IIM Shillong Student Research - CFA ARX · PDF fileIIM Shillong Student Research ... company is currently commissioning plants in Bangladesh and ... FMCG companies have witnessed rural

IIM Shillong Student Research This report is published for educational purposes only by

students competing in the CFA Institute Research

Challenge.

Important disclosures appear at the back of this report

Personal Care

Ticker: EMAMILTD (531162) Recommendation: Buy

Price: INR 429 Price Target: INR 516

Forecast Summary (INR) 2010 2011 2012E 2013E 2014E

Net Sales (bn) 10.38 12.78 15.51 18.83 22.90

EBITDA (bn) 2.41 2.72 3.31 4.18 5.22

Net Income (bn) 1.70 2.29 2.51 3.27 4.16

Earnings Per Share 11.6 15.1 16.6 21.6 27.5

Dividend Per Share 3.5 4.1 4.9 7.5 11.0 Source: Company's financial statements, Student Research

Highlights

Inno-vedic B-R-A-N-D-I-N-G invigorates Emami: Brand investments, Robust financials,

Aggressive growth, Networks of distribution, Drivers of value, Innovation, Niche market presence

and Governance – attractively positions Emami in the personal care industry. We initiate the

coverage with a BUY recommendation and a target price of INR 516/share by the end of FY2012

that offers a 20.3% upside from the current market price.

Favorable demand drivers: Indian FMCG industry is expected to grow strongly backed by

increase in disposable income, burgeoning middle class, rising consumer awareness level and

strong rural demand due to favorable government policies. In addition, growing consumer

inclination towards natural products gives Emami a distinct advantage. Rising demand for

ayurvedic products in international markets gives a great opportunity to the company to utilize its

export potential.

Market leadership in niche segments: Strong product portfolio having ayurvedic and natural base

helps Emami in differentiating itself from other players. Market leadership in niche segments gives

Emami high pricing power resulting in sustainable margins, highest amongst its peers. Emami’s

presence in under penetrated segments presents a long term growth opportunity. High

advertisement and promotion spend along with a track record of successful brand launches in new

categories enables Emami to strengthen its position and brand equity.

Strong financial position: Emami has a strong balance sheet with low debt and strong cash

position. The company witnessed a sales growth of CAGR 25% and PAT growth of CAGR 36%

over the last 5 years. We see the company to have strong earnings momentum going forward driven

by new product launches, brand extensions, increased penetration, ease in commodity prices, and

above average industry margins. The company has strong cash flows from operation which coupled

with its debt capacity can be used to finance any future organic or inorganic growth opportunity.

Valuation: At the CMP, Emami is trading at 26.3x FY2012E EPS of 16.3 and 20.05x FY2013E

EPS of 21.4. Based on the estimated intrinsic price, the stock should trade at a justified P/E of

31.6x FY2012E EPS and 24.1x FY2013E EPS. The higher P/E of stock is based on strong

fundamentals of Emami’s business, low risk and high return on equity. We have adopted DCF

methodology to arrive at a target of INR 516/share by the end of FY2012.

Investment risks: The main risk to the target price is failure to achieve a superior growth rate in

domestic and overseas markets. The lesser than expected growth rate can be due to failed brand

extension, unsuccessful product launches and counterfeit products. In international markets,

political uncertainty especially in Middle East and Africa can be deterrents to growth. Other risks

come from lower than expected margins due to increase in raw materials prices and packaging cost.

Emami Ltd.

September 28, 2011

Key Financial Data

Book

Value/Share INR 45.60

Earnings/Share INR 15.12

Dividends/Share INR 4.08

Dividend Yield 1.03%

FCF Yield 3.31%

Debt/Equity .33x

Net Debt/Equity .03x

ROE 34.8%

ROA 25.1%

ROCE 24.8%

Forward 12 month Ratios

EV/Sales 4.96

EV/EBITDA 23.9

EV/EBIT 25.2

P/E 31.6 Source: Company's financial statements,

Student Research

Market Data

Mkt. Cap (INR bn) 64.89

Shares O/S (mn) 151.3

Main Shareholders

Promoters 72.73%

Institutional 18.02%

Non Institutional 9.25%

52w Price Range

(INR)

313/545

Avg. Monthly Vol. 20883

Beta 0.88

Stock Performance

1m -6.62%

6m 7.23%

12m -8.20% Source: Company's financial statements

CFA Institute Research Challenge September 28, 2011

2

Source: BSE

Business Description Emami Ltd. is the flagship company of the Emami Group jointly promoted by Kolkata based industrialists

R. S. Agarwal and R. S. Goenka. The company is in the personal, beauty and healthcare business and

primarily manufactures and markets beauty, health and personal care products that are based on ayurvedic

formulation. The main strengths of the company are its brands, product portfolio and its vast distribution

network. Despite a tough economic environment in the fiscal year 2011, Emami outperformed the FMCG

industry with a sales growth of 23.1% against an industry average of 12-14%. The main reasons behind the

outperformance was strong growth from power brands coupled with superior growth reported by new brands,

aggressive brand investments and increased distributions reach. The effect of tough economic environment

was seen on company’s margins which was weighed down by increase in commodity prices. The EBITDA

margins declined to 21.3% in FY2011 from 23.3% in FY2010. The company embarked on judicious price

increase and cost cutting measures to manage the margins.

Geographical presence: The company is headquartered in Kolkata, West Bengal. It has a pan India presence

with six regional sales offices and 31 depots. The company’s manufacturing units are located in Kolkata

(West Bengal), Guwahati (Assam), Pantnagar (Uttranchal), Vapi (Gujrat), Silvassa (Dadar and Nagar Haveli)

and Talasari (Maharastra). The company has strong network of 3500 distributors and 2500 sub-distributors,

with a direct reach across over 0.5mn outlets. The company has market presence across 65 countries with

subsidiaries in Bangladesh, Egypt, Dubai and UK.

Product portfolio: Emami has over 30 brands under its portfolio and markets over 270 products across

various categories, with the famous ones being Navratna oil, Boroplus cream, Zandu balm, and Fair &

Handsome. These power brands are market leaders in their respective category (for detailed product

information refer Appendix VIII, Table 1). We performed BCG matrix analysis for Emami’s product

portfolio (Appendix VIII, Figure 8). Navratna cool talc, Malai Kesar cold cream, Boroplus prickly heat

powder and Vasocare petro jelly are underpenetrated but are in high growth segment. Company would

require significant investment in these products to gain market share. Navratna oil and Boroplus antiseptic

cream are in cash cow segment characterized by market leader position and low market growth. Zandu balm,

Mentho Plus balm and Fair & Handsome constitutes about 28% of revenue and are in the high growth (stars

in BCG matrix) segment indicating good future prospects.

Company strategy: The major elements of company’s strategy involve focusing on power brands coupled

with brand extensions and new product launches. In order to support growth, the company undertakes

aggressive brand investments (18% of their turnover in FY2011 against an industry average of 12%), and

focuses on expanding the distribution network. In order to increase its distribution network and customer

awareness, it embarked on a project called Swadesh where Emami through its field staff aims to reach all

towns having population greater than 5000 by 2013. The company’s internationalization strategy involves

focusing on international markets which have demographic conditions similar to India. Currently, 14% of the

company’s revenue comes from international business. In order to increase its international presence, the

company is currently commissioning plants in Bangladesh and Egypt. Emami also engages in effective and

continuous cost control. Nearly 80% of company’s production facilities lie in tax exempt zones. Last but not

the least, Emami lays high emphasis on R&D. It has world class laboratories with modern and state of the art

infrastructure where highly qualified ayurvedic doctor and scientists carry out their research. Himani

Ayurvedic Scientific foundation (HASF) works with Emami’s R&D team and Zandu foundation for co-

ordinated development of innovative, effective and world class health and personal care products.

