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Emami BUY - The niche advantage
Emami is one of India’s fastest-growing FMCG companies,
with a unique product mix of leadership positions in niche
segments such as ‘cooling oils’, pain balms and antiseptic
creams. With minimal competition from large companies,
Emami commands high pricing power, which would help it
tide over commodity inflation. Growth in low-penetration core
categories, product innovation and expansion in the
international business will drive 24% earnings CAGR over
FY10-13. Margin pressures and an expensive bid for Paras
Pharmaceuticals have led to a correction of 24% in the past
six months, which we believe is an attractive entry point into
the stock.
Niche product portfolio will see high growth with no
meaningful increase in competition: Emami operates in niche,
low-penetration categories (skin-care, pain balms) and in those
categories where consumer adoption is increasing (‘cooling oils’ and
‘cooling talcum powder’). We expect volume growth in Emami’s
product categories to sustain at 15-20% annually. As these are small
product segments, they are unlikely to attract MNC competition. This
should also help Emami maintain or strengthen its market position.
New product pipeline, international business will add to
growth: Emami continues to churn out new products that are either
in niche segments or occupy differentiated positions within large
categories. The company is now ramping up a number of new
launches that it has done in the past 12-24 months, such as cooling
talcum powders, body lotions, cold creams and glycerin soaps. It is
also seriously expanding its international business with new
manufacturing locations in Egypt and Bangladesh, which could drive
25% revenue CAGR for that business over the next three years.
Pricing power in most segments; margin decline likely to
reverse in FY12: Emami enjoys pricing power in most of its
segments, thanks to minimal competition from companies and
dominant market share. Emami has faced steep inflation in a few
inputs such as menthol and liquid paraffin. The company has initiated
prices hikes of 6–7%, which should help EBITDA margins to recover
from their fall seen in the past two quarters without adversely
affecting revenue growth.
Valuations
Stock correction owing to near-term margin pressures and an
expensive bid for Paras Pharma
Emami’s stock has corrected 24% over the past six months largely
due to an earnings downgrade for FY11, owing to lower-thanexpected
margins in 2HFY11 given the sharp spike in some raw
materials like menthol and liquid paraffin. Also, the management’s
bid for Paras Pharma, at over 30x 1-year forward earnings, was seen
as a risk. However, we believe Emami has pricing power to mitigate
cost pressures. Thus, we see the current stock correction as an
opportunity to buy the stock.
Key risks
Further commodity inflation will force more price hikes and
hence, hurt volume growth momentum: If commodity inflation
further intensifies, Emami would need to take further price hikes to
protect margins. However, steep price hikes could adversely affect
the strong double-digit volume growth that Emami is witnessing.
However, given the low penetration of most of Emami’s key
categories, we believe any slowdown in volume growth would be
short lived.
Large companies entering Emami’s niche segments: Emami
has till now faced little competition from large companies in
categories like cooling oils, pain balms and antiseptic creams.
However, companies like Marico continue to attempt an entry into
the cooling oil segment despite a couple of failures. Similarly, skin
care players are looking to enter antiseptic skin creams. If any of the
larger players are able to get a strong foothold in these categories, it
would pose a risk to Emami’s pricing power. However, Emami’s
strong innovation record, diversified revenue stream and high
market growth in its categories significantly mitigates any major risk
to earnings growth.
