RESULTS REVIEW 3QFY19 01 FEB 2019 Emami BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Testing our patience Emami’s 3Q performance was weaker than expected owing to underperformance in winter portfolio (45% revenue mix) and gross margin pressure. Net revenues grew by 7% (exp. 11%) with 3.5% volume growth (exp. 8%). EBITDA/APAT grew by 1/-2% (exp 8/8%). Underperformance in winter portfolio (Boroplus up 4%) was surprising given a pickup in winter during late Dec as well as healthy performance in HUL’s winter portfolio. Emami management stated that dealers hesitate to increase stock in the fag end of winter. As witnessed on multiple occasions earlier, consumer companies have a higher probability of bouncing back. Recovery in Emami’s case has been extended but we are now observing first signs of recovery. During the quarter, both Kesh King and Healthcare range (12% mix combined) bounced back with 18% growth driven by their relaunch in 2QFY19. While, Navratna and Balm (45% mix) have outperformed in the last 6 quarters, Fair & Handsome (10% mix) has struggled (recruited consulted to revive). Emami’s pain has not been caused by competitive intensity rather its own challenges like high dependence on wholesale distribution and volatility in seasons (summer and winter). The company has made healthy progress in the last 2 years in diversifying its distribution from wholesale (38% mix now vs. 52% earlier) to modern trade (8% mix now vs. 4% earlier) and direct reach (0.93mn stores vs. 0.63mn earlier). We cut estimates by ~4% (FY19-21E) due to weak 3QFY19, slower recovery and impact of acquisition. The expected turnaround in Emami can result in earnings surprise for the street and us. We play the waiting game considering the de-rating in the stock. We value Emami at 32x on Dec-20 EPS, with TP of Rs 543 (earlier Rs 561). Maintain BUY. Highlights of the quarter Ex-winter performance was healthy: Ex-winter portfolio grew by ~10%, with Navratana/Healthcare range /F&H/ Pain management/Kesh King clocking 10/18/-2/6/26% growth. EBITDA grew by 1%: GM declined by 380bps to 67% (exp -219bps) owing to inflation in crude and menthol oil (inflation has reversed now). Sharp control on spend led to 1% growth in EBITDA (exp 8%). Emami acquired Crème 21: Acquired a German skin care brand with predominant sales in MENA (80%). We believe the deal is not exciting despite a recognized brand owing to a lack of synergy benefits, limited opportunity to scale and fair valuations. Financial Summary (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Sales 8,109 7,568 7.1 6,280 29.1 25,010 25,306 27,355 31,480 35,446 EBITDA 2,666 2,647 0.7 1,894 40.8 7,591 7,195 7,796 9,370 10,737 APAT 1,940 1,985 (2.2) 1,300 49.3 5,491 5,132 5,635 6,882 8,114 Diluted EPS (Rs) 4.27 4.37 (2.2) 2.86 49.3 12.1 11.3 12.4 15.2 17.9 P/E (x) 34.0 36.4 33.1 27.1 23.0 EV / EBITDA (x) 25.1 26.1 23.7 19.5 16.7 Core RoCE (%) 24.0 21.8 25.1 32.6 40.0 Source: Company, HDFC sec Inst Research INDUSTRY FMCG CMP (as on 31 Jan 2019) Rs 411 Target Price Rs 543 Nifty 10,831 Sensex 36,257 KEY STOCK DATA Bloomberg HMN IN No. of Shares (mn) 454 MCap (Rs bn)/(US$ mn) 187/2,621 6m avg traded value (Rs mn) 178 STOCK PERFORMANCE (%) 52 Week high / low Rs 602 / 385 3M 6M 12M Absolute (%) 4.0 (30.5) (26.9) Relative (%) (1.3) (26.9) (27.7) SHAREHOLDING PATTERN (%) Promoters 72.74 FIs & Local MFs 7.05 FPIs 13.06 Public & Others 8.75 Source : BSE Naveen Trivedi [email protected]+91-22-6171-7324 Siddhant Chhabria [email protected]+91-22-6171-7336
Transcript
RESULTS REVIEW 3QFY19 01 FEB 2019
Emami BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Testing our patience Emami’s 3Q performance was weaker than expected owing to underperformance in winter portfolio (45% revenue mix) and gross margin pressure. Net revenues grew by 7% (exp. 11%) with 3.5% volume growth (exp. 8%). EBITDA/APAT grew by 1/-2% (exp 8/8%).
