buy maintain faith industry fmcg cmp (as on 27 may 2019) … - 4qfy19 - hdfc... · 2019-05-28 ·...

RESULTS REVIEW 4QFY19 28 MAY 2019

Emami BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Maintain faith Emami’s 4Q performance was weaker than expected. FY19 is the second consecutive year of muted EBITDA growth led by erratic seasons, disruption in trade and weak demand for its niche categories. Most negatives are priced-in and we expect performance to improve in FY20 led by (a) Healthy growth for summer portfolio, (b) Softening of RM costs and (c) Benefits from distribution expansion. We value the co. at 32x on Mar-21 EPS, arriving at a TP of Rs 506. Maintain BUY. HIGHLIGHTS OF THE QUARTER Domestic revenues grew by 3% (vs. exp. of 6%) with flat

volume growth. Extended winter impacted summer products performance (40% revenue mix in 4Q). Management commentary suggests healthy offtake of summer portfolio in 1Q.

Navratna/Balm/Male grooming underperformed with 1/1/-4% growth, while BoroPlus/Kesh King/Healthcare grew by 17/15/9%. Encouraging to note that Kesh King grew by 21% in 2HFY19 (post its re-launch). Recovery in other brands (balm and male grooming) is still a WIP. CSD channel pain remains, declined by 1%.

International biz outperformed with 19% growth (37% growth in 4QFY18; 9% exp.). Excluding ‘Crème 21’ (acquired in Jan-19), sales grew by 13% driven by SAARC

and MENAP regions. Management maintains double digit growth guidance in its international division. GM declined by 437bps (menthol and LLP inflation) to

60.8% (exp -167bps). In FY20, management expects input cost inflation to be range-bound. Employee/A&P/Other expenses grew by 17/flat/-7%

resulting in -11% EBITDA growth. EBITDAM declined by 389bps to 24.2%. APAT declined by 10% to Rs 1.07bn.

Near term outlook: Harsh summer will drive healthy growth in summer portfolio in the near-term.

STANCE Emami’s underperformance has not been caused by competitive intensity rather its own challenges like high dependence on wholesale distribution and volatility in seasons (summer and winter). The company has made healthy progress in the last 2 years in diversifying its distribution from wholesale (38% mix now vs. 52% earlier) to modern trade (8% mix now vs. 4% earlier) and direct reach (0.94mn stores vs. 0.63mn earlier). Recovery in macros (rural) coupled with a favorable season can lead to a rebound in Emami’s performance. We remain believers, given favorable risk-reward and high probability for a consumer business to rebound.

Financial Summary (Consolidated) YE March (Rs mn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY17 FY18 FY19P FY20E FY21E Net Revenues 6,396 6,170 3.7 8,109 (21.1) 25,021 25,306 26,929 30,717 34,286 EBITDA 1,547 1,733 (10.7) 2,666 (42.0) 7,602 7,195 7,343 8,626 9,934 APAT 1,068 1,183 (9.7) 1,932 (44.7) 5,491 5,132 5,004 6,131 7,180 Diluted EPS (Rs) 2.35 2.61 (9.7) 4.26 (44.7) 12.1 11.3 11.0 13.5 15.8 P/E (x) 29.5 31.6 32.4 26.4 22.6 EV / EBITDA (x) 21.8 22.7 21.9 18.5 15.8 Core RoCE (%) 24.0 21.8 21.5 28.1 34.5

Source: Company, HDFC sec Inst Research Note: Quarterly numbers are standalone

INDUSTRY FMCG CMP (as on 27 May 2019) Rs 356 Target Price Rs 506 Nifty 11,925 Sensex 39,683 KEY STOCK DATA Bloomberg HMN IN No. of Shares (mn) 454 MCap (Rs bn) / ($ mn) 162/2,335 6m avg traded value (Rs mn) 310 STOCK PERFORMANCE (%) 52 Week high / low Rs 600/336 3M 6M 12M Absolute (%) (10.5) (18.8) (31.6) Relative (%) (21.1) (30.5) (45.2) SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 72.74 62.74 FIs & Local MFs 7.68 17.39 FPIs 10.75 11.31 Public & Others 8.83 8.56 Pledged Shares (% of total shares) 34.61 29.92

