Emami Limited

EMAMI LIMITED
Microsec Research

-126 May 2009 Microsec Research

Emami Limited

Table of contents
To pic Company Profile and History.. Products and Brands. Industry Analysis. Investment Thesis Key M anagement Personnel Peer Group Analysis. Valuations Risks. Financials.. Disclaimer.. P age N um ber 4 5-6 7-8 9 - 12 13 - 15 16 16 17 18 - 19 20

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Emami Limited
BUY
Market Data Current Market Price (INR) Target Price (INR) Upside (%) 52 Week High / Low (INR) Market Capitalization (In INR Mn) 278.45 466.70 67.61% 332 / 175 17,304.32

Emami Limited

Sector- FMCG
We rate Emami Limited (Emami) a BUY. Our rating is driven by the companys strengthening presence across the product verticals, wide distribution network, strategic fit provided by Zandu Pharmaceutical Works Limiteds (Zandu) acquisition, and the companys well planned growth strategy. However, high competition in the Indian FMCG space impedes our optimism.

Investment Highlights Strengthening presence across the product verticals continue to drive growth. Emamis product portfolio consists of some of the most successful brands in the Indian market, across beauty, health and personal care products. Emamis power brand portfolio comprises of Boroplus Anti-septic Cream, Navratna Oil, and Menthoplus Balm etc. This factor coupled with the companys well established geographical reach helped it to witness incremental market share in most of the product categories. Spread out global presence augers well. Emami possesses a wide distribution channel across
the country with more than 2,800 distributors and direct coverage to over four lac retail outlets. The company also has an extensive international presence across 60 nations. We expect Emamis large distribution network to support its performance by providing the company a direct connection with large number of end users.

30

Return (%)

-30

-60 26-Ma y25-Aug-08 24- Nov-08 23-Fe b-09 25-Ma y-

Ema mi

S e nse x

STOCK SCAN BSE Code NSE Code Bloomberg Ticker Face Value (INR) Equity Share Capital (INR mn) Diluted EPS FY09 (INR) Current P/E (on FY2009P EPS) Average P/E (3 years) Beta vs Sensex Average Daily Volmes
Sha reho ld ing Corporate Bodies 7.43% Institutions 1.54% Individuals 3.17% Others 0.01%

531162 EMAMILTD HMN IS 2.00 124.30 14.66 19.0x 22.5x 0.67 26,532

Acquisition of Zandu provides a viable fit. Emami recently acquired ~70.3% stake in Zandu for approxiamtely INR7.35 Bn. The acquisition provided the company with the targets strong R&D capabilities and well known branded products. Emami complements these products with its established presence, both domestic and abroad, and production facilities at tax efficient locations. As a result, we foresee Zandu as a strategic fit for the company. Well planned growth strategy boasts optimism. Emami outlined a well built corporate and marketing strategy focused on revenue growth and margins improvement. While the company plans to boost the revenues by new launches, extension of existing product categories, and concentration on new export geographies; it aims at improving profitability by rationalized advertisement and cost control initiatives. Its marketing theme Ghar-Ghar mein Emami also gels well with the companys corporate strategy.
Exhibit 1. Emami Consolidated Financial Data
P a rtic ula rs Net Sales
Growth (%) EBIDTA EBIDTA Margins (%) Net Profit

(in INR mn)

2009P 8759.6
50.07% 1587.2 18.12% 1154.1 24.43% 13.18% 14.66

2007A 5158.0
71.70% 654.8 12.70% 659.2 34.39% 12.78% 10.61

2008A 5837.1
13.17% 960.2 16.45% 927.5 40.70% 15.89% 14.92

2010E 10486.4
19.71% 2378.9 22.69% 1928.6 67.11% 18.39% 23.57

2011E 12092.8
15.32% 2869.4 23.73% 2582.4 33.90% 21.35% 31.29

Promoter and Promoter Group 87.84%

Growth (%) Net Profit Margin (%) EPS

BVPS P/E (x) P/B (x)

36.92 18.34 5.21

46.50 19.59 6.17

96.67 16.85 2.13

143.28 11.81 1.94

162.66 8.90 1.71

Head of Research:
Ajay Jaiswal (ajaiswal@microsec.in)

Source: Company, Microsec Research, Bloomberg

Analysts:
Nitin Prakash Daga (npdaga@microsec.in) Sumit Jatia (sjatia@microsec.in)

