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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


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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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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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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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)


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 (%)


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%)


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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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)


Asia and Africa account for a high proportion of Emamis exports. Salesgrowth in FY09 was led by growth in the Middle East and Africanmarkets. We expect the company to expand its distribution reach inmarkets where it is already present, and also to enter new markets inAfrica, Middle East and South Asia. We expect exports to register a

CAGR of 32% over the next three years. PAT margins of exports arecomparable to those on domestic FMCG sales, as exports lower grossmargins are compensated by their lower advertising expenses.

Figure 19: Emamis product exports to key international markets

Region Key products sold

Middle EastNavratnaand Fair And Handsome. Distribution infrastructure has been setup; can be leveraged for further growth.

CIS Boro Plusand Fast Relief

Africa Fair And Handsomeand Mentho Plus


Figure 20: Asia and Africa account for most of Emamis exports

% of Emam i's e xports (FY09)

Others

(8%)

South Asia

(20%)

CIS

(19%)

Middle East

(29%)

Africa

(24%)


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Financial summary

Income statement summary (Rs m)

Y/e 31 Mar FY08A FY09ii* FY10ii FY11ii FY12ii

Revenue 5,837 8,393 9,910 11,699 13,760

EBITDA 960 1,544 2,069 2,567 3,079

EBIT 887 1,447 1,949 2,433 2,931

Net Interest expense 135 -267 -279 -133 -53

Other Income 27 5 66 62 91

Profit before tax 1,049 1,186 1,735 2,362 2,970

Taxes -122 -234 -337 -428 -535

Exceptional items 0 3 0 0 0

Minorities and other 0 -81 -136 -167 -195

Net profit 927 874 1,262 1,767 2,239

Cashflow summary (Rs m)


Profit before tax 1,049 1,186 1,735 2,362 2,970

Depr. & amortization 73 97 121 134 148

Tax paid -122 -234 -337 -428 -535

Working capital -528 691 65 -89 -120

Other operating items 0 245 -60 -76 -91

Operating cashflow 472 1,984 1,524 1,903 2,371

Capital expenditure -173 -982 -275 -275 -275

Free cash flow 300 1,002 1,249 1,628 2,096

Equity raised -5 0 3,100 0 0

Investments -248 -6,106 -50 -50 -50

Debt financing/disposal 128 5,393 -3,900 -700 -899

Dividends paid -327 -32 -460 -737 -936

Other items -5 39 0 0 0

Net change in cash -156 297 -61 141 211Source: Company data, IIFL Research, * FY09ii numbers assume full year consolidation of Emami and Zandus financials

Minority interest arising out of Zanduwould go away once restructuring

happens

CAPEX in FY09 on new manufacturinglocations in tax exempt zones

Debt paid back from the money raisedduring the QIP and internal accruals

Equity raised through QIP

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Balance sheet summary (Rs m)Y/e 31 Mar FY08A FY09ii* FY10ii FY11ii FY12ii

Cash & equivalents 28 324 263 405 616

Sundry debtors 340 632 611 725 857

Inventories - trade 401 740 822 970 1,140

Other current assets 1,527 660 974 999 1,173

Fixed assets 913 1,798 1,952 2,093 2,221

Intangible assets 0 6,419 6,419 6,419 6,419

Other term assets 1,030 716 766 816 866

Total assets 4,239 11,291 11,809 12,428 13,293

Short-term debt 31 2,002 1,102 852 152

Sundry creditors 477 1,256 1,163 1,237 1,448

Other current liabs 468 144 677 801 946

Long-term debt/CBs 352 3,774 774 324 125

Other long-term liabs 21 60 60 60 60

Minorities/other equity 0 323 398 489 593

Net wo rth 2,890 3,732 7,635 8,665 9,968

Total liabs & equity 4,239 11,291 11,809 12,428 13,293

Ratio analysis


Revenue growth (%) 13.2 43.8 18.1 18.1 17.6

Op Ebitda growth (%) 46.6 60.8 34.0 24.0 19.9

Op Ebit growth (%) 45.9 63.1 34.6 24.8 20.5

Op Ebitda margin (%) 16.4 18.4 20.9 21.9 22.4

Op Ebit margin (%) 15.2 17.2 19.7 20.8 21.3

Net profit margin (%) 15.9 10.4 12.7 15.1 16.3

Dividend payout (%) 35.3 3.6 36.4 41.7 41.8

Tax rate (%) 11.6 19.7 19.4 18.1 18.0

Net debt/equity (%) 12.3 146.1 21.1 8.9 -3.4

Net debt/op Ebitda (x) 0.4 3.5 0.8 0.3 -0.1

Return on equity (%) 35.8 26.4 22.2 21.7 24.0Source: Company data, IIFL Research, * FY09ii numbers assume full year consolidation of Emami and Zandus financials

EBITDA margin expansion due to largeexpansion in Zandus margins andreduction in some costs at Emami

Debt reduction in FY10 from the moneyraised via QIP

Dip in ROE in FY09 due to high interestcosts from the Zandu acquisition, FY10

ROE lower due to equity issuance

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