Stock Reivew : Emami

EMAMI's unsuccessful attempt to acquire Paras Pharmaceuticals may boost its short-term outlook, but the development will put pressure on the company to identify other suitable targets to stay competitive in the segment of pain relievers and ointments.

   Paras Pharma has a rich portfolio of over-the-counter products, including Moov pain relief ointment, D'Cold cold relief medicine, and Dermicool talcum powder. This is one of the biggest competing portfolios for Emami, which has brands such as Menthoplus, Zandu, Boroplus prickley heat powder and Navratna cool talc in similar categories.

   In an attempt to buy out the portfolio of Paras, Emami had earlier taken approval from the board to raise funds. The strategy to acquire competing businesses worked for Emami when it acquired Zandu in FY09. The deal gave Emami a higher market share and, thus, higher pricing power. The strategy did not work this time around since UK-based Reckitt Benckiser paid . 3,260 crore to buy out Paras, more than Emami's offer of . 2,950 crore.

   Given the interest of multinational players in buying Paras' portfolio, Emami had offered a steeper valuation, more than seven times the annual sales of Paras. Some analysts had raised concern that Emami's debt burden would increase and earnings per share would be lowered if it bagged the deal. Its debt to equity as on October 31 was 0.27. The acquisition would have caused higher interest outflow and earnings dilution. This had caused a 25% fall in its stock price since October, when the company's board had approved the investment. The stock recovered most of its loss on Monday after the news that Emami was no longer in the race to buy Paras.

   While the short-term pressure on its balance sheet is over, Emami may have to face strategic issues. A successful acquisition would have helped the company to expand its market share in the pain relief and talcum powder segments. A higher share of the market means better control over pricing.

   Emami's management has said that it is looking at acquisitions in India and abroad in the healthcare and food sectors.

   Now that its attempt to buy Paras has failed, Emami will have to wait longer to consolidate its position. Moreover, identifying another target with an equally lucrative product portfolio will not be easy. Smaller companies with strong brands in personal healthcare include Amrutanjan, and Himalaya Drugs while Dabur India is a bigger player in the category.