Rating Rationale
November 04, 2020 | Mumbai
Emami Limited
Rating Reaffirmed
 
Rating Action
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 programme of Emami Limited (Emami).
 
Consolidated revenue is likely to moderate this fiscal because of the impact of the Covid-19 pandemic on demand in the first quarter of fiscal 2021. Higher decline in discretionary product segments is partially offset by better growth in the healthcare portfolio, viz the Boroplus and Zandu segments. Operating profitability is expected to be healthy at 26-28% in fiscal 2021 because of stringent cost control measures.
 
Emami has strong liquidity of nearly Rs 175 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 of Rs 400-450 crore and low capital expenditure (capex). The company is likely to pay 30-40% 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 also notes the decline in pledge of promoter stake to 47% 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.
 
The rating continues to reflect the company's 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.

Analytical Approach

CRISIL 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 - Details of Consolidation, 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) as on December 31, 2019. 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 2021, estimated volume growth is likely to be flat as a result of adverse environmental changes and slowing rural demand. The underperformance is comparable with industry standards because of higher rural dependence, dependence on the wholesale channel and the relatively discretionary nature of products.
 
* 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 26.1% and adjusted RoCE of 18.3% in fiscal 2020. 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. However, high dividend outgo of Rs 438 crore in fiscal 2020 and share buyback of Rs 192 crore in fiscal 2021 are expected to limit the accretion to networth, which is expected at Rs 1,600 crore as on March 31, 2021, against Rs 1,777 crore a year earlier. Debt contracted in fiscal 2016 to acquire the Kesh King brand was completely repaid as on March 31, 2019, using cash accrual. This, coupled with the absence of any large capex, will lead to improved gearing. Liquidity is healthy, as reflected in unutilised bank limit and liquid surplus of about Rs 175 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 400-450 crore per annum, will support liquidity in the absence of any debt obligation over the medium term. Cash and equivalents are expected at Rs 250 crore as on March 31, 2021. The company has sufficient accrual and cash and equivalents to meet capex of Rs 150-200 crore over fiscals 2021 and 2022. 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, 46.50% was pledged as on September 30, 2020.

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.
 
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 three months ended June 2020, the company's operating income was Rs 481 crore and PAT was Rs 40 crore against Rs 649 and Rs 39 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore  2656  2696
Profit after tax (PAT)  Rs crore 248 229
PAT margin % 9.3 8.5
Adjusted debt/adjusted networth Times  0.16  0.06
Interest coverage Times  34.9  37.8
*CRISIL-adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity level Rating assigned with outlook
NA Commercial Paper NA NA 7-365 Days 500 Simple CRISIL A1+
 

Annexure - List of entities consolidated
Subsidiary Companies: Subsidiary/ Joint Venture Extent of consolidation
Emami Bangladesh Ltd Subsidiary 100%
Emami International FZE Subsidiary 100%
Emami Indo Lanka (Pvt) Ltd Subsidiary 100%
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+  31-03-20  CRISIL A1+  29-05-19  CRISIL A1+  28-06-18  CRISIL A1+  25-07-17  CRISIL A1+  CRISIL A1+ 
Non Convertible Debentures  LT                  25-07-17  CRISIL AA+/Stable  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 Consolidation
CRISILs Criteria for rating short term debt

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