-3Microsec Research

26 May 2009

Emami Limited

Company Profile & History

Emami was founded by two childhood friends Mr. R. S. Agarwal and Mr. R. S. Goenka, when the duo left their high profile jobs of Birla group to set up Kemco Chemicals, as a partnership firm. Kemco Chemicals started its business with an ayurvedic medicine and cosmetic manufacturing unit in 1974. Following this, the company moved into production of costmetic products, under the brand name Emami, from a small manufacturing unit in Kolkata. Subsequently, it established a chain of distributors to sell Emami products in West Bengal to whole of Eastern India, and then to other states of the country. What proved as a turning point for Emami, was the acquisition of Himani Ltd in 1978. The company strategically acquired the sick unit to leverage its production capabilities, based on ayurvedic preparation, in health care and toiletries space. In 1984, Emami launched its first flagship brand Boroplus Antiseptic Cream under Himani umbrella. Boroplus, today, is the best selling Antiseptic cream not only in India but also in Russia, Ukraine and Nepal. In ninties, the company came up with next flagship brand Navratna in cool oil vicinity and opened second production facility at Pondicherry. In 1995, the partnership firm Kemco Chemicals was turned into a public limited company, Emami Limited. Afterwards, Emami Limited was merged with Himani Ltd and the name of the new company was reflected, as Emami Limited, in new certificate of incorporation as at 01 September 1998. While in the year 2000, the company demerged its investment undertaking, it set up a new unit at Amingaon in 2003. Additionally, Emami came up with a public issue of 5.0 Mn shares of INR2.0 each at INR70.0 per share in 2005. The company also introduced Fair and Handsome, the first fairness cream for men, during the same year. To leverage on its ayurvedic expertise, Emami established a health care division and new brands of ayurvedic Over the Counter (OTC) medicines in 2006. Initiated as a small partnership firm, Emami is now grown to a INR7.00 Bn venture in three decades.

Exhibit 2. Emami Group Structure

Em a m i L t d Emami Bangladesh Ltd Emami Rainbow Niketan Pvt Ltd Orbit Projects Pvt Ltd Basera Enclave Makers Pvt Ltd Swastik Promoters Pvt Nathvar Tracon Pvt Ltd A Raj Abasan Pvt Ltd Emami Skyhigh Pvt Ltd Emami Properties Pvt Ltd Emami Constructions Pvt Emami International FZE Emami Vridhi Commercial Pvt New Age Realty Pvt Ltd Octagon BPO Pvt Ltd Emami Ashiana Pvt Ltd Sri Mohamaya Investments Pvt

Emami UK Ltd

Emami Realty Ltd

Source: Company, Microsec Research

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Emami Limited

Products & Brands

Emamis ability to continuously upgrade its products and services and launch new offerings helped it to substantially expand the product portfolio. The company introduced several power brands in its three decades of existance. Many of Emamis brands are market leaders. While launching new products, the company creates a need and relevance of such products. As most of Emamis products have a low penetration in the country, they have an immense potential to be realized, going forward. The companys strategy to promote its products through well known celebrities provide the products a dominant position in the consumers mind. This acts as an entry barrier as well for the new players in the product category. Furthermore, every new product launch of Emami comes through an extensive research. The companys current research team includes 25 professionals, which it plans to increase to 50 in the coming quarters. The following table reflects the companys market share across various brands and products. Exhibit 3. Emami products across the segments
(INR in millions) Power Brand Boroplus Cream Navratna Oil Mentho Plus Balm Sona Chandi Boroplus Powder Fast relief Fair & Handsome* Segment Antiseptic cream Cooling oil Headache balm Chyawanprash Prickly heat powder Pain reliever Mens fairness cream Market Size 1901 3970 3342 2010 1459 2007 3130 Market Share (%) Volume 73.0 54.0 17.0 10.0 22.0 12.0 59.0 Value 74.0 50.0 14.0 9.0 16.0 11.0 59.0

Source: Company, Microsec Research *Estimated Market Size, Market Share

Therapeutic Healers
Navratna Oil Navratna oil, a potent therapeutic oil, is rated as one of the most trusted brands by ORG Marg. The total market size of the product is INR3,970 Mn. Emami is a market leader in this category with a healthy 54 per cent market share as on 2007-08 by volume and 50.0 per cent market share by value. The other major players in the segment are Himgange, Marico Maha thanda, Dabur super thanda, Banphool and Rahat rooh. In April 2008, the company has launched two strategic variants of Navratna Navratna Extra Thanda and Navratna Lite. Himani Fast Relief Himani fast relief, a product endorsed by Mr. Amitabh Bachchan, is expert in pain management and providing instant relief. The total market size of the product is INR2,007 Mn and the company enjoys a market share 12.0 per cent by volume and 11.0 per cent by value as on 2007-08. The other major brands in the segment are Moov and Iodex. The product has a wide acceptance in the states of Delhi, UP and Punjab.