0

100

200

300

400

01-Apr-08 01-Oct-08 01-Apr-09 01-Oct-09 01-Apr-10 01-Oct-10 01-Apr-11

Emami's share price v/s BSE FMCG and Sensex (indexed)

BSE FMCG BSE Sensex EMAMI

Figure 1: Nationwide presence

Source: Company (FY2011)

Figure 2: Global presence


Figure 3: Emami’s revenue mix


16%

18%

9% 19%

3%

14%

21%

Boroplus Navratna Oil

Fair and Handsome Zandu Balm

Chyawanprash Export

Others


3

Industry Overview and Competitive Positioning The Indian Fast Moving Consumer Goods (FMCG) industry with an estimated size of more than INR 1300bn

is the fourth largest sector in the Indian economy and is responsible for c.5% of total factory employment in

the country. The FMCG industry witnessed a consumer boom over the past decade growing from c.INR

470bn in 2000-01 to c.INR 1300bn in 2009-10. The strong growth was primarily driven by urbanization,

increase in disposable incomes, altered lifestyle, and a heightened level of awareness among the rural

consumers, consequent to the onslaught of satellite televisions. Furthermore, the boom has also been fuelled

by the reduction of excise duties, dereservation from the small-scale sector, social spending programs like

MGNREGA and the concerted efforts of personal care companies to woo the burgeoning affluent segment of

the middle class through product and packaging innovations. Growing Indian consumer aspiration coupled

with rising levels of literacy, income and awareness augurs well for the FMCG sector. The FMCG sector is

expected to grow steadily over the next decade at an annual rate of 12% to become c.INR 4000bn in size by

2020. The Indian market with favorable economic and demographic factors presents an interesting

opportunity for niche players like Emami.

Growth drivers of FMCG industry

We outline various FMCG industry growth drivers below:

-Consumption driven by favorable demographics: India’s population is expected to touch the figure of

1.33bn by 2020-21 from the current figure of 1.2bn. Because of economic growth, the percentage of

population living below poverty line is expected to reduce to 22% in urban areas and 29% in rural areas by

2025. The middle class population that comprises of seekers (household annual income between INR 0.2mn

to 0.5mn) and strivers (household annual income between INR 0.5mn to 1mn) will be the biggest segment in

India by 2025. With increase in disposable incomes, the middle class and aspirer segment (refer figure 5&6)

will consume more and will be the main driver behind the FMCG sector growth.

-Strong demand from rural India: The rural India has seen a sharp increase in the use of personal care

products. FMCG companies have witnessed rural consumption growing 200-300bp faster than urban

consumption. This has been mainly because of rising per capita income, healthy agricultural growth,

improved consumer sentiments and increased penetration of consumer goods in the rural market.

-Favorable Government’s policy: Indian government has formulated many growth inclusive policies like

MGNREGA, loan waiver to farmers, Right to Education Act which has led to increase in income levels and

awareness amongst the people. Also, with the implementation of sixth pay commission, the disposable

income in the hand of salaried individuals have increased significantly. The introduction of Goods and

Services tax (GST) is also expected to have a favorable impact on organized FMCG players.

-Untapped domestic market: The domestic FMCG market is largely untapped especially in rural areas

owing to poor infrastructure. The average spending of Indian consumer on FMCG products remains low as

compared to consumer in other developing markets (refer figure 7 for per capita spending). This augurs well

for Emami which operates in niche segments with low penetration.

-Changing consumer preferences: With the increased awareness and knowledge about health, consumers

are showing preference for personal care products made up of organic or ayurvedic components which are

widely accepted as safe, benign and free of side effects. Emami with its focus on ayurveda is well positioned

to tap the needs of consumers for ayruvedic products.

Key features of FMCG industry

The personal and health care segments of the FMCG industry in which Emami operates are low capital and

technology intensive. However, the strong distribution network and heavy investment needed for brand

building remain key deterrents to new entrants. Low-priced products contribute to the majority of the sales

volume and lower income and lower middle income groups account for over 60% of the sector’s sales.

Moreover, rural markets account for 56% of total domestic FMCG demand. The key features of the industry

are outlined below:

-Cost dynamics: The industry is marked by high advertisement and promotion (A&P) spending, brand

building, brand extensions and very low capital to sales ratio on account of outsourcing and low investment

in fixed assets. Supply chain and brand investments are the key factors driving the industry. Advertisement

costs range from 8% to 25% or even more of the revenue, depending upon the life cycle of the product, brand

value, competition in the segment and the marketing strategy of the players. Emami’s A&P spending has seen

a declining trend over the years due to brand maturity, wider consumer acceptance and rising turnover.

The other major cost drivers of the industry are the raw material and packaging expenses. With commodity

prices increasing in FY 2010-11, the margins of most FMCG players were impacted severely. The cost

Figure 4: Historical growth of FMCG

industry (INR bn)

Source: company, Student Research

Figure 5: Number of Indian

households (mn)

Source: Mckinsey Global Institute “Rise of India’s

Consumer market”, May 2007

Figure 6: Indian Gross National

Income (per capita, INR 1000)

Source: IMF, world economic outlook database

(Sep 2011)

710

860

1020

1160

1300

FY2006 FY2007 FY2008 FY2009 FY2010

49%

30% 18%

44% 43%

33%

5% 23% 34%

1%

2% 12%

1%

1%

3%

2005 2015E 2025E

Deprived Aspirers Seekers

Strivers Globals

207

44 52

63 73

83 93

104

117

131

244

281

17% CAGR


4

pressures are expected to continue in the current fiscal year and ease over subsequent fiscal years as

commodity prices come down. FMCG players are also expected to rationalize cost and eliminate cost

inefficiencies in the coming years to improve margins.

-Brand equity: Brand Equity plays an important role for FMCG companies and FMCG players devote

considerable money and effort in developing brands. With differentiation on functional attributes becoming

difficult to achieve in this competitive market, branding results in consumer loyalty and sales growth. Brand

equities are built over time by packaging innovations, consistent quality, aggressive advertising and

marketing. Brand building, positioning and brand extensions play key roles in the success of a product.

-Distribution and reach: One of the critical success factors in FMCG industry is a strong distribution

network that helps in erecting barriers for new entrants. A strong distribution network also helps in increasing

brand awareness and garnering volumes through increased penetration levels.

-Pricing: The Indian consumer is very price sensitive and it is very difficult to pass on the cost increase to

consumers for most FMCG players. However, Emami is different in this regard and has more pricing power

as compared to larger FMCG players because it operates in niche product categories and undertakes

aggressive brand investments.

Competitive positioning

Though FMCG industry is highly competitive but Emami has cleverly differentiated itself from the other

players in the industry by positioning itself on the Ayurvedic and natural platform. This has helped the

company to command a premium over its competitors, giving it the gross margin percentage of c.59%,

highest amongst its peers. The key competitors in the consumer products industry for Emami include Dabur

India, Marico Industries, Hindustan Unilever Limited, Amrutanjan Health Care Limited.

Emami’s constant focus on product innovation based on Ayurvedic formulation has helped the company in

catering to newer needs of existing customers and reaching out to newer consumers. The strong Research and

Development centers at Kolkata and Mumbai have helped the company to sustain its competitive edge by

bringing out new products at regular intervals and outperform its competitors. Emami’s YoY sales growth

and YoY net profit growth in the last 4 years has been highest in the industry (refer Appendix V, Figure 3&4)

and its stock has constantly outperformed its peers and BSE Sensex (refer Appendix V, Figure 1).

We have done Dupont analysis (refer Appendix V, Table 1) for Emami and its competitors and the analysis

shows that Emami has the highest net profit margin. Also, from Dupont analysis we can see that Emami has

asset turnover of 1.4x in comparison to HUL’s asset turnover of 7.4x. The low asset turnover comes from the

fact that Emami has greater dependence on in-house manufacturing in comparison to competitors. The greater

reliance on in-house manufacturing also resulted into the lower RoCE though the company has the highest

EBITDA margin (refer Appendix V, Figure 2). On Tax front, Emami’s effective tax rate for FY2011 was just

12% (lowest in the industry), well below MAT due to the goodwill amortization of Zandu and manufacturing

units in tax free zones.

Emami undertakes strong brand investments and its brand ambassadors include famous celebrities like

Amitabh Bacchan and Shahrukh Khan. The A&P spending of the company is c.18% of its turnover compared

to an industry average of c.12%. This has helped Emami in creating and maintaining strong brand equity.

Investment Summary We believe that Emami with its focus on ayurvedic and health products displays an impressive upside

potential aided by strong Brand investments, Robust financials, Aggressive growth, Networks of distribution,

Drivers of value, Innovation, Niche market presence and Governance.

Brand investments

Having positioned itself as ‘making people healthy and beautiful, naturally’, Emami has created a strong

brand equity through effective advertising across diverse media.

