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7th March, 2011

Food & Beverages

The FMCG industry in India has witnessed steady sales growth of a 12% CAGRoverthepastdecade,accordingtoACNielsen.Growthmomentumpicked upfromaCAGRof6%inFY0105andacceleratedto16%overFY06FY10F.The most important facilitators for accelerating sector growth has been a significant pickupintheprocessedandpackagedfoodsectorinIndia,inwhichsaleshave faroutpacedhygieneandpersonalcare(HPC)sales. IndianFMCGindustry:acceleratinggrowth

Foodsectorleadsgrowth However, a significant pickup in growth of the processed and packaged food sector has boosted the growth of the FMCG sector. The processed and packagedfoodsector(~46%oftheFMCGmarket)witnessed19%salesgrowthin CY0610, compared with 14% sales growth in the hygiene and personal care (HPC)segmentand16%salesgrowthintheoverallFMCGindustry. Segment Food HPC Others TotalFMCG SizeCY06 (Rsbn) 299.1 292.3 139.3 730.7 SizeCY10E (Rsbn) 596.4 488.9 213.2 1,298.5 CAGR(%) 18.8 13.7 11.2 15.5 1

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7th March, 2011 IncreasedshareoffoodinFMCG Segment Food HPC Others TotalFMCG Categorysize Category Food:Milkproducts Milkpowder Milkfood Food:Emerging Breakfastcereals Saltysnacks Chocolate Noodles BabyFood Coffee Food:PackagedStaples Iodisedsalt Packagedwheatflour Packagedrice Packagedtea Food:Others Beverages Ketchups EdibleOil Biscuits CY06 (Rsmn) 4,458 7,132 1,125 20,840 14,554 8,255 4,017 6,334 12,528 8,671 1,176 39,571 15,205 2,379 48,277 68,980 CY10E (Rsmn) 8,505 13,825 3,214 50,498 28,316 18,001 7,361 9,646 24,906 20,933 3,380 68,373 28,278 4,775 93,565 126,019 CAGR (200610)(%) 17.5 18.0 30.0 24.8 18.1 21.5 16.4 11.1 18.7 24.7 30.2 14.4 16.8 19.0 18.0 16.3 2 ShareCY06(%) 40.9 40.0 19.1 100.0 ShareCY10E(%) 45.9 37.7 16.4 100.0

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7th March, 2011 In2010,emergingfoodcategoriessuchasbreakfastcereals,babyfoodand salted snacks were ~7.3% of total FMCG industry. This means a decade later, emergingfoodcategoriescouldbe~1314%oftotalindustry. FMCGsectorgrowth

Exports Exports of agricultural products from India are expected to cross around US$22billionmarkby2014andaccountfor5percentoftheworldsagriculture exports, according to the Agricultural and Processed Food Products Export DevelopmentAuthority(APEDA). Exports of floriculture, fresh fruits and vegetables, processed fruits and vegetables, animal products, other processed foods and cereals stood at US$ 7,347.07 million in 200910, according to DGCIS annual data published by APEDA. Moreover,Indiaexportedscheduleproducts,floricultureandseeds,fruits and vegetables, processed fruits and vegetables, livestock products, other processedfoodsandcerealsworthUS$1.77billionbetweenAprilJune20092010, accordingtoAPEDA.

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7th March, 2011 GrowthDrivers o Hugeruralopportunitystilltobetapped Over the last few years, despite strong growth witnessed in the rural markets, Indian FMCG companies continue to concentrate in these areas, especiallyinthefoodsegment.Theopportunityisstilllargelyuntapped. RuralIndia:Percapitadisposableincome

Over the last 18 years, per capita rural disposable incomes have steadily increased at a CAGR of 3.2% to ~Rs32,000. However, whats interesting is that over the next few years, the pace of growth is likely to accelerate. According to estimates,ruraldisposableincomesarelikelytoincreaseataCAGRof4.2%over FY08FY30.Oneofthebiggestbeneficiariesofthissteadyriseinruralincomesis likelytobetheconsumersectorandthefoodsectorinparticular. o Urbandisposableincometoaccelerate Overthelast18years,percapitaurbandisposableincomeshavesteadily increasedataCAGRof5.4%,significantlyaheadoftheruralincomes.According to estimates by McKinsey, over the next few years, growth of urban disposable incomes is likely to accelerate, at CAGR of 6.4% over FY08FY30. With steady risingincomesandthecultureofconsumerismincreasing,webelievethatthereis significantopportunityinthefoodsector. UrbanIndia:Percapitadisposableincome