Source : BSE

Naveen Trivedi [email protected] +91-22-6171-7324

Siddhant Chhabria [email protected] +91-22-6171-7336

EMAMI: RESULTS REVIEW 4QFY19

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Quarterly Financials Year to March (Rs mn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY19 FY18 YoY (%) Net Revenue 6,396 6,170 3.7 8,109 (21.1) 26,929 25,306 9.0 Material Expenses 2,508 2,149 16.7 2,677 (6.3) 9,230 8,099 14.0 Employee Expenses 681 580 17.4 699 (3) 2,797 2,547 9.8 ASP Expenses 990 987 0.3 1,291 (23.3) 4,702 4,696 0.1 Other Operating Expenses 671 721 (7.0) 776 (13.5) 2,858 2,770 3.2 EBITDA 1,547 1,733 (10.7) 2,666 (42.0) 7,343 7,195 2.1 Depreciation & amortisation 810 808 0.2 792 2.3 3,253 3,109 4.7 EBIT 737 925 (20.3) 1,874 (60.7) 4,089 4,086 0.1 Other Income (Inc exceptional) 173 22 699.1 55 212.1 181 195 (7.4) Interest Cost 62 68 (8.1) 62 (0.3) 214 343 (37.6) PBT 848 879 (3.5) 1,867 (54.6) 4,056 3,938 3.0 Tax 280 270 3.7 386 (27.6) 1,009 863 16.9 RPAT 568 609 (6.7) 1,481 (61.7) 3,025 3,075 (1.6) Adjustment (Extra-ordinary items net of taxes) 500 574 (12.9) 451 10.8 1,979 2,057 (3.8)

APAT 1,068 1,183 (9.7) 1,932 (44.7) 5,004 5,132 (2.5) EPS (Adjusted) 2.35 2.61 (9.7) 4.26 (44.7) 11.02 11.31 (2.5)

As a % of revenues 4QFY19 4QFY18 YoY (bps) 3QFY19 QoQ (bps) FY19 FY18 YoY (bps) Material Expenses 39.2 34.8 438 33.0 619 34.3 32.0 227 Employee Expenses 10.6 9.4 124 8.6 203 10.4 10.1 32 ASP 15.5 16.0 (52) 15.9 (44) 17.5 18.6 (110) Other Operating Expenses 10.5 11.7 (120) 9.6 92 10.6 10.9 (33) EBITDA Margin 24.2 28.1 (389) 32.9 (869) 27.3 28.4 (116) Tax Rate 33.0 30.7 230 20.7 1,232 24.9 21.9 297 APAT Margin 16.7 19.2 (248) 23.8 (713) 18.6 20.3 (170) Source: Company, HDFC sec Inst Research Business Break-up Revenue Mix (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 Domestic 84.0 84.0 85.0 85.0 85.0 83.0 87.0 85.0 86.0 84.0 84.0 83.0 IMD 12.0 12.0 11.0 11.0 11.0 14.0 9.0 11.0 10.0 13.0 12.0 13.0 CSD 4.0 4.0 4.0 4.0 4.0 3.0 4.0 4.0 4.0 3.0 4.0 4.0 Source: Company, HDFC sec Inst Research

Domestic revenues grew by 4% (12% in 4QFY18) with 2% volume growth International business grew by 19% (37% in 4QFY18) Gross margins declined by 437bps owing to menthol and crude inflation Co. held back ASP spend and other expenses to protect margins


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Domestic Revenue Performance International Revenue Performance

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Gross Margin EBITDA Margin

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Emami has underperformed its peers in the last 2 years International business has rebounded. Management believes >10% growth is sustainable Wholesale dependence declined to 38% vs. 50% in FY17 Menthol and crude inflation has reversed, management does not expect gross margin pressure in 4Q

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ASP Growth Gross Profit Growth vs. EBITDA Growth

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Brand-wise Performance Brands Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Boroplus Cream 38% 16% 13% 2% 41% 38% 10% -2% -15% -7% 4% 17% Navratana Range 8% -3% -4% 5% -15% 16% 15% 14% 19% 3% 10% 1% Male Grooming Range 1% 1% -18% -5% -21% 10% 20% 8% 8% 12% -2% -4% Pain Relief 6% 19% -5% 1% -21% 15% 17% 13% 39% -8% 6% 1% Kesh King 50% 50% 2% 1% -28% -16% -19% 6% 10% 2% 26% 15% Source: Company, HDFC sec Inst Research

