Emami Ltd 16 th March, 2013 BUY

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1 Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Emami Ltd 16 th March, 2013 BUY CMP Target Price Rs Rs Emami Limited is a leading FMCG player in India. It has been in the health, beauty and personal care since the last 35 years and has sustained its prominent position in Ayurvedic products. BSE Code NSE Code EMAMILTD Market Cap (Rs Cr.) Week High/Low / Industry FMCG Face Value Rs.1.00 Shares O/S EPS Book Value P/E P/B Shareholding Pattern The company posted smart numbers for the quarter ending December The Revenues for the quarter ended December 2012 of Rs crores rose by 21.29% from Rs crores y-oy driven by strong volume growth across all the key product categories. Operating profit surged 13.30% at Rs crores as against Rs crores in the like period last year due to steep increase in menthol prices. The company has reported 21.64% rise in its net profit at Rs crore for the quarter as compared to Rs crore for the same quarter in the previous year. EPS for the quarter stood at Rs Boroplus clocked volume growth in the range of 28% to 30% aided by good winter season; Balms grew between 18%-20%, in Fair and Handsome it is about 10% to 12% and in Navratna Oil it is about 5% in the quarter ended December All power brands reported strong and consistent performance during the quarter despite various challenges in the macroeconomic environment and input cost pressures. In value terms Boroplus grew by over 30%; Navratna grew by 13%; balms grew by 17%; Fair and Handsome grew by 19%. Healthcare division comprising of the OTC, ethical and generic products also performed credibly in this quarter, registering a very strong growth of 25%. Zandu Pancharishta sales tripled in this quarter. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With increasing penetration, sustained sales momentum, powerful brands, judicious price increases and new launches; Emami s growth prospects looks promising. We believe Emami Ltd. is trading at an attractive valuation at 28.84x and 24.95x of FY13EPS of Rs and FY14EPS of Rs We initiate a BUY on the stock with a target price of Rs.740 (appreciation of about 24%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

2 Business Details Emami Limited, the flagship company of the Emami Group, is a leading player in the personal and healthcare consumer products industry in India engaged in manufacturing and marketing of health, beauty and personal care products that are based entirely on ayurvedic formulation. It has a portfolio of over 300 products in various SKU. The focus is on providing the consumers with innovative products which are capable of meeting their multiple needs and add value by enhancing the quality of day-to-day life. By repeatedly outperforming the industry standard, Emami Ltd has maintained a CAGR of 23% over the last few years. Emami covers all the states with 32 depots across India. Its supply-chain management assumes immense significance which was aptly reflected through remarkable expansion in dealer-distribution network, outlets and manpower. The company has strong network of 3,500 distributors and 4,000 sub-distributors, with a direct reach across 600,000 retail outlets. Brand power The power brands of the company are Boroplus and Navratna. Boroplus brand is the market leader in the antiseptic cream segment; the Navratna Oil is also in the pole position in the cool oil segment. Fair and Handsome is the pioneer in the fairness cream for men segment. Emami s products in different categories like cool oil, antiseptic cream and fairness cream for men have carved a niche for themselves in their respective segments. Today the Navratna Brand is worth Rs. 400 crore followed by the Boroplus Brand standing also at Rs. 300 crore, Zandu Balm a Rs 265 cr brand and Fair and Handsome standing at Rs. 140 crore. Sona Chandi Chyawanprash, Mentho Plus and Fast Relief are also doing well in their respective categories. Hairlife (crème herbal hair pack) and Malai Kesar Cold Cream, Malai Kesar Cream Soap are also major players. Brand extensions have helped Emami consolidate its position in the market and also cater to varied consumer needs. Emami has entered the glycerine soap category with Emami Pure Skin, petroleum jelly category with Vasocare and hair oil segment with 5 in 1 Emami Hair Oil. Recently launched new brands include, Vasocare lip balm, Vasocare Chap Stick, Vasocare body lotion, Boroplus Skin Therapy cream and Boroplus Healthy and Fair Winter cream. Emami Limited with an investment of approx Rs 730 crore has acquired major stake in Zandu Pharmaceutical Works Ltd on the basis of huge business synergy between Zandu and Emami. Post the acquisition of Zandu Pharmaceutical a century old household name in India, some of its prominent brands like Zandu Balm, Zandu Chyawanprash, Zandu Kesri Jeevan, Zandu Pancharishta, Sudarshan and Nityam Churna are also under Emami s basket of brands. The FMCG business of Zandu has been merged into Emami. This has helped consolidation of FMCG business of Emami and Zandu into one entity. For Private Circulation Only 2 Hem Research

