14
3.2 Trends shaping the FMCG industry 15
3.3 Industry analysis 16
3.4 Key growth drivers of the FMCG sector 18
3.5 Current trends in FMCG sector 20
3.6 FMCG sub-sector analysis 22
4 Growth Capital/Investing 26
4.1 Pre-requisites for growth investing 26
4.2 Financial comparative analysis 28
5 The Investment Proposal 30
5.1 The business model 30
5.2 Marketing mix 30
5.3 SWOT analysis 31
5.4 Financial projections 32
5.5 Financial shenanigans 33
6 Conclusion 34
References 35
Appendix i 39
Appendix ii 40
Appendix iii 41

4. 3
Acknowledgement
The past one-year on the full time MBA at Imperial College Business School has
been a holistic experience for me. It was a an extremely enriching experience and
the program truly challenged me and polished various aspects of my personality
starting from concepts of economics, strategy and finance to the softer side of
ethics, governance and leadership. It offered me an opportunity to interact, work and
excel with students having different experiences and from various cultures. This
report stretched my abilities, pushed me to my limits and is a thorough reflection of
all my concepts, learning and skills. Firstly, I would like to thank my program director
Katja Ahoniemi for initiating and organizing the Perspectives on Practice thus giving
me an opportunity to reflect all that I have learnt over the past one year. This report
comes across as a blend of economics, strategy and finance and I am truly thankful
to all the professors involved in all the core modules which laid down the platform for
me to write this report. I would like to extend a special appreciation to my mentor for
this report Andreas. T Angelopoulos - professor of Private equity, Imperial college
business school and Mr. Hemant Patel – Managing partner, Alder Capital for always
supporting me through my analysis. My family has been a great support pillar,
especially my closest friend and colleague, Gulfy Suri, and it is all of the people
mentioned above that have made this year to be a successful and a one never to
forget.

5. 4
1 An Introduction to Private Equity
1.1 What is private equity?
‘Private’ can be referred to as the risk capital that is provided outside the capital
markets. The word ‘private’ has got nothing to do with keeping anything as a secret;
it simply contrasts with the ‘public’ quoted markets.
‘Equity’ on the other hand can be described as an umbrella under which you can
find a range of financial instruments that enable you an equitable share in the profits
and losses of a business. Equity, under the phrase private equity, has a broader
meaning – the total amount of capital that is put both, at the risk of loss and a share
in any capital gain.
1.2 A private equity fund
A private equity fund can be defined as a cluster or a club which comprises of
institutional investors such as pension funds, insurance companies, endowment
funds, investment funds, banks, family offices, high net worth individuals (HNI) as
well as the private equity fund managers themselves. The objective of a private
equity fund is to invest in equity or risk capital in various or a range of companies
generally known as a portfolio of companies with a view to primarily generate capital
gains/ profits from the sale of investments rather than from fees, dividends and
interest payments. A private equity fund typically may take a minority or majority
stake in the businesses where seed, early and growth capital would be the former
and leveraged buyouts would be the latter. The term leveraged is used when some
other form of debt capital is raised in order to fund the investment.

6. 5
A snapshot of a typical private equity fund – image available [online] from:
https://upload.wikimedia.org/wikipedia/commons/thumb/a/a3/Private_Equity_Fund_
Diagram.png/350px-Private_Equity_Fund_Diagram.png
Objectives of a private equity investment
Any and all investors wish to make returns. Returns could be in form of income,
interest, and dividends or by sale of a particular investment when it has been made
more valuable. The motive of private equity is to buy stakes in businesses, actively
manage those businesses and then take the gains through sale or IPO once the
business has increased in value. Private equity is predominantly about generating
capital gains and is focused on increasing shareholder value.
1.3 Difference between venture capital, growth capital and
late stage capital
Private equity involves investing in businesses from the early stage venture termed
as venture capital investments where the investee company is at a fairly nascent
stage and in the early years of its incorporation, growth and development capital
where the investee company is looking at new market expansion/penetration or
competitor acquisition and finally late stage capital or what we call a buyout where
the fund buys a majority stake and then carries out a complete operational
turnaround to create value.

7. 6
Source lecture notes, Prof. Andreas T Angelopous, Private Equity and
Entrepreneurial finance. Imperial College Business School.
The image above shows private equity financing on the time line starting from early
stage to late stage capital. In seed finance, start-up finance and growth capital
financing, the venture capital fund or private equity fund takes a minority stake in the
business and it is usually all equity financed. Leveraged buyouts and specialized
finance investments are usually at a late stage in the life of a business where the
private equity fund takes majority stake, usually >2/3, and the investment is financed
with a certain ratio of debt and equity.
1.4 Valuation methods in private equity
Prior to investing at any stage, a private equity fund has to value the investee
company and assess whether it will be a profitable investment or not. In other
words, it is critical to assess whether the company is valued at par, over valued or is
it undervalued. The private equity fund therefore assesses the enterprise value and
the equity value of the company.
Enterprise value: it can be defined as the total value of the entire company which
takes into account the market value of equity, debt and offsets the cash.
Enterprise value (EV) = Market value of equity (Market cap) + market value of debt
– cash
Equity value: it can be defined as the total value of outstanding shares of the
company. In other terms it is simply the market capitalization.

