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Revenue in line with expectations; reaping benefits of Project Swadesh
Emami’s Q3FY11 revenue increased 14.9% to INR 4.06 bn (our estimate INR
4.15 bn) and PAT rose 9.3% to INR 856 mn (our estimate INR 900 mn). Muted
sales growth was because of slow sales of Boroplus and Fair & Handsome (lower
SKU is not doing well). The company initiated Project Swadesh with an intention
to increase rural coverage; consequently, rural area sales catapulted ~40-50%.
Margins decline; price hikes to offset cost pressure
While EBITDA declined 3% to INR 1.02 bn, margins declined 464bps. COGS
inflation (up 553bps) was partially offset by lower other expenses (down 10bps),
lower advertising and sales promotion (A&P) costs (down 66bps), and lower staff
expenses (down 13bps). Menthol, light liquid paraffin (LLP), and HDPE prices
increased sharply in Q3FY11, leading to gross margin decline. Emami has hiked
prices ~3% till 9mFY11 and increased prices further 3% in Q4FY11, which
should offset commodity inflation. The company anticipates little risk to volumes
on back of these price increases.
Egypt expansion plans on track
Emami recently bought Pharma Derm’s manufacturing facility in Egypt to
manufacture Navratna, Boroplus and other block buster products and export
them to Africa and the Middle East. Total investment would be ~INR 300 mn and
the company has made an initial investment of ~INR 60 mn. Tax benefits of
~INR 80-100 mn will be derived in the first year itself from this manufacturing
location, while Emami will continue to enjoy income tax benefits for 10 years
from this plant. Plant should be ready in next 6-8 months. Emami is closely
monitoring the political situation in Egypt and hoping turmoil will get over soon.
Outlook and valuations: Positive; maintain ‘BUY’
The company is focused on the mass-market product portfolio, is a leader in
several categories, faces limited competition from MNCs and regional players,
enjoys pricing power, and has high growth potential. New product launches,
combined with rejuvenation of Zandu brands should drive growth, going ahead.
We are bullish on this domestic FMCG consumption story and maintain ‘BUY’ on
the stock. On relative return basis, we rate it ‘Sector Outperformer’.
Q3FY11 conference call takeaways
Sales growth: Historically, the company’s Q3 sales growth is winter driven, which was
delayed in FY11. Hence, winter product sales did not pick up till December. 22% sales
growth YTD (19% volume) were recorded in Q3FY11.
Price increases: Emami has taken ~ 3% price hike till 9mFY11 and has effected further
3% hike in Q4FY11. While Zandu balm price was increased ~10%, Navratna oil and cool
talc prices were increased ~8-10%. These price hikes will offset commodity inflation
New products: Hair colour and shampoo are in test marketing phase; national roll out
is some time away.
International: Distribution issues in Boroplus in CIS led to Emami losing ~2-3 months’
sales; issue now resolved.
Egypt: Emami recently bought a manufacturing facility of Pharma Derm in Egypt:
• Plant should be ready in next 6-8 months.
• Emami is closely monitoring the political situation in Egypt and hoping the turmoil
will get over soon.
• Total investment would be ~INR 300 mn. Emami has made an initial investment of
~INR 60 mn.
• Emami will manufacture Navratna, Boroplus etc., in Egypt and export them to Africa
and the Middle East.
• Tax benefits ~INR 80-100 mn in first year from this manufacturing location; 10
years income tax benefits for this plant.
COGS
Menthol: Fresh production of menthol expected in May and Emami expects prices to
cool off post that. Cost hike ~30-40% Y-o-Y in menthol in Q3FY11.
Light liquid paraffin (LLP): Cost hike ~70% Y-o-Y in LLP during the quarter.
COGS break up: ~60% of COGS is raw material while the rest is for packaging material.
Out of this 60%; ~45% is for menthol and LLP only (i.e. ~27% of COGS).
Distribution
Project Swadesh: UP and MP have done well; 40-50% growth in rural sales because of
the distribution initiative.
Product-wise sales highlights
Boroplus
• Sales in Oct/Nov were dull while December sales doubled from last year, hence good
set of numbers overall despite delayed winter.
• Winter not so severe January 2011 onwards.
• ~6% sales growth Y-o-Y in Q3FY11 (5% volumes led); ~15% YTD growth
Zandu
• INR 2 SKU sales yet to pick up; launched nationally.
• Bigger size of Zandu is growing very well.
• 20% sales growth Y-o-Y in Q3FY11 (18% volumes led).
