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UBS Investment Research
Emami Ltd
O n a favourable growth trajectory [EXTRACT]
Niche, ayurvedic-based products with significant loyalty and mass appeal
Emami is one of India’s fastest-growing fast moving consumer goods (FMCG)
companies with a niche product portfolio focused on ayurvedic and herbal
formulations (health focus leads to strong brand loyalty), which have mass appeal
in India. Emami's brands of ‘cooling’ oil and antiseptic creams are generically
identified with the category itself. These supported its strong gross margins of 59-
65% in FY08-11, aiding a high advertising spend (18% of total sales in FY11) for
national/regional marketing.
Market leader in under-penetrated segments; growth from new products
Emami is a market leader in four key products (60% of its sales)—Navratna
Cooling Oil, Boroplus Cream, Zandu Balm, and Fair Handsome Cream. It has
presence in under-penetrated categories with limited multinational corporation
(MNC) competition. Newer products such as Navratna Extra Thanda Oil, ‘cooling
talc’, Vasocare and cold creams should support sales growth (16.4% of sales in
FY11). We think additional growth drivers are its expanding distribution and rural
reach, a scaling up in its Zandu business operations, and strong international sales.
Forecast 22.1% EPS CAGR in FY11-13; net cash balance sheet in FY12E
We forecast a 22.1% net income CAGR over FY11-13, assuming a 17.7% sales
CAGR and slight improvements in its gross margin (19.8-21.1% in FY11-13E)
from a partial cost pass-through and tapering advertising expenses. Net nonoperating
income and low tax rates should also support earnings growth.
Valuation: initiate coverage with a Buy rating and Rs535.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of 11%.
Our price target implies 23.7x FY13E PE.
Investment Thesis
We initiate coverage of Emami with a Buy rating and a Rs535.00 price target. We
like Emami due to: 1) its strong and niche product portfolio and ayurvedic focus
(these products appeal to Indian consumers, encouraging strong brand loyalty);
2) its robust sales growth (14-18% YoY in key categories); 3) its market leadership
position in four key brands; and 4) limited MNC competition, which support higher
gross margins.
We think its key share price catalysts could be: 1) sustained high earnings growth
momentum; 2) market share gains for its key brands and successful new product
categories; 3) potential M&As at reasonable valuations, given Emami’s good track
record of monetising its Zandu acquisition.
We forecast a 22.1% net income CAGR in FY11-13 (higher than its local peer
average), which should be supported by sales growth and slight improvements in
its EBITDA margins from a partial cost pass-through and slightly declining
advertising expenses. Net interest income and a low tax rate should also support
earnings growth. We believe Emami has a good balance sheet (we expect it to turn
net cash by FY12), limited capex requirements, and will maintain working capital
discipline.
Emami is trading at 24.2x FY12E PE (+1 standard deviation to historical mean)
and 19.7x FY13E PE, a premium to its Indian and global peers (except Dabur and
Hindustan Unilever [HUL]). We believe its premium valuation could be due to a
stronger EPS outlook and gross margins, leadership in niche categories, and
presence in under-penetrated fast-growing segments.
Emami is trading at a 7.3% discount to Dabur’s FY13E PE. Over the past one to
two years, Emami has traded at a 5-15% discount to Dabur on a one-year forward
PE—this has narrowed from FY04 onwards as Emami gained market share and
launched new products. Its PE discount is also partly lower because of higher net
non-operating income for Emami and lower tax rate (tax incentives). However,
Emami is trading at a premium to Dabur on FY13E EV/EBITDA. Given our views
on Emami and the incremental diversification of its product sub-segments, we
estimate its implied FY12/13E PE will be at a 3-7% discount to Dabur’s. We
believe the key risks to our view are higher raw material prices, an inability to pass
on higher costs through price hikes, adverse weather conditions, stronger
competition, and newer, less niche products.
Key catalysts
Sustained high earnings growth momentum. We believe the key catalyst
for Emami will be higher earnings growth momentum than its peers going
forward, which should be supported by strong sales growth, continued
leadership in its key brands, strong export revenue, wider distribution, a
partial price pass-through, a net cash balance sheet possibly by FY12, and
continued tax incentives. We believe niche positioning and low competition
will help Emami command premium valuations.
