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Uniquely positioned

Emami

Initiating Coverage | 25 April 2014

Sector: FMCG

Investors are advised to refer through disclosures made at the end of the Research Report.

Gautam Duggad ([email protected]); +9122 3982 5404

Manish Poddar ([email protected]); +91 22 3027 8029

Emami

225 April 2014

Emami: Uniquely positioned

Page No.

Summary ............................................................................................................ 3

Unique play in Personal Care and Healthcare ........................................... 4-12

Multiple growth drivers ............................................................................ 13-17

Stable RM prices to drive margin expansion ................................................. 18

Fundamentals strong; valuations reasonable .......................................... 19-22

Annexure I ........................................................................................................ 23

Annexure II ................................................................................................. 25-26

Financials and valuations .......................................................................... 27-28

Emami

25 April 2014 3

Uniquely positioned Leader in niche categories; multiple growth drivers

A unique play in Personal Care and Healthcare, with strong and differentiated positioning as a provider of natural/herbal products.

Strong focus on niche segments with low competitive intensity to help post 15.4% revenue and PAT CAGR over FY14-16 on the base of 23% PAT CAGR over FY12-14.

Key concerns: (1) continued consumption slowdown, (2) rising competition in skin care category, and (3) the management’s acquisition intent.

Fundamentals strong; valuations at 23.8x FY15E and 20.1x FY16E earnings. Initiate coverage with a Buy rating and target price of INR555 (24x FY16E EPS).

Unique play in Personal Care and Healthcare Emami (HMN) has successfully entered and established leadership in niche categories. It has created categories like Cooling Oil, Cooling Talc and Men’s Fairness Cream, and has gained leadership in Antiseptic Cream, where it faces limited competition from a regional player. Its strategy of using Ayurvedic proposition, creating a portfolio of high gross margin products with low competitive (especially MNC) intensity, driving volumes through smaller unit packs with a mass market focus, and investing aggressively in brands has made four of its largest brands leaders in their respective categories. ~70% of its sales are from categories where its brands are market leaders.

Multiple growth drivers HMN’s revenue growth in the last three years has been a function of consistent growth in incumbent brands, success of some of its new product launches, and a growing export portfolio. We expect the company’s power brands (Boroplus, Navratna, Zandu Balm & Mentho Plus Balm and Fair and Handsome) to continue posting healthy revenue growth and new launches to help drive volume growth. Distribution expansion and focus on OTC Healthcare are key cornerstones of its medium term growth strategy.

Stable RM prices to drive margin expansion; gains to be invested in brands Correction in menthol prices has driven significant gross margin expansion in FY13 and 9MFY14. Menthol prices are 13% lower YoY and are now stable. This should support gross margin expansion in FY15. We expect HMN to use the gains to invest more in brands, as it introduces new variants/brands.

Fundamentals strong; valuations reasonable We expect HMN to achieve 15.4% earnings CAGR over FY14-16 (on the base of 23% CAGR delivered over FY12-14). EBITDA margin should expand 100bp, driven by higher gross margin and scale benefits. We believe HMN is a good long term bet, with presence in categories having long runway for growth, together with low competitive intensity. We initiate coverage with a Buy rating and target price of INR555 (24x FY16E EPS). Continuation of current consumption slowdown and potential expensive acquisitions remain the key risks.

Initiating Coverage | Sector: Consumer

Emami CMP: INR463 TP: INR555 Buy

BSE Sensex S&P CNX

22,688 6,783

Stock Info

Bloomberg HMN IN

Equity Shares (m) 227.0

52-Week Range (INR) 539/393

1, 6, 12 Rel. Per (%) 4/-16/-4

M.Cap. (INR b) 105.2

M.Cap. (USD b) 1.7

Financial Snapshot (INR Billion)

Y/E March 2014E 2015E 2016E Sales 18.8 21.6 25.0

EBITDA 4.4 5.1 6.0

NP 3.9 4.4 5.2

EPS (INR) 17.3 19.4 23.1

EPS Gr. (%) 25.0 12.0 18.7

BV/Sh. (INR) 39.6 45.5 53.6

RoE (%) 47.0 45.6 46.5

RoCE (%) 48.8 50.2 52.1

Payout (%) 45.2 46.4 45.7

Valuations

P/E (x) 26.7 23.8 20.1

P/BV (x) 11.7 10.2 8.6

EV/EBITDA (x) 23.0 19.4 16.0

Div. Yld (%) 1.4 1.7 1.9

Shareholding pattern (%)

Dec-13 Sep-13 Dec-12

Promoters 72.7 72.7 72.7

Dom. Inst. 18.7 18.9 18.3

FII 2.2 2.7 2.7

Others 6.4 5.7 6.3

Stock Performance (1-year)

Emami

25 April 2014 4

Unique play in Personal Care and Healthcare Leadership in niche categories, limited competition

Market leading presence in niche categories, where gross margins are high and competitive intensity low, coupled with aggressive advertising and promotion strategy gives HMN a unique competitive advantage.

HMN derives ~70% of its sales from uniquely positioned power brands. Innovation and category expansion form the cornerstones of its medium term strategy.

Exhibit 1: Emami’s category mix (FY13)

Source: Company, MOSL

Exhibit 2: Power brands constitute ~70% of revenues


Leadership in niche categories, differentiated positioning imparts pricing power HMN has a demonstrated track record of innovation and category creation. It has successfully entered and established leadership in niche categories that were previously dominated by regional players. It has created categories like Cooling Oil, Cool Talc and Men’s Fairness Cream, and has gained leadership in Antiseptic Cream, where it faces limited competition. Its strategy of using its ayurvedic proposition, establishing presence in categories with high gross margins, driving volumes through smaller unit packs and investing aggressively in brands has helped four of its largest brands – BoroPlus Antiseptic Cream, Navratna Hair Oil, Fair and Handsome, and Zandu Balm – to achieve leadership strength. In this section, we describe the company’s positioning in its key categories – Cooling Oil, Skin Care, and Pain Relief. Exhibit 3: Strong market presence in underpenetrated categories


Cooling oils25%

Skin Care35%

Balm & Pain relief

26%

Others14%

Navratna Oil

19%

Boroplus Antiseptic

20%Zandu Balm & Mentho Plus Balm

24%

Fast Relief2%

Fair and Handsome

11%

Navratna Cool Talc

5%

Exports 11%

Others1%

95.7 92.3 88.674.5 72.8

60.451.0

18.61.6 1.1

Toile

t Soa

p

Det

erge

nt

(Pow

der)

Det

erge

nt

(Bar

)

Hai

r Oil

Toot

hpas

te

Sham

poo

Talc

Fair

ness

Cr

eam

Antis

eptic

Cr

eam

Cold

Cre

am

Penetration(%)

Emami

25 April 2014 5

Exhibit 4: Category Overview-Emami

Overall Market

Emami mkt share (%)

