Emami Limited

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Fusion Investment Call Target: 585

Tenure: Medium

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Emami Limited is an Indian producer of fast moving consumer goods, such as cosmetics and health and baby products. The company is based in Kolkata. The net sales for Q2 have increased by 13%(YoY). Overall volume grew by 6%. Domestic business reported a healthy 11% growth, with volume growth of 6%. International business grew by 27% led by the Middle East and SAARC region. The volume of Navratna oil grew by 3%, Boroplus was 28%, Fair and Handsome was 9% while balm de-grown by 5%. Balm saw decline due to price hike in Zandu Balm (de-grown by 8%) from Rs 25 to Rs 27. Mentho Plus however has shown growth of 5%-6%. The value growth for Boroplus was 30%, Fair and Handsome was 6%, Navratna oil was 6% while Balm was flat. Healthcare category grew by 28%. Boroplus growth was due to overstocking for winter. Margin: The OPM has increased by 370 bps to 21.5 % due to fall in raw material cost by180 bps to 31.74%, purchases of finished goods by 350 bps to 7.07% and ASP cost by 100 bps to 16.11% of adjusted net sales. The operating profit inclined by 36% to Rs 87.33 crore. The mgmt said that the prices are likely to remain soft for the remainder of the fiscal year. The company has covered the Menthol prices for the whole year. The interest cost increased by 321% to Rs 1.39 crore while depreciation has gone up by 4% to Rs 5.89 crore. There was a forex gain of Rs 1.78 crore. The profit before tax was up by 45% to Rs 98.26 crore The tax outgo has increased by 108% to Rs 18.31 crore. The effective tax rate increased from 13% to 18.6%. After considering minority interest, the net profit increased by 35% to Rs 79.96 crore due to rise in margin. Distribution Reach: Although rural continues to grow ahead of urban markets, the growth for Emami has tapered off in both urban and rural areas. While urban markets grew 8%, rural markets witnessed an 11% growth. Direct rural business was up by 17%. The company's direct outlet reach is 6 lakh. The company has added 20000 outlets in Q2 and expects to add 75000 – 100000 in FY14. Product expansion: The Company has launched Boroplus face-wash last month and there will be new launches in Q4 also. The mgmt said that for next 2 – 3 years it has strong pipeline of products to be launch. The mgmt has guided for a capex of Rs 70 – 75 crore each during FY14 and FY15. ASP for FY14 will be 16% - 17%. The management has lowered its annual revenue growth guidance from 16% - 18% to 13% - 15% while PAT guidance continues to stand at 18% - 20% aided by strong gross margin expansion on the back of lower Mentha Oil prices. Considering Emami’s focus on increasing rural penetration, favorable monsoon, continuous strengthening of its brand equity and new product funnel strongly in next 2- 3 years, we are positive on the stock. We recommend “Buy” on the stock. At CMP, the stock is trading at P/E of 28.5x and 25.3x on FY14E and FY15E EPS, respectively. Emami Ltd has reported substantial margin increment in the last 2 quarters and the management expects a 300 bps increase in margins for the year and 13 to 14% growth in revenues. We recommend buying with Price target of Rs 585.

::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: Risk Disclosure & Disclaimer: This report/message is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Narnolia Securities Ltd. (Hereinafter referred as NSL) is not soliciting any action based upon it. This report/message is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any from. The report/message is based upon publicly available information, findings of our research wing “East wind” & information that we consider reliable, but we do not represent that it is accurate or complete and we do not provide any express or implied warranty of any kind, and also these are subject to change without notice. The recipients of this report should rely on their own investigations, should use their own judgment for taking any investment decisions keeping in mind that past performance is not necessarily a guide to future performance & that the the value of any investment or income are subject to market and other risks. Further it will be safe to assume that NSL and /or its Group or associate Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise, individually or otherwise in the recommended/mentioned securities/mutual funds/ model funds and other investment products which may be added or disposed including & other mentioned in this report/message. NSL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any action taken based on the above information or inadvertent error in the information contained in this report/message. :::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::