8. 7
Equity Value (EqV) = Market value per share x Number of shares outstanding.
Enterprise value is more widely used in private equity as when the value of the
company is driven by its capital structure and enterprise value takes into account
both equity and debt.
There are various valuation methods used in private equity.
Price of a recent investment:
Under this type of valuation, the instrument of a company is valued under the
implied market value of the company under that round of the investment. First time
investments are usually valued at cost and further investments may be valued at the
price of the last investment.
Earning Multiple:
This is probably one of the most common and widely used method of valuation
within the private equity space. An array of multiples can be used such as Price to
earnings (P/E) multiple, EBIT multiple (EV/ earnings before interst and tax) or
EBITDA multiple (EV/ earnings before interest, tax, depreciation and amortization).
These can be calculated based on historical data, current financials or projected
incomes of the company. It can be safely said that this is one of the most effective
way to value the company as we can assess the multiple the company is trading at
in the market compared to its competitors.
Valuation
methods
Price
of
a
recent
investment
Earning
multiple
Net
asset
valuation
DCF
of
the
company
DCF
of
the
investment
industry
benchmarks

9. 8
Net Asset Valuation:
This is generally used when a business is not profitable and with those businesses
that deal in purchase and management of fixed assets. Thus these companies are
valued with reference to their net asset value of tangible assets. Goodwill created by
acquisition is normally excluded.
Discounted Cash Flow (DCF) of the company:
The present value of any asset is the value of the future cash flows of the asset
discounted back in time by a discount rate till the cash is received. This is a very
sensitive method of valuation as it is based on various assumptions such as
discount rates, WACC (weighted average cost of capital) and the timing of cash
receipts. In addition, there is a risk of over-valuation as it is assumed that the
business will be a growing perpetuity and the terminal value drives up the valuation.
Discounted cash Flow (DCF) from the investment:
An investment that generated most of its returns from predictable cash payments
and not majorly from terminal payment at sale, DCF valuation could be more
accurate. The NPV (net present value) rule applies where a positive NPV means
that the investment will generate cash over and above the investment and a
negative NPV implies that the investment is loss making.
Industry benchmarks:
This form is valuation is usually used by venture capitalists for start-up companies
that do not have any historical financial statements. For example the value of a
social media company can be computed by the value per user if it is user driven. It
is very difficult to assess accurately the value of a company using industry
benchmarks as it moves away from future cash generation and there is lack of past
financial performance.

10. 9
2 The India Chapter
For this report, the main area for focus will be the Indian consumer staples sector
(FMCG) and to compute an analysis of the most promising company to have a
growth investment in over a five year horizon.
The FMCG sector, historically categorized as non-cyclical in nature, is composed of
companies whose primary lines of business are food and beverage, household
items, beauty & care and tobacco. In an event of an economic downturn, the
demand for these products does not witness a drastic slow down. If the demand for
staples does not grow by much the producers have very few options to raise their
stock prices – reduce price to gain more market share, reduce cost, or differentiate
their products.
Investing in the FMCG sector could be boring to some people due to the unflashy
characteristics of the industry and a lack of windfall gains. Despite this, the FMCG
sector does provide the investors with an opportunity to diversify their portfolio in
terms of capital risk, as it is a relatively easy sector to understand, has a low beta
and a low correlation to the market.
2.1 The Indian economy: A brief
13 years after China, in 1991, India started off on its journey to economic revolution.
Dr. Manmohan Singh, the finance minister then, was in charge to save the country
from bankruptcy. India’s economic growth has accelerated ever since over the past
quarter of a centaury and so has the spending power of the citizens. Real average
household disposable income has roughly doubled since 1985 and with rising
incomes and increased household consumption, a new middle class has emerged.
[McKinsey global institute, 2007]
India has witnessed a significant economic growth in the recent past, growing to
7.3% in 2015 from 6.9% in 2014. The reforms initiated by the Indian government to
improve the economic fundamentals like FDI, RBI’s inflation focus have all
contributed to this rapid growth in 2015. Today, India ranks seventh globally in terms

11. 10
of GDP at current prices and is expected to grow at 7.5% in 2016 [IMF World
economic outlook, 2015].
2.2 The Consumption story
The growth of household consumption in any economy depends on various factors
such as growth of private disposable income, population demographics, extent of
urbanization, sensitivity of interest rates, availability of credit and finally the inflation
as it affects the real purchasing power of the consumer. Pre 2008 crisis, it was all
rosy for the Indian economy as the private household consumption was on the rise
year on year. The consumer spending kept on increasing even in the post crisis
period (2007-08 to 2011-12) because of the surge in discretionary spending which
was driven by low interest rates, increased government spending (effect of the 6th
pay commission), improved trade, increased employment in the non-farming sectors
and a boost in the rural income. Household consumption contributed to
approximately 57% share in the total GDP till 2011-12 and was growing roughly at a
rate of 7-8% each year. However, since 2011-12, the GDP growth has plateaued
out a bit due to a slump in household consumption.
2.3 Consumption downward spiral
It is critical to understand what caused a slowdown in the household consumption.
Inflation could play a major part, high interest rates or even a dip in the growth rate
of GDP. The slowdown in consumption poses a huge threat to drag down the Indian
economy. In 2012-13 the household consumption had a growth rate of 4% which is
quite modest compared to 2011-12 where it was 7.9%