Category Size (INR m) 3 yr CAGR

Emami Offering 2010 2013

Cooling oil Market Size 8600 16.0% Navratna Oil 49 55

Antiseptic Cream 3900 13.1% Boroplus Cream 74 74

Balm 7000 25.9% Zandu & Mentho Plus Balm 57 58

Men's fairness cream 3600 38.1% Fair & Handsome 60 58

Prickly heat powder 3000 13.2% Boroplus Powder 10 13

Cool Talc 4600 24.3% Navratna Cool Talc 13 18

Pain reliever 10000 70.2% Fast Relief 9 4

Chyawanprash 3450 17.7% Sona Chandi & Zandu 10 10

Source: Industry, MOSL

Cooling Oil: The Cooling Oil category contributes ~25% of HMN’s revenue. Its

brands in this category, Navratna and Navratna Xtra Thanda cumulatively have over 55% market share. The company launched Navratna in 1989 and created the Cooling Oil category through aggressive advertising and increased push through smaller unit packs (~30% of Navratna’s sales). In the last three years, Cooling Oil (INR8.6b market) has been the fastest growing category within Hair Oil and now constitutes 11% of the overall Hair Oil category.

Cooling Oil CATEGORY DETAILS Category market size of INR8.6b, 11% of the total

Hair Oil segment. The category has delivered value CAGR of 15.3%

over the last five years. Major brands include Navratna (55% market

share), Himgange (28.5% market share), Rahat Rooh and Parachute Advansed.

Unique positioning as Therapeutic Oil rather than Hair Oil.

EMAMI’S PRESENCE HMN enjoys the first mover advantage and is the only

pan India player in this category. Navratna is the market leader, with 55% share (over

90% share in the South region). The brand has registered 18.2% revenue CAGR in the

last three years. Brand extension, Navratna Xtra Thanda has garnered

4% market share within two years of launch.

EMAMI’S STRATEGY Continued investment in the base Navratna

brand. Increasing push for Navratna Xtra Thanda in key

markets of Uttar Pradesh and Bihar to thwart regional competition (primarily from Himgange).

Category expansion via marketing and consumer activation.

SALES GROWTH

25 23

12

-5

11

24 2318

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Sales growth (%)

Emami

25 April 2014 6

Exhibit 5: Cooling Oil market


Exhibit 6: Market share of Navratna (%)


Exhibit 7: Price point comparison - Cooling Oil category Brand SKU Price (in INR) Price/100 gm (INR)

Bajaj Kailash Parbat Cooling Oil 100ml 55 55.0

Bajaj Kailash Parbat Cooling Oil 200ml 95 47.5

Himgange Ayurvedic 2.8ml 1 35.7

Himgange Ayurvedic 100ml 60 60.0



Navratna Oil 2.8ml 1 35.7

Navratna Oil 100ml 60 60.0




Rahat Rooh 200ml 115 57.5


Emami recently entered the light hair oil segment (category market size of INR12.6b, 16% of the total Hair Oil segment) with its product named 7 Oils in One. The pan-India roll out of the product is currently under way. The launch of the product will be supported by a 360 degree integrated communication Exhibit 8: Emami recently launched 7 Oils in One

Offerings in Light Hair Oil category Price (in INR) Price/100ml (INR)

Bajaj Hair Oil-Almond Drops

3ml 1 33

50ml 28 56

75ml 44 59

100ml 55 55

200ml 102 51

300ml 135 45

500ml 200 40

Emami 7 Oils in One

3ml 1 33

50ml 28 56

100ml 55 55


3,970 3,970

5,5076,650

8,100 8,600

2008 2009 2010 2011 2012 2013

Cooling oil Market Size (INR mn)

51

4849

5455 55

2008 2009 2010 2011 2012 2013

Navratna Oil

Amitabh endorses Emami’s power brands such as

Boroplus, Navratna Tel and Fast Relief

Emami

25 April 2014 7

Skin Care: The INR62b Skin Care category in India is characterized by the presence of large domestic as well as MNC players. Skin Care contributes ~35% of HMN’s revenue and a higher share of its profits owing to superior margin profile. HMN is the market leader in Antiseptic Cream, with its BoroPlus brand. It is also the market leader in Men’s Fairness Cream, with Fair and Handsome (first mover advantage, having capitalized on the need for a fairness product for men; focus on mass market). It is increasing its market share in the Talcum Powder category, with Navratna Cool Talc (niche cooling positioning; benefiting from the market leader’s lack of aggression and focus). Presence of deep pocket MNCs like HUVR and Garnier, which are increasingly focusing on the Men’s Fairness market, coupled with overall slowdown in Fairness Cream may keep growth under pressure in the near term.

Skin Care CATEGORY DETAILS Market size of the Skin Care category is INR62b. Category growth of 21% CAGR in the last three

years has been driven by Facial Care (Moisturizers) and Body Care.

Hindustan Unilever (HUVR) is the largest player in Skin Care, with over 40% market share. Other players include HMN, Beiersdorf (Nivea), Loreal, P&G and Dabur.

HMN is present in Antiseptic Cream (INR3.9b market), Men’s Fairness (INR3.6b market) and Talcum Powder (INR4.3b market).

Category is witnessing flattish growth in the last few quarters due to slowdown in discretionary consumption.

EMAMI’S PRESENCE HMN is the second largest player in the overall Skin Care

category. Skin Care is the largest category in HMN’s revenue and profit mix.

Major brands in HMN’s Skin Care portfolio are: 1. BoroPlus Antiseptic Cream – 74% market share in

Antiseptic Cream category; revenue CAGR of 9% in the last three years.

2. Fair and Handsome – 58% market share in Men’s Fairness; CAGR of 13% in the last three years.

3. Navratna Cool Talc – 18% market share; niche cooling positioning; three-year CAGR of 60%.

EMAMI’S STRATEGY Deepen category presence via:

1. Brand extensions such as BoroPlus Lotion, BoroPlus Face Wash.

2. New launches in Face Wash category – F&H Instant Fairness Face Wash (launched in 4QFY14).

SALES GROWTH

32

19 19

1115

9 710

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Sales growth (%)

Emami

25 April 2014 8

Exhibit 9: Antiseptic Cream category growth decelerated


Exhibit 10: Market share of BoroPlus Cream (%)


Exhibit 11: Men’s Fairness market


Exhibit 12: Market share of Fair & Handsome (%)


Exhibit 13: Cool Talc market


Exhibit 14: Market share of Navratna Cool Talc (%)


2,6943,050

3,6003,900

2010 2011 2012 2013

Antiseptic Cream Market Size (IN R m)

74

75

73

74

2010 2011 2012 2013

Boroplus Cream

1,367

2,8503,300

3,600

2010 2011 2012 2013

Men's fairness cream Market Size (INR m)60

57 57

58

2010 2011 2012 2013

Fair & Handsome

2,070 2,200

2,7503,000

2010 2011 2012 2013

Prickly heat powder Market Size (INR m)

18 17

10

14 13 13

2008 2009 2010 2011 2012 2013

Boroplus Powder

Emami

25 April 2014 9

Balms & Pain Relief: Pain Relief has been a focus segment for HMN, which has home grown brands such as Mentho Plus Balm and Himani Fast Relief. However, the acquisition of Zandu in 2008 significantly increased this category’s contribution to ~26% of HMN’s consolidated sales. The company’s Ayurvedic positioning and widening rural presence has facilitated strong growth in this category over the last three years.

