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  • Uniquely positioned

    Emami

    Initiating Coverage | 25 April 2014

    Sector: FMCG

    Investors are advised to refer through disclosures made at the end of the Research Report.

    Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +9122 3982 5404 Manish Poddar (Manish.Poddar@MotilalOswal.com); +91 22 3027 8029

  • Emami

    225 April 2014

    Emami: Uniquely positioned

    Page No.

    Summary ............................................................................................................ 3

    Unique play in Personal Care and Healthcare ........................................... 4-12

    Multiple growth drivers ............................................................................ 13-17

    Stable RM prices to drive margin expansion ................................................. 18

    Fundamentals strong; valuations reasonable .......................................... 19-22

    Annexure I ........................................................................................................ 23

    Annexure II ................................................................................................. 25-26

    Financials and valuations .......................................................................... 27-28

  • Emami

    25 April 2014 3

    Uniquely positioned Leader in niche categories; multiple growth drivers

     A unique play in Personal Care and Healthcare, with strong and differentiated positioning as a provider of natural/herbal products.

     Strong focus on niche segments with low competitive intensity to help post 15.4% revenue and PAT CAGR over FY14-16 on the base of 23% PAT CAGR over FY12-14.

     Key concerns: (1) continued consumption slowdown, (2) rising competition in skin care category, and (3) the management’s acquisition intent.

     Fundamentals strong; valuations at 23.8x FY15E and 20.1x FY16E earnings. Initiate coverage with a Buy rating and target price of INR555 (24x FY16E EPS).

    Unique play in Personal Care and Healthcare Emami (HMN) has successfully entered and established leadership in niche categories. It has created categories like Cooling Oil, Cooling Talc and Men’s Fairness Cream, and has gained leadership in Antiseptic Cream, where it faces limited competition from a regional player. Its strategy of using Ayurvedic proposition, creating a portfolio of high gross margin products with low competitive (especially MNC) intensity, driving volumes through smaller unit packs with a mass market focus, and investing aggressively in brands has made four of its largest brands leaders in their respective categories. ~70% of its sales are from categories where its brands are market leaders.

    Multiple growth drivers HMN’s revenue growth in the last three years has been a function of consistent growth in incumbent brands, success of some of its new product launches, and a growing export portfolio. We expect the company’s power brands (Boroplus, Navratna, Zandu Balm & Mentho Plus Balm and Fair and Handsome) to continue posting healthy revenue growth and new launches to help drive volume growth. Distribution expansion and focus on OTC Healthcare are key cornerstones of its medium term growth strategy.

    Stable RM prices to drive margin expansion; gains to be invested in brands Correction in menthol prices has driven significant gross margin expansion in FY13 and 9MFY14. Menthol prices are 13% lower YoY and are now stable. This should support gross margin expansion in FY15. We expect HMN to use the gains to invest more in brands, as it introduces new variants/brands.

    Fundamentals strong; valuations reasonable We expect HMN to achieve 15.4% earnings CAGR over FY14-16 (on the base of 23% CAGR delivered over FY12-14). EBITDA margin should expand 100bp, driven by higher gross margin and scale benefits. We believe HMN is a good long term bet, with presence in categories having long runway for growth, together with low competitive intensity. We initiate coverage with a Buy rating and target price of INR555 (24x FY16E EPS). Continuation of current consumption slowdown and potential expensive acquisitions remain the key risks.

    Initiating Coverage | Sector: Consumer

    Emami CMP: INR463 TP: INR555 Buy

    BSE Sensex S&P CNX

    22,688 6,783

    Stock Info

    Bloomberg HMN IN

    Equity Shares (m) 227.0

    52-Week Range (INR) 539/393

    1, 6, 12 Rel. Per (%) 4/-16/-4

    M.Cap. (INR b) 105.2

    M.Cap. (USD b) 1.7

    Financial Snapshot (INR Billion)

    Y/E March 2014E 2015E 2016E Sales 18.8 21.6 25.0

    EBITDA 4.4 5.1 6.0

    NP 3.9 4.4 5.2

    EPS (INR) 17.3 19.4 23.1

    EPS Gr. (%) 25.0 12.0 18.7

    BV/Sh. (INR) 39.6 45.5 53.6

    RoE (%) 47.0 45.6 46.5

    RoCE (%) 48.8 50.2 52.1

    Payout (%) 45.2 46.4 45.7

    Valuations

    P/E (x) 26.7 23.8 20.1

    P/BV (x) 11.7 10.2 8.6

    EV/EBITDA (x) 23.0 19.4 16.0

    Div. Yld (%) 1.4 1.7 1.9

    Shareholding pattern (%)