A&P spend has been muted during 9MY19 on account of weak performance. However as a % of sales it stands at ~20% Navratna was impacted owing to delay in summer Boroplus performance benefited from extended winter Kesh King was driven by product refresh Recovering wholesale channel augurs well for Kesh King

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Emami’s Core Strength And Past Performance Brand-wise Performance Regional Breakup Domestic Brands Gr. (%) FY14 FY15 FY16 FY17 FY18 FY19

Navratna Cooling Oil 3 18 6 3 8 8

Boroplus Cream (2) 11 8 15 22 2

Zandu & Mentho plus balm 2 16 12 6 6 7

Fair & Handsome 11 15 9 (6) 4 3

Navratna Cool Talc 7 32 4 26 2 na

HCD 36 25 34 (1) 2 12

Kesh King na na na 48 (15) 13

Total 5 19 17 12 5 7 Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

Geographic Breakup (FY19) International Performance


Emami has high dependence on SAARC and MENAP as they constitute ~75% of Emami’s international sales

West29%

North32%

East19%

South 20%

SAARC 43%

MENAP33%

CIS11%

Africa8%

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Assumptions Year to March (Rs mn) FY17 FY18 FY19 FY20E FY21E Revenue Growth (%) Domestic Gr. (%) 10.0 4.5 4.0 11.8 11.4

Navratna oil 3.0 7.5 8.0 12.0 11.0 Boroplus cream 15.0 21.8 2.0 12.0 12.0 Zandu & Mentho plus balm 6.0 6.0 7.0 12.0 12.0 Fair & Handsome (6.0) 4.3 3.0 8.0 7.0 Kesh King 48.0 (15.4) 13.0 12.5 12.5

International Gr. (%) (16.0) 14.0 12.0 29.5 12.6 Gross Margin (%) 66.7 68.0 65.7 66.2 67.1 Employee (% of sales) 9.4 10.1 10.4 10.2 10.1 ASP (% of sales) 17.7 18.6 17.5 17.3 17.4 Distribution (% of sales) 2.5 2.5 2.5 2.5 2.5 Other Expenses (% of sales) 6.7 8.4 8.1 8.0 8.1 EBITDA Margin (%) 30.4 28.4 27.3 28.1 29.0 Tax Rate (%) 19.7 21.9 24.9 21.5 21.5 Source: Company, HDFC sec Inst Research Change in estimates

FY20E FY21E

OLD NEW Chg (%) OLD NEW Chg (%) Net Sales 30,630 30,717 0.3 34,429 34,286 (0.4) EBITDA 8,852 8,626 (2.6) 10,111 9,934 (1.8) APAT 6,328 6,131 (3.1) 7,430 7,180 (3.4) EPS 13.9 13.5 (3.1) 16.4 15.8 (3.4) Source: HDFC sec Inst Research

Acquisition of ‘Crème 21 will accelerate international growth in FY20 We cut estimates by ~3% to factor higher promotions and A&P spends. We believe mgt. will focus on volume growth over margin expansion.


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Peer Set Comparison

Company MCap (Rs bn)

CMP (Rs) Reco. TP (Rs)

EPS (Rs) P/E (x) EV/EBITDA (x) Core RoCE (%) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

HUL 3,764 1,772 NEU 1,804 28.1 33.4 40.7 63.0 53.1 43.5 42.3 38.7 30.2 68.3 28.3 21.9 ITC 3,300 291 BUY 398 10.4 11.3 12.4 27.9 25.7 23.4 17.9 16.0 14.4 39.2 40.9 43.7 Nestle 1,064 11,036 NR 11,064 167.1 206.5 245.9 66.0 53.4 44.9 37.9 32.5 27.7 82.1 101.4 121.4 Dabur 705 400 BUY 464 8.2 10.2 12.2 48.8 39.1 32.8 39.1 32.1 27.1 47.5 55.4 61.6 Britannia 695 2,897 NEU 3,101 48.1 56.6 68.9 60.2 51.2 42.0 39.4 32.7 26.9 39.2 41.4 46.1 Marico 472 366 BUY 378 7.2 8.9 10.8 50.7 40.9 33.8 36.7 30.0 25.5 48.8 47.6 54.4 Colgate 321 1,180 NEU 1,227 27.7 31.4 36.3 42.6 37.6 32.5 25.7 22.5 19.6 67.2 72.3 80.6 Jub. Food 176 1,334 BUY 1,739 24.1 30.9 37.8 55.4 43.2 35.3 28.2 22.5 18.5 45.8 57.6 68.3 Emami 162 356 BUY 506 11.0 13.5 15.8 32.4 26.4 22.6 21.9 18.5 15.8 21.5 28.1 34.5 Source: HDFC sec Inst Research