12. 11
Source: The Hindu Business Line [online] available from:
http://www.thehindubusinessline.com/opinion/the-falling-consumption-
story/article5029404.ece
Further analysis of the situation showed that the inflation had remained fairly high,
which reduced the real purchasing power of the consumers. To curb inflation, the
Reserve Bank of India (RBI) kept the interest rates high. To counter high interest
rates, the consumer borrowing dropped and the rate of savings increased causing
the consumption expenditure to fall.
Moderation of household disposable income does not affect the demand in all
sectors equally. For example, the consumer staples or FMCG industry did not
witness a drastic drop in sales due to the inelastic nature of demand, but, however,
increased household disposable income does contribute to increased demand in the
FMCG industry. Industry like luxury goods and consumer durables to get affected as
the demand for theses products can be put on hold in times of tough economic
situations.
The consumption is also affected by factors from outside the economy. For
example, if consumers perceive that the economic scenario outside of India will
remain bleak too, there will prevail overall pessimism, which will impede the growth
of consumption.

13. 12
2.4 The potential for revival
The Chinese slowdown, falling international price of commodities and a better
monsoon in an agricultural driven economy like India will help curb inflation to some
effect. The continuous depreciation of the rupee may restrict the RBI’s agenda of
interest rate cut but it means that local business can benefit from exports.
The rural expenditure, however, in this situation comes as boon as it is still pretty
robust. The occurrence of numerous festivals and a decent performance of the
farming sector are some positives.
The earlier growth rate of around 8% in household consumption is unlikely to return
in 2013-14, but a mild recovery can be expected from the formation and
implementation of new policies and the composition of the annual budget.
2.5 New Government initiatives: an attempt to revive
consumption
Although there are number of initiatives that the newly elected government, under
the leadership of Prime minister Mr. Narendra Modi, has taken in an attempt to
boost consumption, there are a few key initiatives which have really had a telling
impact.
Foreign direct investment:
The new government has eased the FDI policy to aid competition domestically. As
per the earlier policy, any international business must have an Indian partner, a
Foreign Direct Ivestment
Abolshing of Licencing
Tax reforms

14. 13
50/50 joint venture, if it were to operate within the domestic boundary of India. As
per the new policy, international companies can set up businesses and operate as a
sole ownership without requiring any Indian partnership. As a result, there has been
a huge inflow of foreign capital in terms of cash as well as technology. It has
increased competition amongst the major market players and has reduced overall
prices.
Abolishing of Licensing:
New businesses have to obtain fewer licenses if they were to set up and operate
within the country. Earlier obtaining multiple licenses was vey painstaking hence it
restricted the establishment of newer and smaller business. The relief afforded by
the government has not only increased the number of new businesses set up but
also significantly boosted the employment rate.
Tax reforms:
One of the major changes has been made to the tax exemption limits. The tax
exemption limits have been raised, meaning there will be considerable rises in the
level of personal disposable income that will aid consumer spending. Indirect taxes
such as central excise, state VAT, entertainment tax, luxury tax, and octroi have
been major deterrents in the transfer of good and services. They hamper the
manufacturing industry adversely. GST will subsume all these taxes to ensure a
smoother functioning and exchange of goods and services. Finance minister Mr.
Arun Jaitly, in his recent interview with Doordarshan in May 2015, predicts that the
newly introduced tax reforms will fuel the economic growth by 9-10%.
Post the new reforms implemented by the government and according to the mid-
year update of the United Nations World Economic Situations and Prospects, the
Indian economy is expected to grow at 7.6% in 2015 and 7.7% in 2016. As reported
by the IMF, this growth is a consequence of increased investor confidence in the
economy, lower overall food prices and improved policy reforms.

15. 14
3 The Indian Consumer Staples (FMCG)
industry
After concluding that the Indian economy has started seeing a bullish trend and the
consumer spending is beginning to rise as a residue to the new government
reforms, an analysis of these trends on the FMCG industry is critical prior to
devising a robust growth investment model.
3.1 The industry overview
The FMCG, fast moving consumer goods, is the fourth largest sector in the Indian
economy. The overall market is estimated to increase at a compounded annual
growth rate (CAGR) of 14.7% and is estimated to touch approximately US$ 110.4
billion by the end of 2020. It accounts for roughly up to 2.2% of the country’s GDP
and it currently witnessing a high growth rate by favorable macroeconomic
conditions, an increasing urge to consume and increasing rural incomes.
Sub sector analysis show that food products lead the market segment and account
for 43% followed by personal care, tobacco household care and others at 22%, 16%
5% and 10% respectively.
FMCG revenues by segment (% share) – 2013 [online] available from:
http://www.slideshare.net/iimjobs/india-fmcg-sector-report-may-2014

16. 15
3.2 Trends shaping the FMCG industry
Key trends shaping the FMCG industry [Booz & Company 2010] [online] available
from: http://www.strategyand.pwc.com/media/file/CII_FMCG-Roadmap-to-2020.pdf
Consumer related trends:
India is composed of a diverse group of consumers with changing demographic
profiles. These two together brew up some mind-boggling diversity in terms of
consumption trends and patterns. Firstly, consumers are varying of prices in their
search for additional functionality, durability and brand promise. Emergence of new
products and new product categories has also contributed to a change in tastes and
preferences. Finally, businesses are now serving customers with customized
services with which they arte trying to gain customer loyalty in their quest to achieve
more market share. [Booz & Company, 2010]
Market related trends:
These are in context to the evolving geographical markets or the various channels
of distribution available to the FMCG players. The emergence of sub-markets in
India, the growing retail segment and the globalization of FMCG players will
contribute to this trend. FMCG players must keep a close eye on the market trends

