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UBS Investment Research
Emami Ltd
N iche, health based products positive
Event: Q1FY12 results in line; strong revenue growth but higher costs
Emami reported Q1FY12 PAT of Rs415mn, up 17.7% YoY, in line with our and
consensus estimates, supported by a robust 24% revenue growth (16% volume, rest
pricing) and lower tax rate of 3.1% (deferred tax benefit). Raw material costs
continue to remain high at 44.9% of sales and Emami has taken judicious price
hikes in the quarter and expects a 6-7% increase in FY12.
Impact: Maintain estimates, but upgrade PT on roll over to FY13E
We broadly maintain our FY12/13 estimates as we have increased revenue growth
from earlier 17-18% for FY12/13E to 22-23% (6-7% price hike in FY12) but with
a lower margin assumption (gross at 58.5/59% in FY12/13) on high raw material
prices and a tax rate of 12% for FY12E. We upgrade the price target to Rs550 as
we roll over to FY13E but downgrade the stock to Neutral.
Action: Upsides now limited; niche health based brands positive
Despite our price target upgrade (implied 9.7% discount of Dabur), the potential
upside looks limited due to the recent out-performance (23.5% in last 3 months
compared to Nifty) due to robust revenue growth and the defensive nature of the
stock. It is at a P/E of 26.4x FY12E and 21.0x FY13E estimates. Our Neutral rating
reflects the limited upside potential to the stock on FY13E estimates. We are quite
positive on Emami’s niche products, high gross margins and its significant
innovation ability.
Valuation: Downgrade to Neutral 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%.
Q1FY12 result and conf call highlights
In Q1FY12, Emami reported a robust revenue growth of 24% YoY to
Rs3.0bn, which comprised of 16% volume growth and the remaining 8%
from the impact of price hikes. Emami has taken judicious price hikes in the
quarter and expects 6-7% annualised price hikes in FY12.
Navratna oil and extra thanda version grew by 21% in value (volume growth
at 11%) with increased market share to 54.4%. Zandu Balm and Menthoplus
grew 27% YoY with a 30% volume growth. Fair & Handsome has a
blockbuster quarter with 67% growth YoY in value and 53% volume growth
due to 360 degrees aggressive marketing campaign. The ayurvedic Zandu
OTC portfolio grew 42% in value, led by strong sales in Zandu Pancharishta
(Rs180-200 mn sales). The total OTC product portfolio sales were Rs530mn
in FY11 and management expects it to grow to Rs750-800mn in FY12.
Boroplus had negligible sales as it is a winter product. They have launched
Navratna Coconut Cool Oil to capture some share there. This coupled with
Boroplus Sun Protection Lotion has posted promising results in test
marketing.
Raw material costs have continued to remain high at 44.9% of sales in
Q1FY12 and Emami does not carry much inventory. There has been a
limited decline in costs and Emami indicated that there could be a possibility
of decline in menthol prices which is a key concern for company. Emami
management highlighted on the conference call today that while they expect
to continue taking judicious price hikes (the next one in September), it
intends to continue targeting volume growth even due to slight decline in
margins.
Tax rate was lower in the quarter due to deferred tax benefits and guidance
for FY12 is 11-12%.
Bangladesh capacity is due to start in Q3FY12, helping it save on import
duties. Egyptian capacity has been put on hold. Capex guidance for FY12 is
Rs650-700mn. The company 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 the last year it has
appointed 2000 sub-stockists and hopes to take the total stockists to 5,000 by
FY12. The sales force has doubled in the last 3 years.
Broadly maintaining estimates
We have broadly maintained our estimates for Emami for FY12/13 and have
also incorporated the full financial statements from the FY11 annual report.
While we have increased the revenue growth from earlier 17-18% for FY12/13
to 22-23% in line with management guidance of 6-7% annualised price hikes for
FY12 (~8% price hike YoY in Q1FY12), we have lowered our margin
assumption (gross at 58.5/59% in FY12/13) on high raw material prices. Emami
management highlighted on the conference call today that while they intend to
continue to take judicious price hikes (next one in September), it would continue
to target volume growth even due to slight decline in margins. 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. 36-37% of Emami's sales
are currently through lower-priced SKUs, which are price sensitive. Its raw
material costs are made up of packaging (around 40% which is PP, PET, and
HDPE), light liquid paraffin oil (20-25%), menthol (16-17%), Sesame oil (10%),
wax (10%) and other products. We assume slightly lower advertising expenses
going forward. In line with management guidance and benefit on deferred tax,
we now assume a tax rate of 12% in FY12E. Hence, overall our estimates are
broadly maintained.
Upgrade price target slightly; Downgrade to
Neutral
While we have broadly maintained estimates, we upgrade the price target to
Rs550, as we roll over out DCF to FY13E. Despite the price target upgrade we
downgrade the rating from Buy to Neutral, on recent out-performance of the
stock (23.5% in the last 3 months compared to Nifty) partly due to robust
revenue growth and the defensive nature of the stock. The stock currently trades
at P/E of 26.4x FY12E and 21.0x FY13E estimates. Our target multiple for
Dabur is c26.2x on FY13 P/E and Emami has historically traded at a 5-15%
discount to Dabur, which has narrowed over the years. Our implied Rs550 price
target P/E is at a 9.7% discount to Dabur’s implied valuations. We are quite
positive on Emami’s niche product portfolio, higher gross margins and
aggressive advertising strategy, ability to innovate on simple products, hands on
management and some successful new launches. Our Neutral rating reflects the
limited upsides to the stock on FY13E estimates. Any major M&A
announcement could cause us to review our outlook on the stock.
