>EMAMI (IIFL)

INNO - VEDIC

Emami is one of the fastest-growing consumer-goods companies in India and one of the few to have successfully monetised ayurveda. The company has seen a rebound in sales growth in 1QFY10, led by a turnaround in its biggest brand, Navratna oil, while there has been impressive progress on cost savings at its subsidiary Zandu (reflected in the over 1,000bps YoY expansion in EBITDA margin in 1QFY10). Emami’s dominant presence in niche categories with low penetration and minimal MNC presence, innovation-led strategy and significant cost savings at Zandu, we estimate, will drive 18% and 30% CAGR in consolidated revenue and EPS respectively over the next three years. We value the stock at 19x FY11ii EPS, in-line with the mid-cap personal-care FMCG peer group. BUY with a TP of Rs465.

■ Rebound in sales growth as Navratna oil sales recover: Emami’s sales growth rebounded to 21% YoY in 1QFY10 after a sluggish 2HFY09. Sales of its largest brand, Navratna hair oil (25% of standalone sales), rose c16% YoY in 1QFY10 after a decline in FY09. The price correction in the key Re1 SKU and focus on variants are driving growth in the brand. The cooling hair-oils category continues to see strong growth, with 1QFY10 seeing 18% revenue growth. Emami’s other key brands, such as Fair & Handsome and Boro Plus, continue to register 20%+ sales growth.

■ Zandu margin expansion on track, sales pick-up in 2HFY10: Management has shown good progress in driving cost savings in Zandu, leading to 10ppts YoY EBITDA margin expansion in 1QFY10. Trade margin rationalisation, reduction in staff costs and other overheads, reduction in excise and tax rates have been aggressively pursued. Zandu is wellpositioned to drive over 900bps expansion in EBITDA margin in FY10. Zandu’s sales growth was muted at 3% in 1QFY10, as a fall in trade margin, discontinuation of distributor credit and depot mergers caused some disruption. We expect growth to bounce back in 2HFY10 as the sales system stabilises and Zandu launches the Rs2 SKU and a new ad campaign.

■ Margin expansion, interest reduction to drive EPS CAGR of 30%: We estimate Emami’s consolidated EBITDA margin will expand by 400bps over FY09-12, as margins at Zandu and Emami standalone both see an expansion. Interest costs will be much lower from 2QY10 due to repayment of debt. We estimate an EPS CAGR of 30% for Emami over FY09-12ii.

To see full report: EMAMI