Emami - FMCG Available at Low Valuation

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Intro
Emami needs no introduction since the company name is a consumer brand in itself in India. Consumer brands of Emami are household names since past few generations - BoroPlus, Navratna, Fair and Handsome, Zandu Balm, DermiCool, Mentho Plus Balm, Fast Relief, Kesh King, etc.

Emami Limited is a leading Indian FMCG company that was founded in 1974. The company operates in the personal and healthcare space with products such as skincare, haircare, health and wellness, and other FMCG products. The company is headquartered in Kolkata, India, and has a presence in over 60 countries worldwide.

P&L, B/S, Valuations, and Return Ratios

  • As of 31 Mar 2023, the company has a Mcap:15800 crs, TTM Sales:3340cr, TTM PAT:815cr
    implying a P/E of 18.7 which is low for an FMCG company
  • PAT can vary every quarter with margin fluctuations, so additionally if we can consider MCap/Sales,
  • MCap/Sales currently stands at 4.7, historical high(last 15yrs):13, historical low(last 15 years): 1.7, avg: 5.9
  • Debt free company
  • Keeps doing buybacks from open market and generally during during the period when market falls, hence it gets the best price for buyback due to these 2 reasons . Recent buyback was done during Mar2023 market fall. Hence maintains ROE of 23-28% over 3/5/10year periods
  • Though sales growth has been slower in high single digit CAGR over the years. Profit growth around 12% over a 10year period.
  • Strong moat due to strong Indian brands
    *One negative is that the company also invests in unrelated sports business - football leagues in Kolkata, which I feel could be a distraction. However I have not come across management integrity issues.

SWOT Analysis:

Strengths:

  • Diverse product portfolio
  • Strong market position in India
  • Growing global presence
    Weaknesses:
  • Dependence on the Indian market
  • Limited presence in some FMCG segments, unlike companies like HUL
    Opportunities:
  • Expansion into new markets
  • Increased demand for natural and herbal products
  • Growing awareness of health and wellness
    Threats:
  • Intense competition in the FMCG industry
  • Changing consumer preferences
  • Increasing raw material costs

Financials:
P&L
Sales growth over the last 10years has been accompanied by sustained profitability.
Emami Ltd has been paying regular dividend to its shareholders. Company has been increasing its dividend payout with increasing profits.
It has been spending about 15-17% of its sales inflow on its brand promotions every year.
Operating profit margins (OPM) of Emami Ltd has been consistent at 24-25% since FY2010. This is a good sign as Emami is able to pass on the increase in the cost of raw material to its consumers easily and protect its margins.

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Last 10year return ratios:

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Balance Sheet:

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Promoter Holding:
Due to consistent buybacks, the promoter holding is increasing. This also helps return ratios.

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Risks:

  • The company has delivered a poor sales growth of 5.11% over past five years. The sales growth in recent years seem low, so growth is slow
  • Diversification of the group in unrelated business like Realty, Hospital, which they are looking to dispose off. Though these don’t fall into Emami FMCG umbrella, it deviates the focus of the promoters from the core money making business. The promoter group also owns Emami East Bengal FC.
  • High Promoter pledge: If you look at promoter shareholding, it stays consistent around 54% mark, but the promoters have pledged their shares.
    Pre-2020, the promoters of the group had sold cement business to Nirma group at a valuation of Rs 5,500 crore which helped them to reduce the ratio of pledge to around 45 per cent from 89.24 per cent earlier. Source: Emami promoters to hive off assets to reduce pledge - The Economic Times
    In 2020, the promoter pledge was around 54%. The promoters had publicly declared that they want to reduce their pledge by selling some of the group’s non-core assets. This was visible in their pledge reduction to around 36%. However in recent quarter, the promoter pledge has once again increased by 4% to 40% levels.
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  • Consumer demand remains muted across urban and rural markets with high inflation affecting consumption
    *Company has been delivering low single digit growth, compared to a high single digit growth of 8% of pre-pandemic levels

Disc: Invested at 390 levels. I am not a registered investment advisor

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Its sales are 5% for last 5 years. Its businesses are into unrelated businesses. And very high percentage of pledge by promoters…These are very big turn off .
As against this,
What are your views on HUL and Nestle?

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When there is no overlapping of products, or if they are into same products but catering to different sections, I don’t think of the need to compare.