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Emami Limited

Mentho Plus Balm Mentho plus balm, a pain relief balm and headache reliever, is another strong brand of the company. Despite the product not being endorsed by any celebrity, it grew at a CAGR of 29.0 per cent in the last three years. The company extended its product presence through 110,000 incremental outlets. With a strong distribution network, the company aims to achieve an aggressive brand growth in 2008-09. The major competitor brands in the segment are Zandu Balm (which is now aquired), Amrutanjan Balm, Tiger Balm, and Monisons Balm.

Personal Care Segment

Fair and Handsome In October 2005, Emami launched the first fairness cream for men in India. The product is one of the major contributors in the companys topline which is endorsed by Shah Rukh Khan. The company enjoys a first mover advantage in the segment with the total market size of around INR3130 mn. Riding on the early-mover advantage, underpenetration in the category and the rise of the metro-sexual man provide ample growth opportunities for the brand. The major competitors operating in the same segment include Nivea Whitening, Menz Active, Fair One Man, and Set Wet Get Fair. The company enjoys a market share of ~59% in this product category. Boroplus Antiseptic Cream Emami ltd is a market leader in the antiseptic cream segment with a market share of ~73.0 per cent for the year ended FY08. Boroplus antiseptic cream is the largest selling antiseptic cream in India growing at a CAGR of 22.0 per cent in last three years. The main reason for the products superior performance was thrust on rural sales, multi purpose positioning and introduction of Kareena Kapoor and Amitabh Bachchan as brand ambassadors. The brands popularity and credibility can be gauged by The Brand Equity Survey conducted by The Economic Times, India in which it has been ranked 87th.

Ayurvedic Health Supplement

Sona Chandi Chyawanprash Sona Chandi is a unique product based on years of research by Himani Ayurveda Science Foundation. The market share of Sona Chandi grew to 9% (or ~INR180.9 Mn) in 2007-08, on account of a strong following in UP, Uttaranchal (12%), MP (10%) and Maharashtra (8%). In the medium sized markets of Delhi, Rajasthan, Punjab and Haryana, the brand enjoyed a market share of 16%, 21%, 11% and 22% respectively. The company has been sucessful in introducing product extensions like Sona Chandi Kesar Chyawanprash targeted at the older gentry and a summer variant called Sona Chandi Amritprash and a chocolate variant for children, Chocoprash. The other major players in the segment are Dabur, Baidyanath and Zandu (now acquired).

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Emami Limited

Industry Analysis Indian FMCG Space

Indian FMCG sector witnessed a strong growth in last several years. The industry expanded by ~16.0% y-o-y to USD17.36 Bn in FY2008. According to Federation of Indian Chamber of Commerce and Industry (FICCI), the Indian FMCG sector could rise to USD33.40 Bn by FY2015. This represents a Compounded Annual Growth Rate (CAGR) of 9.8% over FY200815 period. Continued increase in Indian population coupled with increase in per capita income is likely to remain the key drivers of this growth. In addition, emerging demand from rural India and inelastic nature of demand are expected to support the incremental demand of FMCG goods. The demand for these goods is likely to get a boost due to low penetration levels as well in the some of the industry segments. Low penetration levels indicate a huge untapped growth opportunity for the FMCG players of the country. Exhibit 4 reflects the penetration levels in India across the major FMCG product categories. Exhibit 4. FMCG penetration levels across the products R100.0% i 80.0% s i 60.0% n 40.0% g
20.0% 0.0% Deodorants Toothpaste Skin Cream Shampoo Untensil Cleaner Instant Coffee Washing Powder Detergent Toilet Soap Packaged Bar Fruit Juice Mosquito Repllants Hair Oil 2.1% 86.1% 88.6% 91.5% 71.0% 48.6% 38.0% 22.0% 28.0% 6.6% 30.0%

1.0%

Penetration Levels

Source: Company

Inflation levels during mid FY2009 also supported the growth of industry by providing room to increase prices. This factor, however, was not lucrative for the industry players due to a similar hike in raw material prices during the same period. Nevertheless, the raw material costs started declining in the latter part of the year, which is expected to help the companies, in the sector, to witness an upturn in the margins. Major companies in the industry include Hindustan Unilever Limited (HUL), Procter & Gamble Hygiene and Health Care Limited (P&G), Dabur India Limited (Dabur), Marico Limited (Marico), Emami, and Godrej Consumer Products Ltd (Godrej).

Emamis presence in the industry

Personal care products such as antiseptic cream, powder, hair oil etc. accounts for more than 22.0% of the Indian FMCG pie. Low penetration of personal care products in India pose even more lucrative growth prospects in this space. Emami is rightly placed to reap the benefits of these opportunities. With all its gamut of products, Emami was catering to a large slice of FMCG market at the end of FY2008. These products include some of the personal care product categories, therapeutic product categories, hair care products, and ayurvedic health supplements. In addition, the company is present in Over-the-Counter (OTC) drugs and medicines. While the company is a market leader in domestic antiseptic cream and therapeutic oil segments, it has a pioneer presence in the market of fairness cream for men.

