Emami’s stock has gained momentum after it announced plans to revive its healthcare business and foray into the glucose drink segment. This, in addition to its leadership in niche product categories like cooling talc and headache balms in the fast moving consumer goods (FMCG) business, should help the company report top line growth of close to 20 per cent in FY13. With the company taking price rises to offset cost pressures, margins should also stabilise and see some uptick in the coming quarters. These should rub off positively on the stock, which is trading at 20 times FY13 estimated earnings, below its peers’ valuation of around 25 times. Given the company’s return ratios of around 30 per cent, clean balance sheet, high cash generation and dominant market position in core portfolio, analysts expect the stock to deliver 12-15 per cent from current levels of about Rs 427.
Revamping healthcare biz
The company is reviving its over-the-counter (OTC) healthcare business under the Zandu brand through brand re-launches and investing in its distribution system, packaging and marketing campaign. Products like digestive tonic Zandu Pancharishta, blood and skin purifier Zandu Lalima, laxative Nityam Churna, cough tonic Sardi Ja and popular pain reliever Zandu Balm are being re-launched. The company has roped in Mahendra Singh Dhoni (Zandu Pancharishta), Virendra Sehwag (Sardi Ja) and Kathak dancer Birju Maharaj (entire Zandu range) as brand ambassadors.
Further, the company’s distribution system will now include modern retail, kiranas and pharmacies instead of merely ayurvedic drug stores currently. With the OTC market growing at 25-30 per cent, the management expects Emami’s business in the segment to grow 35-40 per cent annually and its share of total revenue to increase from 10 per cent presently.
| IMPROVING PROFITABILITY IN FY13 | |||
| In Rs crore | 9M’ FY12 | FY12E | FY13E |
| Sales | 1,031.0 | 1,491.0 | 1,772.0 |
| % change y-o-y | 16.1 | 22.1 | 18.8 |
| Operating profit | 256.0 | 289.5 | 359.0 |
| % change y-o-y | 2.4 | 15.3 | 24.0 |
| Net profit | 191.0 | 253.0 | 329.0 |
| % change y-o-y | 8.1 | 11.2 | 30.0 |
| E: Estimates Source: Company, Analyst reports | |||
In order to strengthen its product portfolio, the company also entered the glucose drink segment — another high-growth category (growing at about to 20 per cent) but a niche market worth Rs 600 crore with few players (Dabur, Heinz) - under the Zandu brand. The product is being test-marketed in West Bengal and will be rolled out nationally within the next one year depending on consumer feedback.
Rural focus
Rural markets form 50 per cent of the company’s total sales. The management expects this to go up to 60 per cent in future led by rise in rural household income due to higher farm wages and increase in minimum support price (MSP) for farm produce, brand promotions with the help of celebrities as brand ambassadors and focus on value-for-money products.
Outlook
The management expects overall sales growth to be maintained at around 16 per cent (recorded in nine months ended December 2011) in FY13, after the same moderated from 20 per cent plus levels in the preceding the nine months. In fact, the December quarter had seen sales growth slip to just 13.2 per cent. Operating profit margin, which tanked 332 basis points year-on-year in the nine months to December 2011 despite savings in advertising expenses, is also expected to be maintained. Recently, price hikes in some of its products like Zandu Balm, Menthoplus and Navratna Oil following the excise duty rise and rising input costs (especially mentha oil, which forms 20 per cent of total raw material costs and has tripled in the last two years to around Rs 2,200 per metric tonne) will help on this front.
While mentha oil prices continue to remain high, these have fallen from Rs 2,700 levels seen in January 2012. For Emami, analysts at Emkay Global say the company has booked forward contracts at Rs 1,700 until May 2012.
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On the whole, analysts at Emkay note that the rectification of business dynamics in international portfolio (partly responsible for slower growth) will drive growth momentum to normalcy in the ensuing quarters.
On the flip side, thanks to competition from domestic as well foreign players, the company may find it difficult to break ice in some of the new segments. Also, the impact of price rises (2-16 per cent) on volume needs to be monitored as over half of the company’s revenue comes from the price sensitive rural markets, given that majority of the products are either discretionary or seasonal in nature.