February 16, 2010

Emami Ltd.

…the power of brands

CMP Rs. 565.30 Target Rs. 711.00 Initiating Coverage- Buy

Key Share Data Company Profile

Face Value (Rs.) 2.00
Equity Capital (Rs. Crs) 15.13
Market. Capitalization (Rs. Crs) 4245.48 Emami Ltd. (EL) is the flagship company of the Kolkata based Emami Group, which
52-wk High / Low (Rs.) 620/175 is engaged in the business of manufacturing personal care and health care products
Average Yearly Volume 34119 for over 3 decades and has diversified in the field of real estate, paper, biofuel,
BSE code 531162
NSE code EMAMILTD
cement etc. Some of the major brands of the company are Boroplus Antiseptic
Reuters code EMAM.BO Cream, Boroplus Prickly Heat Powder, Fair and Handsome Fairness Cream for men,
Bloomberg code HMN.IN Navratna Oil, Himani Fast Relief, Mentho Plus balm, Sona Chandi Chyawanprash
and Amritprash, amongst others.
Shareholding Pattern – 31st December, 2009
Investment Rationale
Presence in niche segments

Emami is an FMCG company that offers products based on ayurvedic
concept.

The company operates in segments where there is minimum competition,
hence ensuring a larger share of the market.

The company only focuses on products offering high margins, thus
maintaining superior profitability.
Financials (Consolidated) (Rs. Crs)
Financials (Rs. crs.) FY09 FY10E FY11E FY12E
Net Sales 749.01 987.80 1258.9 1600.7 Strong brands registering better than industry growth rates
Sales Gr 29.39% 31.88% 27.45 27.15
EBIDTA 160.54 247.48 301.26 382.38
Emami has brands like Boroplus Antiseptic Cream and Navratna Oil
PAT 92.11 164.40 202.52 256.14 which are undisputed market leaders in their respective categories.
PAT Gr 1.73% 79.73% 23.12 26.41
EPS (Rs.) 13.85 21.73 26.77 33.86
Other brands like Fair & handsome Fairness Cream, Sona Chandi
CEPS (Rs) 15.61 24.51 31.01 40.45 Chawanprash, Himani Fast Relief, MenthoPlus Balms etc. are growing at
better than the industry rate .
Key Financial Ratios
FY09 FY10E FY11E FY12E
Div. yield 0.83 0.72 0.72 0.72 International presence
P/E 13.98 25.82 20.96 16.57
P/BV 4.00 5.65 4.69 3.81

Emami has an international presence that includes 60 countries in the
P/Cash EPS 12.40 22.90 18.09 13.87 GCC, CIS and SAARC regions.
MCap/Sales 1.70 4.30 3.37 2.65
EV/EBIDTA

The company’s exports grew by 60% in 2008-09, contributing 13.6% to
10.38 17.63 14.32 11.09
ROCE 18.41% 19.55% 20.45% 21.36% the topline. This contribution is expected to grow in future.
RONW 30.46% 21.93% 22.41% 23.05%
EBITDM(%) 21.43% 25.05% 23.93% 23.89%
NPM (%) 12.25% 16.69% 16.13% 16.03% Extensive distribution network
Debt-Equity 1.49 0.32 0.23 0.18
EL has an extensive distribution network of more than 2700 distributors,
Performance comparison EL v/s BSE Midcap
1200 sub distributors, 60 super stockists and 4,00,000 direct outlets,
covering every nook & corner of the country.
4.00
Emami has tied up with ITC Ltd. to distribute products through the e-
choupal outlets, thus ensuring greater rural reach.
2.00
The company also implemented project “Navodaya”, in consultation with
E&Y, to tap the target customers in shopping malls and lifestyle outlets.
0.00
Outlook & Recommendation
-2.00 EL is expected to expand both its topline and bottomline in future by virtue of
Emami Ltd. BSE Midcap increased market share, improved realizations and lower interest outgo.
We recommend BUY rating on the stock with an 15 months target price of
Analyst: Soumen Ghosh Rs 711, at 21x FY12 earnings, giving it an upside potential of 26% from
Tel No.: +91 33 4007 7416; Mobile: +919830447472
the current levels.
Email: soumen.ghosh@skpmoneywise.com

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 Emami Ltd.

Industry Overview
The fast moving consumer goods (FMCG) industry represents consumer goods required for daily or frequent use. It
can be broadly classified into personal care, oral care and household products. The Rs 86,000-crore Indian FMCG
industry is expected to witness a lot of action in 2010. With the economy showing signs of revival, the industry is
expected to register a 15% growth in 2010 as compared to the previous year.