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Emami Limited

Furthermore, Emami is aggressively taking initiatives to extend its product line as well as product width across the product categories. The acquisition of Zandu is also likely to help the company increase its market share especially in therapeutic healers category. These initiatives, in our view, will help the company to garner a greater share of the Indian personal care, and thereby FMCG pie, going forward.

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Emami Limited

Investment Thesis Strengthening presence across the product verticals continue to drive growth - Emamis
product portfolio consists of some of the most successful brands in the Indian markets, across beauty, health, and personal care products. Emamis power brand portfolio comprises of the following brands: Boroplus Anti-septic Cream Navratna Oil Menthoplus Balm etc. Most of Emamis power brands have very high growth prospects. In addition, the companys ability to introduce value-added products and brand extensions, are likely to drive revenue growth, going forward. This factor, coupled with the companys well-established geographical reach, helped it to witness incremental market share in most of the product categories during FY2008. Exhibit 5 reflects the companys performance vis--vis the overall product categories during FY2008. Exhibit 5. Emami performance against the overall product categories
35.0% 27.4% 25.0% 23.9% 19.2% 15.0% 13.8% 17.2% 11.4% 6.2% 5.0% -3.2% 0.3% 0.8%

14.7% 11.9%

-5.0% Thick Oil Antiseptic Cream Chyawanprash Industry Growth Balm Emami Growth Rubificient Prickly Heat Powder

Source: Company, Microsec Research, ACN Report 07-08

Emami strategically develops new products for some of the least penetrated markets. This factor enables a first mover advantage for the company, which in turn helps it in gaining higher margins and larger share of the target market. In line with this, the company posted incremental market share across most of its product categories, as reflected in the following exhibit. Exhibit 6.Market share across the product categories
80.0%
20.0%

70.0%

15.0%

60.0%

10.0%

50.0%

5.0%

40.0% FY2005 FY2006 Boroplus Antiseptic Cream FY2007 FY2008 Navratna Oil

0.0% FY2005 FY2006 FY2007 FY2008 Mentho Plus Balm Boroplus Prickly Heat Powder Sona Chandi Chyawanprash Fast Relief

Source: Company, Microsec Research

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Emami Limited

Spread out global presence continues to support performance - Emami complements its
strategy Nukkad Nukkad pe Emami with its wide spread distribution channel. The companys distribution network comprises of over 2,800 distributors, connecting it to more than 400,000 retail outlets. The large distribution network provides Emami a large foothold in the rural markets of India. Emami products are available across 2.6 Mn outlets in India enabling it to garner uniform sales across all directions. The highest revenue contribution is from north (33.0 per cent) followed by west, east and south contributing 26.0, 22.0 and 19.0 per cent respectively. Exhibit 7 demonstrates the companys wide domestic distribution network. Exhibit 7. Emami Distribution Channel across India

Source: Company

In addition, the companys distribution network entails unique support from the rural promotion initiatives such as Emami Mobile Traders, Small Village Shops, and alliances with ITC e-Choupal, Indian Oil Corporation (IOC) Petrol Pumps, and Indias postal network. The company also introduced Low Unit Packs (LUPs) to attract first time and price sensitive customers in the rural areas. In urban regions, Emami promote the products

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Emami Limited

through malls, retail chains, grocery stores, and specialized distributors. The following exhibit reflects the companys geographical promotion strategy. Exhibit 8. Emami Promotion Strategy
Rura l Urb an

Tie up with ITC e-chaupal

Tie up with district post office

Emami Mobile Trader and small village shops

Modern trade channel

Retail Network

Coverage of four states

Coverage of 280 post offices

Coverage of 7.8 lac households

Coverage of 2200 outlets

Coverage of 4 lac outlets

Source: Company, Microsec Research

Besides strong domestic presence, the company has established its presence in nearly 60 countries in CIS, Indian sub-continent, Middle East, Europe & North America. Emamis ability to develop different product ranges based on different consumer preferences at different locations bodes well for its future performance.

