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UBS Investment Research
Emami Ltd
L ondon conference takeaways
�� Event: key takeaways from the London Bat with India Inc conference
Management largely reiterated its positive outlook with its niche ayurvedic healthfocussed
product portfolio in under-penetrated categories, limited MNC
competition, and aggressive advertising spend. It is keen on evaluating M&A
opportunities (but no internal targets) and thinks Indian ayurvedic/cosmetic
companies are unlevered for any distressed buy-out opportunities. Mom-and-pop
shops are integral to distribution and there are no major hierarchy issues.
�� Impact: maintain our estimates and long-term positive view on the stock
We maintain our estimates and long-term positive outlook on the company based
on the company’s ability to innovate on new products and patiently incubate
categories. Sales growth in top five products and new launches is encouraging,
although we remain slightly cautious on raw material cost pressures.
�� Action: upside limited; niche health-based brands positive
Our Neutral rating reflects the limited upside potential on the stock on FY13
estimates. We are positive on Emami’s niche products, high gross margins and
plans to introduce a 6-7% price hike for FY12 to pass on high costs.
�� Valuation: Neutral rating with a price target of Rs550
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.3%.
We hosted Emami at the UBS Bat with India Inc conference in London on 12
September 2011 and the following are the key takeaways from the meetings.
Reiterated its niche product portfolio comprising ayurvedic healthfocussed
over-the-counter and personal care products. 38-40% of Emami’s
products sell through the lower-priced SKUs between prices of Rs1.0-
5.0/satchet. Management highlighted that it has been a category leader, and
in many cases, has created categories for itself. This puts it in a very strong
position. In the categories where Emami is present, there is limited MNC
competition. MNCs have typically struggled to enter and grow in the markets
in which Emami is present.
Where are the opportunities? Emami has a 50-60% market share in men's
skin-lightening cream and this market has been growing rapidly. Only about
17% of men in India use this type of product as compared to ~50%
penetration for women, indicating significant potential for sales growth.
Zandu acquisition and more M&A? There has been significant progress at
Zandu, whose sales have increased substantially. Emami has worked to plug
inefficiencies in sales, packaging, distribution post the acquisition in
November 2008. Management seems keen on evaluating M&A (no internal
targets though) but believes real opportunities are infrequent. Management
indicated that most Indian ayurvedic/cosmetic companies are unlevered and
hence, not vulnerable even in a downturn.
Aggressive advertising spend This averages 18% of sales and for more
established products, this eases to 13-14%. For new products, advertising
spend is higher.
Expanding distribution network: Emami is expanding its distribution
network and maintains a limited range of products as there is limited shelf
space in small shops in India. Management believes that the supermarket
chain will take time to expand across the country and hence, dominance of
mom-and-pop shops is likely to be maintained. Due to this, it is of the view
that a strong distribution network is critical.
Family participation in the business: Emami was started by the Agarwal
and Goenka families and they still are the controlling shareholders of the
company. Also, the control is still maintained within a relatively small group
of members with limited hierarchy issues, if any.
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
L ondon conference takeaways
�� Event: key takeaways from the London Bat with India Inc conference
Management largely reiterated its positive outlook with its niche ayurvedic healthfocussed
product portfolio in under-penetrated categories, limited MNC
competition, and aggressive advertising spend. It is keen on evaluating M&A
opportunities (but no internal targets) and thinks Indian ayurvedic/cosmetic
companies are unlevered for any distressed buy-out opportunities. Mom-and-pop
shops are integral to distribution and there are no major hierarchy issues.
�� Impact: maintain our estimates and long-term positive view on the stock
We maintain our estimates and long-term positive outlook on the company based
on the company’s ability to innovate on new products and patiently incubate
categories. Sales growth in top five products and new launches is encouraging,
although we remain slightly cautious on raw material cost pressures.
�� Action: upside limited; niche health-based brands positive
Our Neutral rating reflects the limited upside potential on the stock on FY13
estimates. We are positive on Emami’s niche products, high gross margins and
plans to introduce a 6-7% price hike for FY12 to pass on high costs.
�� Valuation: Neutral rating with a price target of Rs550
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.3%.
We hosted Emami at the UBS Bat with India Inc conference in London on 12
September 2011 and the following are the key takeaways from the meetings.
Reiterated its niche product portfolio comprising ayurvedic healthfocussed
over-the-counter and personal care products. 38-40% of Emami’s
products sell through the lower-priced SKUs between prices of Rs1.0-
5.0/satchet. Management highlighted that it has been a category leader, and
in many cases, has created categories for itself. This puts it in a very strong
position. In the categories where Emami is present, there is limited MNC
competition. MNCs have typically struggled to enter and grow in the markets
in which Emami is present.
Where are the opportunities? Emami has a 50-60% market share in men's
skin-lightening cream and this market has been growing rapidly. Only about
17% of men in India use this type of product as compared to ~50%
penetration for women, indicating significant potential for sales growth.
Zandu acquisition and more M&A? There has been significant progress at
Zandu, whose sales have increased substantially. Emami has worked to plug
inefficiencies in sales, packaging, distribution post the acquisition in
November 2008. Management seems keen on evaluating M&A (no internal
targets though) but believes real opportunities are infrequent. Management
indicated that most Indian ayurvedic/cosmetic companies are unlevered and
hence, not vulnerable even in a downturn.
Aggressive advertising spend This averages 18% of sales and for more
established products, this eases to 13-14%. For new products, advertising
spend is higher.
Expanding distribution network: Emami is expanding its distribution
network and maintains a limited range of products as there is limited shelf
space in small shops in India. Management believes that the supermarket
chain will take time to expand across the country and hence, dominance of
mom-and-pop shops is likely to be maintained. Due to this, it is of the view
that a strong distribution network is critical.
Family participation in the business: Emami was started by the Agarwal
and Goenka families and they still are the controlling shareholders of the
company. Also, the control is still maintained within a relatively small group
of members with limited hierarchy issues, if any.
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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