    Dec-13 Sep-13 Dec-12

    Promoters 72.7 72.7 72.7

    Dom. Inst. 18.7 18.9 18.3

    FII 2.2 2.7 2.7

    Others 6.4 5.7 6.3

    Stock Performance (1-year)

  • Emami

    25 April 2014 4

    Unique play in Personal Care and Healthcare Leadership in niche categories, limited competition

     Market leading presence in niche categories, where gross margins are high and competitive intensity low, coupled with aggressive advertising and promotion strategy gives HMN a unique competitive advantage.

     HMN derives ~70% of its sales from uniquely positioned power brands. Innovation and category expansion form the cornerstones of its medium term strategy.

    Exhibit 1: Emami’s category mix (FY13)

    Source: Company, MOSL

    Exhibit 2: Power brands constitute ~70% of revenues

    Source: Company, MOSL

    Leadership in niche categories, differentiated positioning imparts pricing power HMN has a demonstrated track record of innovation and category creation. It has successfully entered and established leadership in niche categories that were previously dominated by regional players. It has created categories like Cooling Oil, Cool Talc and Men’s Fairness Cream, and has gained leadership in Antiseptic Cream, where it faces limited competition. Its strategy of using its ayurvedic proposition, establishing presence in categories with high gross margins, driving volumes through smaller unit packs and investing aggressively in brands has helped four of its largest brands – BoroPlus Antiseptic Cream, Navratna Hair Oil, Fair and Handsome, and Zandu Balm – to achieve leadership strength. In this section, we describe the company’s positioning in its key categories – Cooling Oil, Skin Care, and Pain Relief. Exhibit 3: Strong market presence in underpenetrated categories

    Source: Company, MOSL

    Cooling oils 25%

    Skin Care 35%

    Balm & Pain relief

    26%

    Others 14%

    Navratna Oil

    19%

    Boroplus Antiseptic

    20% Zandu Balm & Mentho Plus Balm

    24%

    Fast Relief 2%

    Fair and Handsome

    11%

    Navratna Cool Talc

    5%

    Exports 11%

    Others 1%

    95.7 92.3 88.6 74.5 72.8

    60.4 51.0

    18.6 1.6 1.1

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    Penetration(%)

  • Emami

    25 April 2014 5

    Exhibit 4: Category Overview-Emami

    Overall Market

    Emami mkt share (%)

    Category Size (INR m) 3 yr CAGR

    Emami Offering 2010 2013

    Cooling oil Market Size 8600 16.0% Navratna Oil 49 55

    Antiseptic Cream 3900 13.1% Boroplus Cream 74 74

    Balm 7000 25.9% Zandu & Mentho Plus Balm 57 58

    Men's fairness cream 3600 38.1% Fair & Handsome 60 58

    Prickly heat powder 3000 13.2% Boroplus Powder 10 13

    Cool Talc 4600 24.3% Navratna Cool Talc 13 18

    Pain reliever 10000 70.2% Fast Relief 9 4

    Chyawanprash 3450 17.7% Sona Chandi & Zandu 10 10

    Source: Industry, MOSL

     Cooling Oil: The Cooling Oil category contributes ~25% of HMN’s revenue. Its

    brands in this category, Navratna and Navratna Xtra Thanda cumulatively have over 55% market share. The company launched Navratna in 1989 and created the Cooling Oil category through aggressive advertising and increased push through smaller unit packs (~30% of Navratna’s sales). In the last three years, Cooling Oil (INR8.6b market) has been the fastest growing category within Hair Oil and now constitutes 11% of the overall Hair Oil category.

    Cooling Oil CATEGORY DETAILS  Category market size of INR8.6b, 11% of the total

    Hair Oil segment.  The category has delivered value CAGR of 15.3%

    over the last five years.  Major brands include Navratna (55% market

    share), Himgange (28.5% market share), Rahat Rooh and Parachute Advansed.

     Unique positioning as Therapeutic Oil rather than Hair Oil.

    EMAMI’S PRESENCE  HMN enjoys the first mover advantage