-Power brands: Navratna Oil, Boroplus Antiseptic Cream, Fair & Handsome, Menthoplus Balm and Zandu

Balm are strong market leaders with strong consumer awareness. The Economic Times’ Brand Equity Survey

has ranked Zandu Balm at 53rd position, up 11 places from the last year. Fair & Handsome, Navratna Oil and

Boroplus also enjoy high trust amongst its customers.

-Advertising and Promotion: By rolling in high profile celebrities like Amitabh Bachchan, Shah Rukh Khan

to endorse its diverse products, the company has effectively increased brand awareness. Advertisement and

communication spend stands at INR 2.30bn i.e. 18% of total revenues, in 2010-11, as against 18.7% in 2009-

Figure 7: Per capita spending on

personal care products (INR)

Source: Cosmetics "India and Cosmetics”, 2010

Figure 8: Indian personal care

market size (INR bn)

Source: Outlook for personal care ingredients

industry: An Indian presepective,2009, Tata

Strategic Management Group

Figure 9: A&P spending as

percentage of sales of major FMCG

players


33 73

440 489

586

224

266

317

376

2009 2010 2011 2012E

18%

12% 11%

14%

Emami Dabur Marico HUL


5

Figure 10: Emami outperforming

FMCG industry

Source: Company, Student Research

14% 12% 13%

30%

35%

23%

FY2009 FY2010 FY2011

FMCG Growth YoY

Emami Growth YoY

10 and 19.3% in 2008-09 - the highest across the FMCG space. We believe that this has been and will be the

key strength of Emami which will propel the brand equity to newer heights.

Robust financials

Emami has a strong balance sheet with net debt to equity ratio of 2.74% and a cash balance of INR 2.10bn.

The company’s revenue and PAT have been rapidly increasing at a CAGR of 25% and 36% respectively over

the past five years. It has the highest YoY growth for revenue and PAT amongst its peers (refer Appendix V,

Figure 3&4). The company has 80% of its production coming from tax exempt zones which is one of the

reasons behind its superior net margins and return ratios. The company also has strong operating cash flows

and sufficient cash on balance sheet which can be used to finance any future organic or inorganic growth

opportunity.

On the whole, we expect the earnings momentum to remain strong driven by new product launches, brand

extensions, increased penetration, ease in commodity prices, and above average industry margins. For further

details, please refer to the financial analysis mentioned in later section of the report.

Aggressive growth strategy

The company has been growing strongly through both organic and inorganic measures. It has constantly

brought out innovative products to tap into the growing skincare and OTC segments. The acquisition of

Zandu has helped the company to strengthen its ayurvedic product portfolio.

-Product portfolio: Presence in under-penetrated and high growth categories gives the company a distinct

advantage. Newer products have been increasingly contributing to the incremental revenues and will be a key

criterion for Emami to create long term value and break away from competition. Refer Appendix VIII, Figure

2 to 7 for YoY growth rates and market share of the entire product portfolio. Diversified portfolio reduces

dependence on a single brand – no product contributes more than 19% of revenues (refer Appendix VIII,

Table 2). Cash cows – Navratna Oil and Boroplus could fund new products. Fair and Handsome, Zandu and

Mentho Plus are Stars that are high growth products and market leaders (refer BCG matrix in Appendix VIII,

Figure 8).

-New launches: The company has been constantly bringing out 2-3 new products every year and we expect

this to continue. Ideal combination of new products in need of cash coupled with stable market leaders that

generate cash helps in maintaining bottom line and increasing the customer base. Some of them like Navratna

Cool Talc have grown by more than 100% YoY after launch (refer Appendix VIII, Table 1).

With increasing reach in both the domestic and international markets, Emami’s revenues are set to grow

exponentially. Moreover, with the Indian economy poised to grow and higher disposable incomes, the whole

FMCG sector is set to witness accelerating growth and Emami is rightly positioned to exploit this

opportunity.

Niche market

The Company has positioned itself on the Ayurvedic and natural platform by combining the ancient wisdom

with modern technology so as to offer solutions to customers’ needs in the most natural way possible.

-Ayurveda for growth: By constantly focusing on Ayurvedic and therapeutic segments, Emami has created

a strong product portfolio with high entry barriers and strong brand equity resulting in superior growth

opportunities. The differentiated positioning has thus helped Emami charge premium for its products.

-Under-penetrated, high growth segments: Emami is present in categories having low penetration (refer

Appendix VIII, Figure 1) that gives the company ample opportunities for growth as these categories expand

owing to increasing consumer awareness and buying power.

With growing consumer consciousness about the side effects of chemicals and increasing bent towards

natural products, the company’s positioning as a niche player in the personal and health care industry will

provide Emami additional leverage that will boost its growth and revenues.

Drivers of value

-Raw material management: Emami has in place a proper hedging policy in order to mitigate the risk of

volatile commodity prices. They have altered their raw materials usage and substituted inputs thereby

improving the product yield and quality. Company has a strategy to procure its raw materials from vendors in

non-excisable areas at affordable costs and create a dedicated vendor community. Farm forestry initiatives

and backward integration has ensured an un-interrupted supply of herbs which is critical for smooth

operations.


6

-Vendor relationship: Emami has a policy to select vendors based on plant proximity, appropriate quality

certification, financial stability and product quality. In order to reduce freight, the company has moved its

focus from a multi-vendor to single-vendor within plant proximity. This has resulted in the decline in

inventory costs coupled with enhanced working capital efficiency.

-Cost management: In order to counter increased raw materials cost, use of alternative inputs and packaging

adaptations have been developed along with prudent change in specifications, sizes and dimensions of raw

materials and introduction of substitutes.

-Operations initiatives: Increase in the number of manufacturing plants along with an increase in their

production capacities, manufacturing in tax-free zones, focusing on operational efficiency, ensuring vendor

proximity to the production units, adoption of upgraded technology and better working capital management

has resulted in efficient operations. Quality controls and use of Information Technology has also helped to

streamline operations.

Going forward, we expect the above drivers to continue as a strong growth engine for the company and give

the company a relative advantage over its competitors.

Innovation

With the industry facing high levels of competition, the strong R&D team has helped the Emami position

itself as ‘Category Creator’ by meeting the unmet demands of the consumers like the introduction of Fair and

Handsome cream. Innovation, through a combination of rapid technological sciences and extensive focus on

Ayurveda has been one of the strong growth drivers for the company which helps in not only creating new

products but also bring out brand extensions to meet the varying needs of its consumers.

Going ahead we expect possible entry into new categories and brand extensions that leverages on company’s

foucs on ayurveda and innovation.

Networks of distribution

Though Emami has smaller distribution network compared to the other players in the FMCG Industry, the

company has, by both organic and inorganic means, constantly increased its expansion and reach. The

acquisition of Zandu Pharmaceuticals has strengthened the company’s distribution and it now reaches to

0.5mn outlets directly and 2.6mn outlets indirectly. The company has tied up with ITC’s E-chaupal, IOC

petrol pumps in addition to the mobile traders to expand its presence in the Indian hinterland. The company

also started ‘Project Swadesh’ with a vision of reaching all the villages with a population above 5000 by 2013

by using the ‘Super-Stockists’ model and leveraging on the mobile van operations.

-International business: Emami has presence in over 65 countries across the globe, with significant presence

in Africa, SAARC, the Middle East and the CIS nations. Exports are not only driven by Indian population but

also by locals and other Asian expats and have been a major growth driver for company with its export

revenue growing at a CAGR of 34% in last 5 years, contributing c.14% to the total revenues. Power brands

like Boroplus (market leader in Russia), Fair and Handsome and Menthoplus balm have showed very good

performance in terms of product acceptance and revenues with some of them being market leaders in UAE

and Saudi Arabia.

To cater the growing overseas demand, Emami acquired personal care manufacturing unit in Egypt in 2010

and commenced construction of a manufacturing facility in Bangladesh in March, 2011. Company also plans

to get into new brands and enter into new markets within the existing overseas geographies; hence we see

export growth momentum to continue in future at a CAGR of 30% over FY2012-14E.