• Balm market share at ~75%.
• Emami expects the pain relief category to be ~INR 30 bn (including tablets which is
~INR 12 bn).
Navratna Oil
• 19% sales growth Y-o-Y in Q3FY11 (20% volumes led).
• Market share ~50%.
Chyawanprash
• 20% sales growth Y-o-Y in Q3FY11 (flat volumes; all pricing led increase).
• 20% market share.
Menthoplus
• 25% sales growth Y-o-Y in Q3FY11 (12% volumes led).
Fair & Handsome
• ~3% sales growth Y-o-Y in Q3FY11 (zero volume growth).
• Small size (~40% of F&H sales) is declining heavily. INR 5 SKU declined ~20% Y-o-
Y; hence brand has not grown.
• Emami has taken corrective actions to arrest the decline of F&H and expects
correction March onwards.
• Reduced prices from INR 7 to INR 5 for the small SKU to capture market share; but,
volumes declined further. So price increase again to INR 7.
• Market share has come down because of new players coming in
Fast Relief: ~6% sales growth Y-o-Y.
Exports: 15% sales growth Y-o-Y.
Guidance
• FY11 PAT of INR 2.25-2.30 bn despite input cost pressure.
• FY11: EBITDA margins in the 22-23% range. PAT margin ~18-19% => guidance
maintained.
• FY12: EBITDA margins ~23%. PAT margins ~20%. This guidance is assuming that
raw material costs will not correct; margins will improve if there is correction in
commodity costs.
• A&P: ~18-19% of sales in FY11. Q4Fy11 A&P will be low.
• Top line: 18-20% top line growth for next 2-3 years.
• Emami anticipates no pressure on volumes in the near term in light of price
increases as small SKUs will continue to drive volume growth.
Company Description
Emami is the flagship company of Emami group. It is a leading FMCG player in India,
operating in certain attractive segments such as skin care and hair oil. The company is
promoted by Kolkata-based industrialists, Mr. R.S. Agarwal and Mr. R. S. Goenka. The
company has been operating in health, beauty and personal care products for the past
30 years and has sustained a prominent position in therapeutic and Ayurvedic based
products, ensuring strong entry barriers for competition.
Over the years, Emami has innovated and built block-buster brands such as Navratna,
Boroplus, and Fair and Handsome. With the acquisition of ‘Zandu’, another strong
Ayurvedic brand was added to the portfolio. ~80% of the business is from wellness
categories, ensuring strong brand loyalty and ~80% of the company’s production is in
tax exempt zones. Recently, the Emami Group Company announced plans to enter the
edible oil business as well as a tie up with Disney for making toys. Since margins in both
of these businesses are very different from the FMCG business, these businesses are
launched through different legal entities with no impact on the listed FMCG business.
Investment Theme
Emami’s product portfolio provides a play on Indian FMCG spend by virtue of its strong
presence in less penetrated and high growth categories. More than 80% of Emami’s
products have Ayurvedic base. The therapeutic usage gives customer loyalty leading to
high gross margins, high barriers to entry, strong brand equity, mass acceptance and
superior growth opportunities. Emami has a superior track record of launching new
brands (Fair & Handsome, first fairness cream for men in India) and transforming them
into blockbusters.
Emami does not compete with any large multinational or domestic player in its key
segments. While Emami has already addressed the operational inefficiencies at Zandu in
FY10, we believe, many benefits from the latter’s brands are yet to flow in. Introduction
of lower SKUs for Zandu balm and rejuvenating more than 200 of Zandu’s Ayurvedicbased
prescription products will be another growth driver for Emami.
Key Risks
Seasonality risk is one of the biggest risks to Emami. Summer products (like Talc) and
winter products (like Boroplus) sales depend upon the weather conditions. Any disruption
in weather conditions can result in volatile sales of some of these products. With the
popularisation and increase in mass consumption of herbal products, several key
ingredients might be difficult to source.
Ayurvedic products are produced by more than a thousand small companies in India,
though only about a dozen are big national players. Given Emami’s success, entry of new
competitors cannot be ruled out. Hence, Emami, like other FMCG players, will need to
continuously invest in A&P to build superior brand equity and gain customer loyalty.