Balms & Palm Relief

CATEGORY DETAILS Overall size of the Balms & Pain Relief category is

estimated at INR17b, with Balms constituting INR7b.

Balms and Rubs constitute 70% of the category, and Tablets constitute the balance 30%.

Major players in Balms and Rubs include HMN (Zandu Balm, Mentho Plus Balm, Himani Fast Relief), P&G Hygiene and Healthcare (Vicks Vaporub), GSK Pharma (Iodex) and Paras Pharma (Moov).

EMAMI’S PRESENCE HMN is the market leader in Balms, with Zandu Balm

and Mentho Plus having a combined market share of 58% (Zandu Balm: 43%, Mentho Plus: 15%) in the INR7b category.

Zandu Balm (acquired in November 2008) has posted 22% sales CAGR for FY10-13.

Himani Fast Relief has achieved a CAGR of 10% in the last three years; growth has tapered off in the last two years on slow category growth. HMN enjoys 4% share in the INR10b category.

EMAMI’S STRATEGY Grow the Balms category by increasing brand

investments. Focus on increasing sales of the low unit pack SKU

of Zandu Balm to facilitate higher penetration and increased volume growth.

Increase presence in Pain Relief through Zandu’s untapped Ayurvedic and OTC products portfolio.

SALES GROWTH

Exhibit 15: Balm market


Exhibit 16: Market share of Zandu Balm & Mentho Plus (%)


3,507

6,1006,800 7,000

2010 2011 2012 2013

Balm Market Size (INR m)

57

56

58 58

2010 2011 2012 2013

Zandu & Mentho Plus Balm

125.3

20.8 23.2 20.1

FY10 FY11 FY12 FY13

Sales growth (%)

Emami

25 April 2014 10

Strong innovation track record; leveraging LUPs to build rural presence HMN’s management has a good track record of innovation and has developed several niche categories (see Annexure: HMN’s entry into Men’s Fairness – a case study). Consequently, it enjoys first mover advantage in categories like Men’s Fairness, Cooling Oil, Antiseptic Cream. We note that HMN’s portfolio largely caters to the mid and mass end of the category spectrum. The company is looking at building deeper presence in small towns. Hence, its focus on the mass end through low unit packs (LUPs) is natural, in our view. It is also looking to leverage the equity of its brands to drive portfolio expansion.

Innovation to extend presence in adjacent categories: HMN’s medium term strategy includes extension of its presence in existing categories through new variant launches, introduction of value-added offerings and exploiting the brand equity of its power brands to enter into new categories (entry into Face Wash under BoroPlus and Fair & Handsome).

Exhibit 17: Key Face Wash brands in India

Brand SKU Price (in INR) Price/100 gm (INR)

Lakme Perfect Radiance 100ml 165 165

Ponds Facial Foam-White Beauty 50 gm 75 150

Garnier Face Wash Intense Fresh 100 gm 145 145

Himalaya Face Pack 100 gm 110 110

Everyuth Face wash cream 50 gm 60 120

Pears Fresh & Gentle 60 gm 70 117

Clean & Clear 80 gm 99 124

Nivea 50 gm 89 178


Exhibit 18: Emami launched Face Wash under its "Fair and Handsome" brand in 4QFY14 Offerings in the Face Wash category Price (in INR) Price/100 gm (INR)

Boroplus Face Wash

50gm 45 90

Fair & Handsome Instant Fairness Face Wash

20 gm 30 150

50 gm 65 130

100 gm 100 100


Distribution expansion: HMN has completed the first phase of Project Swadesh and increased its rural reach to towns with population clusters of 10k. Its direct reach has increased from 500k outlets in FY12 to 600k in FY13 and it is targeting 800k in FY15. It aims to cover villages with population of 8k, going forward. Increasingly, it is relying more on technology to boost its market presence and improve the sales productivity of its team.

Emami launches Fair and Handsome extension in the

Face Wash category

http://www.milestores.com/s/99/supermarket/p/9096/boroplus-face-wash-anti-pollution-50ml�

Emami

25 April 2014 11

Exhibit 19:Project Swadesh strengthened reach of the company’s offerings (Store count-m)


Recruiting new consumers through LUPs: HMN is also leveraging its low unit pack (LUP) portfolio to drive penetration of its products in rural and semi-urban areas. ~30% of its turnover comes from SKUs priced below INR5. HMN offers (a) INR2 SKUs of Zandu Balm and Mentho Plus, (b) INR1 sachet of Navratna Talc, (c) INR1 sachet of Navratna Oil (40% of brand sales), (d) INR10 SKU of Fair & Handsome, and (e) INR5 SKUs of Vasocare Petroeum Jelly and BoroPlus, to drive penetration and usage in rural markets.

Exhibit 20: Emami’s LUP portfolio – helps to recruit new consumers

Products SKU size M.R.P. (Net)

Fair & Handsome Fairness Cream. 8 gm 10

Boro Plus Oil Control Face Wash 12 ml 10

Navratna Oil 20 ml 10

Navratna Cool Talc 20 gm 10

Fast Relief Ointment (CHEETAH) 4 ml 10

Zandu Balm 4.5 ml 10

Boroplus Adv.Winter Moist. Lotion 20 ml 7

Boro Plus Prickly Heat Powder 20 gm 7

Navratna Cool Talc 12 gm 7

Emami Vasocare T.M.Lotion 20 ml 6

Boroplus Antiseptic Cream 7 ml 5

Sona-chandi Chyawanprash 6 gm 5

Emami Keshar Malai Cold Cream 8 ml 5

Emami Vasocare Petroleum Jelly. 8 ml 5

Fast Relief Ointment (CHEETAH) 1.7 ml 3

Menthoplus Balm 1 ml 2

Navratna Oil 5 ml 2

Zandu Balm 1 ml 2

Navratna Oil 2.7 ml 1

Navratna Extra Thanda Oil 2.5 ml 1

Navratna Cool Talc

1


0.40 0.43 0.45 0.50 0.60

2.6 2.6 2.8

3.6 4.0

2009 2010 2011 2012 2013

Direct Reach Indirect Reach

Emami

25 April 2014 12

Aggressive advertising and promotion strategy to strengthen brands HMN has consistently maintained an aggressive advertising and promotion strategy. It has been investing heavily in its brands. Though its A&P-to-sales has declined in the last four years, at 16.4%, it is still one of the highest amongst its Consumer peers that have largely maintained sub-15% A&P-to-sales. In 9MFY14, its ad spends fell 180bp to 16.6% due to low new launch momentum and conscious management decision to withhold investments in a weak economic environment. However, we expect ad spends to move up in FY15, as HMN drives new launches in Skin Care and enhances presence in the OTC Healthcare segment. HMN’s advertisement campaigns are in keeping with its mass market focus. The company has a large number of celebrities endorsing its brands, which keeps its ad spends high. Preference for celebrity endorsements: HMN has a large number of celebrities