Good governance and focused management

Emami is a well-run family business which has the right mix of family and non-family members in the core

management team. Family members head the key strategic areas including R&D, marketing, manufacturing

& distribution while the seasoned professionals are in charge of the day-to-day business operations of the

company. Some of the key decisions by the management include acquisition of Zandu and de-merging the

realty arm of Zandu which have aided in achieving superior growth. Other decisions like increasing price

points of Emami product portfolio, superior hedging policy, raw material management, constant investments

in innovation and brand building activities are the key factors contributing to Emami’s growth story.

Adherence to corporate governance requirements and CSR initiatives also point to the code of conduct that

guides the business and prevents private interests being pursued outside the business. For detailed analysis,

please refer the CG and CSR section later in the report.

Figure 11: Regional sales

contribution

Source: Company (FY2011), Student Research

Figure 12: Overseas revenues

Source: Company (FY2011), Student Research

East

22%

West

26% North

29%

South

23%

21%

30%

35%

11% 3%

Middle East SAARC Africa

CIS Others


7

Figure 13: Emami’s share price and news flow in last 18 months

Source:BSE, Student Research (Adjusted for stock split)

Valuation We have derived an intrinsic value of INR 516/share by the end of 2012 for Emami based on Discounted

Cash Flow (DCF) Analysis. We have used a three stage DCF with different sales growth and margins

assumptions in each stage. The different assumptions in the DCF are outlined below:-

Sales: The sales of the company have been segregated into domestic and overseas sales as the two segments

are growing at a very different growth rates. The domestic sales is estimated to grow by 20% while the

overseas sales is expected to grow by 30% over FY2011-2014E which is the length of the analytic period.

After this we have introduced a convergence stage, wherein we assume both domestic and overseas sales

growth to linearly decline to terminal growth rate over a long 10 year period. In the perpetuity stage or the

last stage, we assume the sales to grow at 5%.

Margins: The company faced strong margin pressures in the last 2 years due to increase in prices of key raw

materials and packaging costs. The costs pressures are expected to continue in the current fiscal as confirmed

by the results of Q1 FY12. The cost pressures are expected to subside in the later part of FY12. The COGS as

percentage of sales is expected to be high over FY12 and is assumed to decrease slightly to a conservative

estimate of 40% over the projection period. The A&P spend and the Manufacturing & Administration

expenses as percentage of sales have also been assumed to remain same in the near term and assumed to

decline slightly over longer term due to economies of scale. The A&P spend of Emami is currently the

highest in the industry and there has been a declining trend over the last 3 years as the company is getting

bigger in size. The EBITDA margins are expected to improve over longer term as raw material prices subside

and A&P spending is reduced.

Capex: The capex has been assumed to grow in proportion to sales. The net capex as a percentage of change

in sales has been assumed to be 10% which is in line with past years’ capex.

Working capital investments: The working capital investments of company is expected to reduce over the

years primarily driven by improving inventory and receivables management. The current receivables

turnover, inventory and payables turnover have been assumed to improve marginally as the company gains

more bargaining power with customers and suppliers with increasing size.

WACC: The company has been constantly reducing its exposure to debt over the last few years. The target

debt to equity ratio is expected to be 0 if company doesn’t go for any inorganic growth opportunity. The cost

of equity for the firm has been estimated using the traditional CAPM methodology with a provision for

country risk premium taking into account India’s BBB- rating. We have estimated the WACC for the

company as 13.8% in the near term and 12.3% in the perpetuity stage.

300

350

400

450

500

550

01-Apr-10 01-Jun-10 01-Aug-10 01-Oct-10 01-Dec-10 01-Feb-11 01-Apr-11 01-Jun-11 01-Aug-11

Announces

Q1 results-

net profit rises 7%

Annouces

Q4 and

FY11 results

Budget

2011:Increase

in excise duty and MAT,

govt increase

rural spending

Egypt unrest:Marico,

Dabur shut down plants,

Emami assessing situation

Emami loses

Paras despite

highest bid, hits upper

circuit-20%

Emami in bid to buy

Paras;possibility of

overpaying hurts stock price

Dabangg song

propels Zandu

sales;PAT up 45%

Q1 results

FY10

results;strong

revenue guidance;stock

split announced

Dabur, Emami opt out

of race to acquire

Henkel India

Emami Ltd.

eyeing to buy

Paras' personal care business

DCF Model Characteristics

Model Three Stage

Analytic Stage

Convergence Stage

Perpetuity

WACC Assumptions

Target D/E ratio 0

Risk free rate 5.9%

US equity risk premium 5.4%

Country risk premium 3.6%

Market premium 9.0%

Beta (β) 0.88

Table 1- Source: Student Research

Emami in

race to acquire Henkel


8

Terminal WACC Assumptions

Convergence stage 10 yr.

Convergence growth

rate

Linear

decay

Perpetuity WACC 12.3%

Perpetuity growth 5%

Country risk premium 1.9%


P/E Price Range (INR)

Lower limit 498

Upper limit 612


Valuation Summary (INR)

Stress case 491

Base case 516

Optimistic case 549


Figure 14: DCF target price

distribution (INR)

Source: Student Research

0

50

100

150

200

250

418 450 483 515 548 580 613

Please refer to Appendix VII for further details on DCF assumptions.

Peer comparison

The DCF value of INR 516/share implies a forward P/E multiple of 31.6x and EV/EBITDA multiple of 23.9.

Comparing it to the broader FMCG industry (Appendix XII), we find that the DCF value is fair and in line

with the industry valuation multiples. There is no listed company operating in same segments as Emami.

Emami competes with different companies in different segments. Hence, a good comparable is difficult to

find. However, the comparable listed in Appendix XII are players from the same industry in which Emami

operates and are governed by similar factors as Emami. Hence, we have used their valuation multiples to

justify the DCF valuation of Emami. The lower bound calculated on the basis of P/E multiple is INR 498

implied by P/E of HUL and upper bound is INR 612 implied by Dabur.

Peer Comparison Table is reported in Appendix XII.

Risks to price target

We have carried out a sensitivity analysis to study the impact of the change in WACC and sales growth in the

terminal period along with impact of deviation in COGS/Sales assumption. The terminal value contributes

c.54% to value and hence terminal WACC and sales growth assumptions have been chosen to carry out the

sensitivity analysis. Also, there is a huge impact of raw material prices on profit margins. Currently,

COGS/Sales has been taken conservatively as 40% in the long run. We have estimated how prices will be

affected due to deviation in assumed COGS/Sales. Based on the sensitivity analysis, we have devised two

additional cases (besides the base case) – stress case and optimistic case. For the stress case we have taken an

average of worst case scenarios and for the optimistic case we have considered an average of best case

scenarios from the table presented in Appendix XIII. The stress case and best case prices are presented in the

Table 4 along side.

Sensitivity Analysis Tables are reported in Appendix XIII.

Montecarlo analysis

We performed a Montecarlo simulation on the DCF model assigning probability distribution to various

parameters in order to estimate the volatility of the target price. The major risks identified are lesser than

expected growth rate in domestic and overseas markets, increased COGS/Sales due to the increase in

commodity prices and higher than expected terminal WACC. From the Montecarlo simulation, we obtained a

probability distribution of target price with a standard deviation of INR 29 around the INR 511 mean. Based

on the analysis, we believe that the company’s price will fluctuate within a range of INR 465 and INR 560

with a probability of 90% (refer figure 14).

Detailed assumptions on the Montecarlo simulation are reported in Appendix X.


9

Financial Analysis Net sales to grow at a CAGR of 21% over FY2011-14E

Net sales of Emami are expected to grow at a CAGR of 21% over FY2011-14E driven by both domestic and

overseas segment which will grow at different growth rates. We project domestic sales to grow at a CAGR of

20% from 2011 to 2014 primarily driven by increased penetration, brand extension and new product

introduction. Rising disposable income, increasing per capita spending on personal care products and

growing middle class, will fuel the company’s growth in domestic market. Emami’s overseas revenues are

expected to grow at a CAGR of 30% over FY2011-14E due to increased focus on strengthening its existing

international presence through aggressive branding and entering into new geographies (refer Appendix VI,

Figure 1).