In addition to menthol and plastic, ~50% of Emami’s raw material cost is crude linked,
which exposes the company to price shocks, if any, in future. Last year, the company
increased prices and reduced package sizes to counter this. In addition to this, company
is exposed to volatility in soap stone powder, Light Liquid Paraffin (LLP), wax and Til Oil.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Revenue in line with expectations; reaping benefits of Project Swadesh
Emami’s Q3FY11 revenue increased 14.9% to INR 4.06 bn (our estimate INR
4.15 bn) and PAT rose 9.3% to INR 856 mn (our estimate INR 900 mn). Muted
sales growth was because of slow sales of Boroplus and Fair & Handsome (lower
SKU is not doing well). The company initiated Project Swadesh with an intention
to increase rural coverage; consequently, rural area sales catapulted ~40-50%.
Margins decline; price hikes to offset cost pressure
While EBITDA declined 3% to INR 1.02 bn, margins declined 464bps. COGS
inflation (up 553bps) was partially offset by lower other expenses (down 10bps),
lower advertising and sales promotion (A&P) costs (down 66bps), and lower staff
expenses (down 13bps). Menthol, light liquid paraffin (LLP), and HDPE prices
increased sharply in Q3FY11, leading to gross margin decline. Emami has hiked
prices ~3% till 9mFY11 and increased prices further 3% in Q4FY11, which
should offset commodity inflation. The company anticipates little risk to volumes
on back of these price increases.
Egypt expansion plans on track
Emami recently bought Pharma Derm’s manufacturing facility in Egypt to
manufacture Navratna, Boroplus and other block buster products and export
them to Africa and the Middle East. Total investment would be ~INR 300 mn and
the company has made an initial investment of ~INR 60 mn. Tax benefits of
~INR 80-100 mn will be derived in the first year itself from this manufacturing
location, while Emami will continue to enjoy income tax benefits for 10 years
from this plant. Plant should be ready in next 6-8 months. Emami is closely
monitoring the political situation in Egypt and hoping turmoil will get over soon.
Outlook and valuations: Positive; maintain ‘BUY’
The company is focused on the mass-market product portfolio, is a leader in
several categories, faces limited competition from MNCs and regional players,
enjoys pricing power, and has high growth potential. New product launches,
combined with rejuvenation of Zandu brands should drive growth, going ahead.
We are bullish on this domestic FMCG consumption story and maintain ‘BUY’ on
the stock. On relative return basis, we rate it ‘Sector Outperformer’.
Q3FY11 conference call takeaways
Sales growth: Historically, the company’s Q3 sales growth is winter driven, which was
delayed in FY11. Hence, winter product sales did not pick up till December. 22% sales
growth YTD (19% volume) were recorded in Q3FY11.
Price increases: Emami has taken ~ 3% price hike till 9mFY11 and has effected further
3% hike in Q4FY11. While Zandu balm price was increased ~10%, Navratna oil and cool
talc prices were increased ~8-10%. These price hikes will offset commodity inflation
New products: Hair colour and shampoo are in test marketing phase; national roll out
is some time away.
International: Distribution issues in Boroplus in CIS led to Emami losing ~2-3 months’
sales; issue now resolved.
Egypt: Emami recently bought a manufacturing facility of Pharma Derm in Egypt:
• Plant should be ready in next 6-8 months.
• Emami is closely monitoring the political situation in Egypt and hoping the turmoil
will get over soon.
• Total investment would be ~INR 300 mn. Emami has made an initial investment of
~INR 60 mn.
• Emami will manufacture Navratna, Boroplus etc., in Egypt and export them to Africa
and the Middle East.
• Tax benefits ~INR 80-100 mn in first year from this manufacturing location; 10
years income tax benefits for this plant.
COGS
Menthol: Fresh production of menthol expected in May and Emami expects prices to
cool off post that. Cost hike ~30-40% Y-o-Y in menthol in Q3FY11.
Light liquid paraffin (LLP): Cost hike ~70% Y-o-Y in LLP during the quarter.
COGS break up: ~60% of COGS is raw material while the rest is for packaging material.
Out of this 60%; ~45% is for menthol and LLP only (i.e. ~27% of COGS).
Distribution
Project Swadesh: UP and MP have done well; 40-50% growth in rural sales because of
the distribution initiative.
Product-wise sales highlights
Boroplus
• Sales in Oct/Nov were dull while December sales doubled from last year, hence good
set of numbers overall despite delayed winter.
• Winter not so severe January 2011 onwards.
• ~6% sales growth Y-o-Y in Q3FY11 (5% volumes led); ~15% YTD growth
Zandu
• INR 2 SKU sales yet to pick up; launched nationally.
• Bigger size of Zandu is growing very well.
• 20% sales growth Y-o-Y in Q3FY11 (18% volumes led).