endorsing its brands, which is one of the key reasons for the higher ad spend ratio. It typically signs actors/ cricketers/other sportspersons and uses locally relevant brand ambassadors (regional actors, etc) to create a buzz around its brands. The management believes that the celebrity appeal creates aspirational value for its brands and enhances the target audience for its niche products. In South India, HMN has used regional advertising and regional celebrities (Surya, Chiranjeevi) to market its product range. Such a strategy improves brand acceptability.

Creating mass appeal through television campaigns: A large number of HMN’s

television campaigns are aimed at attracting the bottom of the pyramid (BOP) consumer and creating aspirational value for its brands at the lower end of the consumer pyramid. It also leverages local fairs, jatras and melas to drive visibility of its brands.

Exhibit 21: Highest A&P-to-Sales among Consumer peers (%)


1.9

4.1

8.6

11.2 11.8 13.3

14.5 14.7 14.7 16.4

ITC Nestle Britannia Marico HUL Dabur GCPL GSKCH Colgate Emami

Movie Marketing: In 1983 Bollywood film, Agar Tum

Na Hote, Emami did a brand placement campaign with

lead actor Rajesh Khanna playing the

managing director of Emami

http://en.wikipedia.org/wiki/Agar_Tum_Na_Hote�



http://en.wikipedia.org/wiki/Rajesh_Khanna�



Emami

25 April 2014 13

Multiple growth drivers Portfolio expansion + OTC Healthcare focus

HMN’s organic revenue growth has been a function of consistent growth in incumbent

brands, success of new product launches, and a growing export portfolio.

It has expanded its Skin Care portfolio through entry into adjacent categories.

It is focusing on Zandu and its OTC Healthcare portfolio for the medium term.

Hitherto known for its family-driven organizational culture, HMN has been recruiting

senior-level talent from MNCs in the last 12-18 months. We see this as an important

milestone in its growth strategy.

New product launches to drive volume growth In a slowing urban consumption environment, HMN’s volume growth has dipped from 13-15% in FY13 to 5% in 9MFY14. Adverse seasonality coupled with overall slowdown in Consumer categories has impacted HMN’s performance. HMN has been continually launching innovative products in the Personal Care space, and has leveraged its brand strength and Ayurvedic positioning to enter new categories. Its strategy entails indentifying niche mass market segments within Personal Care and Healthcare, where gross margins are high and competitive intensity is low. New launch momentum has been relatively sedated in the last two years. HMN typically test markets 3-5 brands every year, and then, based on the success and consumer acceptance, scales them up nationally. We expect an increase in new launch momentum in FY15. HMN has recently launched Fair & Handsome Instant Fairness Face Wash after entering the category in early 2012 by launching BoroPlus Advanced Moisturizing Face Wash. Subsequently, it launched a niche anti-pollution variant of BoroPlus Face Wash in October 2013, with endorsement by actress, Bipasha Basu. Face Wash is an INR10b category, growing at over 20%. MNCs with deep pockets – HUVR, Beiersodrf (Nivea), L’oreal (Garnier), etc, are present in the category. Some of the notable new launches/relaunches from HMN’s stable in the last few years include Navratna Extra Thanda, Navratna Cool Talc, Vasocare Petroleum Jelly, Malai Kesar Cold Cream, BoroPlus Lotion, and Himani Fast Relief. We expect innovations/extensions and new category entries in Skin Care to drive volume growth for HMN in FY15 and FY16.

Emami

25 April 2014 14

Exhibit 22: Emami’s product launch/renovation calendar Launch Year Category

Acquired Himani 1978

Boroplus Antiseptic Cream 1982 Skin Care

Boroplus Prickly heat powder 1982 Skin Care

Mentho Plus Balm 1987 Pain Relief

Navratna Cool Oil 1989 Cooling Oil

Sona Chandi Chyawanprash 1989 Others

Sona Chandi Healthy 2004 Others

Fair Baby Massage Oil 2004 Cooling Oil

Fair and Handsome 2005 Skin Care

Fair & Ageless Fairness Cream 2006 Skin Care

Boroplus Antiseptic Light Cream and Body Lotion 2006 Skin Care

Navratna Cool Talc 2006 Skin Care

Mr. Black & Mrs. Black, Herbal Hair Dye Powder 2006 Skin Care

Malai Kesar Cold Cream 2006 Skin Care

Hair Life hair pack 2007 Cooling Oil

Navratna Oil Lite 2007 Cooling Oil

Navratna Cool Talc Active Deo 2007 Skin Care

Keshkala 2007 Cooling Oil

Navratna Extra Thanda Oil 2007 Cooling Oil

Acquisition of Zandu Pharmaceuticals 2008 Pain Relief

Emami Pure Skin Glycerine Bar 2008 Skin Care

Emami Vasocare Petroleum Jelly 2008 Skin Care

Navratna Cool talc 2009 Skin Care

Boroplus Winter Lotion 2009 Skin Care

Emami Malai Kesar Soap 2009 Skin Care

Navratna Oil (new variant) 2009 Cooling Oil

Extra Thanda Cooling oil 2010 Cooling Oil

Vasocare 2010 Skin Care

Boroplus Facewash 2011 Skin Care

Zandu Pancharishta 2011 Pain Relief

Boro Plus Sunscreen 2011 Skin Care

Boroplus Sun Protection Lotion 2012 Skin Care

Vasocare Lotion 2012 Skin Care

Fair and Handsome Instant Fairness Face wash 2014 Skin Care


Emami

25 April 2014 15

Healthcare: Abundant opportunity; medium term catalyst The management emphasizes the lucrative Healthcare opportunity, underpinned by rising stress levels in urban centers and growing preference for a healthy lifestyle. Ayurvedic and herbal products are popular in India. Given its rich century-old heritage, Zandu has a very strong brand equity amongst both practitioners and consumers. The OTC Healthcare market in India is growing at 25-30% a year. HMN’s Healthcare business (including ayurvedic generics, OTC products and ethical products) grew 34% in FY12, 27% in FY13 and 29% in 9MFY14. HMN aims to strengthen its Healthcare portfolio of OTC and generic products under the Zandu umbrella.