The PF of HUL and Nestle are different, so may be there is place for both. HUL is more or less consistent on all parameters compared to Nestle, because it is present in many categories. Scientific moat is something that cannot be replaced easily, particularly when there is brand recognition and trust, but for other products, a local brand may pop up at any point of time. And as with many sectors, one can choose to invest via ETF here too.

Have a position in HUL, also had a position in Nestle, but couldn’t add more whenever I wanted because of its high price, so sold Nestle.

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My 2cents:

  1. Past Sales growth is a bummer but in the last few years there was a lot going on in the company:
    - Limited promoter focus(focusing on other companies in the group)
    - Trying to go deep into existing categories rather than the width(Recognized late)
    - Macro headwinds(From 2017 they faced issue after issue)
    - And shifting of strategy to direct retail etc…
  2. I disagree with unrelated businesses because they are focusing only on niche areas where there is limited competition and developing brands in that area rather than directly going head-on-head with Big FMCG companies that is one of the reasons for high EBITA margins.
  3. True high pledge by promoters but in the last investor call they mentioned the hospital deal is sealed but waiting on permission from govt. If this happens pledge will be reduced a lot.
  4. Interesting thing to note is continuous Buybacks.
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  1. Sales growth is low. I wonder why established brands aren’t able to grow fast like new age brands like Mamaearth. You have an advantage of wide distribution network, something that D2C brands can’t get even after burning cash. You also have a trusted parent brand like Emami that can be leveraged to enter into more premium segments. India is in a hyper growth phase. With India moving from 3.75 trillion to 7trillion economy in the next few years there is no shortage of growth drivers in the premium segments.
  2. Continuous buyback is helping the return ratios, which is a good thing the company is doing. Company did a lot of open market buyback at low prices ~350-400 levels which is a really good value generator for existing shareholders

Valuations are low, so downside from here is limited. Any uptick in PAT, revenue, or any positive news can trigger mean-reversion to historical median valuations

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What’s the expectation here?

Compared to historical data, valuations do not seem attractive. Median EV/EBITDA for 5Yr or 3Yr period is 21. Currently, EV/EBITDA stands at 18. So, reversal to mean (R2M), if it happens, upside is limited to ~15%. But, R2M may happen in a horizon of 0 to 5 Yrs. In case it takes more than a year, return expectation must be very-very low.

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  1. For Emami, the issue I observed regarding growth is with their domestic business like Boroplus, Zandu balm, oils, etc… these are already well-penetrated in their respective categories. Management points out they are yet to fully penetrate but IMO they can’t grow better than category growth.
    - Few mistakes, I observed here are they are late in extending the brands to other categories(Focused only on one sub-category).
    - Even though they are market leaders, their volumes are coming from low-priced SKUs because their core market is rural and D2C brands and other brands are pulling some volumes away(Especially in oil categories).
    I observed management realizing this mistake and expanding into other categories. Also, they are focusing on Healthcare(Checkout Zanducare platform) and international business to drive growth plus premiumization in these segments. Let’s see how it goes.

  2. I agree valuation is low for an FMCG company and saw an uptick in volumes at 345 and 370 price points. I also think the downside is limited.

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Yes, compared to the median EV/EBITDA upside is low but the downside is also limited.
Re-rating comes only when the promoter pledge is reduced drastically and in terms of relative comparison with other FMCG companies it is undervalued. Alpha will be created only if they show double-digit growth in sales and profit.

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Too many ifs and buts…If at all it happens, growth wont be mouth-watering then…Its better may be consider Nestle , HUL

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Finally, mean reversion in valuation from multi-year lows.
At 725, it is nearly 2x from the lows.

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Both HUL and Nestlé are strong performers with their own strengths. HUL offers stability and growth in the Indian market, while Nestlé provides a diversified global presence and strong innovation capabilities.

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I saw your first post and very in depth analysis.

Just a question, if the play is only on mean reversion (which can also fetch 2-3x sometimes), then is so much analysis needed?

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Mean reversion works out only if,

  1. Company is not doing worse fundamentally(2x)
  2. Company is doing much better than past - increasing revenues, profits, ROE, etc (3+ x)
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correct, for case 1… is too much detailed analysis needed or a rough idea about the sector, promoters, brands and no red flags would do…was my thought and I was thinking loud…

say even a Bajaj consumer for that matter…would it also mean reverse…Jyothy lab and Emami did…Jyothy became part of case 2 with improved performance I believe

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Yes, even Bajaj Consumer has shown mean reversion from 150lows to now, where it’s on its way to reach its previous 2021’s 290levels.