17. 16
and adapt their products and services, go-to-market strategies as per the evolving
needs in order to stay competitive within the market. [Booz & Company 2010]
Environmental related trends:
These refer to the introduction and evolution of new technologies, legal systems,
government polices and socio-political landscape. FMCG players will have to
continuously adopt their business strategies to keep the interest of the communities
and the sustainability of the environment. [Booz & Company, 2010]
3.3 Industry analysis
An industry analysis is essential to understand the dynamics and the profitability of
the industry. A deep understanding of these dynamics will enable companies or new
entrants to come up with an appropriate strategy.
Prior to devising a growth investment strategy, it is also necessary to understand
these dynamics, as they will drive the performance of the companies in the industry.
a five potter analysis of the FMCG industry [online] available from:
http://www.ibef.org/download/FMCG-August-2015.pdf

18. 17
Competitive Rivalry:
There are lots of players within the market – private as well as MNC’s. The private
label brand products are usually priced at a discount to the mainframe brands. This
limits the competition for the weaker brands. In addition, the industry is becoming
highly fragmented due to the influx of more MNC’s post the FDI reform introduced
by the new government.
Threat of new entrants:
Success in the FMCG industry majorly depends upon the market reach and
branding. The more market share you want to capture, the more investment is
needed to set up distribution networks and on aggressive advertisement. This could
be a possible repellant for the new companies with limited financial resources that
are looking to enter this vast market.
Substitute products:
There is an array of options for the consumers to choose from due to the presence
of multiple brands with very narrow lines of product differentiation. Cost
differentiation is the primary factor now days with the consumer becoming more and
more price sensitive. There is a huge price war within the industry.
Bargaining power of suppliers:
A wide pool of local commodity suppliers enables the big FMCG companies to
dictate sourcing prices. The suppliers in this industry are only rising, as they are
attracted towards the volume of demand.
Bargaining power of customers:
Switching costs are low from one brand to another, which keeps the consumers on
their toes if there is any deterioration in the product or service offered to them.
Marketing strategies play a big role in gaining customer loyalty. Consumers are
exposed to an abundance of similar alternatives offered by different brands, as there
is low product differentiation.

19. 18
3.4 Key growth drivers of the FMCG sector
As per a report by Eidelweiss in May 2015, the FMCG sector has seen growth not
only in EBITDA margins but also in volume of sales. Price hikes were seized as the
FMCG companies passed on benefits to the suppliers. Some key drivers to this
revival of growth are GDP growth, population growth, per capita income growth,
lifestyle changes and the implementation of new government policies.
GDP growth:
An increase in the GDP growth in the country has increased the employment
opprtunites in the economy which has led to increase in income levels of
consumers. Inflation comes under control and there prevails and air of optimism in
the entire country. This in turn increases the domestic demand for good and
services. In India, approximately more that 50% of the GDP is consumed internally.
Population growth:
As per reports by the CIA (central intelligence agency) publised in August 2015,
28.09% of the poulation agest between 0-14 years and majority of the population,
58.80%, is between the age of 15-54 years leaving a small chunk of 13.11% over 55
years of age.
current age structure in india [online] available from:
https://www.cia.gov/library/publications/resources/the-world-factbook/geos/in.html
Majority of the population is young who earn and spend – a prerequisite for growth.
As more and more young people join the workforce, their dependency on the aging
population decreases. There are fewer aged people in India compared to most other
countries thus decreasing burden on the youth and leaving more money in its hand
to spend.

20. 19
Key drivers for growth:
Source: booze & company, 2010 [online] available from:
http://www.strategyand.pwc.com/media/file/CII_FMCG-Roadmap-to-2020.pdf
Per capita income growth:
The income per capita is expected to grow at more than 15% over the next 5 years
meaning higher personal disposable income. Modern trade in tier II/III cities is
increasing. Growing income is increasing the demand for goods and services within
the country.
Lifestyle changes:
With the wave of modernization and urbanization hitting India, more and more
people are willing to spend on newer products. The income level of the rural
population is growing and they are keen to come toe to toe with the urban
population. A currently low penetration level and the growing demand for premium
food & beverage, tobacco, personal care ad healthcare products in the rural market
offer much room for growth.