Ayurvedic generics: These are essentially herbal medicines manufactured as per ancient text books of Ayurveda. HMN has a portfolio of 139 health solutions and 200 products, and uses various below-the-line activities like doctor contact programs, health camps, etc, to promote them. It has renewed its entire product range and looks to leverage it, going forward.

OTC products: HMN relies on celebrity endorsements to drive growth in this segment. For example, Indian cricket team captain, MS Dhoni promotes Zandu Pancharishta, which posted a growth of 47% in FY12 and 68% in FY13.

Ethical products: These are Ayurvedic proprietary medicines, sold through prescriptions of registered medical practitioners. HMN has a portfolio of 15 products in this category. Its flagship brand Rhumasyl, a topical pain reliever for pain associated with osteoarthritis, rheumatoid arthritis, musculoskeletal pain, frozen shoulder, spondylitis and lumbago is the market leader in the Ayurvedic topical pain management category.

Emami’s Healthcare strategy Launch new products and close portfolio gaps. Expand distribution in targeted (chemist) channel. Build modern trade presence. The management believes that Zandu Pancharisht and Vigorex have strong

potential. Zandu Pancharisht contributes INR450m and could grow at 25-30% in the medium term.

We expect HMN to leverage Zandu’s brand equity and build a gradual presence in the Healthcare space. We believe this will provide an additional catalyst for medium term growth. We are modeling for 25% revenue CAGR over FY14-16 for HMN’s Healthcare portfolio.

Exhibit 23: OTC market size (INR m)


Exhibit 24: Emami consistently expanding market share (%)


29,7

02

31,5

40

33,5

59

37,0

77

42,1

38

46,8

04

51,8

01

58,2

70

64,1

30

2005 2006 2007 2008 2009 2010 2011 2012 2013

OTC Category Size (INR m)

5.2 5.6 6.3

9.9 9.910.8

11.812.7 13.1

2005 2006 2007 2008 2009 2010 2011 2012 2013

OTC Market Share

Emami

25 April 2014 16

International Business: FY14 growth driven by lower base; expect moderation HMN’s International Business division contributes ~11% of its overall revenue. It has a presence in 60 countries. While SAARC countries account for 45% of the division’s revenue, GCC countries contribute 20%. In 9MFY14, the division’s revenue grew 30%, aided by low base. In FY13, revenue had declined 5.4%, primarily due to the discontinuation of low margin products in Africa, inventory correction and counterfeiting issues in Russia. Over FY14-16, we expect 12% revenue CAGR for the International Business. HMN remains vulnerable to political and currency risks. Local production in Bangladesh a positive: HMN’s Bangladesh plant

commenced operations in FY13; localized production has helped save on import duties. While revenue declined 5% in 3QFY14, impacted by political disturbances, we expect Bangladesh to be a key catalyst for HMN’s SAARC performance, going forward.

International presence relatively limited: Unlike its Tier-II peers like Dabur, Marico, and Godrej Consumer, HMN’s international footprint is limited. Godrej Consumer, Dabur and Marico derive 25-45% of their revenues from international operations. Footprint for these players has increased primarily owing to inorganic initiatives over the last 4-5 years.

Exhibit 25: Geographic distribution of export sales


Exhibit 26: Rising contribution of international sales


Exhibit 27: Contribution of International Business to total sales


GCC20%

CIS13%

SAARC45%

Africa9%

Others13%

10.7

12.7 13.213.8

13.212.4 12.2 12.3

12.3

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

International business as a % of total revenues

11% 13% 13% 14% 13% 12% 12% 12% 12%0%

15%

30%

45%

60%


Dabur GCPL Marico Emami

Emami

25 April 2014 17

Professionalizing senior management: An important milestone Hitherto known for its family-driven organization culture, HMN is recruiting senior-level talent from MNCs over the last 12-18 months. We see this as a very important step, as it underscores the management’s intent to professionalize the set-up as it embarks on its medium term growth strategy. It has recruited several CXO-level professionals from organizations like P&G and HUVR across functions like IT, International Business, Healthcare, and Research & Innovation. Typically, HMN has faced constraints while recruiting senior hires, as it operates out of Kolkata. To circumvent this issue, it is allowing some senior managers to operate from Mumbai. For example, Mr Chetan Gore, CEO, International Marketing, as well as Ms Punita Kalra, CEO, Research & Innovation, operate from Mumbai.

Exhibit 28: Emami has recruited CXO level talent from MNCs

Name Earlier assignment New assignment with Emami

Chetan Gore Marketing director, Oral Care, at P&G, Singapore CEO, International Marketing division

K S Arunkumar IT Director - Business Partnering & Innovation - Asia, Africa and Russia Region, HUL President, IT

Punita Kalra Product Technology Group Head Skin Care-South Asia, HUL CEO, Research & Innovation strategy

C K Katiyar Vice President and Head, Ayueveda Research,Dabur CEO, Healthcare (technical)

Rishi Bhattacharya Consultant (ex-HUL) Healthcare

Source: Company

In the Consumer sector, Marico has set a benchmark in terms of professionalizing the senior management. Godrej Consumer is also following a similar strategy. Both these organizations have professionalized senior management, significant ownership by promoter family. HMN appears to be headed the same way.

Emami

25 April 2014 18

Stable RM prices to drive margin expansion Gains to be invested in brands

Prices of menthol, ~20% of HMN’s raw material cost, have remained flat in the last six

months and declined 13% in the last 12 months. Currently, menthol prices are stable

at INR850-900/kg.

Correction in menthol prices has driven significant gross margin expansion in FY13 and

FY14. Stable menthol prices should support gross margin expansion even in FY15.

We expect HMN to use the gains to invest more in brands, as it introduces new

variants/brands in Skin Care and Healthcare.

Stable menthol prices provide margin visibility Prices of menthol, ~20% of HMN’s raw material cost, have remained flat in the last six months and declined 13% in the last 12 months. 9MFY14 gross margins have expanded 490bp YoY to 62.8% due to decline in menthol prices. Currently, menthol prices are stable at INR850-900/kg. HMN has sufficient covers till June 2014, which provides gross margin visibility. However, other RM costs are rising. Light liquid paraffin (LLP) prices are up 20% YoY while HDPE prices are up 24% YoY. We believe modest pricing action coupled with steady menthol prices can support 100bp gross margin expansion in FY15. Ad spends to increase 200bp in FY15 In 9MFY14, ad spends have contracted 180bp, as the management consciously curtailed brand spends in a low growth environment. However, we expect ad spends to increase 200bp in FY15, as HMN expands its Skin Care and Healthcare portfolios.