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Income Statement (Rs mn) FY17 FY18 FY19 FY20E FY21E Net Revenues 25,021 25,306 26,929 30,717 34,286 Growth (%) 4.4 4.5 6.4 14.1 11.6 Material Expense 8,327 8,099 9,230 10,376 11,278 Employee Expense 2,347 2,547 2,797 3,140 3,454 ASP Expense 4,428 4,696 4,702 5,324 5,963 Distribution Expense 638 645 687 783 874 Other Expense 1,679 2,125 2,171 2,468 2,783 EBITDA 7,602 7,195 7,343 8,626 9,934 EBITDA Growth (%) 10.6 (5.4) 2.1 17.5 15.2 EBITDA Margin (%) 30.4 28.4 27.3 28.1 29.0 Depreciation & Amortisation 3,086 3,109 3,253 3,403 3,578 EBIT 4,516 4,086 4,089 5,223 6,356 Other Income (Inc. EO Items) 311 195 279 206 359 Interest 580 343 214 74 24 PBT 4,247 3,938 4,056 5,355 6,691 Tax 836 863 1,009 1,151 1,439 RPAT 3,415 3,064 3,025 4,182 5,230 Adjustment 2,076 2,069 1,979 1,949 1,949 APAT 5,491 5,132 5,004 6,131 7,180 APAT Growth (%) 3.1 (6.5) (2.5) 22.5 17.1 Adjusted EPS (Rs) 12.1 11.3 11.0 13.5 15.8 EPS Growth (%) 3.1 (6.5) (2.5) 22.5 17.1

Source: Company, HDFC sec Inst Research Note: Acquisition of ‘Crème 21’ is factored from FY20

Balance Sheet (Rs mn) FY17 FY18 FY19P FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 227 227 454 454 454 Reserves 17,320 19,909 20,356 21,296 22,308 Total Shareholders’ Funds 17,547 20,136 20,810 21,750 22,762 Minority interest 14 6 (2) (2) (2) Long Term Debt - - - - - Short Term Debt 4,730 3,259 1,098 298 98 Total Debt 4,730 3,259 1,098 298 98 Net Deferred Taxes 282 118 160 160 160 Non Current Liabilities 367 580 505 494 482 TOTAL SOURCES OF FUNDS 22,939 24,098 22,571 22,699 23,500 APPLICATION OF FUNDS Net Block 7,504 8,005 7,490 8,225 8,860 CWIP (Including capital advances) 129 226 - - - Goodwill 12,520 10,095 8,774 7,239 4,754 Non Current Investments 944 1,855 1,855 1,855 1,855 Other Non Current Assets 526 790 790 790 790 Total Non-current Assets 21,622 20,971 18,910 18,110 16,260 Inventories 1,792 1,940 2,217 2,529 2,823 Debtors 970 1,559 2,164 2,426 2,661 Other Current Assets 814 1,433 1,953 2,053 2,153 Cash & Equivalents 834 2,076 2,240 2,998 5,458 Total Current Assets 4,409 7,008 8,573 10,005 13,094 Creditors 1,847 2,420 2,914 3,275 3,560 Other Current Liabilities 1,245 1,460 1,998 2,140 2,293 Total Current Liabilities 3,092 3,880 4,912 5,416 5,853 Net Current Assets 1,317 3,127 3,661 4,590 7,241 TOTAL APPLICATION OF FUNDS 22,939 24,098 22,571 22,699 23,500