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7th March, 2011 Householdconsumptionisexpectedtodoubleby2020

Investments o ThelargestinbounddealbetweenJanuary1,2009andAugust1,2010was the acquisition of the businesses of Eastern Condiments Pvt Ltd, by McCormick&CoInc,forUS$35.0million(INR1,680million). o In2010ShreeRenukaSugarsLtdacquiredEquipavS.AAcarelcool forUS$1,160.0million(INR55.7billion)inamajoroutbounddeal. M&Ascenariodetails Period:January1,2009toNovember1,2010 Dealtype Inbound Outbound Domestic CumulativeFDIinflow Period:April2000toAugust2010 Sector AmountofFDIinflow(US$million) Agriculturalservices 1,538.18 Foodprocessingindustries 1,086.01 Fermentationindustries 786.72 Agriculturalmachinery 150.25 Vegetableoilsandvanaspati Teaandcoffee Sugar Total 185.65 94.57 41.74 3,883.12 www.ghallabhansali.com 5 Noofdeals 5 7 17 Dealvalue(US$million) 43.0 1,402.8 185.1

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7th March, 2011 Industryinfrastructure AgriExportZones(ThetotalnumberofAEZsinIndiais60.)

Products Mangopulpandfreshvegetables,grapes,mangoes,gherkins AndhraPradesh andchillies Assam Freshandprocessedginger Bihar Litchi Mangoesandvegetables,dehydratedonionsandsesame Gujarat seeds HimachalPradesh Apples Jammu&Kashmir Applesandwalnuts Jharkhand Vegetables Karnataka Gherkins,roseonions,flowersandvanilla Kerala Horticultureproductsandmedicinalplants Potatoes,onionsandgarlic,seedspices,wheat,lentiland MadhyaPradesh gramsandoranges Grapesandgrapewine,mangoesincludingKesarmango, Maharashtra flowers,onions,pomegranate,bananaandoranges Orissa Gingerandturmeric Punjab Vegetables,potatoesandbasmatirice Rajasthan Corianderandcumin Sikkim Ginger,flowers(orchids)andcherrypepper TamilNadu Flowers,mangoesandcashewnuts Tripura Pineapples UttarPradesh Potatoes,mangoes,vegetablesandbasmatirice Uttaranchal Basmatirice,litchi,flowers,medicinalandaromaticplants Pineapples,litchi,potatoes,mangoes,vegetablesand WestBengal Darjeelingtea www.ghallabhansali.com 6 State

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7th March, 2011 Globalfoodindustry Globalfoodopportunityisevolving Global food opportunity is constantly evolving as a result of changing lifestylesandpreferenceformoreconvenienceandvariety.Globalprocessedfood opportunity is valued at 2.5tn, of which the US, Europe and Japan combined accountfor60%,accordingtoaFICCIreport.Inthatcontext,theshareoftherest oftheworld(ROW)isquitesmall,buttheopportunitysizeismuchlarger. Globalprocessedfoodindustry

Foodinflationtobeaglobalconcern Theglobalfooddemandsupplyconditiontoundergoasignificantchange, leadingtoasurgeinglobalfoodinflation.Thesurgeincommoditypricesin2003 08 was the largest, longest and most broadbased of any commodity boom since 1900.Thepricesofenergyandmetalssurgedthemost,butitwastheagricultural market that saw the most fundamental change. It may not take much of a disruption in food supply to trigger another surge in prices given that the dynamicshavebecomeawholelotmoreuncertainasaresultofnewand some increasinglypowerfulinfluencesactingonbothsidesofthefoodsupplydemand equation. The another multiyear food price rise is expected partly because of burgeoningdemandfromtheworldsrapidlydevelopingandmostpopulated economies, where diets are changing towards a higher calorie intake. Most models significantly underestimate future food demand as they fail to take into accountthewideincomeinequalityindevelopingeconomies. www.ghallabhansali.com 7