Margins expected to improve

The company in FY2011 had a gross margin of 59% which is higher as compared to its peers but lower when

compared to previous years. The gross margin declined by 420 bps YoY in FY11 due to sharp rise in prices

of key raw materials and packaging cost. The costs pressures are expected to continue in the current fiscal as

confirmed by the results of Q1FY12. The gross margins are expected to improve as raw material prices

subside over subsequent fiscal years. The other factor driving net margins would be declining A&P expenses

as brands gain maturity and turnover increase. Overall, we expect the margins to improve over subsequent

financial years. The EBITDA margins are expected to be c.22% and net margins c.17% over FY2012-14E

(refer Appendix VI, Figure 2).

Balance sheet & financing

Emami has a strong balance sheet with very little debt and strong cash balance to support its growth. The

cash balance is further expected to increase as the company has strong cash flows from operation and very

little reinvestment needs for organic growth. With the increased cash balance, the company is expected to

retire its debt and become a debt free company over next 3 years. The asset turnover of the company is lower

as compared to other FMCG companies primarily because of greater reliance on in-house manufacturing and

goodwill of INR 4.80bn from Zandu’s acquisition. In the long run, the asset turnover is expected to improve

as Zandu’s goodwill gets amortized over the next 3 years. The company has higher working capital to sales as

compared to larger industry peers such as HUL, Dabur and Godrej, indicating potential to extend supplier

credit as company gets larger in size and acquires more bargaining power.

Strong cash flows from operations

Sales growth and margin expansion as raw material prices subside will lead to increased operating cash

flows. Emami is expected to generate cash flows of INR 2.64bn to INR 4.33bn over the projection period.

The strong operating cash flows will be used to reduce the net debt on balance sheet. Also, dividend

payments are expected to increase in absence of inorganic growth opportunity. The dividend payments over

the FY2012-14E is expected to be an average of 35% (refer Appendix VI, Figure 3).

High return ratios expected to continue

The RoCE of the firm has steadily increased over the past few years and is currently 24.8% which is in line

with the industry average. The RoCE is expected to increase over the projection period primarily because of

sales growth, margin expansion and reduction in debt (refer Appendix VI, Figure 4).

Corporate Governance and Social Responsibility We believe that the market perception and valuation of a company depends to a considerable extent on the

corporate governance and CSR of a firm. It relates to the ethical business conduct and the method of

managing a business. This further impacts its long term value. We analyzed the subject company on different

parameters to access this area of valuation. For more details on CG and CSR, please refer Appendix I-III.

Corporate governance

This is not merely compliance to existing laws but goes to the extent of improving economic efficiency and

superior delivery of the company’s objectives. Emami fulfills the mandatory requirements of Clause 49.

Details regarding the non-mandatory compliance requirements can be found in Appendix II. We have

identified areas where the company complies with the best practices code and areas where they don’t.

Corporate social responsibility

As a part of company's Corporate Social Responsibility, Emami has devised various Self Employment

schemes like Emami Mobile Traders and Small Village Shops schemes for the rural unemployed youth which

covers small to large villages with population ranging from 1500 to 5000. We expect the CSR initiatives of

the company to improve as it establishes its presence across India as initial trials in West Bengal were

Figure 15: Dupont analysis


30% 27%

33%

0%

10%

20%

30%

40%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY2009 FY2010 FY2011

Leverage Asset Turnover

Net Profit Margin RoE (RHS)


10

Figure 16: Raw material prices

breakup


Source: Company data (FY2011)

50%

6% 4%

7%

33%

Packaging material LLP

Wax Menthol

Others

successful and the scheme aims to cover more states in due time. Please refer Appendix III to compare CSR

initiatives for different companies in same industry.

Investment Risks In this section we analyze the major risks that could affect the target price.

Strategic risks

-Succession planning risk: Emami faces succession planning risk as founders Mr. R.S. Agrawal and Mr.

R.S. Goenka plan to retire and hand over the business to new generation. In order to offset this risk, Emami

has set up a 10-member advisory board to chart out a smooth succession plan and identify the next chairman.

-Unsuccessful product launch: Emami has been growing through product line extensions. If new products

do not meet customers‘ needs and tastes, Emami’s sales may be lower than expected. To minimize this risk,

the company is investing heavily in R&D, introduces new product in timely way and aggressively markets its

products. Emami also conceives and test markets its products before planning the prospective launch.

-Brand risks: Emami enjoys strong brand equity with four of its products being market leader in their

respective market category. Emami’s brands could be affected by growing competition. In order to offset

brand risk, Emami engages in aggressive brand investments, celebrity endorsements and relies on its unique

ayurvedic positioning.

External risks

-Macroeconomic factors: India’s GDP is expected to grow at a rate of 8.15% per year. This is one of the

major drivers of the growth of Emami’s revenue. However, higher inflation may result in RBI going for

tighter monetary policy which may affected the customers’ earnings and expenditure. In addition, an industry

slowdown or downturn would affect the business sustainability.

-Seasonality factor: Emami’s products are seasonal in nature and this is one of the biggest risks to company.

Summer products (like Cool Talc) and winter products (like Cold Cream, Boroplus) sales depend upon the

weather conditions. A cool summer and hot winter season can impact the sales growth adversely.

-Climatic risks: About 45% of Emami’s sales come from rural areas. With the uncertainty in monsoon, rural

income growth will suffer and hence impact their spending on FMCG products.

-Political risks: Emami derives 14% of its revenues from international markets. Some of the overseas

markets like Middle East and Africa face political uncertainty which could hurt Emami’s growth prospects in

international markets.

-Counterfeit risk: FMCG industry suffers from the problem of duplication. Product imitation may adversely

affect the company’s brand and would result in lowering the profitability. Emami has taken many initiatives

like investments in packaging and product quality to reduce counterfeit risk.

Operating risks

-Raw material costs: Raw material price fluctuations of HDPE (packaging material), paraffin wax or

Mentha oil would impact the revenues. Around 50% of Emami’s raw material price is linked to crude which

exposes Emami to price shocks. Last year, the company increased prices and reduced package sizes to

counter this. Also, the company procures raw materials from local vendors in non-excisable areas –

Guwahati, Baddi – at cost effective prices.

-Quality risks: Emami operates in a very competitive market. Any decline in its product quality may affect

the brand and profitability of Emami. To counter this, the company has adhered to many certification

standards and has also implemented Total Production Maintenance (TPM) across all its production units.


11

Appendix I: Emami’s Senior Management Team

Table 1: Emami’s Senior Management Team

Strong Management team with proven execution capabilities

Name Designation Association with Emami Other Posts / Description

Mr. R. S. Agarwal

Mr. R. S. Goenka

Mr. S. K. Goenka

Mr. Mohan Goenka

Mr. Aditya V. Agarwal

Mr. Harsh V. Agarwal

Ms. Priti Sureka

Executive Chairman

Director

Managing Director

Wholetime Director

Wholetime Director

Wholetime Director

Wholetime Director

Co-founder in 1974

Co-founder in 1974

Joined Emami after

graduation

Associated with Emami

for more than 15 years

Associated with Emami for more than 15 years



Chartered Accountant, LLB and Company Secretary

Board member of Emami paper mills, Emami Realty

Ltd., AMRI hospital, Rupa & Co Ltd

Served as director of West Bengal Industrial development

Corporation Ltd and President of Merchant’s Chamber of Commerce

LLB and Master’s in Commerce

Board member of Emami paper mills, Emami Realty

Ltd., AMRI hospital, Rupa & Co Ltd

Honored with the title of Honorary Consul general of the

Republic of Poland

Manages production, operation, distribution and human

resource management

Director of Emami (Meghalaya) Cement Ltd and Emami

Bangladesh Ltd

Responsible for developing company’s market share in

domestic and international market

Vice chairman of marketing committee, CII-Eastern

region, Honorary consul of Poland in Kolkata

Director of Zandu Realty Ltd., Emami Cement Ltd.,

Emami (Megahalaya) Cement Ltd and Emami Chisel Art Pvt. Ltd.

Director of Emami Biotech Ltd., Emami paper mills Ltd., AMRI Hospitals Ltd, CRI Ltd

Honorary consul of the Republic of Ethopia in Kolkata and executive committee member of ASSOCHAM

Director of Emami Cement Ltd., Emami (Megahalaya) Cement Ltd, Zandu realty Ltd.

Nurtures flagship brands of Navratna and Boroplus

Heads the marketing division of Emami Ltd.

Director of AMRI hospitals, Emami Frank Ross Limited

and Emami Biotech Ltd.

