ayurvedically hedged rs. 434 rs. 502 despite large fmcg...

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

1

Stock performance (%)

1m 3m 12m

Emami -7% -10% 11%

Sensex 5% 4% 18%

BSE FMCG 7% 6% 18%

Financial summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) ROE (%)

FY14E 18,738 4,417 3,899 17.4 25.0 43.5%

FY15E 21,781 5,215 4,679 20.6 21.1 40.4%

FY16E 25,294 6,132 5,422 23.9 18.2 37.0%

Initiating Coverage – Ayurvedically hedged

Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset

Date Mar 27, 2014

Market Data

SENSEX 22055

Nifty 6584

Bloomberg HMN IN

Shares o/s 227mn

Market Cap Rs. 98bn

52-wk High-Low Rs. 540-380

3m Avg. Daily Vol Rs. 76mn

Index member BSE 200

Latest shareholding (%)

Promoters 72.7

Institutions 18.7

Public 8.6

Tejash Shah

[email protected]

+91 22 4228 8155

Gnanasundaram S

[email protected]

+91 44 4344 0062

Initiating Coverage Despite large FMCG players still struggling to come to terms with the evolving Indian consumer, players like

Emami(HMN) had brilliantly decoded the Indian consumer ‘needs and wants’ more than two decades earlier.

Emami has not only managed to sustain market leadership against the strong, cash rich MNC/domestic

counterparts but also managed to pioneer various niche categories in India. Determined to take the otherwise

premium Ayurvedic/herbal formulation to a mass platform, HMN ventured into categories that were low in

penetration and high in margins. The Ayurveda/herbal platform enabled them to offer innovative and niche

products that were devoid of high competitive intensity. Another notable growth propeller has been effective

use of celebrities in brand promotions. Further, clearly understanding on how to market to the mass end of the

consumer pyramid, HMN unleashed heavy celebrity endorsement on several of their brands. Over the years, the

combination of right products and integrated marketing has enabled HMN to develop a well diversified portfolio

with strong leadership in several under penetrated categories guarding them well against any volatility.

Penetration potential in the key categories, brand extensions of the power brands and growth opportunity in the

Zandu portfolio, keeps us excited on ‘Ayurvedically hedged’ Emami. We initiate coverage with a BUY rating and

a Target Price Of Rs. 502 (16% upside to CMP, ~21x FY16E EPS)

Investment rationale

• Low penetration in the key categories: Emami has built strong brands around categories that have minimal

penetration and have immense potential to become large. Diversifying into new unexplored categories backed by strong

celebrity endorsements have enabled HMN to maintain market leadership in these categories despite competitive

intensity inching up. We believe HMN would be the key beneficiary as these niche categories expand to become larger

propositions.

• Brand Extensions: HMN currently has 4 power brands in Navratna, Boroplus, Zandu and Fair & Handsome. With

these brands having become household names, we believe brand extension opportunities into complementing

categories presents an exciting growth opportunity.

• Zandu Portfolio: The acquired Zandu portfolio came with the immense growth and brand extension opportunities.

Strong Ayurveda platform of HMN coupled with Zandu brand should enable HMN to command a significant presence in

the niche herbal OTC market.

• Inorganic Growth opportunity: Armed with Rs.~5bn cash in hand, HMN is well placed to scout for inorganic growth

opportunities and also assures a healthy dividend payout in the interim.

mailto:[email protected]

mailto:[email protected]

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

2

Executive Summary

Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset

Corporate Factsheet

Company Background

Emami commenced its operations in 1974, when Mr.RS Agarwal and Mr.RS Goenka set up a cosmetics manufacturing

unit in Kolkata, as a partnership under the name of Kemco Chemicals. Kemco acquired the ailing Himani Ltd, another

cosmetics and toiletries company based in Kolkata, in 1978.

Kemco changed its name to Emami Ltd in 1995, and merged with Himani in 1998. Emami Ltd was a private company until

2004, when it went public. In October 2008, Emami Ltd acquired a controlling stake of 65% in Zandu Pharmaceutical Works

Ltd, and in June 2009 Emami Ltd merged Zandu Pharmaceutical into itself, adding to its portfolio Zandu’s brands viz. Zandu

Balm, Zandu Chyawanprash and Kesari Jivan.

Presence Pan India presence with ~3000 distributors, ~5600 sub-distributors and ~4mn retailers.

250 products sold in over 60 countries internationally

Management depth

Promoter Directors:

Sri R. S. Agarwal, Sri R. S. Goenka, Sri S. K. Goenka, Sri Mohan Goenka, Sri A. V. Agarwal, Sri H. V. Agarwal, Smt. Priti

Sureka

• Independent Directors:

Sri K. N. Memani, Sri Y. P. Trivedi, Sri P. K. Khaitan, Sri Amit Kiran Deb, Sri S. B. Ganguly, Vaidya Suresh Chaturvedi, Sri

Sajjan Bhajanka,

Corporate Structure

As of March 2013, Emami had five subsidiary companies: (1) Emami UK Ltd [100% holding], (2) Emami Bangladesh Ltd

[100% holding], (3) Emami International FZE [100% holding], (4) Emami Overseas FZE [100% holding], (5) Pharma Derm S

A E Co, Egypt [90.6 % holding],

Revenue Model Domestic – 84% ; International – 11% & CSD – 5%

Key Success Factor Mass Positioning - affordable and everyday use offerings.

