Emami Limited (Emami) is the flagship company of the Kolkata based Emami Group

Emami Limited (Emami) is the flagship company of the Kolkata based Emami Group. Apart from the FMCG space, Emami Group also has interests in paper, construction, cement and real estate. Emami Limited is engaged in the manufacture of personal and health care products. The company’s top four brands, namely, Navratna, Boroplus, Zandu and Fair and Handsome contribute about 60 per cent to Emami’s topline. All the brands did well in Q3FY’10. Brands like Navratna oil, Boroplus antiseptic cream, Fair and Handsome and Menthoplus Balm reported revenue growth of 25%, 15%, 10% and 13% respectively (y-o-y), in Q3FY’10. Emami is focusing on smaller variants of Navratna Extra Thanda oil and Navratna Lite oil. Navratna hair oil constitutes approximately 24 per cent of the company’s standalone sales. Recently, the company launched a Rs.10 SKU of Navratna oil, thus filling in the vacuum it had at this price point. The company is also looking at increasing the distribution of Navratna oil in men’s parlours, where the oil is used for head massages. At present, this distribution channel contributes only 5 per cent of sales, however, we feel that this is an important brand awareness initiative taken by the company. Post the acquisition of Zandu, Emami Limited has achieved the operating efficiencies it was looking for. This includes the savings in production and cost of goods sold (COGS) along with reduction in trade margins. In FY’09, the COGS was 34 per cent of sales. Going forward, the management feels that the COGS could reach a normalized level of 37 per cent from FY’11. The company shifted its Zandu balm production from Gujarat to an excise free location in Pantnagar, in May 2009, thus helping in higher realizations and margin expansion. Due to some mold issues in the manufacture of Rs.2 Zandu balm SKU’s, the launch of the Rs.2 pack had been postponed. However, with the issues being resolved, the company plans to launch the new Rs.2 SKU of Zandu Balm, going forward from Q1FY’11. The company has plans to set up manufacturing plants in Egypt and Bangladesh, over the next two years. Each plant would incur a capex of Rs.10-12 cr (approximately). The company management plans to have at least three manufacturing units in Africa in the next three years and is closing in on an acquisition in Egypt as part of its strategy to expand in the continent. Going forward, the company plans to strengthen its presence in international markets like US, CIS and UK. At the current market price of Rs.646 the stock is trading at 28.30x its FY’10E earnings and 20.92x its FY’11E earnings. Emami is one of the fastest growing FMCG companies in India, in the ayurvedic space. The company’s dominant presence in niche categories and low penetration and minimal presence of MNC’s in the space it operates in, augurs well for the company. The synergies of Zandu’s brands with Emami’s brands are strengthening, with continuous launch of new products under these bands. Going forward, the company will focus on products offering high margins, thus ensuring superior profitability. Taking all this into consideration, we recommend a “BUY” on the stock with a target price of Rs.780 over the next 12 months.