Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Emami Limited (Emami).

 

The rating continues to reflect the leading position of Emami across product categories, its strong market position in niche ayurvedic product categories, healthy operating efficiency and robust financial risk profile. These strengths are partially offset by intense competition in the fast-moving consumer goods (FMCG) industry and susceptibility to volatility in raw material prices.

 

Revenue is expected to grow by 8-9% in fiscal 2023 driven by continuing focus on power brands and revival in demand in discretionary product segments. The growth pace of healthcare and pain management products is witnessing correction given the decreasing requirement of immunity products. For fiscal 2023, volume growth is likely to be modest with price hikes contributing to growth. Also acquisition of Dermicool is expected to support growth in this fiscal. However, calibrated price hikes and increased traction of e-commerce and modern trade channels to supplement the distribution network, will also help support growth over the medium term.

 

Operating margin is expected to contract by 350-450 basis points on account of the product mix (lower contribution of Covid contextual products), raw material price pressure and increased advertisement & promotional expenses. However, strong cost control measures and strong operating efficiencies will benefit in safeguarding the operating margins at 26-28% over the medium term. As a result, Emami is expected to generate healthy cash accruals of over Rs. 450 crores annually.

 

Emami has strong liquidity in the form of unutilised bank limit, cash surplus and marketable securities to withstand any impact on cash flow in the near term. Financial risk profile is expected to remain robust, with healthy annual cash accrual and low capital expenditure (capex). The company is likely to pay 40-50% of cash profits as dividend over the medium term, as it has done in previous years. Furthermore, liquidity is robust and is expected to increase in the absence of any large capex or acquisition over the medium term.

 

CRISIL Ratings also notes decline in pledge of the promoter stake to 33.37% (as on September 30, 2022) from 90.48% as on 30th June 2020 in line with reduction in debt at the group level following the sale of group’s cement business. The promoters are in the process of liquidating certain non-core business segments to reduce promoter-level debt in the near-medium term. Timely reduction of the pledge will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Emami and its direct and wholly owned subsidiaries. The intangibles and goodwill of Rs 1651 crore in fiscal 2015 paid by Emami on the Kesh King acquisition has been amortised over the five years beginning fiscal 2016. Also, the intangibles and goodwill of Rs. 432 cr on account of acquisition of Dermicool carried out in fourth quarter of fiscal 2022 will be amortised over the five years beginning fiscal 2022

 

Please refer Annexure – List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in niche product categories

The company's leading position in the niche ayurvedic segment (personal and healthcare consumer items) is underpinned by the market leadership of its key products, Navratna (66% volume market share in the cooling oil segment), Boroplus (68% volume market share in antiseptic creams), Zandu and Mentho Plus (55% in balms), Kesh King (29% in ayurvedic hair oil) and Fair and Handsome (64% in men's fairness creams). Market share for the Prickly Heat and Cool Talc (Dermicool and Navratna) stands at 45%. Market share gains for these brands over the last three fiscals reflect the strength of the brands of Emami and the well-spread pan-India reach.

 

Healthy operating efficiency

Efficient supply chain management and judicious mix of contract-own manufacturing have led to high capacity utilisation, strong operating profitability and healthy return on capital employed (RoCE). Healthy operating efficiency is reflected in operating margin of 30.0% and adjusted RoCE of 40.7% in fiscal 2022.

 

The company has also relied on the acquisition of brands such as Zandu, Kesh King and Dermicool complement its current portfolio and help with diversification into new segments and strengthening the market position. Successful integration of these acquisitions has helped the company enhance its operating profitability. RoCE is expected to be healthy in fiscal 2023, even as the company is facing inflationary headwinds. Working capital management is efficient, as Emami, like its peers, operates on a negative working capital cycle. Operating efficiency is sound because of a strong network of 4,600+ distributors and 11,900+ sub-stockists, providing direct retail reach of >9.4 lakh outlets and indirect reach of around 49 lakh outlets across India.

 

Robust financial risk profile

Financial risk profile is supported by strong cash generation, robust capital structure, healthy debt protection metrics and prudent capital spending. Dividend pay out is typically at 40-50% of cash profits limiting accretion to networth which is expected at Rs 2,074 crore as on March 31, 2022, against Rs 1,762 crore a year earlier. The company continues to not have any long term debt and minimal utilisation of its bank lines. This, coupled with the absence of any large capex, will lead to improved gearing. Liquidity is healthy, as reflected in partially low utilisation of bank limit of over Rs. 350 crore and liquid surplus (net of short term borrowing) of about Rs 171 crore as on September 30, 2022.

 

Weakness:

Exposure to intense competition

The FMCG industry has organised as well as unorganised players across segments. Also, growing popularity of herbal and natural products has led to other strong FMCG players launching products with similar positioning. Increase in competition necessitates higher advertising and promotion expenditure. Also, some of the products are seasonal, and any disruption in weather conditions can result in volatility in products’ sales.