Market share gains for key brands. Further market share gains—potentially
supported by strong advertising spend, expanding distribution and star power—
for its existing brands will be a positive.
Success in developing new categories and product variants. Emami aims to
launch two to three products every year. Its newer products are Navratna Extra
Thanda (competes in the north, a fast-growing variant), Navratna Cool Talc,
Boroplus Winter Body Lotion (Rs7bn in annual sales for the market), sun
protection lotion (Rs5bn in annual sales in India), Healthy and Fair Winter cream
(Rs15-16bn in annual sales, strong growth and competition), Vasocare (Rs2.8bn
in annual sales, Vaseline is the only competitor in this category) and soaps
(limited advertising spend). A scaling up in these products should add to
earnings growth.
Scale up of Zandu’s brands and over-the-counter (OTC) products. In
November 2008, Emami concluded its acquisition of Zandu Pharmaceutical
Works (Zandu). Nearly a century old, Zandu is an ayurvedic, herbal and
healthcare company with strong R&D capabilities (strong product synergy with
Emami). It owns popular products such as Zandu Balm, Zandu Chyawanprash,
Zandu Kesari Jivan and other OTC products. A scale up of Zandu’s brands could
boost Emami’s sales growth.
Potential M&As. M&As at reasonable valuations could act as a share price
catalyst as Emami has a good track record of integrating and monetising its
acquisitions (Zandu) as well as achieving significant cost synergies.
Risks
Higher raw material costs could affect margins and growth. In FY11,
Emami’s raw material costs rose 400bp to 40.9% of its sales due to higher
paraffin oil, packaging material and menthol prices. This lowered its EBITDA
margin to 19.8% in FY11. Although Emami gradually implemented price hikes
to pass on the absolute raw material cost increases, it also needs to maintain its
product competitiveness to retain high growth rates and market share. 36-37% of
Emami's sales are currently through lower-priced SKUs, which are price
sensitive. However, it tries to implement price hikes for its higher-priced SKUs.
Its raw material costs are made up of packaging (around 40%), light liquid
paraffin oil (20-25%), menthol (16-17%), til oil (10%), wax (10%) and other
products. A significant increase in these raw materials or an inability to
implement price hikes could limit Emami’s earnings growth.
Adverse weather conditions. Sales of some products such as Boroplus Cream
(and other variants) and Navratna Cool Talc (a summer product) partly depend
on extreme weather (hot and cold). Thus, a milder summer/winter could curtail
some product usage and limit sales.
New products are less niche; established products could face stronger
competition. We believe stronger incremental growth will come from newer
products than its key brands, which have an average annual sales growth of 14-
16%. With a target of two to three brand extensions/product launches per year,
many of Emami’s newer products are in more competitive categories such as
cold creams, soaps, shampoos, and ‘fairness’ creams. This could increase the
need for advertising and delay their breakeven points. In addition, less product
differentiation in its newer products could limit growth. Meanwhile, Emami’s
top five products contribute to 65% of its sales in India and 14-15% to export
revenue. Thus, competition from MNCs or regional firms could impact its
market share.
Aggressive M&As. Expensive M&As could stretch the company’s balance
sheet and could affect investor sentiment.
Valuation and basis for our price target
We derive our Rs535.00 price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a WACC of 11%.
Emami Ltd
Established in 1974, Emami is the flagship company of the Emami Group.
Originally a small company, it is now one of the leading FMCG firms in India.
Emami's products are ayurvedic-based formulations that use modern processing
methods. This creates wider acceptance among domestic consumers and
generates strong brand equity. Its portfolio comprises 300 products across
diverse segments (skin care, hair care, ayurvedic health supplements,
rubificients and ayurvedic medicines). 56% of revenue in FY10 came from taxexempt
zones. The company has 30 brands in its portfolio.