• Balm market share at ~75%.
• Emami expects the pain relief category to be ~INR 30 bn (including tablets which is
~INR 12 bn).
Navratna Oil
• 19% sales growth Y-o-Y in Q3FY11 (20% volumes led).
• Market share ~50%.
Chyawanprash
• 20% sales growth Y-o-Y in Q3FY11 (flat volumes; all pricing led increase).
• 20% market share.
Menthoplus
• 25% sales growth Y-o-Y in Q3FY11 (12% volumes led).
Fair & Handsome
• ~3% sales growth Y-o-Y in Q3FY11 (zero volume growth).
• Small size (~40% of F&H sales) is declining heavily. INR 5 SKU declined ~20% Y-o-
Y; hence brand has not grown.
• Emami has taken corrective actions to arrest the decline of F&H and expects
correction March onwards.
• Reduced prices from INR 7 to INR 5 for the small SKU to capture market share; but,
volumes declined further. So price increase again to INR 7.
• Market share has come down because of new players coming in
Fast Relief: ~6% sales growth Y-o-Y.
Exports: 15% sales growth Y-o-Y.
Guidance
• FY11 PAT of INR 2.25-2.30 bn despite input cost pressure.
• FY11: EBITDA margins in the 22-23% range. PAT margin ~18-19% => guidance
maintained.
• FY12: EBITDA margins ~23%. PAT margins ~20%. This guidance is assuming that
raw material costs will not correct; margins will improve if there is correction in
commodity costs.
• A&P: ~18-19% of sales in FY11. Q4Fy11 A&P will be low.
• Top line: 18-20% top line growth for next 2-3 years.
• Emami anticipates no pressure on volumes in the near term in light of price
increases as small SKUs will continue to drive volume growth.
Company Description
Emami is the flagship company of Emami group. It is a leading FMCG player in India,
operating in certain attractive segments such as skin care and hair oil. The company is
promoted by Kolkata-based industrialists, Mr. R.S. Agarwal and Mr. R. S. Goenka. The
company has been operating in health, beauty and personal care products for the past
30 years and has sustained a prominent position in therapeutic and Ayurvedic based
products, ensuring strong entry barriers for competition.
Over the years, Emami has innovated and built block-buster brands such as Navratna,
Boroplus, and Fair and Handsome. With the acquisition of ‘Zandu’, another strong
Ayurvedic brand was added to the portfolio. ~80% of the business is from wellness
categories, ensuring strong brand loyalty and ~80% of the company’s production is in
tax exempt zones. Recently, the Emami Group Company announced plans to enter the
edible oil business as well as a tie up with Disney for making toys. Since margins in both
of these businesses are very different from the FMCG business, these businesses are
launched through different legal entities with no impact on the listed FMCG business.
Investment Theme
Emami’s product portfolio provides a play on Indian FMCG spend by virtue of its strong
presence in less penetrated and high growth categories. More than 80% of Emami’s
products have Ayurvedic base. The therapeutic usage gives customer loyalty leading to
high gross margins, high barriers to entry, strong brand equity, mass acceptance and
superior growth opportunities. Emami has a superior track record of launching new
brands (Fair & Handsome, first fairness cream for men in India) and transforming them
into blockbusters.
Emami does not compete with any large multinational or domestic player in its key
segments. While Emami has already addressed the operational inefficiencies at Zandu in
FY10, we believe, many benefits from the latter’s brands are yet to flow in. Introduction
of lower SKUs for Zandu balm and rejuvenating more than 200 of Zandu’s Ayurvedicbased
prescription products will be another growth driver for Emami.
Key Risks
Seasonality risk is one of the biggest risks to Emami. Summer products (like Talc) and
winter products (like Boroplus) sales depend upon the weather conditions. Any disruption
in weather conditions can result in volatile sales of some of these products. With the
popularisation and increase in mass consumption of herbal products, several key
ingredients might be difficult to source.
Ayurvedic products are produced by more than a thousand small companies in India,
though only about a dozen are big national players. Given Emami’s success, entry of new
competitors cannot be ruled out. Hence, Emami, like other FMCG players, will need to
continuously invest in A&P to build superior brand equity and gain customer loyalty.
In addition to menthol and plastic, ~50% of Emami’s raw material cost is crude linked,
which exposes the company to price shocks, if any, in future. Last year, the company
increased prices and reduced package sizes to counter this. In addition to this, company
is exposed to volatility in soap stone powder, Light Liquid Paraffin (LLP), wax and Til Oil.
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