Source:Company, Student Research


12

Appendix II: Emami’s Corporate Governance

Table 1: Corporate Governance

Comply Does not comply

Clause 49: Emami complies with all the mandatory requirements Tenure for Independent director: No specific tenure for

independent directors

Maintenance of Chairman Office: Non-Executive chairman office

not required as company has Executive Chairman

Audit Qualification: Not given in the auditor's report

Remuneration Committee: Consists of three Non-Executive

Independent directors

Training of board members: No mandatory training for

members as company considers it prudent as most of the

members are highly experienced Training of Executive directors: Company arranges risk

management training to increase competence of directors

Whistle blower policy: Yes, in place to deter and detect misconduct

Source: Company

Appendix III: Corporate Social Responsibility

Table 1: Corporate Social Responsibility matrix

Company Emami Marico Dabur HUL Godrej Consumer

Products Ltd

CSR

areas

Women

Empowerment

Education

Healthcare

Community

welfare

Innovation

Rural

development

Environment

Health and

Hygiene

Community

Welfare

Water

Healthcare

Rural

Development

Environment

Education and

Children

Healthcare

Publish

Sustainability

Report

CSR rating

Foundation for

CSR

The Emami

Foundation

Marico Innovation

Foundation

Sundesh - a

Sustainable

Development

Society

Hindustan Unilever

Vitality Foundation

Pirojsha Godrej

Foundation



13

Appendix IV: Financial Statements and Ratios

Table 1: Income Statement

Y/E March (INR bn) FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

Net Sales 7.66 10.38 12.78 15.51 18.83 22.90

Reported Growth 32.4% 35.5% 23.1% 21.4% 21.5% 21.6%

Geographical Area

Domestic 6.65 9.01 11.04 13.25 15.89 19.07

Reported Growth 29.0% 35.6% 22.4% 20.0% 20.0% 20.0%

Overseas 1.02 1.37 1.74 2.26 2.94 3.82

Reported Growth 60.0% 34.4% 27.5% 30.0% 30.0% 30.0%

Other opreating income 0.13 0.31 0.33 0.63 0.82 1.04

Cost for materials 2.67 3.81 5.23 6.27 7.52 9.04

Advertisement & sales promotion 1.50 1.94 2.31 2.79 3.30 3.95

Manufacturing & admin expenses 2.20 2.18 2.71 3.26 3.96 4.81

EBITDA 1.37 2.41 2.72 3.31 4.18 5.22

EBITDA margins 17.9% 23.3% 21.3% 21.3% 22.2% 22.8%

Net Depreciation 0.08 0.15 0.14 0.17 0.19 0.20

EBIT 1.29 2.26 2.58 3.14 3.99 5.02

EBIT margins 16.8% 21.8% 20.2% 20.2% 21.2% 21.9%

Interest & other charges 0.23 0.21 -0.11 0.01 -0.10 -0.19

Earning before taxes 1.06 2.05 2.69 3.13 4.09 5.21

Tax 0.14 0.35 0.40 0.63 0.82 1.04

Effective tax rate 13.3% 17.2% 15.0% 20.0% 20.0% 20.0%

PAT 0.92 1.70 2.29 2.51 3.27 4.16

Reported Growth 1.9% 84.8% 34.7% 9.6% 30.5% 27.3%

Profit margins 12.0% 16.4% 17.9% 16.2% 17.4% 18.2%

Basic & Diluted EPS (INR) 7.23 11.63 15.12 16.56 21.61 27.52

Avg. number of ordinary shares (mn) 62.1 151.3 151.3 151.3 151.3 151.3

Dividend per share (INR) 3.20 3.51 4.08 4.97 7.56 11.01

Payout Ratio 43.4% 31.3% 27.0% 30.0% 35.0% 40.0%



14

Table 2: Balance Sheet


Source of Funds

Equity Share Capital 0.13 0.15 0.15 0.15 0.15 0.15

Reserves & Surplus 2.88 6.10 6.75 7.48 8.58 10.06

Shareholder's Fund 3.01 6.25 6.90 7.63 8.74 10.21

Total Loans 4.48 2.59 2.29 1.14 0.44 0.00

Deferred Tax Liability 0.06 0.07 0.14 0.25 0.25 0.21

Total Liabilities 7.55 8.91 9.33 9.03 9.42 10.42

Application of Funds

Gross Block 7.07 7.64 7.99 8.60 9.32 10.17

Less: Acc Depreciation 0.94 2.03 3.15 4.34 5.55 6.77

Net Block 6.13 5.61 4.84 4.26 3.77 3.40

Capital Work-in-progress 0.37 0.06 0.06 0.07 0.07 0.08

Investments 0.42 0.60 0.07 0.07 0.07 0.07

Current Assets 2.40 4.26 6.00 6.55 7.87 9.80

Cash 0.14 1.61 2.10 2.17 2.96 4.27

Loans & Advances 0.81 1.07 1.57 1.60 1.60 1.60

Inventories 0.74 0.83 1.23 1.46 1.71 2.01

Total Debtors 0.71 0.75 1.09 1.32 1.60 1.92

Current Liabilities 1.76 1.62 1.65 1.91 2.36 2.92

Net Current Assets 0.63 2.64 4.35 4.64 5.51 6.88

Total Assets 7.55 8.91 9.33 9.03 9.42 10.42



15

Table 3: Statement of Cash Flows


Profit Before Tax 1.06 2.05 2.69 3.13 4.09 5.21

Interest 0.21 0.21 -0.11 0.01 -0.10 -0.19

Depreciation 0.08 0.15 0.14 0.17 0.19 0.20

Change in Working Capital 1.49 -0.53 -1.22 -0.23 -0.08 -0.07

Less:

Other Income -0.20 -0.42 -0.24 -0.18 -0.14 -0.22

Taxes Paid 0.13 0.31 0.33 0.63 0.82 1.04

Cash Flow from Operations 2.6 1.5 1.3 2.6 3.4 4.3

(Inc.)/Dec Fixed Assets -6.00 -0.57 -0.35 -0.61 -0.72 -0.85

(Inc.)/Dec Investments 0.72 -0.18 0.54 0.00 0.00 0.00

(Inc.)/Dec Loans & Advances 1.14 -0.26 -0.50 -0.03 0.00 0.00

Other Investment Income -0.52 0.67 0.69 0.00 0.00 0.00

Cash Flow from Investing -4.66 -0.34 0.37 -0.64 -0.72 -0.85

Equity Added 0.01 3.10 0.00 0.00 0.00 0.00

Inc./(Dec.) in loans 3.19 -1.85 -0.31 -1.15 -0.71 -0.44

Dividend Paid -0.40 -0.53 -0.62 -0.75 -1.14 -1.67

Others -0.70 -0.3824 0.7043 0.00 0.00 0.00

Cash Flow from Financing 2.10 0.35 -1.14 -1.90 -1.85 -2.10

Inc./(Dec.) in cash 0.07 1.47 0.49 0.10 0.85 1.38

Opening Cash Balances 0.07 0.14 1.61 2.10 2.17 2.96

Closing Cash Balances 0.14 1.61 2.10 2.17 2.96 4.27



16

Table 4: Financial Ratios

Y/E March FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

Turnover (X)

Assets 1.31 1.26 1.40 1.69 2.04 2.31

Receivables (days) 34 27 31 31 31 31

Inventory (days) 101 79 86 85 83 81

Per share Data (INR)

EPS 7.23 11.63 15.12 16.56 21.61 27.52

DPS 3.20 3.51 4.08 4.97 7.56 11.01

Book Value 24.24 41.33 45.60 50.44 57.74 67.50

Profitability Ratios (%)

EBITDA Margin 17.9 23.3 21.3 21.3 22.2 22.8

EBIT Margin 16.8 21.8 20.2 20.2 21.2 21.9

Net Profit Margin 12.0 16.4 17.9 16.2 17.4 18.2

Return on Assets 15.7 20.6 25.1 27.3 35.5 42.0

Return on Equity 31.2 36.6 34.8 34.5 40.0 43.9

RoCE 19.3 23.2 24.8 27.4 34.6 40.5

Solvency (X)

Net debt to equity 1.49 0.41 0.33 0.15 0.05 0.00

Net debt to EBITDA (%) 327.36 107.34 84.35 34.58 10.45 0.00

Liquidity (X)