Underperformance in winter portfolio (Boroplus up 4%) was surprising given a pickup in winter during late Dec as well as healthy performance in HUL’s winter portfolio. Emami management stated that dealers hesitate to increase stock in the fag end of winter.
As witnessed on multiple occasions earlier, consumer companies have a higher probability of bouncing back. Recovery in Emami’s case has been extended but we are now observing first signs of recovery. During the quarter, both Kesh King and Healthcare range (12% mix combined) bounced back with 18% growth driven by their relaunch in 2QFY19. While, Navratna and Balm (45% mix) have outperformed in the last 6 quarters, Fair & Handsome (10% mix) has struggled (recruited consulted to revive).
Emami’s pain has not been caused by competitive intensity rather its own challenges like high dependence on wholesale distribution and volatility in seasons (summer and winter). The company has made healthy progress in the last 2 years in diversifying its
distribution from wholesale (38% mix now vs. 52% earlier) to modern trade (8% mix now vs. 4% earlier) and direct reach (0.93mn stores vs. 0.63mn earlier).
We cut estimates by ~4% (FY19-21E) due to weak 3QFY19, slower recovery and impact of acquisition. The expected turnaround in Emami can result in earnings surprise for the street and us. We play the waiting game considering the de-rating in the stock. We value Emami at 32x on Dec-20 EPS, with TP of Rs 543 (earlier Rs 561). Maintain BUY.
Highlights of the quarter Ex-winter performance was healthy: Ex-winter
portfolio grew by ~10%, with Navratana/Healthcare range /F&H/ Pain management/Kesh King clocking 10/18/-2/6/26% growth.
EBITDA grew by 1%: GM declined by 380bps to 67% (exp -219bps) owing to inflation in crude and menthol oil (inflation has reversed now). Sharp control on spend led to 1% growth in EBITDA (exp 8%).
Emami acquired Crème 21: Acquired a German skin care brand with predominant sales in MENA (80%). We believe the deal is not exciting despite a recognized brand owing to a lack of synergy benefits, limited opportunity to scale and fair valuations.
Domestic revenues grew by 7% (10% in 3QFY18) with 3.5% volume growth International business grew by 18% (16% in 3QFY18) Gross margins declined by 380bps owing to menthol and crude inflation (inflation has softened now) Co. held back ASP spend and other expenses to protect margins Emami acquired Creme 21 for ~Rs 950mn at 1.5x EV/Sales and 15x EV/EBITDA. The brand has a 50% gross margin and 9-10% EBITDAM Valuations are fair but given no material synergy benefits and limited opportunity to scale, we aren’t enthused by the deal
EMAMI: RESULTS REVIEW 3QFY19
Page | 3
Domestic Revenue Performance International Revenue Performance
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Gross Margin EBITDA Margin
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Emami has underperformed its peers in the last 2 years International business has rebounded. Management believes >10% growth is sustainable Wholesale dependence declined to 38% vs. 50% in FY17 Menthol and crude inflation has reversed, management does not expect gross margin pressure in 4Q
21
9
3 3
(16)
14 10 10
21
-
7
(20)
(10)
-
10
20
30
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
Q1F
Y18
Q2F
Y18
Q3F
Y18
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Y18
Q1F
Y19
Q2F
Y19
Q3F
Y19
(%)
14
(11)(16)
(38)
(19)
22 16
37
7 4
18
(60)
(40)
(20)
-
20
40
60
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Y17
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(%)
64.6
67.7
68.8
65.5 66.2
68.9
70.8
65.2
66.3
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67.0
61.0
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63.0
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FY1
7
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FY1
7
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FY1
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8
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FY1
9
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FY1
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(%)
23.0
30.6
36.2
31.2
15.2
32.1 35.0
28.1
20.1
30.2 32.9
-
5.0
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FY1
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Q2
FY1
7
Q3F
Y17
Q4
FY1
7
Q1
FY1
8
Q2
FY1
8
Q3
FY1
8
Q4
FY1
8
Q1
FY1
9
Q2
FY1
9
Q3
FY1
9
(%)
