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UBS Investment Research
Emami Ltd
U pgrade to Buy – niche product portfolio
�� Event: Recent stock price easing, positive view compels us to revise rating
Emami stock price has eased c18% and underperformed BSE Sensex by c8% since
August 2011, possibly on high valuations earlier, increase in costs (menthol up
sharply; 16-17% of total cost) and a slightly lower expected volume growth of 8-
9% in Q2FY12 on weather. Emami is to take 6-7% price hikes in FY12 to offset
cost pressures. Our long-term outlook is positive and Emami is one of the fastest
growing consumer companies in India. H2 is seasonally stronger for Emami.
�� Impact: Maintain estimates and price target; upgrade to Buy
We maintain our FY12/13 estimates as we had earlier already incorporated a 14-
16% volume growth, 6-7% price hikes and lower margins. We also maintain price
target of Rs550. We estimate maximum impact of increase in menthol costs on
gross margins at 1-2%. Yet Emami is taking price hikes, optimising costs. We
think concerns are more than factored in stock price and we upgrade to Buy on
valuations (18.3x FY13E P/E; discount to peers) and positive long-term outlook.
�� Action: Continue to like their product portfolio, management capability
High brand loyalty for Emami’s products, 39-40% of sales through lower price
SKUs and health based products make it less likely to be impacted by potential
consumption cuts, innovative product launches, high ROEs and net cash position,
make us believe that Emami is an attractive Buy at current levels.
�� Valuation: Upgrade to Buy 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, at a WACC of 11.3%.
Emami : Upgrade to Buy on valuation, positive outlook
Given the strong long-term growth trajectory, anticipated seasonally stronger
H2FY12, and aggressive management, the current valuation of Emami looks
compelling at a P/E of 23.0x FY12E and 18.3x FY13E. In our view, the stock
correction has been led by the sharp jump in menthol prices (up 20-25% in the
last 1-2 months; 16-17% of total costs) and a potential slower Q2FY12 on
pleasant weather. We believe that all these concerns are already more than in the
price making current valuation attractive. High brand loyalty for Emami’s
products, 39-40% of sales through lower price SKUs making it less likely to
curb consumption, innovative product launches, high ROEs, net cash position,
growing non-food consumption share in the Indian consumption basket and
increasing propensity to spend for Indians make us believe that Emami is an
attractive Buy at current levels. We have maintained our estimates and price
target of Rs550, at an implied valuation for Emami at 23.7x FY13E, at a 10%
discount to target implied Dabur’s FY13E P/E and 8% to our target multiple of
consumer sector.
Emami on a favourable long-term growth trajectory
�� 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. This health focus leads to strong brand loyalty and has
mass appeal in India. Emami’s brands of ‘cooling’ oil and antiseptic creams
are generically identified with the category itself.
�� 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. We expect newer products such as
Navratna Extra Thanda Oil, ‘cooling talc’, Vasocare, Zandu products and
cold creams should support sales growth. In our view, additional growth
drivers are its expanding distribution and rural reach, a scaling up in its
Zandu business operations, and international sales. Emami has reported
strong gross margins of 59-65% in FY08-11, aiding a high advertising spend
(18% of total sales in FY11) in these years to grow its brands and support
new product launches.
�� In last few quarters, margins have come under pressure due to rise of raw
material costs of packaging, menthol (up 20-25% in the last 1-2 months; 16-
17% of cost of goods sold) and light liquid paraffin oil. Even, if we assume a
20-25% increase in menthol costs which is 16-17% of total costs (which is
40-42% of sales) and no price hikes, the net impact on gross margins would
likely be only 1.5-2.0%. However, Emami has started taking judicious price
hikes from Q1FY12 and management expects 6-7% annualised price hikes in
FY12, to partly offset the impact the impact of high raw material costs. They
are also working on minimising costs in other areas like packaging. While
we expect financial performance of Q2FY12 may be slightly impacted by
lower volume growth of 8-9% (pleasant weather is the key reason we
believe) and higher costs, we believe that over the medium to long term
Emami should continue to grow on a favourable trajectory in terms of
volume growth, new products and price hikes. We believe management will
to continue to evaluate cost cutting and take select price hikes. Net cash
position and low tax rate is a positive.
