Emami Ltd. Ahead of expectations:: Macquarie

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Emami Ltd.
Ahead of expectations
Event
 Emami reported strong 2Q FY11 results; sales grew by 26%YoY and PAT
grew by 36%YoY. Net profit was 25% ahead of our expectation and 35%
ahead of Bloomberg consensus estimates. The company reported 24%
volume growth, with strong growth across all key products. We reiterate our
Outperform rating and target price of Rs550/share.




Impact
 Robust 26% sales growth – driven by 24% volume growth. Emami’s 2Q
FY11 sales grew by 26% YoY to Rs2.7bn, led by 24% volume and ~2% price
hike impact. Sales growth was supported by strong growth recorded in key
brands: Zandu Balm (28%), Navratna Hair Oil (14%), Fair and Handsome
(30%) and Boroplus Antiseptic Cream (60%). International export business
also grew by 22%YoY, driven by growth in Boroplus and Fair and Handsome.
 EBITDA margin impacted by higher raw material (RM) costs. Emami
reported a 300bp EBITDA margin decline to 21.2% in 2Q. This margin decline
was due to a 554bp drop in gross margin on account of higher RM costs,
particularly menthol (75% increase) and LLP (30%). However, the impact of the
RM cost increase on margins was partially offset by lower staff cost (52bp),
advertising and promotion (24bp) and other operating expenses (170bp).
 Price hike and operating leverage – likely defence to margin. Emami is
contemplating a limited price hike in higher value packs of few products to tide
over the current cost pressure and optimize its other operating costs.
 PAT grew by 36%YoY to Rs534m. PAT growth was aided by strong 27%
top-line growth, interest income (compared to expense in the previous year)
and higher other income. We believe that higher interest income, a lower
effective tax rate and strong product portfolio with limited near-term
competitive threats should help the company post greater than 26% earnings
CAGR between FY10E and FY13E.
 New product launches continue: Emami has rolled out Malai Kesar soap
nationally post favourable feedback during test marketing. The company is
currently test marketing its hair colour brand Hair Life in West Bengal. In
addition, the recently launched Rs2 sachet of Zandu balm is growing ahead of
management’s expectations.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs550.00 based on a DCF methodology.
 Catalyst: 1) product launch successes; 2) M&A.
Action and recommendation
 Outperform maintained. We maintain our positive view on Emami given its
strong growth momentum, healthy product pipeline and new initiatives that will
add growth and maintain leadership in key products.