Stock Review: Emami

The Emami scrip has risen nearly 16 per cent in the last two trading sessions as the company lost the battle to buy Paras Pharma (acquired by Reckitt Benckiser for `3,260 crore).

It was the front-runner and ready to pay about $750 million, or `3,400 crore, as Paras would have offered it synergy in over-the-counter and personal care segments. Besides high top-line growth, it has superior operating margins of 27 per cent compared to Emami's 24 per cent.

However, the deal, which happened at eight times the enterprise value to Paras' 2009-10 sales, would have strained the company's balance sheet (near zero-debt position). Analysts are more positive on companies looking at international acquisitions, as opportunities in India's fast moving consumer goods space are getting limited and expensive, prolonging the payback period.

Meanwhile, Emami is doing well on its own. In the first half of the current financial year, sales surged 27 per cent to `514 crore on the back of 25 per cent volume growth. Net profit jumped 61 per cent to `88.5 crore.

The company aims to increase sales organically by 25-30 per cent over the next few years; acquisitions will only add to it. Emami's board recently approved raising 5,000 crore for purchases in personal care and healthcare spaces, either in domestic or overseas markets.

Analysts like the company due to its focus on the mass market and leadership in categories that have less competition (cooling hair oil, antiseptic cream, headache balm, men's fairness cream, among others). New product launches and rejuvenation of Zandu brands will act as upside triggers for sales growth.

However, operating profit margins, which have been under pressure in the first half of the current financial year, are likely to be hit further due to higher raw material prices and advertising expenses. But net profit may rise on account of lower tax rates, as a majority of its plants are in tax-free zones.

Losing the battle for Paras is seen as a positive for the company