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Student ResearchThis report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Indian FMCG Industry

Emami Ltd.Recommendation: BUY Price Target: INR 515FY10A 10462.8 2535.3 2380.7 1697.4 FY11A 12962.8 2719.3 2579.3 2286.9 FY12P 15543.6 3222.3 3106.6 2435.1 FY13E 18504.2 3876.4 3777.9 2992.2 FY14E 21419.7 4576.3 4488.9 3590.3

Date 04.10.2011

Ticker: HMN.IN Price: INR 413Highlights Sales(Rs m) EBITDA(Rs m) N EBIT(Rs m) i PAT(Rs m) FY09A 7534.5 1740.6 1657.8 1306.4

Market Profile52 Week Price Range Average Daily Volume Beta Dividend Yield (Estimated) Shares Outstanding Market Capitalization (in mn) Institutional Holdings Insider Holdings Book Value per Share Debt to Total Capital Return on Equity Rs. 545.00 / 313.20 26815 0.70 0.85% 15,13,11,746 Rs. 62,529.58 27% 73% 46.41 25% 33%

c Niche portfolio ensures a high growth trajectory

Ayurvedic and traditional portfolio with a strong brand loyalty and mass appeal: Emami is a leading Indian FMCG company with a niche portfolio of herbal and traditional formulations.Key brands of Emami like Navratna Cooling Oil and Boroplus Antispectic Cream are identified as category leaders.Aurvedic nature of the products ensures higher gross margins(~60%) compared to peers.High advertising & promotional spending and endorsements by leading celebrities ensures high brand loyalty. Zandu acquisition strengthens market leadership: The acquition of Zandu by Emami in 2008 and the subsequent merger will lead to increased market share, higher revenues and enhanced profitability.The product offering of Emami was richly complemented by Zandu portfolio of ayurvedic products like Zandu Balm, Zandu Kesari Jivan and Zandu Chyawanprash.Following the acquisition of Zandu, the revenues of Emami strengthend from INR 580 crores in FY 08 to INR 1038 crores in FY 10.The consolidated distribution network resulted in an increased domestic and global footprint. Sustained revenue growth from key categories;Increasing contribution from exports and new product launches: Net sales of Emami grew at a CAGR of 25.1% to increase from INR 521.68 crores in FY07 to INR 1277.78 crores in FY11.The company management expects revenues to grow at a CAGR 20-22% over the next 5-6 years. International markets b ring in 14% of the revenues and the company has its presence in 75 countries. Most of Emamis products find consumer relevance even in the overseas markets like Middle East, Africa and SAARC, we expect increased revenue contribution from exports. The company continues to launch 2-3 new products/brand extensions every year in low-competition segments to drive revenues and profitability. We initiate coverage of Emami with a BUY recommendation and a price target of INR 515: We derive our price target from a combination of DCF-based and multiples methodology ,assuming a WACC of 12.1%.Our price target implies an upside of 24.62% and 22.2 x FY12E PE.

Analyst Ratings8

3 1

Consensus Rating: 4.083 Consensus Target Price: 523 Source: Bloomberg

Buy

Sell

Hold

12 month Forward RatiosP/E P/BV EV/EBITDA EV/Sales 22.4x 7.4x 20.0x 4.2x

Figure 1: Emami 1 year stock price performanceEmami stock performance since Oct. 2010