Acquisition of Zandu provides a viable fit - Emami recently acquired ~70.3% stake in Zandu, a multi product entity for approximately INR7.35 Bn. This acquisition provided the company with the targets strong R&D capabilities and well-known branded products. Emami complement these products with its established presence, both domestic and abroad, and production facilities at tax efficient locations. As a result, we foresee the acquisition as a strategic fit for the company. Emami financed the acquisition through issue of new shares worth INR3.50 Bn, new debt of INR1.61 Bn and sale of investments.
Zandu is mainly engaged in the promotion of ayurveda and bringing the benefits of ayurveda to the common persons. The acquired company has four existing manufacturing facilities with the fifth one at Uttarakhand to commence production shortly. Zandu has a strong R&D capability, recognized by the Department of Scientific and Industrial Research, Ministry of Science and Technology, and Government of India. It produces more than 300 health promoting products using as many as 200 medicinal plants and their extracts. Zandu also owns renowned brands like Zandu balm, Zandu special chyawanprash and other ayurvedic and ethical products. The company expects the following synergies from Zandu acquisition, going forward: Scale buying Improved packaging Removal of redundant and unnecessary expenses Advertisement rationing and reduction of commission in the middle of the value chain Strategic use of factory locations

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Emami Limited

Income tax benefits Synergies from offering Zandu products in domestic and export markets through Emamis wide distribution channel, etc. With this, the acquisition of Zandu is seen as a strategic fit for Emami due to the resultant distribution and production synergies. The company deployed a team of 80 Chartered Accounts and 140 MBAs to drive the integration process across the departments. Additionally, under its integration process Emami is planning to limit consolidated number of its manufacturing locations to six. Currently, Emami produces goods from nine locations while Zandu manufactures goods at 6-7 locations. Since both the companies have rich heritage and experience, they are now better poised to exploit the emerging opportunities because of this acquisition.

Well planned growth strategy boosts optimism - Emami outlined a well built corporate strategy focused on revenue growth and margins improvement. While the company plans to boost the revenues by new launches, extension of existing product categories, and concentration on new export geographies, it aims at improving profitability by rationalized advertisement and cost control initiatives. The company has been able to successfully upgrade its existing product portfolio and stregthen its distribution channel. Added to this, new product launches and aggressive branding helped the company to register a healthy revenue growth. Emami plans to expand its presence into Baby Care, Female Hygiene, Hair Dye, Shampoo, Cold Cream, Body Lotions, Glycerin Soap, and OTC product categories in near term. Its marketing initiatives, aimed at the concepts of Ghar-Ghar mein Emami, Sabke Dimag pe Chaya Emami, Jahan Dekho wahan Emami, and Har Jaroorat ke Liye Emami etc. are expected to support its expansion plans in the country.
Emami is actively seeking growth opportunities in the overseas markets as well. The companys brand Boroplus in antiseptic cream space is not only a market leader in India but also in Ukraine, Russia and Nepal. Going forward, the company plans to boost its foreign presence by aggressive promotion and introduction of new product categories. Exports contributed around 10% of Emamis total sales in FY2008. With the companys strengthening presence across more than 60 countries, including SAARC, Gulf, African, European, and CIS nations, we expect this share to increase in the coming quarters. The company also expects its international promotion initiatives to push the export realizations by 50% in the forthcoming year. Moreover, Emami expects the exports to touch INR3.0 Bn in next three years and INR7.0 Bn in next five years from the current levels of INR1.0 Bn. In addition, Emami continues to foresee a robust demand for Fair and Handsome in export markets. The company also focuses on incremental margins led by its strong brand, helping it reduce advertising and promotion burden and its cost control initiatives, going forward.

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Emami Limited

Key Management Personnel

Emami limited has a strong management team with rich experience and eminent personalities. The educational and professional qualifications of Emamis key management personnel are as follows: Mr. Radhe Shyam Agarwal Education Chartered Accountant Company Secretary LLB Eminent industrialist with experience in strategic planning, corporate affairs and finance On the Board of Emami Paper Mills Limited Emami Realty Limited Advance Medicare & Research Institute Limited Susruta Clinic & Research Institute for Advance Medicine Pvt. Limited South City Projects (Kolkata) Limited Bengal NRI Complex Limited Rupa & Co Limited Committee Member of Shree Vishudhanand Hospital & Research Institute Served Director on the Board of the West Bengal Industrial Development Corporation and president of MCC, etc Mr. Radhe Shyam Goenka Education M.com LLB Expert in taxation, strategic planning, corporate affairs and financial planning On the Board of Emami Paper Mills Limited Susruta Clinic & Research Institute for Advance Medicine Pvt. Limited Advance Medicare & Research Institute Limited South City Projects (Kolkata) Limited Khaitan (India) Limited and others Trustee in Emami Foundation, Maa Foundation, Shree Vishudhanand Hospital Trust, Keshardeo Ratni Devi Goenka Trust, Banshilal Janki Devi Agarwal Trust and Bhagatram Charitable Trust. Chairman (Research & Seminar) of Shree Vishudhanand Hospital & Research Institute Committee member of Shri Shikshayatan Secondary School, Nagrik Swastha Sangha, and the Indian Cancer Society