Rural India growth story

• Rural India makes up 40 per cent of India’s US$ 280 billion retail market and offers alluring opportunities
for retailers. The rural market offers great untapped potential. In 2008, the rural market grew at an
impressive rate of 25 per cent compared to the 7-10 per cent growth rate of the urban consumer retail
market. Further, the rural market has the potential to grow to US$ 1.9 billion by 2015 from the current
levels.

• The union budget for 2009-10 hiked the allocation for the National Rural Employment Guarantee Act
(NREGA) to US$ 8.03 billion, giving a further boost to the rural economy. This is in addition to the
farmers’ loan waiver of US$ 13.86 billion and the ambitious Bharat Nirman Programme with an outlay of
US$ 34.84 billion for improving rural infrastructure.

• A recent study by the Rural Marketing Association of India (RMAI) found that the rural and small town
economy which accounts for 60 per cent of India's income has remained insulated from the economic
slowdown. Moreover, rural incomes are on the rise driven largely due to continuous growth in agriculture
for four consecutive years.

• According to a Technopak study, rural demand for fast moving consumer goods (FMCG), pharma, auto
and consumer durables industries is estimated to match sales generated in urban areas soon. While durables
market shrunk in urban India, rural market is seeing a 15 per cent growth rate. FMCG sales are up 23 per
cent and telecom is growing at 13 per cent.

• Rural consumers spend around 13 per cent of their income, the second highest after food (35 per cent), on
FMCG, as per a RMAI study.

• The FMCG industry in India was worth around US$ 16.03 billion in August 2008 and the rural market
accounted for a robust 57 per cent share of the total FMCG market in India.

• Further, rural India’s demand for personal care products grew faster than in urban areas during April-
September 2009, as per the latest numbers released by market researcher AC Nielsen.

• Most FMCG companies are now working on increasing their distribution in smaller towns and focusing on
marketing and operations programme for semi-urban and rural markets. Major domestic retailers like AV
Birla, ITC, Godrej, Reliance and many others have already set up farm linkages. Hariyali Kisan Bazaars
(DCM) and Aadhars (Pantaloon-Godrej JV), Choupal Sagars (ITC), Kisan Sansars (Tata), Reliance Fresh,
Project Shakti (Hindustan Unilever) and Naya Yug Bazaar are established rural retail hubs.

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 Emami Ltd.
The rising of the middle class

• The Indian middle class population is poised to grow from 300 million people in 2008 to 583 million
people by 2025. This segment is expected to generate maximum demand for FMCG and consumer goods.

• The FMCG sector caters to the needs of the masses. It does not merely address the needs of the rich and
the elite. Low-priced products for the lower income and lower middle income groups account for over 60
per cent of the sector’s sales.

• As per the McKinsey Global Institute (MGI), the number of people in the lowest income bracket (of less
than Rs 90,000 annual income) will drastically reduce from the current level of 54% of population to 22%
of population by 2025. These people will add to the demand of FMCG and other perishable and off-the-
shelf products.

• Growing numbers in the strata of middle class has led to an increase in the awareness about health, hygiene
and preference for packaged food which has given a major boost to the demand of FMCG products.
Further, an increase in the disposable income, constant innovations in the product, aggressive advertising
and efforts to increase the visibility have acted as the driving force behind the growing demand of the
products. Consumers’ preference for FMCG products is shifting towards higher lifestyle categories like
skin care, shampoos, deodorants, anti-aging solutions, fairness products and men’s products.

• India’s leadership in the ITES sector and the BPO boom has given rise to large numbers of young
consumers, who typically live with their families and have large disposable incomes that can be spent at
their discretion. These young consumers are experimental and willing to try new products. Understanding
and capturing their needs and synthesizing these into actionable strategies and then into final product is
important for FMCG players. This may lead to the launch of products specifically designed for the young
people.

• The growth in FMCG industry has also been fuelled by the reduction in the excise duties, de-reservation
from the small-scale sector and the concerted efforts of the companies engaged in the business of
manufacturing of personal care and beauty care products to woo the burgeoning affluent segment of the
middle class through the introduction of innovative methods of packaging the products.

Company overview
Emami Ltd. (EL) is the flagship company of the Kolkata based Emami Group, which is engaged in the business of
manufacturing personal care and health care products for over 3 decades and has diversified in the field of real
estate, paper, biofuel, cement etc. Some of the major brands of the company are Boroplus Antiseptic Cream,
Boroplus Prickly Heat Powder, Fair and Handsome Fairness Cream for men, Navratna Oil, Himani Fast Relief,
Mentho Plus balm, Sona Chandi Chyawanprash and Amritprash, amongst others.

