Emami - Event Update - Dermicool Acquisition: positive, but not a game changer

Quick Pointers:

- Emami to emerge as a leader post Rs4.32bn acquisition of Dermicool in cool talc category, Net EPS accretion ex amortization not meaningful

- Input cost and demand headwinds a near term reality

Emami's Dermicool acquisition for Rs4.32bn funded by internal accruals will make it a market leader in cool talc category. Assuming mid-single digit growth and synergy benefits, we believe it will add Rs0.16 and Rs0.22 to EPS (net of Interest income loss and ex Amortization). We believe that the move is positive, but not a game changer as it does to change the seasonality impact in the company.

Near term growth remains a concern given slowdown in rural demand and sharp jump in input costs in past month. While we expect 2/3% price increase in April, poor demand and high inflation will impact profit growth in 1H23 on a high base. We cut EPS estimates of FY23/24 by 5.9/1.3% amidst near term uncertainty. We estimate 11.7% PAT CAGR over FY22-24 and value the stock at 30xDec23 EPS and assign a value of Rs607/share. We believe Rs1.6bn buyback, Dermicool acquisition and strong FCF limit downside at 21.6xFY24 EPS. Retain Accumulate.

- Emami to Acquire Dermicool: Emami has announced acquisition of "Dermicool" a leading brand in Prickly Heat Powder and Cool Talc category from Reckitt Benckiser Healthcare (India) Pvt for Rs4.32bn. The acquisition will be funded from internal accruals and cash in the books.

- Emami to emerge as leader in Cool talc category: Dermicool has ~20% share in Rs 7.5-8bn prickly heat powder and cool talc category. Dermicool was a low priority brand for Reckitt and will enable Emami to emerge as a market leader with 45-47% market share in prickly heat powder & cool talc category. As Dermicool competes mainly in prickly heat segment with Nycil and Shower to Shower, there will not be any cannibalization in Navratna cool talc and Boroplus prickly heat powder.

- Synergy in Distribution: Dermicool will provide synergy in distribution with strong presence in E com, Modern trade and south India versus Emami's strength in rural and other regions. With Emami's strong rural footprint, direct coverage of 0.94mn retail outlets across 26k rural clusters, Emami will tap rural markets with the introduction of its small packs.

- Net EPS accretion ex Amortization not meaningful-" Dermicool had reported sales of Rs.1.1bn with gross margins of 55% and EBITDA of 36%. We factor in 7% CAGR in sales. Post netting off loss of interest income on surplus funds, we estimate that the acquisition will provide incremental PAT of Rs102mn and EPS of Rs0.22, excluding the amortization impact.

Shares of Emami Limited was last trading in BSE at Rs. 449.95 as compared to the previous close of Rs. 450.60. The total number of shares traded during the day was 15561 in over 758 trades.

The stock hit an intraday high of Rs. 453.50 and intraday low of 446.85. The net turnover during the day was Rs. 6997406.00.

Source : Equity Bulls

Keywords

Emami INE548C01032 Acquisition EventUpdate Drmicool PrabhudasLilladher