Billion Rs. Brands Boro Plus, Zandu Balm, Himani Navratna, Emami Fair & Handsome

Manufacturing Facility 7 manufacturing facilities situated across India in addition to one in Bangladesh.

International Operations 45% SAARC, 20% GCC, 13% CIS, 9% Africa, 14% Others

Employees ~2500 as on March 31, 2013

Credit Rating Rated PR1+ (by CARE) - highest rating for short term borrowings.

CARE AA+ Rating for long term borrowings

Corporate Bankers Canara Bank, ICICI Bank Ltd., State Bank of India, HDFC Bank, HSBC

IPO Bankers AnandRathi

Auditors M/s. S.K. Agrawal & Co2

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

3

1974

1978

1984

1989

1992

1995

1998

1999

2002

2005

2005

2007

2008

2009

2010

2014

Mr.RS Agarwal and Mr.RS Goenka set up Kemco chemicals

Acquires Himami ltd, 100 year old company with strong brand equity in East India

First flagship brand Boroplus Antiseptic Cream under the Himani

Navratna Cool Oil came in the late eighties under the Himani Umbrella.

Taking one step at a time Emami went overseas.

Kemco Chemicals, partnership firm converted into Public Limited Company as Emami Ltd

Emami Ltd was merged with Himani Ltd and its name was changed to Emami Ltd

Launch of Sona Chandi Chyawanprash with high decibel celebrity endorsement promotions

First time in brand history that an endorser co-owns a brand. ‘Beauty secrets by Madhuri’ range

IPO - Lists on the BSE, raises Rs. 350mn.

Created a completely new category by introducing India’s first men’s fairness cream

Emami extends the Boroplus brand to Cool talc, Paras and Heinz other players in the segment

Emami concludes takeover of Zandu, acquires 72.8%, Zandu Business restructured, Zandu healthcare division

merged with Emami

Raises Rs. ~3bn through FPO

Starts its first ever offshore manufacturing unit in Bangladesh.

Extends Fair & Handsome into face wash segment

Emami – Timeline

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

4

Emami’s key strength has been its strong power brands

Source: Company, Spark Capital Research

7 production facilities in India and One in Bangladesh


Emami – Domestic Operations

Kolkata,

West Bengal

Vapi,

Gujarat

Pantanagar,

Uttarakhand

Silvassa,

Dadar &

Nagar

Haveli

Talasari,

Maharashtra

Guwahati,

Assam (2

facilities)

Brands

Power Brands (~70%

of revenues)

Healthcare

portfolio (~4% of

revenues)

Others (~26%

revenues)

1. Navratna

cooling oil

2. Boroplus

Antiseptic

cream

3. Emami Fair &

Handsome

4. Zandu & Mentho

balm

1. Zandu Vigorex,

2. Zandu Lalima

3. Zandu

Pancharrishta

4. Zandu Nityam

1. Navratna Cool

talc

2. Boroplus Cool

talc

3. Fast relief

4. Chyawanprash,

5. Malai Kesar

6. Boroplus Lotion

7. Vasocare cream

Emami’s key strength has been its strong power brands


1999 2000 2005 20071982 1983 1987 1989

Boroplus

Antisepti

c cream

Fair &

Handsom

e

Chyawan

prash

Zandu &

Mentha

balm

Boroplus

Powder

Navratna

Cool talc

Fast

Relief

Navratna

Cooling

hair oil

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

5Source- Company, Spark Capital Research

Boroplus

Antiseptic

Cream

Revenue

Share ~17%

Antiseptic CreamCategory

Rs.~36bnMarket size

GD Pharma,

Reckitt

Benckiser, J&J

Competitor

High, minimal

RM impact

Pricing

Power

Boroline,

Itchguard

Competitor

brands

~16%FY10-13

Value CAGR

~74%Market share

Fair &

Handsome

~10%

Mens Fairness

cream

Rs.~33bn

Hindustan

Unilever, L’Oreal,

Beiersdorf

Low, Intense

competitive

scenario

Fair & Lovely

Men, Garnier

Men, Nivea Men

~19%

~58%

Navratna Cool

talc

~4%

Prickly Heat

Powder

Rs.~43bn

Heinz, Reckitt

Benckiser

Low, Intense

Competitive

scenario

Nycil, Dermicool

~50%

~18%

Emami Fast

Relief

~1%

Pain relief

Rs.~100bn

GlaxosmithKline

consumer,

Amurtanjan

High, Minimal

RM impact

Iodex,

Amurtanjan

~9%

~4%

Zandu

Healthcare

~4%

OTC,Ethical

na

Dabur

High

Dabur

na

na

Emami – Domestic Operations

Navratna Oil

~25%

Cooling hair Oil

Rs.~81bn

Himgange,

Marico

High

Thanda Tel,

Coconut cooling

~21%

~55%

Zandu Balm

and Mentho

plus

~17%

Pain Balm

Rs.~70bn

GlaxosmithKline

consumer,

Amurtanjan,

High

Iodex,

Amurtanjan

~19%

~58%

Power Brands

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

6

Volume

Offtakesf

Growth – function of (f) Weightage Outlook

f

Low penetration

Niche categories

f

f

f

f

E

M

A

M

I

r

e

v

e

n

u

e

g

r

o

w

t

h

d

r

i

v

e

r

s

Mix

improvement

Increasing usage

Brand Recall

Market leadership

Low MNC

competition

f

f

f

Source: Spark Capital Research- Negative- Strong - Weak - Positive - Neutral

Pricing power

f

Emami – Revenue drivers

f

Most of the categories where HMN operates are of low penetrated, offering the huge

category growth potential.

f

Increasing usage via distribution increase to also lead to category growth.