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Emami Limited

Mr. Sushil Kumar Goenka Education Commerce Graduate Work Experience Secretary of Aradhana Trust, Vishwa Jagriti Mission Trust (Kolkata) and Vivekananda Hospital and Research Centre, Kolkata Former president of the Lions Club of North Calcutta and a member of Shri Ramkrishna Matrimangal Pratishthan, Ariadaha. Mr. Viren J. Shah Education AMP from the Harvard Business School, USA Special expertise in general business management Work Experience Served as West Bengal Governor from December 1999 to December 2004. Was the Chairman of Mukund Limited for 27 years. Former President of ASSOCHAM, IMC and other associations. Member of the Parliament for 16 years in the Lok Sabha and Rajya Sabha and of several parliamentary committees Mr. K.N. Memani Education Chartered Accountant Specializes in business and corporate advisory, foreign taxation, financial consultancy, etc. and is consulted on corporate matters by several domestic and foreign companies Work Experience Former Chairman and country managing partner of Ernst & Young, India Was the member of Ernst & Young Global Council for a decade Chairman of the Audit Committee and other committees in DLF Limited, Hindustan Times, ICICI Venture Funds Management Company Limited, HEG, Indo Rama, NEI, Aegon, etc Former member of the Expert Committee constituted by the Ministry of the Company Law for the amendment of the Companies Act for two consecutive years Served in the External Audit Committee (EAC) of the International Monetary Fund and was appointed the Chairman of EAC for 1999-2000 the only Indian appointed in this committee by the IMF Mr. Shrawan Kumar Todi Education M.Com Work Experience Chairman of Shrachi group of companies On the Board of Advance medicare and research institute Limited Bengal NRI research Complex Ltd

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Emami Limited

Bengal Shrachi housing Development ltd, etc Mr. Shyamanand Jalan Education & Work Experience Commerce graduate LLB Attorney and member of the Incorporated Law Society, India, and the Bar Council of India Former Vice-Chairman of the Central Sangeet Natak Academy Formal Chairman of the Science City and the Birla Industrial & Technological Museum Director of many other prominent companies Mr. Krishna Kumar Khemka Education & Work Experience Science Graduate Former Chairman of the Indian Paper Mills Association Former president of the Rotary Club of Calcutta, Indo-American Chamber of Commerce, Indo-Italian Chamber of Commerce, etc. Committee member of the Bharat Chamber of Commerce and associated with other chambers. Honorary Consul General of the Philippines Mr. Mohan Goenka Education & Work Experience Commerce graduate with an MBA from UK. Possesses extensive knowledge and experience in marketing and brand development Vice- Chairman of the Marketing Committee of the Confederation of Indian Industry (CII), Eastern Region Member of the Merchants Chamber of Commerce (MCC) and Young Entrepreneur Organization Mr. Aditya Vardhan Agarwal Education & Work Experience Commerce graduate Extensive knowledge and experience in marketing and brand development. Past Ex. Director, Committee Member and Chairman (FMCG) of ASSOCHAM Vice-President of West Bengal Basketball Association Advisor of the Academy of Ayurvedic Doctors of India, Kolkata Mr. Harsh Vardhan Agarwal Education and Work Experience Commerce graduate Possesses extensive knowledge in marketing and brand development and served as a Director of several companies

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Emami Limited

Peer group Analysis

Among the peer group, Emami ltd is expected to enjoy strong revenue and earnings growth in the next two-three years. The stock quotes at a discount to most of its peers. However, the stock is likely to be re-rated looking at the growth prospects of the company coupled with its diversified business model derived post Zandu acquisition. The company outpaced its peer group with regard to sales and net profit growth. Five years CAGR growth in sales for Emami is highest at 28.45 per cent. The company is also a front-runner among its peer group in net profit growth that stood at 28.56 per cent, except Dabur. Daburs CAGR growth in net profit is slightly higher, by 51 bps, than Emami. Although Dabur, Godrej, and Marico have comparable diversified FMCG businesses, HUL operate in different segments and is not strictly comparable. The companys performance vis--vis its peers is described in Exhibit 9.
E xhibit 9 : Co m petativ e Landscape E m am i Co m pany Net Sales EBIDTA PAT EBIDTA (%) NPM (%) EPS CM P P/E BVPS Price/Book
Source: BSE, Microsec Research

HU L (FY 0 9 )*

Dabur (FY0 9 ) 28309.80 4916.20 3908.00 17.37% 13.80% 4.52 112.45 24.88 9.46 11.89

M arico (FY0 9 ) 23884.20 3002.20 1886.80 12.57% 7.90% 3.10 65.20 21.03 7.44 8.76