21. 20
New government policies:
The new government has approved up to 100% foreign equity in single brand which
is huge boost for international businesses looking to step foot in India. Abolishing of
extra taxes and having a unitary tax law (GST) makes transfer of goods and
services easier. Food Security bill and direct cash transfer subsidies reach about
40% households in India [IBEF, 2015]
3.5 Current Trends in the FMCG sector
The correlation between the dynamics within the FMCG industry and the growth
drivers is what shapes the current trends within the FMCG industry.
Some notable current industry trends are as under.
Product innovation:
After a fairly saturated industry with similar products, FMCG companies are starting
to innovate their products with an aim to achieve a product differentiation
advantage. Product differentiation gives an added dimension to competition.
Customized products:
Due to the enhanced knowledge about products and services and with a wide
variety of products to choose from, the consumers have started to demand products
and services catering to their individual needs and preferences. This is very
challenging for the FMCG companies as it is difficult to tailor products for a very
vastly scattered consumer profile.
Brand conscious consumer:
As the disposable income rises, the consumers are becoming more and more brand
conscious. In addition, the society is moving towards a brand culture where using a
branded product or service relates to a certain level and class in the society. FMCG
companies thus have to spend aggressively on advertising and creating a strong
brand image.
Backward integration:
With not much room to play when it comes to product differentiation and with very
similar products offered by all companies, the only way to increase the profits is to

22. 21
backward integrate, meaning, reduce internal costs. FMCG players have gone into a
cost cutting spree in order to attain a cost advantage.
Spreading the distribution network:
The only way to reach the mass markets is to expand the distribution network. In the
FMCG sector, the consumers have an upper hand and are not going to make an
effort to search for products. The onus lies in the hands of the companies to reach
the consumers if they are to access the mass markets and sell bulk products.
Outsourced manufacturing:
This trend is seeing a major upside as third party manufacturing enables the FMCG
companies to concentrate more on the market entry strategies and they can more
efficiently utilize their resources in branding and aggressive advertising. It also
enables them to keep the prices of products low as smaller manufacturers have
fewer overhead costs hence it turns out to be much cheaper to source from outside
rather than produce on their own.
Demand for smaller sized packages:
The price sensitive Indian consumer is beginning to prefer one-time use products.
Tastes and preferences can change continuously hence smaller sized products
means that they can switch easily without worrying about any wastages. This is
good from the FMCG companies’ point of view. A smaller sized package allows
them to keep the prices low as well as keep their margins intact.
Rural market focus:
The rural market contributes to about 50% of the total FMCG market [IBEF, 2015] A
major chunk of the FMCG product demand and the volumes lie in the rural markets
with the ever-increasing income levels, literacy rate and awareness about the
products available in the market.
The successful FMCG companies over the next 5 year horizon are the ones that will
effectively be able to adapt and cater to the above mentioned market trends.
It would be unfair to decide a company for a growth-investing plan based on the
above market trends and growth drivers of the FMCG industry as the FMCG sector
is comprised of many subs-sectors in which various companies operate. Different
products drive the profitability of these companies for example. P&G ‘s profitability is

23. 22
driven by household care and personal care products, ITC’s by tobacco products
and Nestle’s by Food and beverage products. Each of the subsectors has varied
dynamic and trends based on the political, economic, technological and social
factors. An in-depth analysis of these sectors will better put us in a position to
narrow down to a company with the highest growth potential.
3.6 FMCG sub-sector analysis
For simplicity, the FMCG sector can be categorized under 3 major sectors – Food
and beverage, Household and personal care and tobacco and others.
Food and beverage has majority of the share with about 47% followed by household
and personal care with 27% and tobacco and others with 26%.
Food and beverage v/s Household and personal care v/s tobacco and others:
Subsector /
Factors
Food and
beverage
Household and
personal care
Tobacco and
others
Political
-Post the 100%
FDI reform,
government
predicts an
investment of
$21.9 billion.
-New regulations
to address supply
chain
inefficiencies.
-Introduction of
incentive schemes
and training
programs to
encourage
employment.
- 100% FDI
promotes the entry
of more
established foreign
companies.
- Although licenses
are reduced, key
licenses are
required to set up
operation plants.
- Essential to
comply with health
and safety
standards.
- Highly regulated
industry.
- Licenses are very
difficult to get.
- Government has
started anti
tobacco and
alcohol campaigns.
- Sale of certain
items is banned
within the country.
Economical
- India is an
agricultural driven
- Certain raw
materials need to
- Very high taxes
are levied on

24. 23
economy;
agriculture
contributes about
70% towards GDP.
- Diverse agro-
climatic conditions
promote cultivation
of different crops.
- Rising exports
keep the demand
for Indian
agricultural
products on a high.
- Concession on
import duties,
exemption of
central excise on
several items,
service tax
exemption helps
keep the prices of
food low.
be imported hence
prices are
adversely affected
by the fluctuation
in the foreign
exchange rates.
- Influx of MNC’s
has resulted in
reduced business
opportunities for
the local players.
- There has been a
rise in M&A
activities where
Indian companies
are being taken
over by
multinationals.
- MNC’s command
the prices.
companies.
- Huge source of
revenue for the
government.
- Large amounts of
black money in
circulation within
the economy.
- Advertising of
tobacco products
and alcohol is
banned.
Technological
- New machines
and techniques for
crop harvesting
and cultivation help
increase yield and
reduce costs.
- Introduction of
organic fertilizers
keeps the yield
young and healthy.
- Newer and better
techniques of food
processing
increase turnover
- Foreign
technologies are
being imported by
bigger players,
which immensely
drive down the
costs of
production.
- Not much scope
for product
innovation as the
market is saturated
by a wide variety of
similar products
- Fairly
straightforward
processes for
manufacturing of
tobacco and
alcoholic items.
- Tobacco is a very
labour intensive
industry.
- Branding and
market
segmentation is
key to growth.