3 Sales and distribution Emami has also taken up a major revamping project to enhance the sales and distribution, human resources development and logistics with the globally renowned professional advisory services firm, Ernst and Young. Project Navodaya, as it is truly called, will help Emami fast track its top line and bottom line growth and build a robust platform for growth initiatives. The company has ultra modern manufacturing facilities at Kolkata (West Bengal), Abhoypur and Amingaon (Assam), Panthnagar, Baddi (Himachal Pradesh), Dongri, Silvassa, Vapi. It has adopted the Total Quality Management system and all its manufacturing facilities have received cgmp and ISO 9001:2000 certifications. The Amingaon unit received Par Excellence Award and Abhoypur unit received Excellence Award in the All India Competition on National Convention on Quality Circles conducted by National Quality Council. Around the world Emami s quality products not only have a pan India presence, but also have a deep imprint in over 60 countries across the world including GCC, UK, Sri Lanka, Bangladesh, Nepal, African and the CIS countries. Emami Limited has five overseas subsidiary companies, including Emami UK Limited in London and Emami International FZE in UAE. On the one hand, it is possible to walk into some of the fanciest malls of the country and buy Emami products; on the other, it is possible to access the Company s products in pockets with a population of less than 50,000. An amazing array of Ambassadors Emami has successfully established its brands through strong celebrity endorsements. It is the only corporate entity in the country to have both Amitabh Bachchan and Shah Rukh Khan as brand endorsers for the same brand, Navratna cool oil. The concept of brand endorsement by celebrities has been successfully experimented in case of most of the brand launches. Besides Amitabh and Shah Rukh, other celebrity endorsers of Emami s brand include Madhuri Dixit- Kareena Kapoor- Preity Zinta- Malaika Arora Khan- Bipasha Basu-MS Dhoni- Suriya- Mahesh Babu- Dinesh Karthik- Amit Mishra- Virender Sehwag-Sachin Tendulkar- Harbhajan Singh-Zaheer Khan-, Govinda, Sourav Ganguly, Chiranjeevi, Surya and Upendra among others. For Private Circulation Only 3 Hem Research

4 Strong product portfolio Emami has unique product portfolio based on ayurvedic formulation with some of its products being market leaders. Its powerful brands has strong market reach and contribute 60-70% to the revenues. It has the best track record of innovations and higher A&D spends in the industry. The company has strong foothold and keep focusing on brand extensions and new product launches. The company also enjoys first mover advantage with its innovative product basket. Emami is the first company to identify and create men fairness cream and hit the market with strong market gains. Boroplus antiseptic cream is the largest selling antiseptic cream not only in India but also in Ukraine, Russia and Nepal. The company s new launches like Navratna Cool Talc, Boroplus Body Lotion, Navratna Extra Thanda Oil, Malai Kesar Cold Cream and Vasocare Petroleum Jelly are performing very well. With the acquisition of Zandu the company has one of the strongest Ayurvedic brand in the portfolio. The company has roped in prominent film (national and regional) and sporting celebrities for its product endorsement leading to high recognition, wide acceptance and strong market presence of its products. For Private Circulation Only 4 Hem Research

