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Research
Emami - Growth handsome but valuation far from fair - HDFC Securities
Posted On : 2012-12-24 10:46:55( TIMEZONE : IST )
Emami's strong focus on niche product portfolio with herbal positioning ensures lower competitive intensity from MNCs. On account of resilient domestic volume growth, anticipated seasonally stronger 2HFY13 with softening in key RM and aggressive management, we recommend OPF with TP of INR 650.
Higher focus on existing portfolio to aid growth
- Emami has gamut of high growth potential product portfolio. Due to its herbal positioning, Emami remains shielded from MNC competition. Also, lower penetration level provides high growth potential to these categories.
- The management with an eye to grab a larger pie of the market has constantly invested in the brands (highest A&P as % of sales amongst peers @ 17-18%).
- We believe that managements increased focus on
existing product portfolio will help achieve 14-15% volume growth for next 2 years.
Bangladesh: the new opportunity
- Emami will soon commission a factory in Bangladesh (trial production going on) with an eye on INR 1000 mn revenue in FY14E.
- The company plans to set up manufacturing facility in Egypt to cater MENA region (commission in FY14E). However CIS (fighting counterfeits) and GCC (geopolitical issue) remain under pressure in near term.
RM tailwinds to provide profitability boost
- Menthol (20% of COGS) witnessed unparalleled inflation over the past 2 years when it moved from INR 900/kg to INR 2700/kg. However in past 9 months, menthol prices have softened (continues to be volatile) at INR 1500-1600 range. In 1HFY13, average price of menthol was at INR 1900/kg (due to long term menthol contracts) vis-Ã -vis INR 1400 in FY12E. Subdued prices would aid gross margin in 2HFY13 (maximum benefit in 1QFY14E) as the company continues to take 5-6% price hike annually.
Valuations
- Lower competitive intensity, higher pricing power and growth visibility makes valuation of Emami look compelling at a 25x FY14 and 20x FY15E. Recommend OPF on the stock with one year TP of INR 650 (22x FY15E in line with 5 year average multiple).