25. 24
and reduce end
prices.
and product
functionalities.
Social
- Rising disposable
incomes,
urbanization,
young population,
nuclear families
and increased
consumption is
increasing the
demand for food
products.
- Inflow of foreign
food retail brands
and an increased
variety in food
products coupled
with changing
consumer
preferences drive
up the demand.
- People are
getting more and
more aware of
their personal care
and hygiene.
- Rising disposable
incomes is
increasing
consumption of
care products but
the consumers still
are very price
sensitive.
- More and more
people are
becoming aware
about the ill effects
of consuming
alcohol and
tobacco.
- Consumers have
restricted their
consumption of
tobacco and
alcohol.
- More emphasis is
given to clean
eating and
exercising
Key players Pepsico, Nestle,
Britannia, Amul,
Parle.
HUL, P&G, Marico,
Emami, Dabur
ITC, united sprits,
Kingfisher
From the above comparison it is pretty evident that food and beverage is the
dominant industry within FMCG and is set to grow manifold by the changing
dynamics within the country with the new government reforms, rising incomes,
changing consumer preferences, new technologies and more and more availability
of products.
Key growth drivers for food and beverages:
Increasing domestic demand:
With rising incomes, changing lifestyle and food habits, urbanization and a young
population, the demand and consumption of processed food and beverage products
is set to double by 2020 [IBEF, Food processing, 2015]

26. 25
Scope for greater exports:
India’s greater integration with the global economies, treaties with other countries,
proximities to key export destination and an increased global demand for food
products from India fuel the domestic demand for the processed foods industry.
Efficient food supply:
Better expected monsoons, wide variety of cultivated crops, a long coastline for
marine products aid the food and beverage industry as the prices of materials are
low which enables Indian companies to remain competitive on the global landscape.
Policy reforms:
Mega food parks and agricultural export zones are attracting FDI to aid
infrastructure development. The approval of the National Mission for Food
Processing comes as a boon for the industry as it promotes operational processing
facilities, provides training for skilled development and capacity up gradation, aids
supply chain logistic and supports the organized food sector.
To narrow the investment proposal down to one company within the food and
beverage industry, it is essential to execute a preliminary financial analysis with a
due diligence of the business model and vision of the major players.

27. 26
4 Growth Capital/Investing
Growth capital/investing can be defined as the mid-way point between venture
capital and buy-outs. Growth capital is structured to facilitate the target company’s
already accelerated growth by expanding operations, entering and tapping new
markets or even completing strategic acquisitions. Capital is provided to mature
businesses with proven business models and those having a track record of sales,
costs and profits. Growth equity is not as predominant as venture capital or buy-
outs, however, if the transaction is properly sourced, diligenced, negotiated and
executed, growth capital can provide investors with a lower risk adjusted cost of
capital.
4.1 Pre-requisites for growth investing
Prior to providing growth capital it is extremely essential that an investor assesses
and carries out a thorough due diligence on certain key elements of the business.
The key elements can be discussed as follows:
The business model:
The business model is probably one of the most important elements to be
inspected. It is essential to understand the type of activity carried out (manufacturing
or service), the product or kind of service offered, its uniqueness and sustainability.
In addition, the most compelling part of the business model should be looked at, that
is, what is advantage does the business model offer – cost advantage or product
differentiation
Management team:
A successful, profitable or unique business model can be ruined if a strong
management team does not manage it. At times, it is the faith in the management
that drives the investment process as a strong, skillful experienced and cohesive
management team can even turn a mediocre business model into a profitable one.
Target market:
A sound business model and a strong management team will be a complete waste if
the company does not adhere to the right target market. It is important to

28. 27
understand the value add to the customers by the product or service offered by the
company. For example, if nike targeted cricket fans for its range of football shoes,
no matter how highly performing and efficient the shoes may be, it will be difficult to
sell them.
Market volume and growth rate:
Market volume and growth rate is directly related to the demand, which is directly
affected by the disposable income and consumption levels of individuals. The level
of disposable income is currently increasing in India and with urbanization and a
rising rural population; the consumption levels are also on the rise within the FMCG
sector.
Business protection:
Patents and licenses protect the business model or products and services from
being easily replicated. Usually businesses having any sort of patents or those
operating within strict regulations are more prone to attract any sort of investment as
competition is low which is key to profitability.
Competitor mapping:
An analysis of the competitors of the target company is necessary and it is crucial to
understand their business model, target market, pricing strategies too. The target
company should be assessed against its competitor on the value curve, as that is
key determinant of the competitive advantage, which in turn affects the revenues of
the company. Higher the competitive advantage, more the chances of higher
revenues.
Financials and the trading multiple:
The historical income statement, balance sheet and cash flows of the target
company should be analyzed with respect to the market environment to judge the
performance of the company. Generally, cash flows are the true determinants of the
value of the company. Operating margins must be assessed to understand the
efficiency of the business. The rationale behind understanding and analyzing the
trading multiple (EV/EBITDA, EV/Sales or EV/EBIT) is to determine whether the
company is trading at par, premium or a discount with respect to its book value.
Generally, most FMCG companies trade at a premium due to high demand for its
stocks. The trading multiple also helps us understand the level at which the target