Exhibit 29: Mentha oil prices declined 13% YoY


Exhibit 30: However, LLP and HDPE prices remain firm


0

800

1,600

2,400

3,200

Apr-

11

Aug-

11

Dec

-11

Apr-

12

Aug-

12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr-

14

Mentha Oil prices INR / kg

50

70

90

110

130

25

40

55

70

85

Mar

-09

Jul-0

9D

ec-0

9Ap

r-10

Aug-

10D

ec-1

0A

pr-1

1Au

g-11

Dec

-11

Apr-

12A

ug-1

2D

ec-1

2Ap

r-13

Aug-

13D

ec-1

3A

pr-1

4

Liquid Paraffin (INR/Lt)-LHS HDPE (INR/kg)-RHS

Emami

25 April 2014 19

Fundamentals strong; valuations reasonable Initiating coverage with a Buy rating

We expect 15.4% revenue CAGR over FY14-16 and 100bp EBITDA margin expansion by

FY16. Cash flows are likely to grow from INR2.7b in FY14 to INR4.6b in FY16.

With moderate capex requirements of INR750m per year and a stable working capital

profile, RoE should remain steady at 45-47%.

We initiate coverage with a Buy rating. Our target price of INR555 implies 20% upside.

Fundamentals strong We expect HMN’s revenue to grow at a CAGR of 15.4% over FY14-16, driven by new launches in Skin Care and Healthcare as indeed its power brands. We estimate ~10% volume growth for HMN, higher than the 6% it has clocked so far in FY14. EBITDA margin should expand 100bp over FY14-16 to 24.2%. Capex requirements over the next three years are limited and HMN’s already healthy balance sheet (current net cash of INR5b) should strengthen further, providing the company the flexibility to scout for acquisitions or increase payout. Expect healthy revenue CAGR of 15.4% over FY14-16: We expect HMN to

maintain healthy 15.4% revenue CAGR over FY14-16, driven by consistent performance by its mainline brands, and incremental growth from new product launches and international forays.

EBITDA margin to expand by 100bp over FY14-16: HMN’s operating margin expanded by 100bp in FY13 and nearly 370bp in 9MFY14 owing to correction in menthol prices and curtailment in ad spends. With steady menthol prices and annual price hikes of 4-5%, we expect 100bp EBITDA margin expansion over FY14-16, despite our expectation of 200bp rise in ad spends.

Exhibit 31: Expect revenue CAGR of 15.4% over FY14-16


Exhibit 32: Margins to expand 100bp over FY14-16


Strengthening balance sheet; expect net cash to double by FY16: We expect

HMN’s net cash balance to nearly double from INR4.5b to INR8.6b in FY16. Capex requirements over the next three years are limited (our estimate: INR750m-800m per year). HMN’s already healthy balance sheet should strengthen further, providing the company the flexibility to scout for more acquisitions or increase payout.

5,72

8

7,47

4

10,2

17

12,4

71

14,5

35

16,9

91

18,7

94

21,6

39

25,0

23

11.1

30.5

36.7

22.116.6 16.9

10.615.1 15.6


Revenue (INR m) Revenue Gr. (%)

58.564.3 62.8

58.0 56.9 57.9 60.9 62.0 61.5

16.6 17.124.0 21.3 19.2 20.1

23.2 23.6 24.2


Gross Margin (%) EBITDA Margin (%)

Emami

25 April 2014 20

Exhibit 33: Estimate net cash of INR7.7b by FY16


Exhibit 34: Expect operating cash flow of INR 4.6b by FY16


Steady return ratios: We expect EBITDA margin to expand by 100bp over FY14-

16, led by higher gross margin. Our expectation of 15.5% PAT CAGR coupled with moderate capex requirements and a stable working capital profile should result in stable RoE of 45-47%, higher than Dabur, Godrej Consumer and Marico. HMN enjoys higher RoE than tier-II peers due to difference in depreciation policy on fixed assets and lower salience of International Business, where working capital requirements are higher than domestic operations.

Exhibit 35: Steady return ratios


Exhibit 36: RoE in the upper band of the tier II consumer names


Exhibit 37: Comparable working capital in tier II FMCG universe


446

-4,014

-426 -189

1,148 1,616

3,6405,379

7,692


Net Cash and cash equivalents (INR m)

441

1,7641,362

886

4,070

3,0022,663

3,875

4,625


Operating cash flows (INR m)

31.2

23.728.9 31.2

34.6

41.8

48.8 50.2 52.135.831.1

38.834.8 37.1

42.447.0 45.6 46.5


ROCE (%) ROE (%)

35.8

31.1

38.8

34.8

37.1

42.4

0

25

50

75

100

2008 2009 2010 2011 2012 2013


0.26

0.10

0.29

0.40

0.30

0.30

0.00

0.12

0.24

0.36

0.48

2008 2009 2010 2011 2012 2013


Emami

25 April 2014 21

Niche portfolio with solid long term prospects; Buy We like HMN’s niche Ayurveda and herbal-based positioning, strong track record on innovation and new category incubation with limited direct competition from MNC players. Hiring of senior level managers in R&D, International Business, IT and Healthcare signifies HMN’s intent at professionalizing the hitherto family-driven organization culture. We are also excited about HMN’s focus on the Healthcare opportunity. Scale-up of this business can be a long-term growth driver. Other positives are lower competitive intensity in its key categories and its proven track record of innovation and category incubation. We initiate coverage with a Buy rating and a 12-month forward target price of INR555, 20% upside excluding dividend. We value the stock at 24x FY16E earnings and arrive at a target price of INR555. Our target multiple for HMN is in line with our target multiple for our mid-cap Consumer universe – Dabur, Godrej Consumer and Marico.

Exhibit 38: P/E Exhibit

Source: Bloomberg

Exhibit 39: HMN 1-year forward PB

Source: Bloomberg

Exhibit 40: Comparative Valuation

Company Price

Reco Target Price EPS (INR) P/E (x) EV/EBITDA (x) ROE (%)