 

Volatility in raw material prices

Mentha oil and polymers, comprising primarily of the company’s raw materials, are crude-linked, exposing their prices to sharp volatility. Significant increase in raw material prices in the last 12-18 months has impacted the profitability across the sector. Also, competition and impact on demand limit the ability to pass on increase in input cost to customers. Focus on cost efficiency and continued price leadership will help mitigate the impact of volatility in raw material prices.

Liquidity: Strong

Net cash accrual, expected at Rs 400-450 crore per annum, will support liquidity in the absence of any debt obligation over the medium term. Liquid surplus (net of short term borrowing) stood at about Rs 171 crore as on September 30, 2022. The company has sufficient accrual and cash and equivalents to meet capex of ~Rs 100 crore over fiscals 2023 and 2024. Bank limit utilisation is low, and there is no commercial paper outstanding. Liquidity is expected to remain strong over the medium term.

 

ESG profile

CRISIL Ratings believes Emami Limited’s ESG profile supports its strong credit risk profile.

 

The FMCG sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste intensive processes, and its direct impact on the health and wellbeing of its customers.

 

Key ESG highlights

• Company has undertaken focussed efforts towards energy conservation and achieved 5% reduction in specific energy consumption in FY2022 over the previous year. Further, renewable energy consumption has increased to 5% in FY22 (from 1% in FY20)
• The company undertakes measures to enhance water management efficiency where it reuses ETP-treated water for gardening and toilets, making the factories zero-discharge. 23% of the water consumed was recycled in fiscal 2022.
• Gender diversity in Emami Limited is relatively higher than industry peers, with women employees comprising 13-14% of the workforce over past few years.
• Emami Limited has adequate governance structure, with 50% of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The company’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence.

Rating Sensitivity Factors

Downward factors

• Large, debt-funded capex or acquisition weakening the financial risk profile, with gearing increasing to significantly above 0.5 time on a sustained basis
• Significant erosion in the market share of some of the power brands impacting revenue profile

About the Company

Emami, the flagship company of the Kolkata-based Emami group, was started in 1974 as a partnership firm for manufacturing cosmetic products. In 1995, the firm was reconstituted as a public limited company and was merged with an associate, Himani Ltd, in 1998; the consolidated entity’s name was changed to Emami Ltd. The Emami group, promoted by Mr RS Agarwal and Mr RS Goenka, has diverse business interests, including FMCG, newsprint paper, writing instruments, edible oil and cultivation, biodiesel, hospitals, real estate, retail, cement and contemporary art. The promoter group owned about a 54.27% stake in Emami as on September 30, 2022. Of the total promoter holding, 33.37% was pledged.

Emami manufactures ayurvedic personal and healthcare products and markets more than 300 products across India and in more than 60 countries. The main brands include Navratna, Boroplus, Zandu, Fair and Handsome, Kesh King and Mentho Plus. Emami added prominent ayurvedic brand Zandu to its portfolio when it acquired around a 70% stake in Zandu Pharmaceuticals Works Ltd in 2008 for Rs 710 crore. Emami has manufacturing plants in Kolkata, West Bengal; Guwahati, Assam; Pantnagar, Uttarakhand; Vapi and Silvassa, Gujarat and Talasari, Maharashtra. In fiscal 2014, Emami, through one of its subsidiaries, set up a manufacturing plant in Gazipur, Bangladesh.

 

In June 2015, Emami acquired the Kesh King brand of hair and scalp care products from SBS Biotech Pvt Ltd for Rs 1,651 crore. The Kesh King portfolio includes hair oil, shampoo and ayurvedic capsules along with the respective formulations.

 

In fiscal 2018, the company acquired a strategic stake in Helios Lifestyle Pvt Ltd (30%) and Brillare Science Pvt Ltd (26%) in order to foray into professional salons and online male grooming segments. On June 22, 2018, Emami International FZE, a Dubai-based wholly owned subsidiary of the company, acquired a 7.54% stake in M/s Loli Beauty Inc, a US-based company dealing in natural and organic personal care products. Brillare Science Pvt Ltd becomes a Subsidiary of Emami Ltd on conversion of compulsory convertible preference shares into equity shares. Shareholding of the company increased from 34.70% to 57.36%. Further the company has increased its stake in Helios Lifestyle to 50.4% and Brillare to 77.53% in current fiscal.

 

Also, in March 2022, Emami announced the acquisition of Dermicool for a total consideration of Rs 432 crores excluding taxes and duties.

 

For the six months ended September 2022, the company’s operating income was Rs 1587 crore and profit after tax was Rs 253 crore against Rs 1448 and Rs 263 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2022	2021
Revenue	Rs crore	3195	2883
PAT	Rs crore	835	455
PAT margin	%	26.1	15.8
Adjusted debt/adjusted networth	Times	0.13	0.05
Interest coverage	Times	202.3	70.3

*Based on reported numbers

Any other information: Not applicable