(in INR mn) Go drej

(FY0 9 ) 8759.60 1587.17 1154.08 18.12% 13.18% 14.66 278.45 19.00 96.67 2.88

(FY0 9 ) 13929.70 2073.90 1732.50 14.89% 12.44% 6.83 164.75 24.12 22.05 7.47

208695.70 30713.80 25099.30 14.72% 12.03% 11.49 230.15 20.03 9.80 23.48

*For 15 months ending M ar'09

Valuations
We adopted a comparable valuation method to value Emami based on Price-to-Earnings (P/E) multiples. Historically, the company traded on a three year average closing P/E multiple of 18.3x. This reveals a discount to the peer group average P/E of 23.3x for the same period. While valuing Emami, we also considered historical average P/E multiples of Zandu, as the latter was acquired by the company. Though Zandu also traded at a discount vis--vis peer group average P/E historically, it traded at a premium over Emami. The target company traded at an average P/E multiple of 21.3x based on last three years closing P/E. To arrive at our target P/E multiple for Emami, we averaged the three year closing P/E multiples of Emami and Zandu. This resulted in a P/E multiple of 19.8x for the company, which on FY2010E EPS of INR23.57, reflects a target price of INR466.70 for the stock. Our target price translates a 67.6% upside over Emamis current stock price. The target price reflects a Price-to-Book Value (P/BV) multiple of 3.26x on FY2010E Book Value per Share.

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Emami Limited

Risks
Competitive environment with global giants dominating FMCG space The FMCG market in India comprises of some of the worlds biggest giants in this business. These players, including HUL and P&G, have more resources and highly diversified operations. As a result, they are better positioned to command a price as well as quality edge over the competitors. However, Emamis expertise in skincare, therapeutic, and Ayurvedic food supplement segments are likely to help it differentiate its products. This factor is also visible in the companys historical performance. Furthermore, Emamis innovative product launches, proposed entry into new business areas, and acquisition of Zandu, in our view, will enhance its competency, going forward.

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Financials
Consolidated Profit and Loss Account
P articulars N et Sales % YoY Growth E BI TDA E BI TDA M argin % Interest Depreciation Other Income P BT Tax FY0 9 P 8 ,7 5 9 .6 50.1% 1 ,5 8 7 .2 1 8 .1 % -87.9 -131.9 23.5 1 ,3 9 1 .0 -236.9 17.0% 1 ,1 5 4 .1 24.4% 0.0 -81.9 1 ,0 7 2 .2 14.7 5.4 FY1 0 E 1 0 ,4 8 6 .4 19.7% 2 ,3 7 8 .9 2 2 .7 % -127.2 -146.5 87.6 2 ,1 9 2 .9 -264.3 12.1% 1 ,9 2 8 .6 67.1% 2,340.0 -204.7 4 ,0 6 3 .9 23.6 8.9 FY1 1 E 1 2 ,0 9 2 .8 15.3% 2 ,8 6 9 .4 2 3 .7 % -38.5 -163.0 269.5 2 ,9 3 7 .3 -355.0 12.1% 2 ,5 8 2 .4 33.9% 0.0 -293.6 2 ,2 8 8 .8 31.3 11.9 FY 1 2 E 1 3 ,9 3 3 .2 15.2% 3 ,4 5 4 .7 2 4 .8 % -38.5 -180.6 421.9 3 ,6 5 7 .6 -440.8 12.1% 3 ,2 1 6 .7 24.6% 1.0 -340.7 2 ,8 7 7 .1 39.3 17.3 FY1 3 E 1 6 ,0 5 3 .6 15.2% 4 ,0 3 1 .1 2 5 .1 % -38.5 -198.2 609.8 4 ,4 0 4 .2 -529.3 12.0% 3 ,8 7 4 .8 20.5% 2.0 -379.5 3 ,4 9 7 .4 47.8 20.9 FY1 4 E 1 8 ,5 1 6 .5 15.3% 4 ,7 0 6 .6 2 5 .4 % -38.5 -215.9 840.6 5 ,2 9 2 .7 -634.5 12.0% 4 ,6 5 8 .2 20.2% 3.0 -422.2 4 ,2 3 9 .0 58.0 25.8

Tax Rate (%)

P AT % YoY Exceptional Items Minority Interest P AT after E xceptio nals & M in I nterest EPS DPS