�� Bangladesh capacity will start in Q3FY12E, helping it save on import duties.
Emami continues to evaluate M&A opportunities in India and international
market.
�� Emami continues to strengthen its distribution reach and targets taking direct
reach outlets from 0.5mn to 0.55 mn by FY12. In last one year it has
appointed 2000 sub-stockists and plans to take the total stockists to 5,000 by
FY12. Sales force has doubled in the last 3 years.
�� Key risks to our positive outlook include 1) adverse weather impacting sales
of their summer and winter products; 2) escalating raw material costs and
inability to take price hikes; 3) expensive M&A given Emami’s appetite for
exploring inorganic growth and unlevered Indian mid-size FMCG companies
(hence most likely to ask for premium valuations); 4) any potential hierarchy
issues – management indicates there aren’t any though.
Maintain estimates, price target of Rs550/share
We have maintained our estimates for Emami for FY12/13. Our revenues
growth forecast is at 22-23%, which includes 6-7% annualised price hikes for
FY12E (~8% price hike YoY in Q1FY12). Our margin assumption in FY12 is
lower than that in FY11, given the cost pressures (especially the recent
escalation in menthol prices). We also re-iterate our UBS VCAM-based price
target of Rs550/share.
Indian consumer should trade at high P/Es
The report on the Indian consumer sector dated 04 October 2011 by UBS
analyst Sunita Sachdev highlights the key reasons (see points below) why we
believe consumer sector should trade at premium valuations. Further, Sunita has
derived target P/E for the consumer sector at 25.7x FY13E, based on a two-stage
forward PE target multiple model. We value Emami at 23.7x, at a 10% discount
to target implied Dabur’s FY13E P/E and 8% to our target multiple of consumer
sector. The P/E discount to Dabur has narrowed from FY04, as Emami has
expanded its product portfolio in under-penetrated categories, gained market
share and the Emami management has proven itself in developing new
categories. We believe that Emami is one of the most innovative FMCG
companies in India. Further, we believe that the following positives are relevant
for Emami – high ROEs, net cash position and presence in health based
categories coupled with ~40% of sales through low priced SKUs supporting
consumption and brand loyalty.
�� The ROE of the Indian consumer sector is the highest among all sectors and
the sector has historically had a higher ROE. Even in periods of economic
turbulence, consumer companies have historically recorded ROEs of 35-36%.
�� In FY11, the consumer sector had one of the highest FCF yields (post capex)
among all sectors, at 3.1%. The agri-chem, IT and metals sectors are all more
exposed to global economic downturns, in our view.
�� Indian consumption is still at a nascent stage and we believe there is
significant scope for growth given the low consumption per capita. We have
created a consumption basket to study the trend in consumption spending
versus savings growth in India, which shows that consumption spending
grew at a CAGR of 12% over FY00-11 and at 15.6% despite inflation in
FY10 and FY11. The UBS consumption basket includes soaps, personal
products, oral care products, biscuits, beverages and tobacco, which together
account for about 25% of the monthly per capita expenditure (MPCE) in
both rural and urban India according to National Sample Survey
Organisation data. There has also been a change in consumer consumption
patterns, with the proportion of total expenditure spent on food declining
from 46.1% in 1990-91 to 29.8% in 2009-10. This reduction indicates that
consumers are adding new products to their portfolio and implies a growth in
spending on other categories.
�� Consumer stocks have historically given the highest returns. We have
compared the sector’s historical risk-adjusted returns with other sectors and
arrive at two important conclusions: 1) the average risk-adjusted returns of
the consumer companies we cover were the highest across sectors over
FY05-FY11; and 2) the variation in returns was the least for the consumer
sector over the same period, with a standard deviation of 0.8.