HMN’s strong market leadership in power brand categories provides them with the

strong pricing power leading to value growth.

Majority of the categories that HMN operates have minimal MNC competitive threat

Increasing contribution from niche categories which have higher margins

Plethora of celebrities endorsing various brands have given HMN brands a strong

recall and pricing power

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

7

Input Costs

(~42% of

sales)f

Margin – function of (f) Weightage Outlook

f

Mentha oil

Employee cost

f

f

f

f

E

M

A

M

I

M

a

r

g

i

n

d

r

i

v

e

r

sOther

Operating

expense

(~21% of

sales)

Others (LLP,

HDPE)

Other Operating

expenses

Support to new

launches

Promotional

expenses

f

f

f

Source: Spark Capital Research- Negative- Strong - Weak - Positive - Neutral

A&P

expenses

(~16% of

sales)f

Emami – Margin drivers

f

Mentha oil prices are expected to be subdued given the low demand pressure for

menthol

f

Other raw materials are expected to slightly increase in the near term

Advertisements to support forthcoming launches to pressurise margins.

Promotional expenses and discount to distributors to remain in control.

Employee cost as a % of sales to remain constant

Minimal scope for operating leverage

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

8

Drivers of Future Growth

Source Spark Capital

Emami, has made

its intentions clear

by staying in niche

portfolios that

have tremendous

growth

opportunities

given their lower

penetration and

increasing

preference

towards herbal

formulations.

Further brand

extensions to

complimentary

categories to

assist growth.

V

o

l

u

m

e

O

f

f

t

a

k

e

P

r

I

c

i

n

g

P

o

w

e

r

Emami assumes

market leadership

position in the key

categories it

operates in, Most

of the categories

they operate

attracts minimal

MNC competition

too. Hence

assisted by strong

brand led market

leadership and low

competitive

intensity, Pricing

power in key

categories

remains strong.

Category Expansion in power brand categories

Brand Extension

power brands

Zandu Portfolio growth

# 1 Diversified

portfolio

# 2 Market

leadership in

power brands

enabling

extension

# 3 Clever and

conservative

strategy in

shaping growth

# 4 Attracting

least

competition

from MNCs

Strong economic moat in the existing business

model

# 5 High A&P

outlay backed by

celebrity

endorsements

# 6 Healthy cash

generation

enabling

inorganic growth

opportunities

=

Emami – The Success Formula

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

9

#1 Diversified Portfolio - Young, contemporary yet mass appealing

…leading to power brands contributing ~70% of revenues


Growth to be a Penetration led opportunity in power brand

categories to be a key long term growth driver


New markets have been the way until now, diversifying offerings…


95.7% 92.3% 88.6%

74.5% 72.8%

60.4%51.0%

28.0%18.6%

1.6% 1.1%

0%

20%

40%

60%

80%

100%

So

ap

Wash P

ow

der

Dete

rgent

Hair O

il

To

oth

paste

Sh

am

poo

Ta

lcum

Pow

der

Coolin

g H

air O

il

Fa

irness C

ream

An

tiseptic C

ream

Cold

Cre

am

Jack of all trade; Master of all trade

Emami holds a unique portfolio of brands that caters to the needs of

the urban and rural consumer alike.

Many of the brands are positioned to address niche needs with roots

of herbal in it, making them instantly attractive and mass appealing.

Association with herbal platform has given the brands a massive trust

appeal.

With brand risk spread across product baskets, we believe that HMN

is well hedged to cover any category specific slowdown.

Given that penetration is low in most of the categories it operates in,

strong category led growth to be a major revenue driver in long term.

With no brand commanding disproportionate revenues share, we see

that HMN brand risk is minimal in case of catastrophic developments

in any particular category.

Existing brand New brand

Pre

sent

mark

et

Market penetration Brand Development

New

Mark

et Market Development Diversification

Navratna oil25%

Zandu and mentho plus balm

17%

Boroplus antiseptic

17%

others 15%

International business

11%

Fair and handsome10%

Navratna talc4%

Himani Fast relief1%

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

10

#2 Strong market leadership - Innovative launches enabled edge

Number of players occupying 2/3rd market share in power brand

categories limited indicating the strength of the brands


No threat to the leadership status in power brand categories,

despite competition intensifying off late


Strong market leadership in niche categories


First come; strong leadership

With HMN being the category innovator in most of their key categories,

HMN holds an unassailable market leadership in these categories.

The strong leadership has also dissuaded several plyers from entering

the category acting as a strong entry barrier.

Even in categories where MNCs have shown tremendous interest,

HMN has displayed strong market resilience to protect its turf.

The niche proposition has not only limited competition but also given

HMN unlimited pricing power.