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7th March, 2011 Newerandemergingcategoriestogrowfastest Growthinthefoodsegmentwillalsobedrivenfromemergingcategories suchasjuices, milk powder,baby foods, etc.Withconsumerpreferencemoving towardsconvenienceandwithalargepercentageofthewalletstillbeingspenton food,theseproductcategoriesareprimedtotakeoff,especiallyinurbanareas. Someofthebestexamplesofthisarebreakfastcerealsandpackagedjuices. BothcategoriesarerelativelynewtotheIndianmarket,butaregrowingatafast clip.Weexpectbreakfastcerealstodeliveramediumtermgrowthrateof2025% andjuicestocontinuetogrowstronglyoverthenextfewyears.Toputthisinto perspective, the breakfastcerealsmarketis worthRs 5bn andjuices is worthRs 15bn,accordingtoACNielsen. Alsonotethatinboththesecategories,consumersaremovingfromhome made/ unbranded products to packaged products. With demographics supportive for such a move, we see a big shift from unbranded products to packageddrinks.Inthejuicessegment,CocaColaIndiasuggeststhatonly90mn casesoutofthe660mncasesofjuicesmarketvolumearepackaged.Thisclearly leaves plenty of room for growth over the medium term. The first phase of this move has already started to happen, with packaged drinks moving from under 10%ofthetotaljuicemarketto1617%today(source:CocaColaIndia)

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7th March, 2011 Quickservicerestaurantindustry:robustgrowthinrecentYears Thequickservicerestaurantindustryhasseenrobustgrowthoverthepast fewyears.Thishasbeensupportedbyseveralstructuralmacroeconomictriggers, as well as the industry recognizing the opportunity and investing in improving theavailabilityandaffordabilityoftheproduct.Thishasbeentrueacrossvarious quickservicerestaurantformatssuchaspizza(bothdeliveryanddinein),cafs, burgersandfriedchickenrestaurants. QSRrestaurants Pizzabrands Dominos PizzaHut SmokingJoes USPizza PizzaCorner GarciasPizza PapaJohns Total NonPizzabrands CafCoffeeDay Barista McDonalds Subway Nirulas KFC CostaCoffee Total Conclusion: TheIndianFMCGindustrywillwitnessasalesCAGRof1012%overthe nextdecade,accordingtoBooz&Coestimates.However,webelievethemixwill incrementally shift towards food from HPC. The share of emerging food categoriescoulddoubleintheoverallFMCGspaceoverthenextdecade. TheIndianfoodsectorislikelytoregistersteadysalesgrowthinthehigh teens over the next decade on rising penetration, increasing urbanization and lifestyle changes. Over the medium term, the food sector will likely also benefit from a shift towards branded and organized packaged foods. The evolution of modern retail will play a critical role in the growth rate of the food sector. A wideravailabilityofproducts,focusonincreasingconsumptionandsupplychain efficienciessuggestfastergrowthprospects. www.ghallabhansali.com 9 2003 75 70 31 20 30 226 35 50 50 24 30 2 191 2010 306 158 52 60 54 20 21 671 923 230 169 145 67 72 40 1,646 Growth(x) 4.1 2.3 1.7 3 1.8 3 26.4 4.6 3.4 6 2.2 36.0 8.6