Statement of Risk
We believe the key risks for Emami are volatility in key raw material prices,
adverse weather conditions and any expensive M&A which could potentially
stretch the company’s balance sheet
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Emami Ltd
O n a favourable growth trajectory [EXTRACT]
Niche, ayurvedic-based products with significant loyalty and mass appeal
Emami is one of India’s fastest-growing fast moving consumer goods (FMCG)
companies with a niche product portfolio focused on ayurvedic and herbal
formulations (health focus leads to strong brand loyalty), which have mass appeal
in India. Emami's brands of ‘cooling’ oil and antiseptic creams are generically
identified with the category itself. These supported its strong gross margins of 59-
65% in FY08-11, aiding a high advertising spend (18% of total sales in FY11) for
national/regional marketing.
Market leader in under-penetrated segments; growth from new products
Emami is a market leader in four key products (60% of its sales)—Navratna
Cooling Oil, Boroplus Cream, Zandu Balm, and Fair Handsome Cream. It has
presence in under-penetrated categories with limited multinational corporation
(MNC) competition. Newer products such as Navratna Extra Thanda Oil, ‘cooling
talc’, Vasocare and cold creams should support sales growth (16.4% of sales in
FY11). We think additional growth drivers are its expanding distribution and rural
reach, a scaling up in its Zandu business operations, and strong international sales.
Forecast 22.1% EPS CAGR in FY11-13; net cash balance sheet in FY12E
We forecast a 22.1% net income CAGR over FY11-13, assuming a 17.7% sales
CAGR and slight improvements in its gross margin (19.8-21.1% in FY11-13E)
from a partial cost pass-through and tapering advertising expenses. Net nonoperating
income and low tax rates should also support earnings growth.
Valuation: initiate coverage with a Buy rating and Rs535.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a WACC of 11%.
Our price target implies 23.7x FY13E PE.
Investment Thesis
We initiate coverage of Emami with a Buy rating and a Rs535.00 price target. We
like Emami due to: 1) its strong and niche product portfolio and ayurvedic focus
(these products appeal to Indian consumers, encouraging strong brand loyalty);
2) its robust sales growth (14-18% YoY in key categories); 3) its market leadership
position in four key brands; and 4) limited MNC competition, which support higher
gross margins.
We think its key share price catalysts could be: 1) sustained high earnings growth
momentum; 2) market share gains for its key brands and successful new product
categories; 3) potential M&As at reasonable valuations, given Emami’s good track
record of monetising its Zandu acquisition.
We forecast a 22.1% net income CAGR in FY11-13 (higher than its local peer
average), which should be supported by sales growth and slight improvements in
its EBITDA margins from a partial cost pass-through and slightly declining
advertising expenses. Net interest income and a low tax rate should also support
earnings growth. We believe Emami has a good balance sheet (we expect it to turn
net cash by FY12), limited capex requirements, and will maintain working capital
discipline.
Emami is trading at 24.2x FY12E PE (+1 standard deviation to historical mean)
and 19.7x FY13E PE, a premium to its Indian and global peers (except Dabur and
Hindustan Unilever [HUL]). We believe its premium valuation could be due to a
stronger EPS outlook and gross margins, leadership in niche categories, and
presence in under-penetrated fast-growing segments.
Emami is trading at a 7.3% discount to Dabur’s FY13E PE. Over the past one to
two years, Emami has traded at a 5-15% discount to Dabur on a one-year forward
PE—this has narrowed from FY04 onwards as Emami gained market share and
launched new products. Its PE discount is also partly lower because of higher net
non-operating income for Emami and lower tax rate (tax incentives). However,
Emami is trading at a premium to Dabur on FY13E EV/EBITDA. Given our views
on Emami and the incremental diversification of its product sub-segments, we
estimate its implied FY12/13E PE will be at a 3-7% discount to Dabur’s. We
believe the key risks to our view are higher raw material prices, an inability to pass
on higher costs through price hikes, adverse weather conditions, stronger
competition, and newer, less niche products.
Key catalysts
Sustained high earnings growth momentum. We believe the key catalyst
for Emami will be higher earnings growth momentum than its peers going
forward, which should be supported by strong sales growth, continued
leadership in its key brands, strong export revenue, wider distribution, a
partial price pass-through, a net cash balance sheet possibly by FY12, and
continued tax incentives. We believe niche positioning and low competition
will help Emami command premium valuations.