5 Decent guidance Emami s management is optimistic to achieve percent growth in sales and profit during the January-March 2013 quarter and the same range of growth for FY The company s foray into new product categories, focus on core brands and international business is expected to drive revenue growth. It also plans for price hike by 4-5 per cent in some of its products mainly for summer. It plans to continue launch 2-3 innovative products or brand extensions every year keeping Ayurvedic healthcare, Hair care and skin care as the key focus areas. Healthcare division contribution is expected increase from current 6% -7% to about 10% over the next two to three years. The company is increasing its A&P spends and plans to incur more than Rs.250 crores which would be around 17% of increased sales as compared to last year. The company plans to have a capex of 50 crores to 60 crores over next one or two years. Tax rate for the next year is expected to stay around 17%. It will be 20% plus after 2015 till then it will be below 20% tax rate. On the raw material cost front; the company estimates its key raw material- menthol prices to soften going ahead and did not see any significant inflation in other materials too. Further, the company is also looking for inorganic route of growth via overseas acquisition especially in geographies that include West Asia where it already has a presence. Commissioning of Bangladesh facility Emami has been exporting its manufactured goods in India to Bangladesh. The company has to pay huge import duty ranging between 70% to 100% for some product categories. The company plans to start full-fledged manufacturing plant in FY14 in order to save such taxes even though operations are started during the December quarter. The company has already shifted production of Fair and Handsome and Boroplus and plans to manufacture antiseptic cream and Navratna Oil from March onwards. The plant will help in meeting Bangladesh requirement and also help in reducing the imports by about 80%-90%. Emami aims to establish itself better in Bangladesh. For Private Circulation Only 5 Hem Research

6 Market share gains and increasing rural penetration Emami has created a niche product portfolio of its own. Many of its products are first of its category and are strong market leaders in their respective categories. Navratna oil market share gained tremendously from 47% in 2005 to 55% in 2012 and is growing at a CAGR of 23% in the last 3 years. Boroplus cream gained strong market share at 73% in 2012 from 65% in 2005 and witnessing CAGR of 12% in the last 3 years. The company has launched first fairness cream for men in India in 2005 which achieved a market share of 57% and has grown with CAGR of 23% in last 3 years. Zandu & Mentho Plus Balm market share stood at 58% with a CAGR growth of 23% over last 3 years; Navratna Cool Talc stood at 18%. Other brands like Boroplus Powder, Fast Relief and Sona Chandi & Zandu market share remained more or less the same and standing at 13%, 5% and 10% respectively. Consumer sentiments in both urban and rural sector continued to be positive Emami has created a strong foothold in rural India by following hub-and-spoke model through appointing super-stockists and sub-stockists. Further, the company has initiated project Swadesh to reach population towns by For Private Circulation Only 6 Hem Research

7 Consolidated Profit & Loss Account Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Net sales Growth 20.14% 16.55% 18.20% 17.30% Expenditure EBITDA Growth 8.19% 5.12% 24.47% 19.04% EBITDA margin 23.62% 21.27% 19.18% 20.20% 20.50% Other income Depreciation & Amortisation EBIT EBIT margin 22.93% 22.80% 21.61% 22.49% 22.86% Interest PBT Tax PAT Minority interest 0.00 (0.01) (0.03) Adjusted PAT Growth Net Profit margins Extraordinary item Reported PAT Equity Capital Res. & Surplus Equity Shares Adjusted EPS Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio Book value per share For Private Circulation Only 7 Hem Research

8 Balance Sheet Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Share Capital Reserves & Surplus Shareholders funds Borrowings Deferred tax liability Minority Interest Sources of funds Gross block Accumulated Depreciation Net block Capital work in progress Investments Goodwill on consolidation Projects in progress Inventories Sundry debtors Cash and bank balance Other current assets Loans and advances Total current assets Foreign currency trans. Diff Current liabilities and provisions Net current assets Misc exp Uses of funds , For Private Circulation Only 8 Hem Research

9 Quarterly Financial Highlights Rs. Crore Particulars Q3FY13 Q3FY12 Q2FY13 YoY% QoQ% Revenues Expenditures Operating Profit Adjusted Net Profit OPM% (209bps) 476bps NPM % bps 454bps Adjusted EPS Past Price movement of the stock For Private Circulation Only 9 Hem Research

10 HEM SECURITIES LIMITED MEMBER-BSE,CDSL, SEBI REGISTERED CATEGORY I MERCHANT BANKER MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI PHONE FAX JAIPUR OFFICE: , JAIPUR TOWERS, M I ROAD, JAIPUR PHONE FAX GROUP COMPANIES HEM FINLEASE PRIVATE LIMITED MEMBER-NSE HEM MULTI COMMODITIES PRIVATE LIMITED MEMBER-NCDEX, MCX HEM FINANCIAL SERVICES LIMITED NBFC REGISTERED WITH RBI For Private Circulation Only 10 Hem Research

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