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7th March, 2011 JubilantFoodworks Jubilant Foodworks, part of the Jubilant Bhartia group, holds the master franchise agreement (MFA) for the Dominos Pizza brand in India, Nepal, BangladeshandSriLanka.Thecompany,earlierknownasDominosPizzaIndia Ltd,wasfoundedin1995andlauncheditsfirststoreinNewDelhiin1996. Today, the company has 364 stores under operation in 78 cities in India. Jubilant Foodworks is the market leader in the organized pizza space in India with 50% share and has a 65% share in the pizza delivery segment. It competes withotherpizzabrandsaswellasotherQSRrestaurantsandlocalrestaurantsin the areas where it operates. The companys stores mostly have a delivery and dinein option. The stores are served by four commissaries located at Noida, Bengaluru,MumbaiandKolkata.JFLpaysDominosIncaroyaltyof3%ofsales andhasanagreementtopaythisfortheremainderoftheperiodthattheMFAis valid(i.e.,through2024). McDonalds McDonalds Corporation is the worlds largest chain of hamburger fast foodrestaurants,servingmorethan58millioncustomersdaily.McDonaldshas morethan32,000restaurantsservingover50millioncustomerseachdayinmore than119countries.McDonaldshasadedicatedsupplychaininIndiaandsources 99%ofitsproductsfromwithinthecountry.Thecompanyhasstrongbackward integrationrightuptothefarmlevel.McDonaldsIndiahadmorethan169quick service restaurants in India. In India, over quarter of a million customers visit McDonaldsfamilyrestaurantseveryday. InIndia,McDonaldsdoesnotofferporkorbeefbasedproducts.Itsmenu is more than 50 per cent vegetarian. The fast food retail chain has separate productionlinesandprocessesforitsvegetarianandnonvegetarianofferings. CafCoffeeDay CafCoffeeDayisachainofcoffeeshopsinIndiawithitsheadquartersin Chikkamagaluru, Karnataka. It is a division of Amalgamated Bean Coffee Trading Company Ltd. (ABCTCL) and is commonly known as Coffee Day or CCD. It openeditsfirstcafein1996 on BrigadeRoadin Bangalore and today is thelargestcaferetailchaininIndia,with1000cafesin141citiesandmanyinits base,Bangalore. Caf Coffee Day sources coffee from 10,500 acres (4,249 ha) of coffee estates, the second largest in Asia, that is owned by a sister concern and from 11,000smallgrowers.

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7th March, 2011 Caf Coffee Day aims to expand its outlets network from the current 972 outletsto2,000by2014.Aspartoftheexpansionplan,thecompanywouldhave 1,100outletsbyMarch2011.ThecompanyisplanningtospendaboutINR1,000 million($21.8million)fortheexpansion.Thecompanygetsabout35%to40%of itsrevenuesfromfoodwhiletherestisaccruedfrombeverages,includingcoffee. KFC KFC is the worlds No.1 Chicken QSR and has industry leading stature across many countries like UK, Australia, South Africa, China, USA, Malaysia and many more. KFC is the largest brand of Yum Restaurants, a company that ownsotherleadingbrandslikePizzaHut,TacoBell,A&WandLongJohnSilver. Renowned worldwide for its finger licking good food, KFC offers its signature products in India too! KFC has introduced many offerings for its growing customerbaseinIndiawhilestayingrootedinthetastelegacyofColonelHarland Sanders secret recipe. Its signature dishes include the crispy outside, juicy insideHotandCrispyChicken,flavorfulandjuicyOriginalRecipechicken,the spicy,juicy&crunchyZingerBurger,ToastedTwister,ChickenBucketandahost ofbeveragesanddesserts.ForthevegetariansinIndia,KFCalsohasgreattasting vegetarianofferingsthatincludetheVegaZingerandVeggieSmacker.InIndia, KFC is growing rapidly and today has presence in 21 cities with close to 107 restaurants. In February 2011, KFC, the fast food retail chain announced a new menu called Streetwise to offer products at more affordable prices to attract the collegecrowd.KFChasaround108storesinIndiaandStreetwisewouldhelpit compete better against McDonalds youth brand offering in India (products pricedatRupees20).KFCsproductsweretypicallypricedbetweenRs65andRs 500butwiththenewmenubetweenRs25andRs100. PizzaHutInc Pizza Hut Inc. is the largest pizza restaurant company in the world in terms of both the number of outlets and the percentage of market share that it holds. A subsidiary of PepsiCo, Inc., the company oversees more than 11,000 pizza restaurants and delivery outlets in 90 countries worldwide. With a 27 per cent market shareofthe eatingout market and more than70,000 footfalls every dayalloverthecountry,PizzaHutisallsettooffercustomers,aperfectplaceto buildmemoriesandassociationsoverappetizingfood.

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7th March, 2011 MittalChheda mittald@ghallabhansali.com Disclaimer:
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