�� 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
U pgrade to Buy – niche product portfolio
�� Event: Recent stock price easing, positive view compels us to revise rating
Emami stock price has eased c18% and underperformed BSE Sensex by c8% since
August 2011, possibly on high valuations earlier, increase in costs (menthol up
sharply; 16-17% of total cost) and a slightly lower expected volume growth of 8-
9% in Q2FY12 on weather. Emami is to take 6-7% price hikes in FY12 to offset
cost pressures. Our long-term outlook is positive and Emami is one of the fastest
growing consumer companies in India. H2 is seasonally stronger for Emami.
�� Impact: Maintain estimates and price target; upgrade to Buy
We maintain our FY12/13 estimates as we had earlier already incorporated a 14-
16% volume growth, 6-7% price hikes and lower margins. We also maintain price
target of Rs550. We estimate maximum impact of increase in menthol costs on
gross margins at 1-2%. Yet Emami is taking price hikes, optimising costs. We
think concerns are more than factored in stock price and we upgrade to Buy on
valuations (18.3x FY13E P/E; discount to peers) and positive long-term outlook.
�� Action: Continue to like their product portfolio, management capability
High brand loyalty for Emami’s products, 39-40% of sales through lower price
SKUs and health based products make it less likely to be impacted by potential
consumption cuts, innovative product launches, high ROEs and net cash position,
make us believe that Emami is an attractive Buy at current levels.
�� Valuation: Upgrade to Buy 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, at a WACC of 11.3%.
See full list -click link below:
UBS Mid-Caps Strategy - What to Buy? �� Oct 2011 Update
Emami : Upgrade to Buy on valuation, positive outlook
Given the strong long-term growth trajectory, anticipated seasonally stronger
H2FY12, and aggressive management, the current valuation of Emami looks
compelling at a P/E of 23.0x FY12E and 18.3x FY13E. In our view, the stock
correction has been led by the sharp jump in menthol prices (up 20-25% in the
last 1-2 months; 16-17% of total costs) and a potential slower Q2FY12 on
pleasant weather. We believe that all these concerns are already more than in the
price making current valuation attractive. High brand loyalty for Emami’s
products, 39-40% of sales through lower price SKUs making it less likely to
curb consumption, innovative product launches, high ROEs, net cash position,
growing non-food consumption share in the Indian consumption basket and
increasing propensity to spend for Indians make us believe that Emami is an
attractive Buy at current levels. We have maintained our estimates and price
target of Rs550, at an implied valuation for Emami at 23.7x FY13E, at a 10%
discount to target implied Dabur’s FY13E P/E and 8% to our target multiple of
consumer sector.
Emami on a favourable long-term growth trajectory
�� 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. This health focus leads to strong brand loyalty and has
mass appeal in India. Emami’s brands of ‘cooling’ oil and antiseptic creams
are generically identified with the category itself.
�� 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. We expect newer products such as
Navratna Extra Thanda Oil, ‘cooling talc’, Vasocare, Zandu products and
cold creams should support sales growth. In our view, additional growth
drivers are its expanding distribution and rural reach, a scaling up in its
Zandu business operations, and international sales. Emami has reported
strong gross margins of 59-65% in FY08-11, aiding a high advertising spend
(18% of total sales in FY11) in these years to grow its brands and support
new product launches.
�� In last few quarters, margins have come under pressure due to rise of raw
material costs of packaging, menthol (up 20-25% in the last 1-2 months; 16-
17% of cost of goods sold) and light liquid paraffin oil. Even, if we assume a
20-25% increase in menthol costs which is 16-17% of total costs (which is
40-42% of sales) and no price hikes, the net impact on gross margins would
likely be only 1.5-2.0%. However, Emami has started taking judicious price
hikes from Q1FY12 and management expects 6-7% annualised price hikes in
FY12, to partly offset the impact the impact of high raw material costs. They
are also working on minimising costs in other areas like packaging. While
we expect financial performance of Q2FY12 may be slightly impacted by
lower volume growth of 8-9% (pleasant weather is the key reason we
believe) and higher costs, we believe that over the medium to long term
Emami should continue to grow on a favourable trajectory in terms of
volume growth, new products and price hikes. We believe management will
to continue to evaluate cost cutting and take select price hikes. Net cash
position and low tax rate is a positive.