74%

55% 58% 58%

18%

4%29%

30% 30%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

BoroplusAntiseptic

Cream

Navratna Oil Fair &Handsome

Zandu & MenthaBalm

Navratna CoolTalc

Emami Competitor 1

1

2 2

3 3

0

1

2

3

4

BoroplusAntiseptic


Zandu & MenthaBalm

Navratna CoolTalc

74%

55% 58% 58%

18% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

BoroplusAntiseptic


Zandu &Mentha Balm

NavratnaCool Talc

Emami FastRelief

1 53111

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

11

#2 Strong market leadership - enabling category extension

Given the strong brands, diversification opportunities galore

Source: Spark Capital Research

Strong brands present exciting category

extension story

Emami has created plethora of strong

brands assisted by high A&P. Emami, a

company with one of the highest spending

behind celebrity endorsement, has created

strong grass root level recall for its brands.

The brands now having become household

name across, these brands present exciting

opportunity to expand into complementing

categories.

We have already witnessed Boroplus being

extended to cold creams and Fair &

handsome brand being extended into face

washes.

Though we do remain apprehensive of

management being cautious to rapid

expansion fearing intense competitive

scenario, we acknowledge that the brands

have nevertheless evolved to being

associated with more than single category.

The acquired Zandu brand too promises

exciting opportunity given its niche presence

in the Indian OTC market.

Boroplus Navratna Chywanprash Fair &

Handsome Zandu

Antiseptic

cream

Cold cream

Moisturizer

Heel repair

Sunscreen

Antimark

cream

Cooling Hair

Oil

Cooling talc

Talcum

powder

Light hair oil

Deodorant

Styling Gel

Fairness

cream

Face wash

Shaving

cream

Aftershave

lotions

Facial masks

Face scrubs

Pain Balm

Headache

solution

Cough

medications

Cold

treatments

Digetive

capsules

Herbal syrups

Wellness

Adult

Nutritional

drinks

Digestive

candy

Categories HMN

is already

present in

Potential

categories

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

#3 Clever & Conservative strategy - Mass offerings leveraging Herbal/Ayurvedic platform

12

EmamiInnovative

and Effective products

High Margins

Low Competitive

IntensityLow

penetrated categories

Niche Product

Categories

Leveraging Ayurvedic/herbal platform Marketable mass priced offerings

We see that Emami has always preferred

launching offerings where competition was

least or the category was unexplored.

This diversification strategy has enabled

them to cement strong and innovative

brands which provide huge margin leverage

as competitive intensity in these categories

generally tend to remain minimal.

Key to Emami’s success has been offering

niche/herbal ayurvedic products at mass

price points. Throwing open a new mass

herbal market.

As consumer needs have started turning

niche and herbal, Emami portfolio is all set

to benefit from this shift in consumer pattern

towards premium and healthy offerings.

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

13

#4 Avoiding the clash with the Titans

Minimal threat from MNC FMCG players; Strategically, David is avoiding the Goliath

Brand

Contribu

tion to

revenue

Market

share

Key

segments

Market Share (%)

Reckitt

Benckiser

Hindustan

UnileverL'Oreal Beiersdorf Heinz Amway J&J GSK

Boroplus

Antiseptic~17% 74.0% Antiseptic Cream 4% - - - - - 2% -

Navratna Oil ~25% 55.0% Cooling Oil - - - - - - - -

Fair &

Handsome~10% 58.0%

Mens Fairness

Cream30% 5% 2% - - - -

Zandu Balm &

Mentha balm~17% 17.0% Analgesics 11% - - - - - - 15%

Navratna Cool

Talc~4% 18.0%

Prickly Heat

Powder30% - - - 35% - - -

Emami Fast

Relief~1% 4.0% Analgecis 11% - - - - - - 15%

Emami

Vasocare lip

cream

~1% 0.1% Lip Care - 30% 13% - - - - -

Malai Kesar

Cold cream~1% 1.5% Body Moistruizer - 50% - 4% - 14% - -

Boroplus

Advanced

moisturizer

~1% 3.0% Body Moisturizer - 50% - 4% - 14% - -

Sona Chandi

Chywan Prash,

Kesar Jivan &

Zandu

~5% 4.0%Dietary

Supplements- - - - 8% 19% - -

Source: Company data, Industry Source & Spark Capital research

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

14

…in % of A&P spend to sales, HMN ranks the highest.


Despite A&P spends as a % of sales rationalizing off late…


Innovative, attractive and creative proposition on the forefront


Celebrity endorsement has been a key factor driving brand recall


Movie marketing – Rajesh Khanna acts as Emami CEO in the movie Agar Tum Na Hote in 1980s (One of the first few movie co-branding initiatives)

First time in brand history that an endorser co-owns a brand. ‘Beauty secrets by Madhuri’ range

Launches Fair & Handsome, India’s first fairness cream for men with Shah Rukh Khan as its brand ambassador

Superstar Amitabh Bachan, roped in to market all its Ayurveda brands, Amitabh and Ayurveda seemed to be a match made in heaven.