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
N iche, health based products positive
Event: Q1FY12 results in line; strong revenue growth but higher costs
Emami reported Q1FY12 PAT of Rs415mn, up 17.7% YoY, in line with our and
consensus estimates, supported by a robust 24% revenue growth (16% volume, rest
pricing) and lower tax rate of 3.1% (deferred tax benefit). Raw material costs
continue to remain high at 44.9% of sales and Emami has taken judicious price
hikes in the quarter and expects a 6-7% increase in FY12.
Impact: Maintain estimates, but upgrade PT on roll over to FY13E
We broadly maintain our FY12/13 estimates as we have increased revenue growth
from earlier 17-18% for FY12/13E to 22-23% (6-7% price hike in FY12) but with
a lower margin assumption (gross at 58.5/59% in FY12/13) on high raw material
prices and a tax rate of 12% for FY12E. We upgrade the price target to Rs550 as
we roll over to FY13E but downgrade the stock to Neutral.
Action: Upsides now limited; niche health based brands positive
Despite our price target upgrade (implied 9.7% discount of Dabur), the potential
upside looks limited due to the recent out-performance (23.5% in last 3 months
compared to Nifty) due to robust revenue growth and the defensive nature of the
stock. It is at a P/E of 26.4x FY12E and 21.0x FY13E estimates. Our Neutral rating
reflects the limited upside potential to the stock on FY13E estimates. We are quite
positive on Emami’s niche products, high gross margins and its significant
innovation ability.
Valuation: Downgrade to Neutral 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%.
Q1FY12 result and conf call highlights
In Q1FY12, Emami reported a robust revenue growth of 24% YoY to
Rs3.0bn, which comprised of 16% volume growth and the remaining 8%
from the impact of price hikes. Emami has taken judicious price hikes in the
quarter and expects 6-7% annualised price hikes in FY12.
Navratna oil and extra thanda version grew by 21% in value (volume growth
at 11%) with increased market share to 54.4%. Zandu Balm and Menthoplus
grew 27% YoY with a 30% volume growth. Fair & Handsome has a
blockbuster quarter with 67% growth YoY in value and 53% volume growth
due to 360 degrees aggressive marketing campaign. The ayurvedic Zandu
OTC portfolio grew 42% in value, led by strong sales in Zandu Pancharishta
(Rs180-200 mn sales). The total OTC product portfolio sales were Rs530mn
in FY11 and management expects it to grow to Rs750-800mn in FY12.
Boroplus had negligible sales as it is a winter product. They have launched
Navratna Coconut Cool Oil to capture some share there. This coupled with
Boroplus Sun Protection Lotion has posted promising results in test
marketing.
Raw material costs have continued to remain high at 44.9% of sales in
Q1FY12 and Emami does not carry much inventory. There has been a
limited decline in costs and Emami indicated that there could be a possibility
of decline in menthol prices which is a key concern for company. Emami
management highlighted on the conference call today that while they expect
to continue taking judicious price hikes (the next one in September), it
intends to continue targeting volume growth even due to slight decline in
margins.
Tax rate was lower in the quarter due to deferred tax benefits and guidance
for FY12 is 11-12%.
Bangladesh capacity is due to start in Q3FY12, helping it save on import
duties. Egyptian capacity has been put on hold. Capex guidance for FY12 is
Rs650-700mn. The company 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 the last year it has
appointed 2000 sub-stockists and hopes to take the total stockists to 5,000 by
FY12. The sales force has doubled in the last 3 years.
Broadly maintaining estimates
We have broadly maintained our estimates for Emami for FY12/13 and have
also incorporated the full financial statements from the FY11 annual report.
While we have increased the revenue growth from earlier 17-18% for FY12/13
to 22-23% in line with management guidance of 6-7% annualised price hikes for
FY12 (~8% price hike YoY in Q1FY12), we have lowered our margin
assumption (gross at 58.5/59% in FY12/13) on high raw material prices. Emami
management highlighted on the conference call today that while they intend to
continue to take judicious price hikes (next one in September), it would continue
to target volume growth even due to slight decline in margins. 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. 36-37% of Emami's sales
are currently through lower-priced SKUs, which are price sensitive. Its raw
material costs are made up of packaging (around 40% which is PP, PET, and
HDPE), light liquid paraffin oil (20-25%), menthol (16-17%), Sesame oil (10%),
wax (10%) and other products. We assume slightly lower advertising expenses
going forward. In line with management guidance and benefit on deferred tax,
we now assume a tax rate of 12% in FY12E. Hence, overall our estimates are
broadly maintained.
Upgrade price target slightly; Downgrade to
Neutral
While we have broadly maintained estimates, we upgrade the price target to
Rs550, as we roll over out DCF to FY13E. Despite the price target upgrade we
downgrade the rating from Buy to Neutral, on recent out-performance of the
stock (23.5% in the last 3 months compared to Nifty) partly due to robust
revenue growth and the defensive nature of the stock. The stock currently trades
at P/E of 26.4x FY12E and 21.0x FY13E estimates. Our target multiple for
Dabur is c26.2x on FY13 P/E and Emami has historically traded at a 5-15%
discount to Dabur, which has narrowed over the years. Our implied Rs550 price
target P/E is at a 9.7% discount to Dabur’s implied valuations. We are quite
positive on Emami’s niche product portfolio, higher gross margins and
aggressive advertising strategy, ability to innovate on simple products, hands on
management and some successful new launches. Our Neutral rating reflects the
limited upsides to the stock on FY13E estimates. Any major M&A
announcement could cause us to review our outlook on the stock.
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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