In 2008, Emami acquired Zandu Pharmaceutical Works Ltd, thereby getting access to Zandu’s popular brands like
Zandu Balm, Zandu Chawanprash, Zandu Kesari Jivan etc.

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 Emami Ltd.
Business overview

EMAMI LTD.

Emami Brand Zandu Brand

Personal Care Health Care • Cosmetics

• Ayurvedic
Products
• Toiletries • OTC products
• Skin Care
• Oral Care • Ayurvedic
• Hair Care Medicines

Source: Company

Composite Scheme of Arrangement

Consolidation of FMCG Business into one entity: The FMCG business of Zandu was demerged and
transferred into Emami Ltd.

Consolidation of real estate holdings: The realty undertaking of Emami including Emami Realty Limited
and Emami’s interests in Zandu’s non-core business including real estate has been transferred into
Emami Infrastructure Ltd (EIL).

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 Emami Ltd.
Investment Rationale

Presence in niche segments

Emami is an FMCG company that offers products based on ayurvedic concept. The company has a
balanced portfolio comprising of products in health, beauty and personal care segments.

The company operates in segments where there is minimum competition, hence ensuring a larger share
of the market. MNC companies are reluctant to enter these segments (eg. Cooling oil), where regional
and local players rule the roost.

Emami has proven its ability to tap segments like cooling oil, balms, men’s fairness cream and other
niche Ayurvedic OTC products to the company’s advantage.

The company only focuses on products offering high margins, thus maintaining superior profitability.
Through its efficient raw materials management, farm forestry initiative, contract manufacturing and
working capital management, the company is able to keep costs under control even in case of escalating
input costs, thereby restricting the impact on margins.

Emami also uses judicious price increases to pass on the high input costs to the consumers. Also, the
company has been innovative in the packaging of their products with a view to suit customer
requirements. Introduction of Low Unit Packs (LUP’s), sachets, dibbies and small tubes helped in
expanding the customer base by creating new customers, thereby resulting in an increased market share
across various segments.

Strong brands registering better than industry growth rates

The Boroplus Antiseptic Cream is the dominant market player with more than 73% share. While the
category grew by 13.8% in 2007-08, the product grew by 19.2% (as per AC Nielson 2007-08 Report). It
is also the market leader in countries like Ukraine, Russia and Nepal. Capitalizing on the strong brand
presence, the company has extended the product by introducing Boroplus Winter and Summer Lotions.

Himani Navratna Oil is another market leader with more than 54% market share. The brand extensions
of the product include Navratna Cool Talc, while the product variations include Navratna Extra Thanda
and Navratna Lite.

Other brands like Fair & handsome Fairness Cream, Sona Chandi Chawanprash, Himani Fast Relief,
Mentho Plus Balms etc. are also growing at better than the industry rate.

Emami’s brands are promoted by eminent celebrities like M S Dhoni, Amitabh Bachchan, Shah Rukh
Khan, Madhuri Dixit, Kareena Kapoor, Sunny Deol, Preety Zinta etc, who help the company to gain
mass appeal through its brands.

After the acquisition of Zandu, Emami now has the strength of century old Zandu Ayurveda products
like Zandu Balm, Zandu Chawanprash, Kesri Jeeven, Panchristha, Nityam Churna, etc, which help the
company in bolstering the brand image.

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 Emami Ltd.
International presence

Emami has an international presence that includes 60 countries in the GCC, CIS and SAARC regions.

East Africa is a strong sales market for Mentho Plus Balm and Naturally Fair Cream, while Mentho Plus
Balm is number two brand in its category in Kenya.

Boroplus Antiseptic Cream continued to remain the number one brand in Russia, Commonwealth of
Independent States and SAARC countries.

The company’s exports grew by 60% in 2008-09, contributing 13.6% to the topline. This contribution is
expected to grow in future.

Emami’s products are also available in countries of Middle East, Europe, America and Australasia.

Extensive distribution network

EL has an extensive distribution network of more than 2700 distributors, 1200 sub distributors, 60 super
stockists and 4,00,000 direct outlets, covering every nook & corner of the country.

Emami Ltd’s Distribution Network

RURAL URBAN

Tie up with Tie up with 11000 Emami Modern Trade Retail Network
ITC e-chaupal District Post Mobile Traders Channel
Offices & Small
Village Shops

Coverage of 4 Coverage of 280 Coverage across Coverage of 2.6 Coverage of 4

states Post Offices 7 states and 8 million outlets lakh retail
lakh households outlets

Source: Company

Emami’s distribution network is extensive enough to include local paanbiri shops to reach the lower and
lower-middle income population group. Besides army CSDs have also served as a significant mode of
penetration into otherwise inaccessible areas.