Interest Coverage 5.66 10.77 - - - -

Current Ratio 1.36 2.63 3.63 3.43 3.34 3.36

Acid Test Ratio 0.94 2.12 2.89 2.20 2.48 2.87

Capex (%)

Capex/Sales 74.99 3.19 3.28 3.93 3.82 3.73

D&A/Capex 1.45 46.59 33.44 28.26 25.93 23.85



17

Appendix V: Competitive Landscape

Figure 1: Stock Prices of Industry Players

Emami has outperformed its peers consistently

Source: BSE

Figure 2: Competitive Map

Competitors positioning w.r.t. EBITDA margin, RoCE, annual sales

Source: Company,Capitaline database, Student Research

Figure 3: Sales Growth YoY

Emami has highest sales growth among its peers

Source: Company,Capitaline database

0

50

100

150

200

250

300

350

400

01-Apr-08 01-Oct-08 01-Apr-09 01-Oct-09 01-Apr-10 01-Oct-10 01-Apr-11

BSE FMCG BSE Sensex EMAMI Marico HUL Dabur

Amrutanjan

Hindustan

Unilever Ltd

Dabur India Ltd

Emami Ltd

Marico Ltd

0%

5%

10%

15%

20%

25%

0% 20% 40% 60% 80% 100% 120%

EB

ITD

A M

arg

in

RoCE

Size- Annual sales

11.8% 15.2%

12.7%

22.3%

46.9% 18.3% 30.3% 25.3%

-15.7%

20.5%

35.5%

11.3% 11.6% 20.3% 23.1% 17.6%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Hindustan Unilever Ltd Dabur India Ltd Emami Ltd Marico Ltd

FY2008 FY2009 FY2010 FY2011


18

Figure 4: Net Profit Growth YoY

Emami has highest net profit growth among its peers

Source: Company,Capitaline database

Table 1: Comparative Financial Analysis

Emami’s growth and margins are the highest among its peers

Mar 11 (INR bn) Emami Dabur HUL Marico

Market Cap 65.78 178.90 732.83 89.20

Sales 12.77 32.64 193.81 23.46

PAT 2.28 4.62 20.96 2.68

Growth 3 yr. CAGR (FY08-11)

Sales 28% 16% 12% 14%

EBIT 36% 17% 8% 28%

PAT 34% 14% 6% 30%

Margins

Gross Profit Margins (%) 58 52 49 49

EBITDA Margins (%) 21.3 19.6 15.6 15.9

Dupont

EBIT Margins(%) 20.2 18.49 14.1 14.4

Interest Burden (x) 1.05 0.96 1 0.92

Tax Burden (x) 0.85 0.8 0.8 0.8

Net Profit Margin (%) 17.9 14.2 11.28 10.6

Asset Turnover 1.4 2.4 7.4 1.6

RoA (%) 25.1 34.1 83.5 17

Leverage 1.33 1.5 1 2.1

RoE(%) 34.8 51.1 83.5 35.6

Source: Company,Capitaline database, Student Research

1.3%

18.3%

36.2%

49.8%

30.8%

17.1% 1.7% 11.6%

-13.8%

28%

85%

24%

6.6%

14%

35%

25%

-20%

0%

20%

40%

60%

80%

100%

Hindustan Unilever Ltd Dabur India Ltd Emami Ltd Marico Ltd

FY2008 FY2009 FY2010 FY2011


19

Appendix VI: Emami’s Performance

Figure 1: Emami’s sales performance Figure 2: Emami’s profitability graph Projected sales figures for the company Presents the EBITDA margin of the relevant years


Figure 3: Emami’s cash position and capital expenditure Figure 4: Emami’s Return Ratios Company strong enough to look out for inorganic growth opportunity Increasing trend in return ratios


Figure 5: Emami’s financial performance Figure 6: Emami’s operational performance Highlights wealth generation and profit margin Highlights cash flow from operations and RoCE


0%

10%

20%

30%

40%

0

5

10

15

20

25

FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

Domestic (bn) Overseas (bn) YoY Growth (RHS)

0%

5%

10%

15%

20%

25%

0

1

2

3

4

5

6


EBITDA (bn) EBITDA Margin (RHS)

-6

-4

-2

0

2

4

6

8


FCFF (bn) Capex (bn)

31.2%

36.6% 34.8% 34.1%

39.7%

43.9%

19.3% 23.2% 24.8%

26.7%

33.9%

39.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


RoE RoCE

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0


EVA (bn) EBIT Margin (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

1

2

3

4

5


OCF (bn) RoCE (RHS)


20

Appendix VII: DCF Assumptions

DCF Model:

We have used a three stage DCF model with different assumption for each stage. The first stage or the analytic stage of the DCF spans over

FY2012 to 2014 wherein sales grow annually at 20% and 30% for domestic and overseas business respectively. Next we assume a

convergence stage, or second stage, in which we assume decreasing sales growth rates for both domestic and export business over a

ten year period. The path followed is a linear decay that links the last growth rate of the analytic period to the terminal growth rate of the

perpetuity that follows. The terminal growth rate is fixed at 5% for both domestic and overseas business areas, which is slightly less than

the risk free rate assumed. The average weight of the terminal values is approximately 52%.

Weighted Average cost of capital

We have estimated the target debt to equity ratio as 0 as the company has strong cash flows from operation which the company will use to

retire debt if they don’t find any inorganic growth opportunity. We have estimated a different WACC for the first two stages of DCF and a

different WACC for perpetuity stage. The main source of difference is the country risk premium which is expected to decrease in terminal

stage as the Indian market matures. The different assumptions are outlined below:-

Current Terminal Rationale

WACC 13.80% 12.30% Estimation

D/E 0 0 Target Debt/Equity Ratio stated by Emami

Cost of Equity 13.80% 12.30% Cost of Equity different for current and terminal period

Risk Free Rate 5.90% 5.90% Yield of 10 Yr. Indian bond less the default spread of Indian bonds (Source:

RBI, http://rbi.org.in/; Damodran, http://pages.stern.nyu.edu/~adamodar/)

US Equity Risk Premium 5.40% 5.40% Expected Risk Premium of US markets (Source: Damodran,

http://pages.stern.nyu.edu/~adamodar/)

Country Risk Premium 3.60% 1.9% Country's default spread adjusted for equity market volatility (Source:

Damodran, http://pages.stern.nyu.edu/~adamodar/)

Beta (β) 0.88 0.88 Estimated by regressing monthly returns of Emami stock against the BSE

Sensex over the last 5 years (Source: BSE, http://www.bseindia.com/)

Taxes

Emami currently comes under Minimum Alternate Tax (MAT) as 80% of company’s production is sourced from the units enjoying fiscal

benefits. We expect a tax rate of 20.01% (MAT rate, inclusive surcharge of 5%) over the next 3 years because the goodwill that emanated

with Zandu’s acquisition will be amortized over the next 3 years. After 3 years, we assume an effective tax rate of 25% in the convergence

stage of DCF. This is a conservative estimate as the average tax rate in industry is about 20%. In the perpetuity, we assume Emami to pay

at the marginal tax rate of 32.45% (inclusive surcharge of 5%).