29. 28
company is trading in the market against its competitors. All these factors are
essential in making the investment decision.
Exit potential:
Growth investing is usually done for a period between 3-5 years after which any
investor seeks a profitable exit. Investments are made generally made only in those
companies having a strong business model with a good growth rate of sales and
profitability. The IRR (internal rate of return) that investors look for at the time of exit
varies from investor to investor and from fund to fund, however an investment
yielding IRR of 20-25% per year can be considered to be a good investment.
Keeping in mind the pre-requisites of growth investing, the companies that are
seeing stable growth are namely Nestle India, Brittania, GlaxoSmithKline Consumer
& Healthcare and Parle Agro.
All the mentioned companies have strong business models, target markets, go to
market strategies, growth prospects and rank amongst the top five food and
beverage companies within India.
A brief analysis of the financials of these companies will further help us narrow down
our choice to the one company which has the most potential for growth over the
next 5 years.
4.2 Financial comparative analysis
In million INR
Nestle India Britannia GSKCH
Net revenues 98,548.40 63,422.10 50,754.80
Operating profit (EBIT) 17,925.50 5,426.20 10,160.72
OP % of sales 18.19% 8.56% 20.02%
Profit after tax 11,846.90 3,698.30 6,747.46
PAT % of sales 12.02% 5.83% 13.29%
EPS 122.88 30.84 160.46
P/E 51.95x 59.67x 26.80x
Share price 6384.00 1,840.10 4,300.35
Outstanding shares 96.41 119.92 42.05
Enterprise value (EV) 654,699.54 228,584.39 181,370.00
EBITDA 21,300.90 6,060.00 10,786.18
EV/EBITDA 30.74x 37.72x 16.82x

30. 29
From the above comparative analysis, it is pretty evident that Britannia does not
match up to Nestle and GSKCH in terms of revenues or operational efficiency.
Nestle and GSKCH have much superior operational ratios as a percentage of sales
at 18.19% and 20.02% respectively, meaning, these two companies are able to
extract more profits by carrying out efficient operations and by keeping the costs
low.
Nestle and GSKCH have very attractive earnings per share (EPS) of INR 122.88
and INR 160.46 thus making these companies very lucrative in the eyes of the an
investor. Profit after tax is generally not taken as a benchmark to drive investment
analysis and company valuation decisions as the PAT is derived from the income
statement and is bi-product of various accounting assumptions.
Britannia has the highest EV/EBITDA multiple of 37.72x thus making it the least
attractive company for investment. Lower the EV/EBITDA multiple, the better the
investment opportunity, however, other growth drivers such as market share, brand
presence etc. should also be considered before making an investment decision.

31. 30
5 The Investment proposal
After detailed financial analysis and taking into account the macro and micro
economic factors, Nestle India Limited pans out to be the most lucrative investment
opportunity.
5.1 The business model
Nestle India has consistently followed its vision and ambition of being a recognized
leader in health, nutrition and wellness in India. It has a strong portfolio of brands, a
capable and talented team and commands immense trust and loyalty of consumers.
It targets the needs of the consumers very effectively and evolves the product
portfolio to match the consumers’ needs. As quoted by the Managing Director, Mr.
Etienne Benet “As a company we maintain high standards and values. Stakeholders
have seen that we are ethical and responsible with strong business principles. In
fact, the way we do business is to Create Shared Value.”
Nestle India has its own manufacturing plants for its products which enables them to
keep maintain the highest level of quality at all times. Its distribution channel and
network ensure availability of its products in the most remote areas of the country.
Nestle has currently invested heavily to increase production capacity to in order to
stay toe to toe with the increased demand.
5.2 Marketing mix
Products:
Nestle operates with 4 different strategic business units namely beverages, milk and
milk products, pre cooked dishes and chocolates. The main brands that sell under
these categories are Nescafe, Maggi noodles, Kitkat etc.
Price:
Price is dependent on the individual market for each product. Nescafe and maggi
are clear leaders and are the cash cows of the business. Nestle has adapted a
consumption or packaging based pricing which enables a consumer to chose which
ever size product they want based on their consumption.

32. 31
Placement:
A typical distribution channel is adopted by Nestle. (Manufacturing - C & F agent -
Distributors - Retailers - Consumer). It targets bulk distribution and takes a lot of
care of the players in its distribution network by introducing trade discounts.
Promotion:
Nestle’s promotion techniques are very creative, innovative and witty. For example,
Nescafe focuses on the value of good things in life, kit-kat focuses on “take a break”
and maggi focuses on moments you had with your maggi. Nestle really hits the
ground running with its sales promotion and focuses on its power brands which are
Nescafe, Kitkat and Maggi.
5.3 SWOT analysis
Strength
-Strong brand presence
-Excellent distribution network
-Nescafe and Maggi are the most
powerful brands
-Competitive pricing and value
packaging
Weakness
-Difficult for Kit-Kat to beat Cadbury
-Low margins and penetration for the
milk products.
-Seasonal demand for some products.
Opportunity
-Growing demand for food and beverage
products driven by rural population.
-Overall economic growth leading to
increased disposable income and
consumption.
-Tremendous scope for expansion in the
cold dairy space.
-GST will enable smoother transfer of
products to the end consumer.
Threat
-Price fluctuations due to the devaluation
of the rupee.
-Some materials are imported