The company also implemented project “Navodaya”, in consultation with E&Y, to tap the target
customers in shopping malls and lifestyle outlets.

Tie up with the Indian Oil’s petrol pumps located in the rural areas has made it possible for the company
to access the untapped rural markets.

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 Emami Ltd.
Financial Performance

Latest Results Update

In Q3FY10, the topline grew by 30.34% to Rs 349.58 crore, while the bottomline expanded by 94.01%
to Rs 78.05 crore. The smart expansion in topline and cost control paved way for a 936 bps improvement
in operating margins to 30.21%. The decrease in interest cost also helped to bolster the bottomline for the
quarter.

For 9MFY10, topline and bottomline expanded by 43.07% and 101.45% to Rs 746.64 crore and Rs
130.32 crore respectively. The operating margin also improved by 979 bps to 25.74%, which was a result
of better realizations for the company’s products.

Emami’s international business with revenues of Rs 41 crore has grown by 36% during the quarter.
Growth in the first nine months is 32% with exports at Rs 89 crore. The growth is largely attributable to
the demand from Middle East and Africa.

Sales: In the period FY2006-09, Emami registered a CAGR of 49.38% in Net Sales. However, going forward,
for the period FY2010-12, we expect the company to register CAGR of 20.57%.

Zandu’s FMCG business is already adding to the topline of

Emami Ltd. Aggressive branding and promotions are also expected to
increase the mindshare of the company.

The company has a strategy of introducing 2 to 3 new products

every year. With subtle product variations (eg. Introducing smaller
versions of Zandu Balm), the company is penetrating untapped
segments, thereby capturing new market share.

EBIDTA: The company registered a CAGR of 58.42% in EBIDTA during FY2006-09. However, we expect the
company to register EBIDTA CAGR of 27.25% during FY2010-12.

The EBIDTA growth is expected to be driven by efficient raw

material management that includes a proper hedging policy in
order to mitigate the risk of volatile commodity prices. Emami
also created a dedicated vendor community in non-excisable
zones, thereby protecting their interests through assured
offtake. In order to reduce the freight rate, the company has
shifted focus from a multi-vendor plan to single-vendor plan
within its plant proximity.

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 Emami Ltd.

Farm forestry of herbs in Orissa, MP and UP, usage of alternative raw materials and prudent packaging
alterations also helps the company in countering the rise in raw material prices, thereby protecting the
margins.

APAT: Emami Ltd has an APAT CAGR of 30.05% during FY2006-09. However, we expect the company to
achieve a CAGR of 27.67% during FY2010-12.

Since the company is expected to substantially lower its debt

in the next couple of years (net debt is expected to be below Rs 100
crore in FY2010), hence the interest outgo is expected to come down.

The company also receives tax incentives for its Amingaon

plant, which helps the company in bolstering its bottomline.

Concerns

A major part of Emami’s product offering caters to skin care and hair oil segments. These products are
seasonal in nature, and are consumed more during winter and summer seasons respectively. Naturally,
the severity of the seasons guide the consumption of these products, and the lack of severity may hinder
the sales growth in these segments.
However, the company’s diversified product breadth ensures the seasonal impact on the
company’s topline is limited.

Outlook & Recommendation

With strong R&D, diversified and niche product offering, strong fundamentals and extensive distribution
network, EL offers investors an attractive proposition in the FMCG space.

We recommend BUY rating on the stock with an 15 months target price of Rs 711, at 21x FY12
earnings, giving it an upside potential of 26% from the current levels.

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 Emami Ltd.

Consolidated Financials (in Rs. Crores)

Income Statement Balance Sheet

Particulars Particulars
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Net sales 749.01 987.80 1258.95 1600.76 Equity Capital 13.13 15.13 15.13 15.13
Growth (%) 29.39% 31.88% 27.45% 27.15% Reserves 288.12 736.81 890.62 1098.05
EBIDTA 160.54 247.48 301.26 382.38 Share Warrants 0.00 0.00 0.00 0.00
EBIDTA Margin (%) 21.43% 25.05% 23.93% 23.89% Net worth 301.25 751.94 905.75 1113.18