(INR) (INR) FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E Asian Paints 517 Neutral 465 12.7 15.5 18.6 40.6 33.3 27.8 27.3 23.0 19.1 31.3 32.4 32.8 Britannia 892 Buy 1,090 31.2 37.0 43.9 28.5 24.1 20.3 19.3 15.9 13.2 47.8 45.7 44.2 Colgate 1,480 Neutral 1,300 35.5 43.6 52.0 41.7 33.9 28.4 28.8 22.4 18.3 88.0 96.3 101.5 Dabur* 179 Buy 200 5.3 6.4 7.5 33.9 27.9 23.9 26.9 21.9 18.7 34.6 34.8 33.7 Godrej Consumer 801 Neutral 800 23.8 29.4 35.9 33.7 27.2 22.3 24.1 20.0 17.0 22.5 23.8 24.3 GSK Consumer 4,251 Neutral 4,200 119.1 139.8 164.9 35.7 30.4 25.8 34.1 26.6 21.9 31.1 30.8 30.7 Hind. Unilever 579 Sell 565 16.4 18.0 20.2 35.3 32.1 28.7 27.6 24.2 20.8 61.3 57.5 55.6 ITC 343 Buy 400 11.0 12.9 14.8 31.3 26.6 23.2 21.5 18.4 16.0 37.9 40.6 43.0 Marico* 203 Buy 245 7.6 8.1 9.8 26.6 24.9 20.8 17.9 15.4 12.5 29.4 24.5 24.2 Nestle 4,775 Neutral 5,065 121.9 140.1 164.1 39.2 34.1 29.1 22.8 19.6 16.8 57.0 52.4 54.3 Pidilite Inds. 328 Neutral 295 9.3 11.4 13.5 35.2 28.8 24.4 23.2 19.1 15.9 23.4 24.2 23.9 Radico Khaitan 114 Buy 185 7.6 9.3 11.1 15.0 12.3 10.3 10.7 9.1 7.8 12.6 13.8 14.7 United Spirits 2,818 Neutral 2,200 25.4 42.6 56.0 110.8 66.1 50.3 44.0 35.1 29.2 4.4 7.2 8.9

Emami 463 Buy 555 17.3 19.4 23.1 26.7 23.8 20.1 23.0 19.4 16.0 47.0 45.6 46.5

Source: Bloomberg, MOSL

20.9

15.1

20.6

18.1

0

8

16

24

32

Apr-

00

Apr-

01

Apr-

02

Apr-

03

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

P/E (x) 15 Yrs Avg(x)5 Yrs Avg(x) 10 Yrs Avg(x)

9.6

4.9

8.56.5

0.0

4.0

8.0

12.0

16.0

Apr-

00

Apr-

01

Apr-

02

Apr-

03

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

P/B (x) 15 Yrs Avg(x)5 Yrs Avg(x) 10 Yrs Avg(x)

Emami

25 April 2014 22

Risks and concerns Currently, the key concerns relating to the stock are: (1) potential heightened competition in its key categories, and (2) the management’s aggressive acquisition intent in the domestic market, which could impact profitability as well as product mix. Increasing competition in key categories HMN has followed the strategy of identifying opportunities in niche segments and building sizeable brands in these segments. Within its key categories, competition has thus far been largely regional. The entry of Marico (8-9% market share in Andhra Pradesh) and Bajaj Corp in Cooling Oils has signaled the emergence of large pan India competitors for HMN. However, we note that the efforts haven’t yielded much dividend so far. The larger threat of competition is in the Men’s Fairness category, where Beiersdorf (Nivea), Hindustan Unilever, L’Oreal (Garnier) and P&G (Gillette) have upped the ante. All these players have invested aggressively in their respective brands. HMN’s Fair & Handsome is well-placed, with its mass positioning and attractive pricing, but increasing competitive intensity from large players is a concern from the pricing and margin viewpoint. Aggressive acquisition intent in domestic market HMN acquired Zandu in November 2008 at ~60x FY08 earnings (~45x FY08 earnings excluding land value). At that point, this was seen as an expensive acquisition and significantly impacted the HMN’s valuations. However, post the acquisition, HMN successfully increased Zandu’s profitability, creating value for the shareholders of both companies. HMN subsequently made an aggressive bid for Paras Pharmaceuticals, which was speculated to have been higher than the eventual acquirer, Reckitt Benckiser (EV of 8x FY10 sales and 30x FY10 EBITDA). HMN’s stock price corrected 30%, but recovered post the Reckitt purchase. The impact on HMN’s valuations on both occasions was due to concerns on the company overpaying. The management has indicated that it is not looking at any overseas opportunities, currently. However, its intent to grow its domestic Healthcare and OTC portfolio could result in an expensive acquisition, adversely impacting valuations at that point. The management has indicated that it has not yet identified any other domestic target in the OTC space, which is its key acquisition focus area. Nevertheless, its acquisition intent remains an overhang.

Emami

25 April 2014 23

Annexure I Background Emami Limited (Bloomberg: HMN) is the flagship company of the ~INR60b Emami Group. The two promoters, Mr RS Agarwal and Mr RS Goenka laid the foundations of the company in 1974 as a partnership firm, Kemco Chemicals. In 1978, they acquired Himani Limited, a cosmetics company based in eastern India, with a factory in Kolkata. Himani launched BoroPlus in 1982 and the Navratna cooling oil range in 1989. In 1998, the promoters merged the two entities, creating Emami. The company has since focused on expanding its portfolio in the Healthcare and Personal Care space. In 2008, it acquired Zandu, giving it a leadership position in the Balm category and access to a host of Ayurvedic and OTC products. Exhibit 41: Management background

Name Designation

N.H.Bhansali CEO-Finance Strategy and Business Development

AK Joshi Company Secretary and AVP Legal

Chetan Gore CEO - International Business

Dhiraj Agarwal Head Media Department

R K Surana President - Operations and Commercial

Krishna Mohan CEO - Sales, Supply Chain and Human Capital

Punita Kalra CEO R & D and Innovation

Chandra Kant Katiyar CEO Technical (Healthcare division)

Source: Company

Emami

25 April 2014 24

Exhibit 42: Details of Board of Directors

Name Designation Details

R. S. Agarwal Founder & Executive Chairman

R. S. Goenka Founder & Wholetime Director

K. N. Memani Non-Executive Independent Director i. Former Chairman and Country Managing Partner of Ernst and Young, India

Y.P.Trivedi Non-Executive Independent Director i. Eminent Tax Expert and Advocate, Supreme Court

ii. Rajya Sabha Member of the Parliament

P. K. Khaitan Non-Executive Independent Director i. Advocate and Senior Partner of M/s. Khaitan & Co

Sajjan Bhajanka Non-Executive Independent Director i. Chairman of Century Plyboards (I) Ltd

ii. Chairman and Managing Director of Cement Manufacturing Company Ltd.

Amit Kiran Deb Non-Executive Independent Director i. Former Chief Secretary, Government of West Bengal

ii. Former Commissioner cum Secretary, Education and Social Welfare Department, Government of Tripura

iii. Former Joint Secretary, Cabinet Secretariat and Department of Electronics, Government of India.

S.B.Ganguly Non-Executive Independent Director i. Non-Executive Chairman of Peerless Trust Management Co Ltd.

ii. Former Chairman of Exide Industries Ltd.

Vaidya S. Chaturvedi Non-Executive Independent Director i. Founder of Ayurvedic Herbal Research Centre at Arogya Niketan, Vasai.

Sushil K. Goenka Managing Director

Mohan Goenka Wholetime Director i. Responsible for developing the market share of the Company in India and is in charge of various functions like Investor Relations, Sales.