600 500 400 300

Emami

CNX Nifty

CNX FMCG

Important disclosures appear at the back of this report

CFA Institute Research Challenge

04.10.2011

Revenue growth1400 40%35% 1050 30% 25% 700 20% 15% 350 10% 5% 0 0%

Business DescriptionEmami Limited is the flagship company of Emami Group established by Mr. R.S. Agarwal and R.S. Goenka. The company had grown from humble beginnings to become one of the leading FMCG firms in India. It operates mainly in the HPC-Health and Personal Care segment, manufacturing ayurvedic formulations using modern-day technologies. Emami has a product portfolio of more than 300 products across diverse categories like Hair Care, Skin Care, Rubificient and Health Supplements. Navratna Cooling Oil, Boroplus Antiseptic Cream and Emami-Fair & Handsome Cream are respective category leaders with a market share of more than 50%. With the strategic acquisition of Zandu in 2008, Emami added another category leader-Zandu Balm (Rubificient) and other products like Zandu Chyawanprash to its portfolio. The company continues to launch 2-3 innovative products every year. New products like Vasocare (Petroleum Jelly) and brand extensions Navratna Extra Thanda Oil contribute to more than 10% of the top line. Net sales of Emami grew at a CAGR of 25.1% to increase from INR 521.68 crores in FY07 to INR 1277.78 crores in FY11.The company management expects revenues to grow at a CAGR 20-22% over the next 5-6 years. . Management Strategy: Brand loyalty due to significant A&P spending creates entry barriers: Emami is one of the first companies in India to effectively use celebrity endorsements as a key branding strategy. From Rajesh Khanna in the old days to the current superstar Shahrukh Khan, Emami has engaged many celebrities to endorse its products. Recent strategy to use regional-level marketing by engaging local celebrities has increased the mass market appeal and brand loyalty, creating an entry barrier for new competition. Though, A&P spending of Emami (18% of net sales) is above the industry average, spending on branding as a % of revenues has been falling over the years and is justified by increasing revenue growth. Launch new products and brand extensions to drive revenues: The company plans to focus on product innovation in the areas of ayurvedic treatments, skin and hair care. It also plans to enter the under-penetrated Face Wash and Hair Color categories.Flagship brands-Navratna and Boroplus are very popular with the cusromers and have mass appeal.Emami has leveraged irs brand value by launching succesful extensions of these brands.A complelling example of the same would be Navratna Cool Talc which has grown over 100% in the last 2 years. Significant inorganic growth possible due to potential strategic acquisition: Emami has established a good track record at post-acquisition restructuring and integration with the merger of Zandu. The company maintains that it is on a look-out for an acquisition in the domestic health and personal care segment. Another strategic acquisition like Zandu could contribute to earnings growth through significant synergies. Effective tax breaks, reducing the overall cost structure: More than 80% of the companys production now comes from tax-exempt zones. Two further units enjoying fiscal benefits have started production, one at Guwahati and another at Pantnagar.The quantum of revenues derived from tax-friendly zones increased from 48.4% in 2008-09 to 56.1% in 2009-10.Also, the goodwill amortization from Zandu acquisition helps reduce the overall average tax rate to ~15%.

Sales

y-o-y growth

Source:Company Data

Shareholding patternCorporates MF Others FII Individuals Promoter

Source:Company Data

Emami spends more on A&P20% 15%10% 5% 0% Emami GCPL Marico Dabur

A&P Spending( as a % of net sales)

Source:Company Data

Strategic distribution network: The Hub & Spoke distribution model adopted by the company enables it to react quickly to any sudden changes in demand due to seasonal nature of its products. It widened its direct reach channel to 4.5 lac retail outlets, up from 4 lac outlets in FY07.The number of distributors has increased by 35% from FY07 to FY11. The channel network of Emami currently includes a strong force of 3500 distributors and 2500 subdistributors.

2

CFA Institute Research ChallengeProportion of HPC Packaged Foods in India100% HPC 80% 60% 40% 20% 0% FY08 FY09 FY10 34% 34% 45% Food

04.10.2011

and

Industry Overview and Competitive PositioningThe consumer industry in India in 2010 had a size of approximately US$ 30bn. This is expected to grow at 12% CAGR to reach a size of approximately US$ 74 bn by 2018. Consumer sector is generally categorized in the following categories: Food and Beverages This includes beverages, staples/cereals, bakery and dairy, snack food, processed fruits, vegetables, bottled water and other packaged food products Health and Personal Care (HPC) including OTC products This includes toiletries, personal care items including soaps, shampoos, hair oils, skin creams and household care items including detergents and washing soaps.Also included are non-prescription healthcare products including balms, anti-septic creams and other medicines. Emami operates in the Health and Personal care ( HPC ) segment focusing maimly on ayurvedic and traditional formulations.HPC segment accounts currently accounts for 45% of the sonsumer market in India.

31%

32%

41%

Source: AC Nielsen

Household Disposable Income Growth with GDPGDP growth Household disposable income growth 7.30%

Key Catalysts for the Industry Large domestic market: With a billion plus population, India constitutes one the largest consumer markets in the world. There are approximately 11,000 consumer companiesmultinational and localthat supply to this market.With 50 million middle class households and more households joining in from the low-income segment, the tremendous growth story of Indian FMCG is bound to sustain over the coming years.

7.20%

6.30%

5.70% 5.70% 6.00% 6.40% 7.40%

Rising per capita income: Indian economy is forecasted to grow at an average rate of ~7% for the next 1015 years.With suatained GDP growth and stabilizing rate of population growth, Mackinsey & Co. has forecasted per capita income to grow at a ~14% CAGR in FY10-13 and at a CAGR of ~5% for FY1025.The above growth of per capita income results in a rapid increase in pu

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