Growth (%) 34.65% 54.15% 21.73% 26.93%

Depreciation 8.41 18.50 29.60 47.37
EBIT 152.13 228.98 271.65 335.02 Secured Loan 373.06 162.19 151.03 152.17
Unsecured Loan 75.16 75.00 60.00 50.00
EBIT Margin (%) 20.31% 23.18% 21.58% 20.93%
Deferred Tax Liab. 9.02 11.02 13.02 15.02
Growth (%) 35.95% 50.51% 18.64% 23.33%
Total Liabilities 749.47 989.13 1116.78 1315.35
Interest 46.26 28.46 25.32 24.26
Net Fixed Assets 612.77 735.61 833.22 932.14
Interest Coverage (x) 2.95 7.80 10.67 14.26
Capital WIP 36.69 50.00 20.00 5.00
Other Income 24.20 25.50 31.00 36.50
Investments 39.34 70.81 106.22 159.33
EBT 105.87 200.51 246.33 310.76
Inventories 73.80 107.56 137.08 174.30
Tax 11.00 33.30 40.91 51.61
Accounts receivable 71.04 92.24 117.56 149.47
Minority Interest 0.00 0.00 0.00 0.00 Cash & Bank 14.11 49.92 37.34 47.13
PAT 92.11 164.40 202.52 256.14 Loan & Advances 86.50 114.20 145.60 185.66
PAT Margin (%) 12.25% 16.69% 16.13% 16.03% Current Assets 245.45 363.91 437.58 556.56
Growth (%) 1.73% 79.73% 23.12% 26.41% Current Liab. 126.93 159.28 202.99 258.10
O/S Shares (Crs) 6.57 7.57 7.57 7.57 Provisions 52.03 63.90 67.22 67.57
EPS (Rs.) 13.85 21.73 26.77 33.86 Total Curr. liab. & prov. 178.96 223.18 270.21 325.67
PER (x) 13.98 25.82 20.96 16.57 Net Current Assets 66.49 140.72 167.37 230.89
Dividend Per Sh. (Rs.) 5.48 5.48 5.48 5.48 Total Assets 749.47 989.13 1116.78 1315.35

Cash Flow Statement Key Ratios

Particulars FY12 Particulars FY09 FY10E FY11E FY12E
FY09 FY10E FY11E E Valuation Ratios
P/E 13.98 25.82 20.96 16.57
Profit before Tax 105.87 200.51 246.33 310.76
P/Cash EPS 12.40 22.90 18.09 13.87
Add: Depreciation, Int. & Other P/BV 4.00 5.65 4.69 3.81
50.12 41.97 47.93 62.63
Expenses EV/EBIDTA 10.38 17.63 14.32 11.09
Net changes in WC, tax interest 135.22 -71.42 -79.73 -104.84 EV/Sales 4.42 2.22 3.13 2.19
Cash flow from operating activities 291.21 171.06 214.53 268.54 Earnings Ratios
OPM 18.20% 22.47% 21.47% 21.61%
Capital expenditure -618.82 -154.65 -97.21 -131.29 NPM 12.25% 16.69% 16.13% 16.03%
Investments, Sales of FA, Div. ROCE 18.41% 19.55% 20.45% 21.36%
77.39 -28.47 -30.41 -46.11
Recd & others RONW 30.46% 21.93% 22.41% 23.05%
Cash flow from investing activities -541.43 -183.13 -127.62 -177.40 Balance Sheet Ratios
Cash flow from financing activities 257.71 47.87 -99.49 -81.35 Current Ratio 1.37 1.63 1.62 1.71
Debt/Equity 1.49 0.32 0.23 0.18
Net Increase/Decrease in Cash & Debtor days 35.00 34.00 34.00 34.00
7.49 35.81 -12.58 9.79 Inventory Days 40.00 49.00 49.00 49.00
Cash Equivalents
Opening Cash Balance 6.62 14.11 49.92 37.34 FA Turnover 1.06 1.16 1.29 1.43
Closing Cash Balance 14.11 49.92 37.34 47.13

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 Emami Ltd.
Notes:

The above analysis and data are based on last available prices and not official closing rates.
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offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). SKP Securities Ltd. or any of its
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may have a long or short position in any securities of this issuer(s) or in related investments. While this report has been prepared on the basis of published/ other
publicly available information considered reliable, we are unable to accept any liability for the accuracy of its contents.
SKP Securities Ltd (Member of NSE & BSE)
Analyst: Soumen Ghosh Tel:(033) 4007 7000, Ext. 7416 Kolkata Office (Head Office)
E- Mail: soumen.ghosh@skpmoneywise.com Tel: (033) 40077000
Fax: (033) 40077007
Institutional Sales (Mumbai) Email: research@skpmoneywise.com
Tel. (022) 22811015 ; Fax 2283 0932
E-Mail : dealingdesk@skpmoneywise.com
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