Consolidated Balance Sheet

Particulars Sources o f Funds Shareholders Funds Share Capital Reserves and Surplus Loan Funds Secured Loans Unsecured loans Total Liabilities Application of funds Fixed assets Gross block Less : depreciation -as % of gross block Net block Cap. WIP I nvestments Goodwill Current assets, loans and advances Less: Current liabilities and provisions N et current assets Total Assets 1,126.3 396.7 199.9 6,295.9 2,829.5 1,443.5 1,386.0 9 ,4 0 4 .8 1,229.8 396.7 249.9 6,295.9 5,935.8 2,003.0 3,932.9 1 2 ,1 0 5 .2 1,346.9 396.7 299.9 6,295.9 7,271.8 1,923.9 5,347.9 1 3 ,6 8 7 .2 1,447.3 396.7 349.9 6,295.9 9,210.9 2,214.3 6,996.6 1 5 ,4 8 6 .4 1,531.1 396.7 399.9 6,295.9 11,585.5 2,549.2 9,036.3 1 7 ,6 5 9 .9 1,598.2 396.7 449.9 6,295.9 14,425.6 2,938.7 11,486.8 2 0 ,2 2 7 .6 1 ,5 2 3 .0 2,044.5 -918.2 1 ,6 2 6 .5 2,294.5 -1,064.6 1 ,7 4 3 .5 2,574.5 -1,227.6 1 ,8 4 4 .0 2,855.5 -1,408.2 1 ,9 2 7 .8 3,137.5 -1,606.4 1 ,9 9 4 .9 3,420.5 -1,822.2 7 ,0 7 0 .8 146.3 6,924.5 1 ,9 9 5 .9 1,963.8 32.2 9 ,4 0 4 .9 1 0 ,4 8 0 .4 146.3 10,334.2 3 8 4 .1 351.9 32.2 1 2 ,1 0 5 .3 1 1 ,8 9 7 .7 146.3 11,751.4 3 8 4 .1 351.9 32.2 1 3 ,6 8 7 .4 1 3 ,5 0 8 .2 146.3 13,361.9 3 8 5 .1 352.9 32.2 1 5 ,4 8 6 .5 1 5 ,4 7 9 .8 146.3 15,333.6 3 8 6 .1 353.9 32.2 1 7 ,6 6 0 .0 1 7 ,8 3 2 .3 146.3 17,686.0 3 8 7 .1 354.9 32.2 2 0 ,2 2 7 .7 FY0 9 P FY1 0 E FY1 1 E FY 1 2 E FY1 3 E FY1 4 E

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Emami Limited

Consolidated Cash Flow Statement

CA SH F LOWS

FY0 9 P 1,072.2 8.3 131.9 -251.2 -97.2 507.4 498.8 657.8 1,870.2 -741.9 -5,466.2 -6,208.1 1,613.4 22.0 3,478.0 -391.5 308.6 5,030.5

FY1 0 E 4,063.9 0.0 146.5 -131.7 -81.6 -601.4 559.4 -255.3 3,955.1 -250.0 -50.0 -300.0 -1,611.8 0.0 0.0 -654.2 902.5 -1,363.5 0.0

FY1 1 E 2,288.8 0.0 163.0 -116.8 -84.4 214.0 -79.0 -66.1 2,385.7 -280.0 -50.0 -330.0 0.0 0.0 0.0 -871.6 164.8 -706.8 0.0 1,348.9 3,012.1 4,361.0

FY 1 2 E 2,877.1 0.0 180.6 -133.5 -97.1 -216.8 290.3 -157.0 2,900.6 -281.0 -50.0 -331.0 1.0 0.0 0.0 -1,266.6 187.7 -1,077.9 1.0 1,491.7 4,361.0 5,852.7

FY1 3 E 3,497.4 0.0 198.2 -153.4 -112.4 -250.0 334.9 -180.9 3,514.6 -282.0 -50.0 -332.0 1.0 0.0 0.0 -1,525.7 200.8 -1,323.9 2.0 1,858.8 5,852.7 7,711.5

FY1 4 E 4,239.0 0.0 215.9 -177.7 -131.2 -290.8 389.6 -210.2 4,244.7 -283.0 -50.0 -333.0 1.0 0.0 0.0 -1,886.6 214.2 -1,671.4 3.0 2,240.4 7,711.5 9,951.9

Net Profit Change in Deferred Tax Liability Depreciation Change in Inventories Chg in Debtors Chg in Loans & Advances & others Chg in CL & Provisions Change in Working Capital Cash Flo w fro m Operatio ns Capex Change in Investments/Assets Cash Flo w fro m I nv esting Activ ities Change in Debt Change in Equity Change in Reserves Dividend and Dividend Tax Change in Minority Interest Cash Flo w fro m Financing Activ ities Cash flow from sale of Real Estate Assets Increase/(Decrease) in Cash Opening Cash and Bank Balance Closing Cash and Bank Balance

692.6 27.9 720.6

2,291.6 720.6 3,012.1

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Emami Limited

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- 20 26 May 2009 Microsec Research