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    [email protected]

    Emami BUY

    Rebound in sales as Navratna sees a resurgence

    Emamis sales growth rebounded in 1QFY10 growing at 21% YoY, assales of its key brand Navratna oil (25% of standalone sales) grewstrongly in 1QFY10 after declining in FY09. Other key brands, such asFair & Handsome and Boroplus, are also registering sustained growth.Emamis sales growth in FY09 had tapered off in 2HFY09 because ofpricing issues in Navratna and poor winters hitting sales of Boroplus.With pricing issues in Navratna being resolved, we can expect strongerYoY growth in 2HFY10 as the base turns favourable for Emami.

    Figure 3: Emamis sales growth has bounced back after seeing a sluggish 2HFY09

    21.4%

    3.1%

    14.0%

    18.0%16.9%

    0%

    5%

    10%

    15%

    20%

    25%

    1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

    Emami s tandalone sales gr owth

    Source: Company, IIFL Research

    N a v r a t n a correction in sachet price helps return to growth

    Navratna Oil, which constitutes 25% of sales for Emamis standalonesales, has seen a strong resurgence in growth in 1QFY10, up over 16%YoY on volume growth of 11-12%. Navratnas sales had declined by 5%in FY09 (after registering a CAGR of 20% over FY05-08) because of anincrease in the price of the Re1 sachet to Rs1.5 (the SKU contributesc50% of sales for Emami) which was not well received by consumers.Emami eventually rolled back prices to Re1 while reducing the fill levelfrom 3.5ml to 3ml, which has resulted in a strong recovery in 1QFY10results. The cooling hair-oils segment remains one of the fastest-

    growing segments in the hair-oil category, with growth in 1QFY10continuing to be robust at 19% YoY.

    Figure 4: Navratnas sales growth has seen a resurgence

    16%

    -5%

    12%

    23%25%

    -10%

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    FY06 FY07 FY08 FY09 1QFY10

    Navratna growth rate

    Source: Company, IIFL Research

    Figure 5: Cooling oils category continues to see robust growth

    18%

    23%

    19%

    28%

    5%

    10%

    15%

    20%

    25%

    30%

    FY07 FY08 FY09 1QFY10

    Cooling oil category grow th

    Source: Industry sources, IIFL Research

    Emami has also taken a number of steps to drive further growth inNavratna oil. The key measures spurring growth are:

    1. Focus on smaller variants: Emami is also focussing onvariants to accelerate the brands growth. The two key variants

    on which the company is focussing are Navratna Extra ThandaOil and Navratna Lite Oil. Extra Thanda competes with Himgange

    Slowdown in Navratna &

    poor winters hit Emamissales growth

    Sales growth has reboundedas sachet pricing issue hasbeen resolved

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    Emami BUY

    also reduce interest cost. Assuming a de-merger of debt ofRs1bn, it will be EPS-accretive by c8% for FY11.

    ValuationWe value Emami at 19x FY11ii EPS, in-line with the average PE of thethree mid-cap home and personal-care FMCG peers: Dabur, Marico andColgate. Emami has a far superior EPS growth profile (30% CAGR overFY09-12) to these companies, as it is seeing significant marginexpansion in FY10. Emami is thus placed in the most attractive

    quadrant in the valuation-EPS growth matrix. BUY with a target price ofRs465.

    Figure 10: Emami lies in the most attractive valuation-EPS growth quadrant

    14

    16

    18

    20

    22

    24

    12% 16% 20% 24% 28% 32%

    EPS CAGR (FY09-12)

    PE

    (FY11)

    HUL

    Dabur

    Marico

    Colgate

    Emami

    Source: IIFL Research

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    Emami BUY

    Annexure 1: Restructuring plan

    Emami is in the process of restructuring, involving a de-merger of theFMCG business and real estate assets of the company. The scheme willbe effective from 5 November 2008. High Court clearance for therestructuring is likely to come by end-October.The key aspects of the de-merger are:

    4. De-merger of the FMCG business of Zandu into Emami. Theremaining Zandu business will be renamed Zandu Realty.

    5. De-merger of the realty business of Emami into a separatecompany called Slick Properties Private Limited, to be renamed

    as Emami Infrastructure Ltd6. Emami Infrastructure Ltd includes its investment in the wholly-

    owned subsidiary Emami Realty Limited and its 68.9%investment in Zandu Realty.

