Rating Rationale
June 28, 2018 | Mumbai
Emami Limited
CP reaffirmed ; NCD withdrawn 
 
Rating Action
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Withdrawn)
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of Emami Limited (Emami) and subsequently withdrawn its rating on the non-convertible debentures at the company's request and on receipt of redemption certificate. The withdrawal is in-line with CRISIL's policy.

The ratings continue to reflect the company's strong market position in the niche ayurvedic product categories, healthy operating efficiencies, 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 growth moderated 1% year-on-year (y-o-y) in fiscal 2018 due to slower recovery post
demonetisation, weakened demand due to implementation of goods and services tax and disruption in wholesale and rural channels.

Operating profitability moderated 100 bps y-o-y to 29% in fiscal 2018 owing to increased spends on advertising and promotion coupled with spike in raw material prices. Revenue is expected to register a compound annual growth rate of 10-11% between fiscals 2019 and 2021, driven by expected increase in rural demand and better distribution reach, while operating margin is expected to be ~27-29%.

Financial risk profile is expected to remain robust with healthy annual cash accrual of more than Rs 500 crore and modest capital expenditure (capex) requirement over the medium term. Further, liquidity is robust as on March 31, 2018 and expected to increase in the absence of any large capex or acquisition in the medium term.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Emami and its direct and wholly-owned subsidiaries. Also, the goodwill of Rs 1600 crore on Emami's acquisition of Kesh King in fiscal 2015 has been amortised over five years beginning fiscal 2016.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position in niche product categories
The company's leading position in the niche ayurvedic segment (both personal and healthcare consumer items) is underpinned by the market leadership of its key products, Navratna (64% market share by volume in the cooling oil segment), Boroplus (74% share in antiseptic creams), Zandu and Mentho Plus (54% share in balms), Kesh King (28% in ayurvedic hair oil), and Fair and Handsome (66% share in men's fairness creams). Emami has 6 brands which generates more than Rs 100 crore revenue per annum.

Market share gains for these brands, over the last three fiscals, reflects the strength of its brands and pan-India reach. Further, strong presence acts as an entry barrier and insulates the company from downturns in the FMCG sector.

* Healthy operating efficiency
Efficient supply chain management, and judicious mix of contract-own manufacturing has led to high capacity utilisation, strong operating profitability and return on capital employed. Further, about 40% of the company's production is in tax-exempt zones and two of its nine manufacturing plants enjoy fiscal benefits. The company has also relied on acquisition of brands such as Zandu and Kesh King complementing its existing portfolio to diversify into new segments and strengthen market position.

Successful integration of these acquisitions has helped the company to enhance its operating profitability. Working capital management is also efficient as Emami, like peers, operates on a negative working capital cycle. Operating efficiency is sound due to a strong network of 3150 distributors and 6750 stockists, providing a retail reach of approx. 51 lakh outlets pan India. Also, increasing direct reach and focus on modern trade will further enhance the company's distribution network.

* Robust financial risk profile
Financial risk profile is supported by strong and improving cash generation (Rs 208 crore for fiscal 2018), robust capital structure, healthy debt protection metrics, and prudent capital spending. Debt contracted in fiscal 2016 to acquire Kesh King is expected to be completely repaid in fiscal 2019 through internal cash accrual. This coupled with the absence of any large capex will lead to improved gearing. Liquidity is also healthy, reflected in low bank limit utilisation and liquid surplus of over Rs 200 crore as on March 31, 2018. Emami is expected to pursue inorganic growth and any large debt-funded acquisition will remain a key rating sensitivity factor.

Weaknesses
* Exposure to intense competition and volatility in raw material costs
The FMCG industry has both organised and unorganised players across segments. Also, growing popularity of herbal and natural products has led to other established FMCG players launching similar products. Increase in competition necessitates higher advertising and promotion expenditure. Also, some of its products are seasonal in nature, any disruption in weather conditions can result in volatile sales.

* Volatility in raw material prices
Mentha oil and polymers comprising half of the company's raw materials - are crude linked, which exposes it to sharp volatility. Despite significant variation in raw material prices in the past three years, operating profitability has remained above 25% due to Emami's market leadership. However, competitive pressures may limit the ability to pass on increasing input costs to customers. Focus on cost efficiencies and continued price leadership will help mitigate the impact of volatility in raw material prices on profitability.
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 R S Agarwal and Mr R S Goenka, has diverse business interests, including FMCG, newsprint paper, writing instruments, edible oil and cultivation, biodiesel, hospitals, real estate, retail, cement, and contemporary art. Currently, the promoter group owns about 72.7% stake in Emami.

Emami manufactures more than 300 ayurvedic personal and healthcare products that are marketed across India and in more than 60 countries. Its main brands include Navratna, Boroplus, Zandu, and Fair and Handsome. Emami added prominent ayurvedic brand, Zandu, to its portfolio when it acquired around 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, Silvassa, and Talasari (Maharashtra). In fiscal 2014, Emami, through one of its subsidiaries, has set up a facility 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 1600 crore. The Kesh King portfolio includes hair oil, shampoo, and ayurvedic capsules along with the respective formulations.

During fiscal 2018, the company has acquired a strategic stake in Helios Lifestyle Pvt Ltd (30%) and Brillare Science Pvt Ltd (26%) in order to foray into professional salon and online male grooming segments. On June 22, 2018, Emami International  FZE, a Dubai based wholly-owned subsidiary of the company, acquired 7.54% stake in M/s Loli Beauty Inc, a US based company dealing in natural and organic personal care products.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 2550 2496
Profit After Tax (PAT) Rs crore 307 340
PAT Margin % 12.1 11.3
Adjusted debt/adjusted networth Times 0.18 0.29
Interest coverage Times 21.54 11.62

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs Cr) Rating Assigned with Outlook
NA Commercial Paper NA NA 7-365 Days 500 CRISIL A1+
 
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      25-07-17  CRISIL A1+  04-07-16  CRISIL A1+  03-06-15  CRISIL A1+  -- 
                23-06-16  CRISIL A1+       
                03-02-16  CRISIL A1+       
Non Convertible Debentures  LT    Withdrawn     25-07-17  CRISIL AA+/Stable  04-07-16  CRISIL AA+/Stable  03-06-15  CRISIL AA+/Stable  -- 
                23-06-16  CRISIL AA+/Stable       
                03-02-16  CRISIL AA+/Stable       
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for rating short term debt

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