�� Bangladesh capacity will start in Q3FY12E, helping it save on import duties.
Emami continues to evaluate M&A opportunities in India and international
market.
�� Emami continues to strengthen its distribution reach and targets taking direct
reach outlets from 0.5mn to 0.55 mn by FY12. In last one year it has
appointed 2000 sub-stockists and plans to take the total stockists to 5,000 by
FY12. Sales force has doubled in the last 3 years.
�� Key risks to our positive outlook include 1) adverse weather impacting sales
of their summer and winter products; 2) escalating raw material costs and
inability to take price hikes; 3) expensive M&A given Emami’s appetite for
exploring inorganic growth and unlevered Indian mid-size FMCG companies
(hence most likely to ask for premium valuations); 4) any potential hierarchy
issues – management indicates there aren’t any though.
Maintain estimates, price target of Rs550/share
We have maintained our estimates for Emami for FY12/13. Our revenues
growth forecast is at 22-23%, which includes 6-7% annualised price hikes for
FY12E (~8% price hike YoY in Q1FY12). Our margin assumption in FY12 is
lower than that in FY11, given the cost pressures (especially the recent
escalation in menthol prices). We also re-iterate our UBS VCAM-based price
target of Rs550/share.
Indian consumer should trade at high P/Es
The report on the Indian consumer sector dated 04 October 2011 by UBS
analyst Sunita Sachdev highlights the key reasons (see points below) why we
believe consumer sector should trade at premium valuations. Further, Sunita has
derived target P/E for the consumer sector at 25.7x FY13E, based on a two-stage
forward PE target multiple model. We value Emami at 23.7x, at a 10% discount
to target implied Dabur’s FY13E P/E and 8% to our target multiple of consumer
sector. The P/E discount to Dabur has narrowed from FY04, as Emami has
expanded its product portfolio in under-penetrated categories, gained market
share and the Emami management has proven itself in developing new
categories. We believe that Emami is one of the most innovative FMCG
companies in India. Further, we believe that the following positives are relevant
for Emami – high ROEs, net cash position and presence in health based
categories coupled with ~40% of sales through low priced SKUs supporting
consumption and brand loyalty.
�� The ROE of the Indian consumer sector is the highest among all sectors and
the sector has historically had a higher ROE. Even in periods of economic
turbulence, consumer companies have historically recorded ROEs of 35-36%.
�� In FY11, the consumer sector had one of the highest FCF yields (post capex)
among all sectors, at 3.1%. The agri-chem, IT and metals sectors are all more
exposed to global economic downturns, in our view.
�� Indian consumption is still at a nascent stage and we believe there is
significant scope for growth given the low consumption per capita. We have
created a consumption basket to study the trend in consumption spending
versus savings growth in India, which shows that consumption spending
grew at a CAGR of 12% over FY00-11 and at 15.6% despite inflation in
FY10 and FY11. The UBS consumption basket includes soaps, personal
products, oral care products, biscuits, beverages and tobacco, which together
account for about 25% of the monthly per capita expenditure (MPCE) in
both rural and urban India according to National Sample Survey
Organisation data. There has also been a change in consumer consumption
patterns, with the proportion of total expenditure spent on food declining
from 46.1% in 1990-91 to 29.8% in 2009-10. This reduction indicates that
consumers are adding new products to their portfolio and implies a growth in
spending on other categories.
�� Consumer stocks have historically given the highest returns. We have
compared the sector’s historical risk-adjusted returns with other sectors and
arrive at two important conclusions: 1) the average risk-adjusted returns of
the consumer companies we cover were the highest across sectors over
FY05-FY11; and 2) the variation in returns was the least for the consumer
sector over the same period, with a standard deviation of 0.8.
�� 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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