Management going in for a large acquisition: In the past,
Emami’s management has made acquisitions that are beyond the
comfortable scale for Emami’s size. Emami acquired Zandu in FY08
paying c35% of its market cap at that time. Similarly, the company
bid for Paras Pharmaceuticals recently for a price that would have
been 35-40% of its market cap. While the company has been very
successful in extracting significant value from large acquisitions like
Zandu through aggressive cost cutting and marketing inputs, such
moves create near-term uncertainty, as the acquisition size warrants
equity issuance. However, we do not see any acquisition near the
scale of Paras on the horizon in the Indian personal care space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Emami BUY - The niche advantage
Emami is one of India’s fastest-growing FMCG companies,
with a unique product mix of leadership positions in niche
segments such as ‘cooling oils’, pain balms and antiseptic
creams. With minimal competition from large companies,
Emami commands high pricing power, which would help it
tide over commodity inflation. Growth in low-penetration core
categories, product innovation and expansion in the
international business will drive 24% earnings CAGR over
FY10-13. Margin pressures and an expensive bid for Paras
Pharmaceuticals have led to a correction of 24% in the past
six months, which we believe is an attractive entry point into
the stock.
Niche product portfolio will see high growth with no
meaningful increase in competition: Emami operates in niche,
low-penetration categories (skin-care, pain balms) and in those
categories where consumer adoption is increasing (‘cooling oils’ and
‘cooling talcum powder’). We expect volume growth in Emami’s
product categories to sustain at 15-20% annually. As these are small
product segments, they are unlikely to attract MNC competition. This
should also help Emami maintain or strengthen its market position.
New product pipeline, international business will add to
growth: Emami continues to churn out new products that are either
in niche segments or occupy differentiated positions within large
categories. The company is now ramping up a number of new
launches that it has done in the past 12-24 months, such as cooling
talcum powders, body lotions, cold creams and glycerin soaps. It is
also seriously expanding its international business with new
manufacturing locations in Egypt and Bangladesh, which could drive
25% revenue CAGR for that business over the next three years.
Pricing power in most segments; margin decline likely to
reverse in FY12: Emami enjoys pricing power in most of its
segments, thanks to minimal competition from companies and
dominant market share. Emami has faced steep inflation in a few
inputs such as menthol and liquid paraffin. The company has initiated
prices hikes of 6–7%, which should help EBITDA margins to recover
from their fall seen in the past two quarters without adversely
affecting revenue growth.
Valuations
Stock correction owing to near-term margin pressures and an
expensive bid for Paras Pharma
Emami’s stock has corrected 24% over the past six months largely
due to an earnings downgrade for FY11, owing to lower-thanexpected
margins in 2HFY11 given the sharp spike in some raw
materials like menthol and liquid paraffin. Also, the management’s
bid for Paras Pharma, at over 30x 1-year forward earnings, was seen
as a risk. However, we believe Emami has pricing power to mitigate
cost pressures. Thus, we see the current stock correction as an
opportunity to buy the stock.
Key risks
Further commodity inflation will force more price hikes and
hence, hurt volume growth momentum: If commodity inflation
further intensifies, Emami would need to take further price hikes to
protect margins. However, steep price hikes could adversely affect
the strong double-digit volume growth that Emami is witnessing.
However, given the low penetration of most of Emami’s key
categories, we believe any slowdown in volume growth would be
short lived.
Large companies entering Emami’s niche segments: Emami
has till now faced little competition from large companies in
categories like cooling oils, pain balms and antiseptic creams.
However, companies like Marico continue to attempt an entry into
the cooling oil segment despite a couple of failures. Similarly, skin
care players are looking to enter antiseptic skin creams. If any of the
larger players are able to get a strong foothold in these categories, it
would pose a risk to Emami’s pricing power. However, Emami’s
strong innovation record, diversified revenue stream and high
market growth in its categories significantly mitigates any major risk
to earnings growth.
Emami’s management has made acquisitions that are beyond the
comfortable scale for Emami’s size. Emami acquired Zandu in FY08
paying c35% of its market cap at that time. Similarly, the company
bid for Paras Pharmaceuticals recently for a price that would have
been 35-40% of its market cap. While the company has been very
successful in extracting significant value from large acquisitions like
Zandu through aggressive cost cutting and marketing inputs, such
moves create near-term uncertainty, as the acquisition size warrants
equity issuance. However, we do not see any acquisition near the
scale of Paras on the horizon in the Indian personal care space.
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