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Cash Flow Statement (Rs mn) FY17 FY18 FY19P FY20E FY21E Reported PBT 4,236 3,938 4,056 5,355 6,691 Non-operating & EO Items (124) (90) - - - Interest Expenses 580 343 214 74 24 Depreciation 3,086 3,109 3,253 3,403 3,578 Working Capital Change 226 (612) (1,421) (1,470) (891) Tax Paid (707) (809) (1,009) (1,151) (1,439) OPERATING CASH FLOW ( a ) 7,296 5,878 5,094 6,210 7,964 Capex (2,814) (1,232) (1,192) (2,603) (1,728) Free Cash Flow (FCF) 4,483 4,646 3,902 3,607 6,236 Investments (904) (2,278) - - - Non-operating Income 742 719 3 - - INVESTING CASH FLOW ( b ) (2,975) (2,791) (1,188) (2,603) (1,728) Debt Issuance/(Repaid) (1,985) (1,470) - - - Interest Expenses (583) (344) (214) (74) (24) FCFE 1,753 1,273 3,691 3,533 6,211 Share Capital Issuance - - - - - Dividend (2,353) (1,423) (2,352) (3,242) (4,218) Others (37) - (35) (12) (12) FINANCING CASH FLOW ( c ) (4,958) (3,237) (2,601) (3,327) (4,254) NET CASH FLOW (a+b+c) (637) (150) 1,304 280 1,982 EO Items, Others (53) (445) - - - Closing Cash & Equivalents 501 795 2,161 2,419 4,379


Key Ratios FY17 FY18 FY19P FY20E FY21E PROFITABILITY (%) GPM 66.7 68.0 65.7 66.2 67.1 ASP (% of sales) 17.7 18.6 17.5 17.3 17.4 EBITDA Margin 30.4 28.4 27.3 28.1 29.0 EBIT Margin 18.0 16.1 15.2 17.0 18.5 APAT Margin 21.9 20.3 18.6 20.0 20.9 RoE 32.6 27.2 24.4 28.8 32.3 RoIC (or Core RoCE) 24.0 21.8 21.5 28.1 34.5 RoCE 15.7 13.6 13.2 18.1 21.6 EFFICIENCY Tax Rate (%) 19.7 21.9 24.9 21.5 21.5 Fixed Asset Turnover (x) 3.3 3.2 3.6 3.7 3.9 Inventory (days) 26.1 28.0 30.1 30.1 30.1 Debtors (days) 14.2 22.5 29.3 28.8 28.3 Other Current Assets (days) 11.9 20.7 26.5 24.4 22.9 Payables (days) 26.9 34.9 39.5 38.9 37.9 Other Current Liab & Provns (days) 18.2 21.1 27.1 25.4 24.4 Cash Conversion Cycle (days) 7.0 15.2 19.3 18.9 19.0 Net D/E (x) 0.2 0.1 (0.1) (0.1) (0.2) Interest Coverage (x) 7.8 11.9 19.1 71.0 260.0 PER SHARE DATA (Rs) EPS 12.1 11.3 11.0 13.5 15.8 CEPS 13.1 12.8 12.7 15.5 18.2 Dividend 7.0 7.0 4.4 6.1 7.9 Book Value 38.7 44.4 45.8 47.9 50.1 VALUATION P/E (x) 29.5 31.6 32.4 26.4 22.6 P/BV (x) 9.2 8.0 7.8 7.4 7.1 EV/EBITDA (x) 21.8 22.7 21.9 18.5 15.8 EV/Revenues (x) 6.6 6.4 6.0 5.2 4.6 OCF/EV (%) 4.4 3.6 3.2 3.9 5.1 FCF/EV (%) 2.7 2.8 2.4 2.3 4.0 FCFE/Mkt Cap (%) 1.1 0.8 2.3 2.2 3.8 Dividend Yield (%) 2.0 2.0 1.2 1.7 2.2



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RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 4-May-18 541 BUY 615 9-Jul-18 520 BUY 627

3-Aug-18 569 BUY 634 10-Oct-18 418 BUY 561 30-Oct-18 402 BUY 547 9-Jan-19 423 BUY 551 1-Feb-19 411 BUY 543

19-Feb-19 362 BUY 528 10-Apr-19 402 BUY 534 28-May-19 356 BUY 506

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Disclosure: We, Naveen Trivedi, MBA & Siddhant Chhabria, PGDBM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

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buy maintain faith industry fmcg cmp (as on 27 may 2019) … - 4qfy19 - hdfc... · 2019-05-28 ·...

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