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Lehman Coverage on Godrej + Marico + Dabur +Asian Paints

November 22, 2007

Lehman Brothers, was the first one to Downgrade the Indian IT companies and we were the first one to report it here. Lehman has now come up with recommendations on the Indian FMCG space.

They have recommendations on Asian Paints, Dabur India, Marico Ltd and Godrej Consumer products Ltd.

Godrej Consumer Products Ltd – Overweight: GCPL
Expect steady earnings growth going forward, we believe the stock is attractively valued. Expect its international business to grow at a healthy rate on the back of organic and inorganic initiatives.

Concerns about loss of market share in the hair colour segment are overdone and have been factored into the price. GCPL,s current valuations are the most attractive in our Indian consumer portfolio and we believe that the risk-reward balance is favourable. Lehman expects Godrej to report an EPS of Rs 6.50 and Rs 7.70 for FY08 and 09 respectively. At the current market price of INR132.85, the stock is trading at a P/E multiple of 17.3x FY09E. 12-month target price is INR155, implying potential upside of 17% from current levels.

Asian Paints Ltd – Overweight:
Strong leadership position in the domestic decorative paints segment. It enjoys several key competitive advantages, which we believe will enable it to grow faster than the industry in the long term. Consensus estimates from other analysts is not factoring in a fast growth trajectory for the company and their earnings estimate is about 15% lower than Lehman’s.

Among the companies in our coverage, Asian Paints is likely to be most leveraged to rupee appreciation since prices of key raw materials are import parity led.

At the current market price of INR1,000.95, the stock trades at a P/E of 19.0x FY09E EPS of INR52.8. The paint industry is on a secular growth path, and given the competitive advantages enjoyed by Asian Paints, it is expected to be the biggest beneficiary of this growth. It is likely to continue to perform better than the industry, and, hence, the premium, compared to its peers, is justified, in our view, and it is likely to be maintained. 12-month price target of INR1,309 is based on a P/E multiple of 22x on rolling four quarters EPS of INR 59.5, representing 31% potential upside.

Marico Limited – Overweight:
Anticipate a strong growth path for Marico’s domestic business, driven by momentum in the hair care and edible oil businesses. “Kaya Retail” is now profitable and likely to add substantially at the operating level in a couple of years.

Marico has time and again demonstrated its ability to successfully counter competition, especially in the coconut hair oil business with strong presence of Parachute brand. Marico has been rapidly expanding its international footprint through a judicious mix o f organic and inorganic initiatives. This has resulted in a significant ramp up in the international business division’s revenue in the last three years.

The company would continue to be on a faster growth trajectory as compared to other stocks in the coverage and thus merits a higher multiple. Lehman has valued the stock on a P/E of 22x on rolling four quarters earnings with a 12 month target price of Rs 86.

Dabur India – Underweight
Dabur India is likely to register slower volume and earnings growth compared to its peers largely due to its very fragmented product portfolio.

While the company has a significant presence in several key segments, such as oral care and hair care, it has yet to attain a leadership position in any of these categories. The consumer health division, which traditionally has been the mainstay of the company, has witnessed stagnation in growth in the past few years.

Consensus is building in an optimistic margin scenario, while near-term earnings are likely to disappoint. In terms of earnings growth (a 16.5% CAGR from FY07-10E), the trajectory is going to be lower than that of Asia Paints and Marico, according to our estimates. 12-month price target of INR 96 is based on a P/E multiple of 20x on rolling four quarters EPS of INR 4.8.

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