Roping in regional superstars for promotion of brands in the regions, Actor Surya in Tamil Nadu and Chiranjeevi in Andhra Pradesh

Ropes in Pt. Biju Maharaj and Milkha Singh for promoting Zandu KesariJivan

2.8

32.9

4.9

8.46.0

7.8

1.0 0.9

16.4%

12.2%

15.5%

13.6%13.0%

12.2%

8.6%

14.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

5

10

15

20

25

30

35

Emami HUL Colgate Dabur Marico GCPL JyothyLabs

BajajCorp

% o

f sale

s

Rs.b

n

A&P expenses % of sales

#5 Steady commitment to brands- High A&P spend ensuring the market edge

Product Celebrity Endorsing the brand

Navratna Cooling Hair OilAmitabh Bachan, Shahrukh Khan, Mahesh Babu, Surya,

Jr.NTR

Boroplus Antiseptic cream Sonakshi Sinha, Amitabh Bachan, Kareena Kapoor

Zandu/Mentho BalmMalaika Arora Khan, MS Dhoni, Pt Birju Maharaj,

Jr.NTR, Surya,

Fair & Handsome/ Navratna

talc/ BoroplusShah Rukh Khan

Fast ReliefAmitabh Bachan, Gautam Gambhir, Vijender Singh,

Saina Nehwal, Mary Kom, Sushil Kumar

Chyawanprash Milkha Singh, Shah Rukh Khan

1.05 1.25 1.441.94 2.19 2.29

2.79 2.853.51

3.90

20%22%

19% 19%18%

16% 16%15%

16% 15%

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16e

% o

f sale

s

Rs.B

n

Advertisement & Sales Promotion % of sales

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

15

As mentha oil prices have largely remained subdued

Source: Company data, Spark Capital Research

Gross Margin has stabilized over the past few years


LLP and vegetable oil prices though are slightly on the higher side


Imported raw material minimal, keeping $ related risk low


0

500

1000

1500

2000

2500

3000

Price P

er

KG

Oils & Essential Oils21%

Chemicals & Fats33%

Herbs3%

Tubes & Containers

19%

Other Packing Materials

16%

Others8%

Indigenous 99%

Imported1%

#6 Subdued Mentha Oil prices provide short term margin trigger

2.9 3.44.6

6.6 7.2 8.39.8

11.513.8

15.856.5%

58.8%59.8%

63.3%

58.0% 56.9%

57.9%

61.4%

63.3%62.5%

52%

54%

56%

58%

60%

62%

64%

0

2

4

6

8

10

12

14

16

18


Marg

in (

%)

Rs.b

n

Gross Profit Gross Margin

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

16

#6 Subdued Mentha Oil prices provide short term margin trigger

Mentha Oil Salience

Mentha oil crop sowing season starts during February–March every

year. The crop harvesting is done during May & June.

The manufacture of menthol flakes form de-mentholized oil has been

taken up on a commercial basis by a few firms in Delhi, Mumbai, and

Gujarat. Major Mentha oil markets in UP are Chandausi, Sambhal, and

Barabanki

India is the largest producer and exporter of menthe oil in the world. At

present the major producers of mint oil in the world are India, China,

Brazil and the US.

Area under cultivation is ~0.21mn hectares vs 0.17 last year leading to

increased production of ~60000 tonnes Vs ~50000 last year, Despite

increased demand from pharmaceutical industries, average

consumption thie year is expected to be around ~30000-32000 tonnes.

16

Emami gross margins have historically improved when Mentha

prices have been weak.

Source: Company data, Bloomberg, Spark Capital Research

India remains the largest producer and consumer of Mentha Oil

Source: Global menthol review, Spark Capital Research

0

200

400

600

800

1000

1200

1400

1600

1800

56% 57% 58% 59% 60% 61% 62% 63% 64%

Menth

a O

il prices

Emami Gross Margin

Oral hygiene and Pharmaceutical industry major consumers

Source: Global menthol review, Spark Capital Research

Oral hygiene28%

Pharmaceuticals27%

Tobacco25%

Confectionaries11%

Shaving products7%

Miscellaneous2%

India32%

China21%

Europe20%

USA19%

Others8%

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

17

Wide spread out distribution leads to diversified revenue base


Reaching out

HMN has ~3000 pan-India distributors, ~5600 sub distributors and a

strong sales force of over ~2000 employees.

Direct reach spreading across ~0.6mn Indian retailers, tapping huge

mass segment with indirect reach to ~4.0mn retail outlets

Hub-and-spoke model consists of 5 mother warehouses across the

country for product storage to counter demand spikes.

‘Project Swadesh’ drilled Emami’s distribution down to rural and

isolated population clusters of up to 10,000.

HMN has been the pioneer in rolling out SAP based vendor

collection and order system. HMN had a functional vendor

aligned SAP platform much before even most of the MNCs.

Management believes this has been a key differentiator in terms

of distribution alignment.

Emami reaches out to ~4mn retail outlets


0.0 2.0 4.0 6.0 8.0

Abbott

Zydus Wellness

GSKCH

J&J

Beiersdorf

Heinz India

L'Oreal

Mondelez India

Reckitt Benckiser

Jyothy Lab

Bajaj Corp

Brittannia

Emami

Marico

Nestle

GCPL

Colgate

Dabur

ITC

P&G

HUL

Retail Outlets reach (in mn)

West, 30%

South, 21%East, 19%

North, 30%

Wide distribution spread across the 4 regions

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

18

Given the similar consumer profile, Bangladesh remains a key

international market


International business currently contributes to ~11% of revenues


Political instability in Bangladesh and Egypt led to low sales in FY13


IMD11%

CSD5%

Domestic84%

SAARC45%

GCC20%

Others13%

CIS13%

Africa9%

Commenced

its first

greenfield

international

unit in Dhaka,

Bangladesh in

FY 2013.