33. 32
5.4 Financial Projections
Income statement: (Appendix i)
We can see that Nestle India saw very high growth rates in 2009, 2010 and 2011 as
the economy and the GDP was very strong at that time. The growth dipped to
10.91% in 2012 and further down to 9.20% and 8.28% in 2013 and 2014
respectively as the economy was going into a downward spiral (refer 2.3) and with
restricted growth in the personal disposable income, the Indian consumer was being
very cautious about its consumption.
As discussed earlier in the report under 2.4 and 2.5, the new government reforms
have significantly boosted levels of personal disposable income between both the
rural and urban population, more importantly the rural population, which is now
resulting in an increased demand of food and beverage products. The company
may not reap the benefits of this increasing demand immediately thus expecting a
growth rate of 10% in 2015, however, this increase in consumption and demand will
have a trickling effect and it is expected that the company will hit again growth rates
of 20% by 2019.
The percentage of gross profits have been fairly stable in the lower 50’s with raw
material, packaging, processing and stocking accounting to nearly 45%. These are
pretty healthy margins to be operating on in such a price sensitive and competitive
industry. The EBITDA margins would see a marginal increase from 20.72% in 2014
to 21.50% in 2019. There will be no interest payments from 2015 onwards as it is
expected that the company has paid off almost all of its debt by year-end 2014.
Depreciation is estimated at about 6.5% of the gross block for the coming years. It
has averaged about 6.5% over the past 3-4 years.
Cash Flow statement: (Appendix ii)
Nestle has seen steady cash flows over the past few years. The cash flow is
expected to grow from INR 511 crore*
in 2014 to approximately INR 6787 crore in
2019. This is a result of effective operations, reduced capital expenditure, optimum
asset utilisation and decreased working capital requirements.
The working capital requirements for Nestle are expected to decrease from about
1.84% in 2014 to about 1.5% in 2019. This decrease in requirement of working
*
INR 1 crore = INR 10 million

34. 33
capital is due to an improved debtor turnover ratio. Cash recovery from debtors is
expected to be quicker in terms of days.
Nestle has invested heavily in capital equipment to boost production capacity in
anticipation to match the increasing demand. A huge amount of approximately INR
1559 crore and INR 979 crore was made in 2011 and 2012 respectively. No further
significant expenditure is expected to be made in the coming few years till 2019.
Interest payments have virtually come close to zero as most of the debt is paid off
by 2014 with only about INR 20 crore, which is paid off in 2015. Nestle believes in
its philosophy of taking care of its shareholders and hence as a company policy,
dividends of about 45% of profits after tax are taken into account. In all, Nestle is a
steady cash generating company over the next 5 years.
5.5 Financial shenanigans
The impact of the increased sales, steady growth in profit and cash flows puts
Nestle in a commanding position and has boosted the overall value of the company
(Appendix iii). At present the company is has a EV/EBITDA multiple of 30x which
means it is expensive to invest in this company, but future growth potential shows
that it is worth taking this risk.
The market cap of the company is expected to increase from INR 61514 crore in
2014 to INR 128218 crore in 2019 with the Price to earnings (P/E) multiple
remaining constant at 52x in both these years. This means that the company is
seeing organic growth and that it is safe to invest.
It is assumed that the company does not issue any more shares from the period
2014 to 2019 and the total number of shares are 9.64 crore. The increased profits
have significantly boosted the earnings per share (EPS) from INR 122.9 per share in
2014 to INR 256.98 per share in 2019.
The asset turnover ratio, meaning, sales generated per every rupee invested in
assets is constantly on the rise. This means that the operations of the company are
becoming more and more efficient over the years and without having to make any
more capital investments. The ratio is expected to improve from 3.45 in 2104 to 7.92
in 2019.

35. 34
6 Conclusion
The Indian economy has had a wavy past few years with the decline in GDP,
extraction of foreign capital, high rates of inflation, decreased personal incomes and
no stability in economic growth. After the change of guard within the government,
implementation of new policies and reforms has seen the economy revive as a
whole. There is now an influx of foreign capital, as investors believe that the
economy will prosper, levels of personal disposable incomes are rising and the
domestic consumption is improving which is boosting the overall GDP.
The FMCG is an industry that is non-cyclical in nature meaning it is not adversely
affected by the economic downturns, however a healthy economy with high
consumption levels does boost the bottom line for the FMCG companies. No matter
how bad the scenario is, there will always remain a certain demand for food and
beverages which makes this industry in specific a lucrative investment opportunity to
reap a steady portfolio growth and to diversify risk.
Amidst this shaky economic environment, a company like Nestle has consistently
believed in its vision and values of excellence, creating value and customer focus
thus showing mettle and intent. It is correctly stated that “when the going gets tough,
the tough get going” and Nestle posts a classic example. It has prepped up for the
battle and withered the economic storm. The economy is now seeing a gradual
revival in GDP, income and consumption levels and Nestle looks to take the early
mover advantage with increased capacity, strong and enhanced distribution
channels and a robust marketing campaign to create a distinct brand image.
An investment in Nestle India pans out to be a profitable one over the next 5 years
and the company is well on its path to high growth in sales, profits, reduced debt
and increased cash flows. The company is estimated to have a compounded annual
growth rate (CAGR) of 16%, which means that this could be a cash cow with low
beta of risk within a diverse investment portfolio.

36. 35
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40. 39
Appendix i (all figures INR crore)

41. 40
Appendix ii (all figures INR crore)

42. 41
Appendix iii