    Current structure

    Proposed structure

    How w ill the transfer happen?- Emami shall issue 14 shares of Emami (of face value Rs2) for

    every one share held (of face value Rs100) in Zandu.- Emami Infrastructure Ltd will issue one equity share (of face

    value Rs2) of Emami Infrastructure Ltd for every three equityshares (of face value Rs2 per) held in Emami Limited.

    - Shareholders of Zandu who are allotted shares of Emami shallnot be eligible to issuance of shares by Emami Infrastructure.

    Key implications: Creates a pure-play FMCG company: Emami (the listed

    entity) will be a pure-play FMCG business, with no association

    with the real estate business. This also removes fears of theFMCG cash flows potentially getting diverted to real estate. Part of debt on Emamis books will be demerged: Some

    debt on Emamis books will also get transferred to Zandu Realty,details of which will be known later. The debt de-merger is likelyto be in the range of Rs1bn-1.5bn.

    Likely to be EPS-accretive to Emami shareholdersassuming Rs1bn of debt de-merger: While 3.5 million shareswould be added to Emami, the de-merger of debt would reduce

    interest cost. If the de-merger of debt is Rs1bn, it will be EPS-accretive by c8% for FY11.

    Emami (Listed)

    Zandu Pharmaceuticals (Listed)

    Emami RealtyEmami FMCG

    Real estate assets(2.8 acres of land inDadar)

    Zandu FMCG

    In thecompany

    100%subsidiary

    In thecompany

    In thecompany

    68.9%subsidiary

    Emami Ltd (Listed)

    Zandu FMCGEmami FMCG

    Slick Properties (to berenamed Emami

    Infrastructure Ltd

    Zandu Realty Ltd(Listed)Real estate assets(2.8 acres of Landin Dadar)

    EmamiRealty

    68.9%subsidiary

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    [email protected]

    Emami BUY

    Figure 13: Boro Plus has consolidated its position as a market leader in boro creams

    74%

    71%

    69%

    65%

    73%

    70%

    67%

    63%62%

    64%

    66%

    68%

    70%

    72%

    74%

    76%

    FY05 FY06 FY07 FY08

    Value

    Volume

    (Market share)

    Source: Company, IIFL Research

    The boro creams category has seen stable double-digit revenue growthover the past three years and we expect growth to continue at over10% in the coming years.

    Figure 14: Boro creams category has had steady growth

    11.7%

    10.4%

    14.9%

    0%

    3%

    6%

    9%

    12%

    15%

    18%

    FY06 FY07 FY08

    Boro cream category grow th (%)

    Source: Company, IIFL Research

    Fa i r And Handsom e early-mover advantageFair And Handsome is one of the most important niches in which Emami

    has established itself within Indias Rs14bn fairness-cream market.Marketers have long known that there is a market for fairness creamstargeted at men: market research showed that 30% of the fairnesscreams sold in India was actually used by men, as there were noseparate fairness creams meant for them. Emami was one of the first tospot this opportunity, and its early-mover head-start has given it avolume market share of 59% in the category.

    Emami has used big-bang celebrity endorsement in this category as wellto drive growth, and that has continued even three years after thelaunch. Fair & Lovely Mens Activ (Hindustan Unilever) is the maincompetitor; Fair One (Shahnaz Hussain), Nivea Fair (Nivea) and SetWet Get Fair (Paras Pharma) are very small in this category.

    Figure 15: Emami has dominant share in mens fairness creams

    Marketshare in men's fairness creams (%)

    Set Wet

    (1%)

    Hindustan Unilever

    (36%)

    Emami

    (59%)

    Nivea

    (1%)

    Fair One

    (3%)

    Source: Company, IIFL Research

    Sales of Fair And Handsome grew strongly, by 46% in FY09, thankslargely to the introduction of Rs5 and Rs10 sachets. These sachets nowaccount for c45% of the brands sales and have helped increasedistribution for the product. Emami has also gained share in this

    segment as HUL has reduced its emphasis on this category significantly,reducing its share of voice in media.

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    Emami BUY

    Exports have been a key growth driver

    Exports have been a major growth driver for Emami, increasing at anannualised rate of 38% over FY05-09. Growth accelerated to 56% inFY09 despite the global economic slowdown, and exports now accountfor over 14% of the companys standalone sales.

    Figure 18: Emamis exports have registered 38% CAGR over the last four years

    277

    398

    557622

    991

    100

    300

    500

    700

    900

    1,100

    FY05 FY06 FY07 FY08 FY09

    Exports (Rs m)

    Source: Company, IIFL Research

    Asia and Africa account for a high proportion of Emamis exports. Sal

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