Emami

With its plan of buying brands and building diverse product portfolio, Emami is looks to be a strong FMCG player to watch out for

  

EMAMI, a mid-size FMCG company, has seen its stock surging to a record high of Rs 645 last week. The company's stock price has witnessed a steep re-rating since we recommended it in June 2008 and has tripled in the past one year. Given the rally in its stock, the manufacturer of personal and healthcare products may not be a screaming buy for new investors as the stock is unlikely to repeat its recent outperformance and offers limited upside. Existing investors can look at accumulating or holding on to it expecting further small returns.

BUSINESS:

Kolkatabased Emami has a niche product portfolio due to which it faces less competition. Moreover, the company invests heavily in advertising its brands. The company's strong product portfolio, comprising brands such as Navratna, Boroplus, Mentho Plus, Zandu and Fair & Handsome is generating a robust double-digit growth. The growth has prominently been volume-driven. Both its established brands and newly launched brands are showing a good performance growth. Sales of Zandu Pharma have also gained traction and are logging double-digit growth.

FINANCIALS:

Over the past five fiscals, the Rs 1,000-crore company has posted a compound annual growth rate (CAGR) of 28% in its consolidated revenues that stood at Rs 749 crore in FY09. Its consolidated earnings have grown at a CAGR of 34% during the same period to Rs 92 crore for FY09. The company has consistently paid dividends — maintaining an average dividend pay out of 38% since the past three years — albeit with a low dividend payout of 0.7. Emami's dividends have grown at a CAGR of 85%, significantly higher than the CAGR in profit.
   Lower raw material cost coupled with reduced interest cost helps the company log a steady expansion in profit margins in the past couple of quarters. Emami's operating profit margin has steadily improved to 23% in the year ended December 2009 from 16% for the year ended March 2008. Sales also have been logging a y-o-y growth of over 30% since the past three quarters (on a trailing four quarter basis).

GROWTH OPPORTUNITIES:

With its ambitious plans of acquiring brands and building a diverse product portfolio, the company is likely to emerge a strong FMCG player to watch out for. Emami has acquired Zandu Pharma last year followed by acquisition of two smaller Bengal-based
companies Lakshmibilas Hair Oil Company and M Bhattacharya, a small homeopathy drugs company. Emami has plans to acquire new brands in the personal and healthcare segment. The group has, in the past bought companies in distress and managed to turn them around to generate profits. The company's management is confident of replicating similar kind of success with its acquisitions in the FMCG business.

VALUATIONS:

At a market cap of Rs 4,700 crore, the company is valued at over four times its annual consolidated revenues. These are premium valuations for a midsized FMCG company. The stock is currently trading at a consolidated price to earnings multiple of 36. While higher earnings growth will bring down the P/E, there remains limited room for the stock to zoom further.