EMAMI: RESULTS REVIEW 3QFY19
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ASP Growth Gross Profit Growth vs. EBITDA Growth
`
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
A&P spend has been muted during 9MY19 on account of weak performance. However as a % of sales it stands at ~20% Boroplus performance was impacted on account of delay in winter Kesh King was driven by product refresh Recovering wholesale channel augurs well for Kesh King
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7
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30
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(0)
(30)
(20)
(10)
-
10
20
30
40
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FY1
7
Q2
FY1
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Q4
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8
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FY1
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(%)
28
10 2
(3)
(16)
12 9 8 16
(0)
1
50
15
4
(5)
(46)
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2
(3)
54
(6)
1
(60)
(40)
(20)
-
20
40
60
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Q2
FY1
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Q3
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8
Q4
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FY1
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Q3
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9
Gross Profit Growth EBITDA Growth(%)
EMAMI: RESULTS REVIEW 3QFY19
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Emami’s Core Strength And Past Performance Revenue Break-up (FY18) Domestic Market Share
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Presence In Low Penetration Categories
Source: Company, HDFC sec Inst Research
Emami has leadership in ~70% product portfolio The company focuses on low penetration and high-margin categories, resulting in it having one of the highest gross margins in the consumer space
48 8 11
1625
3541
89
0
20
40
60
80
100
Men
'sFa
irne
ss
Ayu
rved
ic o
il
De
od
ora
nts
Fa
cew
ash
Cool
ing
oil
An
tise
pti
c
cre
am
Ba
lms
Talc
umPo
wde
r
Hai
r Oil
Navratna oil
21%
Boroplus cream18%
Balm21%
Kesh King8%
Fair & Handsome
9%
Others13%
International 11%
75%67% 66%
53%
28%
0%
20%
40%
60%
80%
Bo
rop
lus
Cre
am
Fair
& H
ands
ome
Nav
rata
na
Oil B
alm
Kesh
Kin
g
EMAMI: RESULTS REVIEW 3QFY19
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Brand-wise Performance Regional Breakup
Domestic Brands Gr. (%) FY14 FY15 FY16 FY17 FY18
Navratna Cooling Oil 3 18 6 3 8
Boroplus Cream (2) 11 8 15 22
Zandu & Mentho plus balm 2 16 12 6 6
Fair & Handsome 11 15 9 (6) 4
Navratna Cool Talc 7 32 4 26 2
HCD 36 25 34 (1) 2
Kesh King na na na 48 (15)
Total 5 19 17 12 5
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
Geographic Breakup (FY18) International Performance
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Emami has high dependence on SAARC and MENAP as they constitute ~75% of Emami’s international sales
North
32%
East
19%
South
20%
West
29%
(5.4)
23.0
44.0
15.0
(16.0)
14.0
(36.0)
(18.0)
-
18.0
36.0
54.0
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
(%)
SAARC
47%
MENAP
29%
CIS
13%
Africa9%
Others
2%
EMAMI: RESULTS REVIEW 3QFY19
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Assumptions Year to March (Rs mn) FY17 FY18 FY19E FY20E FY21E
Acquisition of ‘Crème 21 will accelerate international growth in FY20 We cut estimates by ~4% (FY19-21E) due to weak 3QFY19, slower recovery and impact of acquisition which is not EPS accretive (considering opportunity cost of internal accruals)
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target
12-Jan-18 650 BUY 715
30-Jan-18 572 BUY 650
28-Feb-18 544 BUY 650
11-Apr-18 563 BUY 639
4-May-18 541 BUY 615
9-Jul-18 520 BUY 627
3-Aug-18 569 BUY 634
10-Oct-18 418 BUY 561
30-Oct-18 402 BUY 547
9-Jan-19 423 BUY 551
1-Feb-19 411 BUY 543
350
400
450
500
550
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750
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-18
Feb
-18
Mar
-18
Ap
r-1
8
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-18
Jun
-18
Jul-
18
Au
g-1
8
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-18
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-18
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v-1
8
De
c-1
8
Jan
-19
EMAMI TP
EMAMI: RESULTS REVIEW 3QFY19
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