Detailed Rationale

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

 

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

 

Revenue is expected to grow by 10-11% in fiscal 2022 driven by continuing focus on power brands and revival in demand in discretionary product segments. Healthcare (excluding pain management range) products growth pace is however likely to moderate given the decreasing requirement of immunity products and fast pace of vaccination drives. Price hikes across product categories and development of alternative channels such as e-commerce and modern trade to supplement existing distribution network, will also help support growth over the medium term.

 

Operating margins are expected to contract marginally by 80-100bps on account of partial price hikes taken to combat inflationary raw material price pressure and increase in advertisement and promotion expenses. However, efficient cost control measures as well as strong operating efficiencies will benefit in safeguarding their margins at 28-29% over the medium term. As a result, Emami is expected to generate healthy cash acrruals of over Rs. 450 crores annually.

 

Emami has strong liquidity of nearly Rs 450 crore in the form of unutilised bank limit, cash surplus and marketable securities to withstand 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 70-80% of profit after tax (PAT) 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 the decline in pledge of promoter stake to 27.64% (as on 19th November 2021) because of reduction in debt at the group level. The company’s management is in the process of liquidating certain business segments to reduce the promoter-level debt in the near 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. Also, goodwill of Rs 1,600 crore in fiscal 2015 paid by Emami on the Kesh King acquisition has been amortised over the five years beginning fiscal 2016.

 

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 (66.4% volume market share in the cooling oil segment), Boroplus (74.1% volume market share in antiseptic creams), Zandu and Mentho Plus (54.9% in balms), Kesh King (26.6% in ayurvedic hair oil) and Fair and Handsome (65.3% in men's fairness creams). Market share gains for these brands over the last three fiscals reflect the strength of Emami’s brands and the well-spread pan-India reach. Furthermore, strong presence acts as an entry barrier and insulates the company from downturns in the FMCG sector.

 

For fiscal 2022, estimated volume growth is likely to increase as a result of resumption of economic activities leading to higher discretionary spending, scale up of new launches and higher contribution from international sales.

 

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 30.8% and adjusted RoCE of 36.4% in fiscal 2021. Emami also benefits from a large proportion of its production coming in from cost-favourable locations across India (about 60% of the production is carried out in tax-exempt zones; four of its nine manufacturing plants enjoy fiscal benefits).

 

The company has also relied on the acquisition of brands such as Zandu and Kesh King, complementing its current portfolio to diversify into new segments and strengthen the market position. Successful integration of these acquisitions has helped the company enhance its operating profitability. 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 3,200 distributors and about 6,000 stockists, providing direct retail reach of  >9 lakh outlets and indirect reach of around 45 lakh across India.

 

Robust financial risk profile

Financial risk profile is supported by strong and improving cash generation, robust capital structure, healthy debt protection metrics and prudent capital spending. Dividend payout is typically on the higher side at 70-80% of PAT limiting accretion to networth which is expected at Rs 1,425 crore as on March 31, 2021, against Rs 1,389 crore a year earlier. The company continues to have no long term debt and minimal utilisation of bank lines. This, coupled with the absence of any large capex, will lead to improved gearing. Liquidity is healthy, as reflected in partially utilised bank limits of Rs. 300 crores and liquid surplus of about Rs 450 crore.

 

Weaknesses

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 sales of these products.

 

Volatility in raw material prices

Mentha oil and polymers, comprising half of the company’s raw materials, are crude-linked, exposing their prices to sharp volatility. Despite significant variation in raw material prices in the past three years, profitability has sustained above 25% because of Emami’s market leadership. However, competitive pressure may limit the ability to pass on increasing input costs 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 450-500 crore per annum, will support liquidity in the absence of any debt obligation over the medium term. Cash and equivalents are expected at Rs 480 crore as on March 31, 2022. The company has sufficient accrual and cash and equivalents to meet capex of Rs 70-100 crore over fiscals 2022 and 2023. Bank limit utilisation is minimal, and there is no Commercial Paper (CP) outstanding. Liquidity should remain strong over the medium term

Rating Sensitivity factors

Downward factors

• Large, debt-funded capex or acquisition weakening the financial risk profile, with gearing increasing to above 0.5 time
• Erosion in the market share of some of the power brands by 10 percentage points

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 53.86% stake in Emami as on September 30, 2020. Of the total promoter holding, 27.64% was pledged as on 19th November 2021.

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, Guwahati, Pantnagar in Uttarakhand, Vapi and Silvassa in Gujarat and Talasari in 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 CCPS into equity shares. Shareholding of the company increased from 34.70% to 57.36%

 

In January 2019, the company acquired Creme 21, a German brand with strong roots and brand recall. The brand offers skincare and body care products, such as creams and lotions, shower gels, sun care range and men’s range, and has strong presence in the Middle East and other focus markets.

 

For the six months ended September 2021, the company’s operating income was Rs 1450 crore and PAT was Rs 263 crore against Rs 1216 and Rs 158 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2021	2020
Revenue	Rs.Crore	2881	2656
PAT	Rs.Crore	455	248
PAT Margin	%	15.8	9.3
Adjusted debt/adjusted networth	Times	0.07	0.16
Interest coverage	Times	70.31	35.0

*CRISIL-adjusted numbers

Any other information: Not applicable