556.9635.2

1016

1370

1650

18701800

40%

14%

60%

35%

20%

13% -4%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

FY7 FY8 FY9 FY10 FY11 FY12 FY13

International Operations revenue (Rs.mn) % yoy growth

Low key affair

The international marketing division was set up in 1992. the Company

has a strong presence in over 60 countries

Though initial market was limited to Indian diaspora, HMN has

developed of local products and new categories

Key brands, Navratna, Boroplus, Zandu and Fair &Handsome

continue to be popular in most of the international markets.

Bangladesh production facility to further assist in supply.

Though few pockets as Africa and CIS regions continue to exhibit

vulnerability, overall sales from international markets to grow in teens

in near term.

Bangladesh remains a key market for international operations, sales

revival in the subdued macro climate to remain a key monitorable.

International operations to remain a low key affair

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

19

Promoter Holdings


BoD payscale (inclusive of perks and incentives) Rs.mn

Source: Company Annual Report, Spark Capital Research

Dividend Pay Out


FY09 FY10 FY11 FY12 FY13

Shri R.S. Agarwal, Executive Chairman 18.1 31.3 38.9 37.2 45.2

Shri R.S. Goenka, Wholetime Director 0.4 0.4 0.3 0.1 18.2

Shri S.K. Goenka, Managing Director 5.4 5.6 5.7 5.4 10.3

Shri Mohan Goenka, Wholetime Director 4.3 4.8 6.1 6.3 6.3

Shri Aditya Agarwal, Non- Executive Director 4.3 5.1 5.7 4.3 2.3

Shri Harsha Agarwal, Wholetime Director 4.2 4.4 5.0 6.1 6.2

Smt Priti A Sureka, Wholetime Director 0.0 0.5 3.3 2.8 3.5

Shri Viren J. Shah 0.5 0.5 0.5 0.6 0.6

Shri K.N. Memani 0.5 0.5 0.5 0.5 0.6

Shri Y.P. Trivedi 0.0 0.0 0.3 0.2 0.3

Shri Sajjan Bhajanka 0.0 0.0 0.6 0.6 0.2

Shri Amit Kiran Deb 0.0 0.0 0.4 0.4 0.4

Shri S.B. Ganguly 0.0 0.0 0.3 0.4 0.5

Padmashree Vaidya Suresh Chaturvedi 0.3 0.3 0.3 0.3 0.3

Shri S.K. Todi 0.7 0.8 0.0 0.0 0.1

Shri S N Jalan 0.3 0.3 0.0 0.0 0.0

Shri K.K. Khemka 0.6 0.3 0.0 0.0 0.0

Total 39.6 54.9 68.0 65.1 94.9

% of Operating Income 1.3% 1.1% 1.2% 0.9% 0.9%

Management tenets – Pay scale and holdings

1.53 1.75 2.09 2.34 2.72

6.20 6.24

43.2%

36.2%

43.3%

30.2%27.0%

54.4%45.0%

0%

10%

20%

30%

40%

50%

60%

0

1

2

3

4

5

6

7


Adjusted DPS Payout (%)

70.6% 70.1% 70.1% 70.1% 70.1%

2.2% 2.7% 2.7% 2.7% 2.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Promoter (Indian) Promoter (Foreign)

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

20

Pending cases

against

management/Com

pany

Degree of Family

Control

Non Binding

Cases/Agitations

Group companies

Wealth Creation

Corporate social responsibility

HMN focuses its CSR on four areas namely Education,

Health, Women empowerment and Environment. In

addition, the company also engages in other areas like

relief during natural calamities, community welfare

program, food for poor program, and house construction

for the needy among others.

As on March 31, 2013 the total claims against the

company not acknowledged as debt amounted to

Rs.180mn.

Various promoters directors including Mr.Agarwal and

Mr.Goenka who are also the directors of AMRI hospitals

were arrested and cases are still pending against them on

account of a fire which occurred in December 2011 in the

AMRI hospital (Kolkata) causing death of 91 people.

There had been campaigns against the company by

entities including NGO’s to remove fair and handsome

advertisements as it discriminated people on the basis of

skin colour.

Though the company is professionally managed, there

is a strong sense of tradition and familial control in the

company differentiating it from multinationals and

purely professionally run companies.

Management tenets – Corporate Governance

CMP MCAP3 Year MCAP

CAGR

Emami paper

ltdRs.27.5 1.6bn -17%

Emami

Infrastructure Rs.15.9 386.3mn -24%

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

21

BOD/Top

Management

Auditors

Succession

Planning

Environmental

Issues

Investor Grievance


Total no. of queries/grievances received and attended

by the company in the nature of non-receipt of

dividend/share certificate/annual report.13 19 44 23 31 105 101


Total No. of Directors 14 14 14 15 12 12 15

No. of Independent Directors 7 7 7 8 6 6 7

No. of changes in directors over last year 1 0 1 1 0 0 1

Current auditors of the company M/S S.K Agarwal & Co.

Any change in auditors over last five years?S.K Agarwal & Co. have been the auditors of HMN at

least for the last seven years ending March 31, 2013.