Market share gains for key brands. Further market share gains—potentially
supported by strong advertising spend, expanding distribution and star power—
for its existing brands will be a positive.
Success in developing new categories and product variants. Emami aims to
launch two to three products every year. Its newer products are Navratna Extra
Thanda (competes in the north, a fast-growing variant), Navratna Cool Talc,
Boroplus Winter Body Lotion (Rs7bn in annual sales for the market), sun
protection lotion (Rs5bn in annual sales in India), Healthy and Fair Winter cream
(Rs15-16bn in annual sales, strong growth and competition), Vasocare (Rs2.8bn
in annual sales, Vaseline is the only competitor in this category) and soaps
(limited advertising spend). A scaling up in these products should add to
earnings growth.
Scale up of Zandu’s brands and over-the-counter (OTC) products. In
November 2008, Emami concluded its acquisition of Zandu Pharmaceutical
Works (Zandu). Nearly a century old, Zandu is an ayurvedic, herbal and
healthcare company with strong R&D capabilities (strong product synergy with
Emami). It owns popular products such as Zandu Balm, Zandu Chyawanprash,
Zandu Kesari Jivan and other OTC products. A scale up of Zandu’s brands could
boost Emami’s sales growth.
Potential M&As. M&As at reasonable valuations could act as a share price
catalyst as Emami has a good track record of integrating and monetising its
acquisitions (Zandu) as well as achieving significant cost synergies.
Risks
Higher raw material costs could affect margins and growth. In FY11,
Emami’s raw material costs rose 400bp to 40.9% of its sales due to higher
paraffin oil, packaging material and menthol prices. This lowered its EBITDA
margin to 19.8% in FY11. Although Emami gradually implemented price hikes
to pass on the absolute raw material cost increases, it also needs to maintain its
product competitiveness to retain high growth rates and market share. 36-37% of
Emami's sales are currently through lower-priced SKUs, which are price
sensitive. However, it tries to implement price hikes for its higher-priced SKUs.
Its raw material costs are made up of packaging (around 40%), light liquid
paraffin oil (20-25%), menthol (16-17%), til oil (10%), wax (10%) and other
products. A significant increase in these raw materials or an inability to
implement price hikes could limit Emami’s earnings growth.
Adverse weather conditions. Sales of some products such as Boroplus Cream
(and other variants) and Navratna Cool Talc (a summer product) partly depend
on extreme weather (hot and cold). Thus, a milder summer/winter could curtail
some product usage and limit sales.
New products are less niche; established products could face stronger
competition. We believe stronger incremental growth will come from newer
products than its key brands, which have an average annual sales growth of 14-
16%. With a target of two to three brand extensions/product launches per year,
many of Emami’s newer products are in more competitive categories such as
cold creams, soaps, shampoos, and ‘fairness’ creams. This could increase the
need for advertising and delay their breakeven points. In addition, less product
differentiation in its newer products could limit growth. Meanwhile, Emami’s
top five products contribute to 65% of its sales in India and 14-15% to export
revenue. Thus, competition from MNCs or regional firms could impact its
market share.
Aggressive M&As. Expensive M&As could stretch the company’s balance
sheet and could affect investor sentiment.
Valuation and basis for our price target
We derive our Rs535.00 price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a WACC of 11%.
Emami Ltd
Established in 1974, Emami is the flagship company of the Emami Group.
Originally a small company, it is now one of the leading FMCG firms in India.
Emami's products are ayurvedic-based formulations that use modern processing
methods. This creates wider acceptance among domestic consumers and
generates strong brand equity. Its portfolio comprises 300 products across
diverse segments (skin care, hair care, ayurvedic health supplements,
rubificients and ayurvedic medicines). 56% of revenue in FY10 came from taxexempt
zones. The company has 30 brands in its portfolio.
Statement of Risk
We believe the key risks for Emami are volatility in key raw material prices,
adverse weather conditions and any expensive M&A which could potentially
stretch the company’s balance sheet
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