Now Bajaj Consumer has the same revenues and profits as 2021. So I wouldn’t expect the market to give it any more valuation than 2021, unless something fundamentally changes like some new product starts contributing to revenues

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Any reviews on the recent acquisition of “The Man company” : The Man Company acquisition: Emami to acquire remaining 49.6% stake, gaining 100% ownership of Helios Lifestyle | Mint ?

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HUL excels in diverse consumer goods with robust local market knowledge. Nestlé leads in food and beverages, focusing on innovation and nutrition.

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I had invested in this company 2 years back, every time I read more about the company the worse it felt to me. From product portfolio to management to market share, they produce copies of popular products with similar name. They have even faced legal battles due to this. They don’t have much growth prospects as far as I remember.

At that time I didn’t have much experience in investing and invested on whim of some good news and PE ratio only. After I started reading the annual reports I started realizing its a wrong bet. Although I have forgotten details about my research/homework but one thing is certain I have blacklisted this company for any investment purpose in future. I felt relief after selling everything I had after few months of holding it. I was so desperate to sell those shares I didn’t even wait for any opportunity or chart pattern and sold it in few percent loss.

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Emami Ltd -

Q1 FY 25 concall and results highlights -

Revenues - 896 vs 814 cr, up 10 pc
Gross Margins @ 67.7 vs 65.4 pc YoY
EBITDA - 216 vs 190 cr, up 14 pc ( margins @ 24 vs 23 pc - despite company investing heavily in A&P - A&P spends were up 24 pc YoY )
PAT - 150 vs 136 cr, up 10 pc - due higher tax rate vs LY

India business volume growth @ 8.7 pc ( 85 pc of total business )
International business constant currency growth @ 11 pc - led by MENA, SAARC regions ( 15 pc of total business ). There was a sales slowdown in CIS region

Brand wise growth rates in Q1 -

Navratna + Dermi Cool grew by 27 pc ( due harsh summers )
Zandu Healthcare grew 11 pc
Boroplus portfolio grew 4 pc
7 Oils in 1 grew 9 pc
Pain Management de-grew 7 pc
Male grooming de-grew 5 pc
Kesh King portfolio de-grew 15 pc
The Man Company + Brillare - grew 23 pc ( strategic subsidiaries )

Modern Trade + E-Comm now contribute to 11 pc of domestic sales

Expecting a harsh winter this FY due to the La Niña effect this year

Company aspires to keep the double digit growth going in the Zandu Healthcare portfolio. Key drivers behind this growth should be - Zandu’s brand equity, first mover advantage in various Ayurvedic products, aggressive A&P spends, 02 WHO GMP compliant manufacturing facilities

Hopeful of Kesh King coming back to growth territory wef Q2 ( however - the whole premium haircare oils category continues to remain under pressure ). Kesh King has greater rural salience. If the rural growth picks up, this should augur well for Kesh King. Also the competitive intensity is coming down in this space ( Indulekha and Patanjali are the main competitors )

The Man Company - has started making profits. Brillaire is still in investment phase. The combined revenues of Man Company + Brillaire in FY 24 were around 225 cr. The profitability of this portfolio will only improve once it scales up meaningfully ( say 2-3 yrs from now ). This yr, company is aiming for 275 cr sales from this portfolio. Among the two, Brillaire is growing faster than the Man Company due smaller base

Demand trends in July have been encouraging

1/3rd of Kesh King portfolio’s sales come from shampoo ( rest from Hair Oil )

RM prices continue to be soft - aiding gross margins

Seeing descent demand pick up in the rural Mkts

Tax rate for full FY should be around 10-11 pc ( same for next FY ). It was higher in Q1. Should moderate going fwd

Company is doing all it can to revive the Kesh King + Male Grooming portfolio. ( investing very heavily behind these brands )

Overall size of Kesh King portfolio is around 300 cr / yr

Amortisation for FY 25 should be around 90 cr. For next two FYs - should be around 85 cr and 80 cr respectively

Full FY EBITDA margins should be better than LY ie > 26 pc ( despite aggressive A&P spends )

In-organic growth continues to be an integral part of company’s growth strategy ( specially given the strength of balance sheet )

Disc: initiated a tracking position, not SEBI registered, not a buy/sell recommendation

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What is % of sales from Bangladesh here?

Rural markets should do good for them. Overall, they used to be at much cheaper valuations, which I believe have caught up to their historical PE,

One thing I would worry about here is the promoter quality.

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