The Company has been honing its second generation of leaders for the past many years. In fact out of the seven

promoter directors currently, four belong to the second generation all of whom are well qualified with considerable

experience in the company at having held various positions across the past decade. In addition, in an interview in

2012 the present founders Mr. Agarwal and Mr. Goenka also indicated that they would be stepping away from

business in a couple of years which reflects the preparedness of the next generations leaders in taking over the reins

of the business.

Though the company has exposure to its subsidiaries which are located abroad and any change in regulations/laws

can possibly impact the business of Emami, there would be no material impact on Emami Limited(the parent

company) as the cumulative revenues or net worth of all overseas companies put together do not account for even 20

per cent of the consolidated revenues or net worth. Though there have been other cases the company has faced in

the international waters, there have been no environmental issues in particular.

Management tenets – Corporate Governance

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

22

S

O T

W

WEAKNESSES

Need based product positioning

Niche target audience

High A&P outlay

Need to maintain celebrity endorsement cycle

Brand dilution

Regional players competition

Exposure to agri related raw materials

Not so favorable product mix

THREATS

Volatile raw material scenario

More MNCs venturing into Ayurveda

Appeal for Ayurveda diminishing

Celebrities backtracking on commitments

Increasing media costs

Vulnerable CSD channel

OPPORTUNITIES

Low penetration of key categories

Expanding distribution

Overseas operation

Cross pollination of technologies

In-organic growth opportunities

Limited MNC competition threat

STRENGTHS

Market leadership in key categories

Strong brands

Mass product pricing

Innovative product offerings

Unlimited pricing power

High brand recall

In control working capital cycle

Healthy cash flow

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

11.8%

13.6%

15.3%

15.6%

16.7%

20.4%

20.8%

28.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Jyothy Labs

Marico

GCPL

HUL

Dabur

Emami

Colgate

Bajaj Corp

23

Financials (1/3)

Revenue grew at ~22% inclusive of inorganic Zandu growth


Despite high A&P, op margins for Emami on the higher side


Gross margin expansion to aid EBIDTA expansion


PAT to outpace revenue CAGR


5.2 5.87.7

10.412.5

14.517.0 18.7

21.825.3

0

5

10

15

20

25

30


Rs.b

n

56%59% 60%

63%58% 57% 58%

61% 63% 63%

13%16% 17%

24%20% 20% 20%

24% 24% 24%

13%16%

11%

17% 18% 19% 19% 21% 21% 21%

0%

10%

20%

30%

40%

50%

60%

70%


Gross Margin EBITDA Margin PAT Margin

0.7 0.9 0.8

1.82.2

2.73.2

3.94.7

5.4

0

1

2

3

4

5

6


Rs.b

n

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

2.3 2.9 3.0

6.3 6.9 7.1 7.810.2

13.0

16.3

0

2

4

6

8

10

12

14

16

18


Net Worth (Rs.bn)

Financials (2/3)

Adjusted EPS has increased 4x in 6 years…


…while net worth has grown ~3x in 6 years


Return ratios has remained robust around 40%...


24

…on a stable working cycle pattern


38.8%

33.3%

39.3%

43.1% 43.5%40.4%

37.0%

27.4%25.9%

33.1%

37.5% 39.0%37.1%

34.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY10 FY11 FY12 FY13 FY14e FY15e FY16eROE ROCE

32 32

9

23

48

27 27 27 27 27

0

5

10

15

20

25

30

35

40

45

50

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e FY16eWorking Capital Days

3.6 4.8 4.87.8

10.1 11.413.9

17.420.6

23.9

0

5

10

15

20

25


CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

Financials (3/3)

Healthy cash position with debt reduced…


…enough to scout for inorganic growth opportunities


Debt/Equity has reduced substantially…


25

…while EVA continues to be on the rise


0.17

0.44

1.48

0.42

0.27

0.16 0.12 0.09 0.07 0.06

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


Debt/Equity

251371

517

13051398

1665

2204

0

500

1000

1500

2000

2500


Rs.m

n

EVA

0.9 0.90.5

2.2 2.1

3.5

4.4 4.2

6.3

8.9

0.4

1.3

4.5

2.6

1.9

1.2 0.9 1.0 0.9 0.9

0

1

2

3

4

5

6

7

8

9

10


Rs.b

n

Cash on books Debt

0.5 0.2

2.6

1.5 1.3

3.63.2 3.3

3.84.4

0.1 0.0

-3.1

1.10.8

2.5 2.4 2.3

4.04.7

-4

-3

-2

-1

0

1

2

3

4

5

6


Rs.b

n

CFO FCF

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

26

Valuations & View

Emami – P/E Band historically traded at rich valuations

Source: Bloomberg, Spark Capital

Valuations and View - The stock has traded at an average of 22.8x on the

back of its solid growth strategy and margin expansion levers. We are

valuing HMN at 21x FY16E.Diversified portfolio expansion, Strong market

leadership in key brands, expansion of the Zandu portfolio to be the key

long term growth drivers. We believe prolonged subdued Mentha oil prices

could present a near term trigger on HMN

Investment thesis risk: – We acknowledge the fact that Emami

businesses are largely bound by seasonality. As IN FY14, extension of any

particular summer or winter season could hamper near term growth

prospects. We understand that mass focused brands and category of HMN

have limited scope of large scale price increases in case of volatile raw

material fluctuations.

