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Emami - Correction overdone; reiterate Buy
Emami’s sharp 23% stock price correction since 1 Nov ’10 is overdone in our view and we expect the price to move up in coming quarters. We estimate that earnings CAGR of 28% over FY10-13 and improving return ratios would help the company command better valuations. We reiterate Buy.
n Core business remains strong. Emami’s core business continues to do well, with all power brands and new launches reporting healthy growth. We expect the company to register revenue CAGR of 18% over FY10-13e. Based on no major pressure of raw material price hikes and lower ad spend, we expect margins to improve 110bps in FY11e over FY10.
n Steady flow of new launches. Emami continues to launch new products – It has introduced Malai Kesar soap, ‘Emami Hair Life Crème’ hair color, a `2 Zandu Balm SKU, and 5-in-1 shampoo. It has also re-launched Boroplus under the Fair and Healthy proposition.
n We introduce FY13 estimates. We expect revenue growth of 18% in FY13e over FY12, with 14pps volume growth and 4pps price hike. We expect 22% earnings growth in FY13e over FY12.
n Valuation and risks. We retain our price target of `502, at target PE of 25x on FY12e earnings. Our target PE is at 50% premium to the 12-month forward Nifty PE. Key risks: higher raw material prices and increase in competitive pressure.
Core business doing well
Emami continues to do well, with all power brands and new
launches reporting healthy growth rate. We expect the company to
register revenue CAGR of 18% over FY10-13e. With 110bps
improvement in EBITDA margin, we expect earnings CAGR of 28%
over FY10-13e.
Steady revenue growth
Emami continues to witness steady growth, with rapid enhancement in
volumes. The company hiked prices of its products by ~4% in 2QFY11.
All power brands such as Navratna oil, Zandu Balm, Boroplus antiseptic
cream and Fair & Handsome are sustaining their rapid growth, as also the
new launches. Products such as Malai Kesar cold cream, Pureskin glycerin
soap and Navratna Cool Talc launched in FY10 are witnessing doubledigit
growth.
New product launches
Emami has been introducing new products at regular intervals. It launched
Malai Kesar cream soap, a brand extension of Malai Kesar cold cream in
2QFY11. The company has recently introduced ‘Emami Hair Life Crème’
hair color in West Bengal. It is also test marketing baby products. Further,
it has introduced a `2 SKU of Zandu Balm. Also, it has re-launched
Boroplus under the Fair and Healthy proposition. We believe steady flow
of new launches augurs well for growth
Improving EBITDA margin
We expect the company to see improved margins on account of success of
new launches; based on this and lower competition in the Chyawanprash
and balm segments, the company is likely to reduce ad spend as a
percentage of net sales in FY11. As Emami enjoys strong pricing power, it
is well positioned to pass on any increase in raw material prices.
Steady net profit growth
With strong revenue growth and improving EBITDA margin, we expect
Emami to register earnings CAGR of 28% over FY10-13e. We believe that
as the company is amortizing the ‘goodwill’ post acquisition of Zandu, the
tax rate will remain lower than MAT rate. With reducing debt and rising
cash on the balance sheet, we expect interest cost to reduce and other
income to increase.
Possible bid for acquisition of Paras Pharma
As per media, Emami is planning to acquire Paras Pharma from the latter’s
promoters and private equity firms. We believe the acquisition would be a
strategic fit and help Emami strengthen its position in niche segments as
well as further drive distribution. Though it is very early to measure the
impact on financials, we believe the company’s success in the past
acquisition (when it acquired Zandu Pharma in ’08) is a positive. In our
view, the company has the ability to support its acquisition through
internal accruals, combination of debt and equity dilution.
Valuation
We introduce FY13 estimates and expect revenue and PAT growths
of 18% and 22% in FY13e over FY12. We reiterate Buy on the stock
with target price of `502, based on target PE of 25x FY12e earnings.
Introducing FY13 estimates
We are introducing FY13 estimates and expect revenue growth of 18%.
We estimate volume to contribute 14pps and price hikes to add 4pps. We
expect the company’s EBITDA margin to be maintained in FY13e at
24.9%. The company’s net profit growth is likely to be 22% in FY13e over
FY12.
Valuation
We retain Buy on Emami, with target price of `502. Our target price is
based on PE of 25x FY12e earnings. Our target PE is at premium of 50%
to the 12-month forward Nifty PE. Historically (over past eight years), the
stock has traded at a 10% discount to the 12-month forward Nifty PE.
The improving earnings outlook is likely to expand the premium.
Key risks
Higher raw material prices,
Increase in competitive pressure,
Lower than expected performance of new launches.
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