21

Appendix VIII: Emami’s Products

Figure 1: Personal Care Products Penetration in India Low penetration in segments of Emami’s products indicates long term growth


Table 1: Product Launches

2008 2009 2010 2011 2012

Malai Kesar

Cold Cream

Navratna

Extra Than da

oil

Boroplus

Winter

Lotion

Emami

fast relief

max

Emami 5 in 1

Shampoo

National Launch

Emami

Hairlife

instant

Boroplus

summer lotion

Navratna

Cool

Talc

Sandal

Variant

Boroplus

intensive

skin

theraphy

cream

National

launch of

Baby care

products

Navratna Oil

Lite

Pureskin

glycerine

soap

INR 10

SKU of

Navratna

Oil

Boroplus

healthy &

fair winter

cream

Emami Coconut

cool oil

Navratna cool

talc Active

Deo

Vasocare

petroleum

jelly

1.2 ml

SKU of

Menthoplu

s balm

Malai

Kesar

Soap

Emami Sunscreen

lotion National

launch

Boroplus

triple action

light

moisturising

lotion

Fast relief

ultra-fast

formula

Test

Market

Malai

kesar

soap

1.2 ml

SKU of

Zandu

Balm

Entry into the

Food Segment

Source: Company

95.6% 92.3%

88.6%

74.2%

64.3%

55.7% 51.6%

17.1% 16.5%

1.7% 1.3%

0%

20%

40%

60%

80%

100%

120%

Toilet Soap Washing

Powders

Detergent

Bars

Hair Oil Toothpaste Shampoo Talcum

Powder

Fairness

Cream

Cool Hair

Oil

Antiseptic

Cream

Cold Cream


22

Table 2: Emami Product’s Competitive Positioning

Brand Name Position in

Category

Revenues Market Share

Competition INR

bn

% of total

% Relative(Emami/

Largest Competitor)

Boroplus Antiseptic Cream

1 1.95

16 75 3.13 Boroline

Navratna Cool

Talc

2 0.41 3

13 0.43

Ponds, Dermi

cool

Navratna Oil

1-Cooling Hair oil

2.84 18

49 2.10

Himgange,

Rahat Rooh

4-Hair Oil

6 0.19

Fair and

Handsome

1 1.26

9 60 4.62 Fair and Lovely Menz Active,

Nivea for Men

Himani Fast

Relief

NA 0.36 2

9

N NA A Moov, Iodex

Zandu Balm 2.05 42

Tiger Balm, Amrutanjan,

Monison's Balm

1 19

57% 2.19

Mentho Plus Balm

0.74 15

Sona Chandi

Chyawanprash

3 0.19 3

8 0.21

Dabur,

Baidyanath

Zandu

5

Source: Company (FY 2011)

57


23

Figure 2: Boroplus Antiseptic Cream Figure 3: Navratna Cool Talc Market leader and still growing at a high rate Recently launched and growing at a very high rate


Figure 4: Navratna Oil Figure 5: Fair and Handsome Market leader in cool oil category and still growing Market leader and still growing at a high rate


Figure 6: Zandu and Mentho Plus Balm Market Share Figure 7: Zandu and Sona Chandi Market Share Market leader after the acquisition of Zandu Dabur chyanprash giving tough competition


14%

19%

11%

15%

9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

67%

68%

69%

70%

71%

72%

73%

74%

75%

76%

FY2007 FY2008 FY2009 FY2010 FY2011

Market Share Growth Rate YOY (RHS)

101%

105%

99%

100%

101%

102%

103%

104%

105%

106%

0%

2%

4%

6%

8%

10%

12%

14%

FY2010 FY2011

Market Share Growth Rate YoY (RHS)

19%

12%

-5%

11%

20%

-10%

-5%

0%

5%

10%

15%

20%

25%

46%

47%

48%

49%

50%

51%

52%

53%

FY2007 FY2008 FY2009 FY2010 FY2011

Market share Growth Rate YoY (RHS)

56%

22%

48%

27%

11%

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY2007 FY2008 FY2009 FY2010 FY2011

Market Share Growth Rate YoY (RHS)

43% 42%

15% 17% 18%

18% 15%

0%

10%

20%

30%

40%

50%

60%

70%

FY2007 FY2008 FY2009 FY2010 FY2011

Zandu Balm Mentho Plus Balm

9% 10% 9% 8% 8%

8% 8%

7%

5% 5%

0%

5%

10%

15%

20%

FY2007 FY2008 FY2009 FY2010 FY2011

Zandu Sona chandi


24

Figure 8: BCG Matrix Emami’s products relative market shares and growth potentials


Appendix IX: SWOT Analysis

Strengths Weaknesses

Strong brand equity by positioning Unable to hike price in LUP segment

Research and Development has helped it being 'Category

creator’

Lack of product variants in fairness cream market

Significant marketing costs due to increased

Wide reach of distribution network into Indian hinterland competition

Lower operational costs by operating in Tax free zones

Opportunities Threats

Variant price points and brand extensions Changes in import-export regulations leading to

increased competition Increase in purchasing power of rural consumers

Growing consumer consciousness for ayurvedic products Changes in tax structure

Low penetration in rural areas Seasonality of products and counterfeit goods

Rising costs of fuel, packaging material and basic raw

materials like Mentho, LLP



25

Appendix X: Montecarlo Volatility Analysis

On the basis of the main risks presented in the report, we performed Montecarlo simulation assigning probability distributions with given

variance to some of the parameters in the DCF model. The parameters considered for Montecarlo simulation are terminal growth rate in

domestic and overseas market, terminal WACC and COGS/Sales. The terminal growth in overseas and domestic market presents downside

risk as lesser than expected growth can result in a reduced target price. COGS/Sales and Terminal WACC present upside risk to the target

price. They have been modeled with lognormal distributions. The variance of each distribution is computed on the basis of assumptions on

the magnitude of each specific risk. The principal assumptions of the analysis are reported in the following tables.

Risk Distribution Mean Std. Dev. Comments

COGS/Sales Log-normal 40% 1.5% Upside risk due to increase in raw materials prices and packaging cost

Terminal WACC Log-normal 12.3% 0.5% Upside risk as increased WACC will lead to lesser than expected target

price

Terminal Growth

Domestic Normal 5% 1% Risk due to slowdown of domestic FMCG industry

Overseas Normal 5% 2% Risk due to failure of internationalization strategy and political uncertainty

in some international markets

The results of 2000 iterations of Montecarlo simulation are presented below:-

Descriptive Statistics of Target Price (INR)

Mean 511

Std. Dev. 29

Minimum 418

First Quartile 483

Median 502

Third Quartile 524

Maximum 632

Appendix XI: Frequency Distribution

Figure 1: Frequency Distribution of Emami’s Stock Price from 1st April 2010 to 15th September 2011

Source: BSE

17

25

8

16 14

21

36

29

39

25

54

28 24

22

9

0

10

20

30

40

50

60

316 329 342 356 369 383 396 409 423 436 449 463 476 490 503

Nu

mb

er o

f occu

ren

ce

Share price range


26

Appendix XII: Peer Comparison

Table 1: Emami’s PE multiple is in line with the industry average


Appendix XIII: Sensitivity Analysis

Table 1: Sensitivity Analysis Table 2: Sensitivity Analysis

Based on terminal WACC and terminal growth rate Based on COGS/sales

Terminal WACC

Terminal

Growth

Rate

11.5% 12% 12.3% 13% 13.5%

4% 509 492 483 464 482

4.5% 529 509 499 478 464

5% 551 529 516 493 478

5.5% 578 552 538 510 493

6% 609 578 562 530 510


Comparable Peers P/E EV/EBITDA

Emami Ltd. 31.6 23.9

Dabur India Ltd. 37.5 27.8

Hindustan Unilever Ltd. 30.5 22.6

Marico Ltd. 30.6 22.8

Average Multiples

Domestic Peers Average 32.8 24.4

COGS/sales Intrinsic Value

+1% 493

+2% 505

-1% 529

-2% 541


27

Appendix XIV: Google Trends

We searched for Emami’s brands in each product category with their respective competitor brands to gain an insight into the popularity of

its brands in their respective category. The results have been measured region-wise (state based) to find out the popular brand in each

category.

Zandu, Amrutanjan Navratna, Rahat Rooh, Himgange

For other brands, data was insufficient to perform any significant trend analysis. To study the brands that define Emami, we performed an

inter-brand comparison within India and other countries. It can be inferred from the Google trends result that ‘Navratna’ and ‘Zandu’ are

the brands that add the maximum ‘Brand Equity’ to the Emami name and after India, UAE is the second most searched country for

Emami’s products.

Zandu, Navratna, Boroplus, Fair and Handsome

Description: Google Trends analyses traffic of web searches on ‘Google’ and provides data that is based on a comparison of number of

searches done for the keywords you entered, relative to the total number of searches that have been done on Google over time. Trends

display the top regions, cities, and languages in which people searched, and can be used as a measure of popularity and awareness.


Zandu outperforms its competitors in most of India (except in

the South). The brand, made famous by the movie ‘Dabangg’,

continues to beat all other brands comprehensively both in

Search and News reference index.

Navratna oil was very well acclaimed across all regions. On a

similar note, Boroplus beats Boroline by a very huge margin.


28

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.

The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…]

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does [not] act as a market maker in the subject company’s securities.

Ratings guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.

A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over

the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but

the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of

an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA

Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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