Valuations and View

Emami, 12m Fwd P/E

P/E Multiple

range

No. of days

traded

% of of no. of

days

Cumulative

traded no. of

days

%of Cumulative

no. of days

16 - 18x 64 4% 68 4%

18 - 20x 253 15% 321 20%

20 - 22x 297 18% 618 38%

22 - 24x 412 25% 1030 63%

24 - 26x 395 24% 1425 87%

26 - 28x 194 12% 1619 98%

28 - 30x 25 2% 1644 100%

Total 1644 100%

Source: Bloomberg, Spark Capital

HMN has traded at an average of 22.8x

Source: Bloomberg, Spark Capital Research

Average PE

-1 sd

-2 sd

+1 sd

+2 sd

15

17

19

21

23

25

27

29

10x

14x

18x

22x

26x

30x

20

120

220

320

420

520

620

Se

p-0

9

Dec-0

9

Ma

r-10

Jun

-10

Se

p-1

0

Dec-1

0

Ma

r-11

Jun

-11

Se

p-1

1

Dec-1

1

Ma

r-12

Jun

-12

Se

p-1

2

Dec-1

2

Ma

r-13

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-14

CM

P(R

s.)

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

27

Financials

Abridged Financial Statements

Rs. mn FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E

Profit & Loss Growth Ratios (%)

Revenue 16,991 18,738 21,781 25,294 Revenues 17% 10% 16% 16%

EBIDTA 3,473 4,417 5,215 6,132 EBIDTA 17% 27% 18% 18%

Other Income 557 646 910 1,052 PAT 17% 22% 20% 16%

Depreciation 220 251 292 352 Margins (%)

EBIT 3,810 4,811 5,832 6,832 Gross 57.9% 61.4% 63.3% 62.5%

Interest 66 57 57 56 EBIDTA 20.4% 23.6% 23.9% 24.2%

PBT 3,687 4,807 5,776 6,776 PAT 18.8% 20.8% 21.5% 21.4%

Normalised PAT 3,196 3,899 4,679 5,422 Leverage Ratios (x)

Balance Sheet Debt to Equity 0.1 0.1 0.1 0.1

Net Worth 7,775 10,151 13,003 16,337 Current Ratio 1.8 2.2 2.9 3.6

Loan Funds 946 956 936 946 Return Ratios (%)

Deffered Tax Liabilities 137 137 137 137 RoCE 37.5% 39.0% 37.1% 34.6%

Sources of Funds 8,931 11,317 14,148 17,491 RoE 43.1% 43.5% 40.4% 37.0%

Net Block 3,252 4,520 4,928 5,276 Total Asset Turnover (x) 2.0 1.9 1.7 1.6

Capital WIP 475 - - - Per Share

Goodwill 656 656 656 656 EPS (Rs.) 13.9 17.4 20.6 23.9

Investments 1,973 1,946 1,946 1,946 Dividend (Rs.) 5.3 6.0 7.0 8.0

Total Current Assets 5,747 7,470 10,076 13,282 Valuation Metrics

Total Current Liabilities 3,230 3,335 3,518 3,729 Current Market Price 434

Net Current Assets 2,516 4,135 6,558 9,553 Shares Outstanding (mn) 151 227 227 227

Application of Funds 8,931 11,317 14,148 17,491 Market Cap. (Rs. mn) 98,504

Cash Flow Enterprise Value (Rs. mn) 94,660 93,308 91,213 88,629

Cash Flow from Operation 3,238 3,321 3,770 4,376 EV /Sales (x) 5.6 5.0 4.2 3.5

Cash Flow from Investments (1,236) (372) 210 352 Price/Earnings (x) 31.3 25.0 21.1 18.2

Free Cash Flow 2,394 2,276 3,979 4,728 Price/Book (x) 12.7 9.7 7.6 6.0

Cash Flow from Financing (1,944) (1,561) (1,904) (2,135) EV/EBIDTA (x) 27.3 21.1 17.5 14.5

Closing Cash Balance 2,817 4,205 6,281 8,875 Dividend Yield 1.2% 1.4% 1.6% 1.8%

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registeredwith SEBI as a Stock Broker and Category 1 Merchant Banker.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document isprovided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment orfinancial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in thisdocument (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solelyfor your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report isnot directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within suchjurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come arerequired to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in anyjurisdiction where such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital ,its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for thesecurities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any companyreferred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While wewould endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory,compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representativesshall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions oractions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequentialincluding without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report.

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Absolute Rating Interpretation

Buy Stock expected to provide positive returns of >15% over a 1-year horizon

Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon

Sell Stock expected to fall >10% over a 1-year horizon

Recommendation History

Date CMP Target price Rating

CMP

Rs. 434

Target

Rs. 502

Rating

Buy

Emami

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the researchanalyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the SecuritiesExchange Act of 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker & Coaccepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker & Co. Allresponsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be effected througha registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker & Co, LLC is prohibited or restricted by any legislation orregulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited arepermitted to provide research material concerning investment to you under relevant legislation and regulations;

Disclosure of interest statement Yes/No

Analyst ownership of the stock No

Group/directors ownership of the stock No

Broking relationship with the company covered No

Investment banking relationship with the company covered No

ayurvedically hedged rs. 434 rs. 502 despite large fmcg...

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