Aditya V. Agarwal Non-Executive Director i. He heads the Cement, edible oil and biodiesel, health care and paper manufacturing businesses of the Group

Harsha V. Agarwal Wholetime Director i. He heads the merger and acquisitions, human resource, information technology, media and advertising functions of Emami Ltd.

ii. He spearheaded the acquisition of Zandu Pharmaceutical Works Ltd in 2008 and the subsequent demerger of its FMCG business into Emami Ltd in 2009

iii. He continues to look after Zandu Ayurvedic and health care business

iv. He also heads the Group’s foray into Solar Power business

Priti A Sureka Wholetime Director i. She is the member of the Emami strategic think tank and one of the key drivers of the crucial Marketing Division,

ii. She also heads the Company’s R & D and Market Research Divisions

iii. She mentors the group’s retail businesses

Source: Company

Emami

25 April 2014 25

Annexure II HMN’s entry into Men’s Fairness – a case study Hindustan Unilever (HUVR) controls over 50% of the Skin Care market. Its key brands in the category include Fair & Lovely (FAL), Pond’s, Lakme and Vaseline. It enjoys leadership in the Fairness Cream market through FAL. However, HMN took the initiative and launched the first Men’s Fairness Cream brand, Fair & Handsome in 2005. It now controls 58% of the Men’s Fairness Cream market, despite launches by other competitors (Fair & Lovely MenzActive by HUVR, Nivea for Men, Fair One Man Cream, Garnier Power Light, etc). Despite a strong incumbent with an iconic brand nearly defining the category, HMN identified the need for a new product and created a segment. It conducted market research, which showed that 1/3rd of the buyers of Fairness Creams were men and developed a dedicated product for this stratum. This highlights the benefits of having a unique/niche offering, notwithstanding the size/reputation of the incumbent leader. HMN's F&H launch – background Fairness Creams had traditionally tried to reach out to women by suggesting

that their chances of finding a good husband/job were considerably brightened by using a fairness cream and men were targeted by hinting that they would be able to impress a girl more easily if they also used a fairness-enhancing product.

One advertisement from HMN, for example, depicted a dark-complexioned boy sneaking into a girls' hostel to steal a pack of a fairness cream meant for women. He is shooed away by the girls and is subsequently advised by a friend to get a fairness cream meant for males -Fair & Handsome. After using the product, he becomes attractive to females, and a jingle plays in the background: 'Hi handsome, hello handsome'.

HMN's Fair & Handsome provoked a reaction from HUVR, which also launched a product meant for men, named Fair & Lovely Menz Active in 2006.

Exhibit 43: Emami's advertising blitzkrieg

Emami

25 April 2014 26

Exhibit 44: Emami is targeting 65% share in Men's Fairness Cream…

Exhibit 45: It has delivered 26% revenue CAGR in Fair & Handsome

Exhibit 46:Skin Care market has more than doubled in 5-years

Exhibit 47: Men's Fairness Cream market has also kept pace

Exhibit 48:Hindustan Unilever lost market share in Skin Care…


Exhibit 49: …while Emami gained


57 5758

61.362

2011 2012 2013 1QFY14 3Q14

Emami F&H market share 48%

27%

11%

35%

13%

FY09 FY10 FY11 FY12 FY13

F&H Sales growth

26.730.6

34.841.0

51.0

62.0

2007 2008 2009 2010 2011 2012

Skin Care market size (INR b)

1.4

2.1

3.6

2009 2011 2013

Men's fairness cream market size (INR b)

58.5

57.5

56.2 56.455.8

2008 2009 2010 2011 2012

HUL

1.9

2.4

2.9 2.9 2.8

2008 2009 2010 2011 2012

Emami

Emami

25 April 2014 27

Financials and valuations Income statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Net Sales 12,471 14,535 16,991 18,794 21,639 25,023 Change (%) 22.1 16.6 16.9 10.6 15.1 15.6 EBITDA 2,652 2,788 3,415 4,366 5,099 6,046 EBITDA Margin (%) 21.3 19.2 20.1 23.2 23.6 24.2 Depreciation 140 188 220 276 323 364 EBIT 2,512 2,600 3,196 4,090 4,777 5,682 Interest 152 152 66 72 66 66 Other Income 331 541 557 658 757 876 PBT 2,691 2,989 3,687 4,676 5,468 6,492 Tax 404 401 540 740 1,058 1,258 Tax Rate (%) 15.0 13.4 14.6 15.8 19.4 19.4 Reported PAT 2,287 2,588 3,147 3,936 4,410 5,234 Adjusted PAT 2,287 2,588 3,147 3,936 4,410 5,234 Change (%) 34.8 13.2 21.6 25.1 12.0 18.7 Min. Int. & Assoc. Share 0 0 0 0 0 0 Adj Cons PAT 2,287 2,588 3,147 3,936 4,410 5,234

Balance sheet (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Share Capital 151 151 151 227 227 227 Reserves 6,747 6,915 7,623 8,763 10,107 11,931 Net Worth 6,899 7,066 7,775 8,990 10,334 12,158 Debt 2,294 1,611 1,201 1,201 1,201 1,201 Deferred Tax 137 145 137 150 150 150 Total Capital Employed 9,329 8,823 9,112 10,341 11,685 13,509 Gross Fixed Assets 7,993 8,377 9,394 10,194 10,994 11,794 Less: Acc Depreciation -3,148 -4,342 -5,472 -6,769 -8,112 -9,498 Net Fixed Assets 4,845 4,035 3,922 3,425 2,882 2,297 Capital WIP 65 768 475 0 0 0 Investments 66 68 68 67 67 67 Current Assets 5,996 6,859 7,651 9,833 12,226 15,234 Inventory 1,234 1,122 1,140 1,368 1,552 1,748 Debtors 1,087 1,005 1,122 1,625 1,871 2,164 Cash & Bank 2,105 3,495 4,381 5,691 7,480 9,793 Loans & Adv, Others 1,570 1,237 1,009 1,148 1,322 1,529 Curr Liabs & Provns 1,649 2,949 3,049 3,030 3,535 4,134 Curr. Liabilities 915 1,327 1,328 1,156 1,382 1,618 Provisions 733 1,621 1,721 1,874 2,154 2,516 Net Current Assets 4,347 3,911 4,603 6,803 8,690 11,099 Total Assets 9,330 8,824 9,113 10,341 11,685 13,509

E: MOSL Estimates

Emami

25 April 2014 28

Financials and valuations Ratios Y/E March 2011 2012 2013 2014E 2015E 2016E Basic (INR) EPS 10.1 11.4 13.9 17.3 19.4 23.1 Cash EPS 10.7 12.2 14.8 18.6 20.9 24.7 Book Value 30.4 31.1 34.3 39.6 45.5 53.6 DPS 2.3 5.3 5.3 6.7 7.7 9.0 Payout (incl. Div. Tax.) 27.0 54.3 45.0 45.2 46.4 45.7 Valuation(x) P/E

22.3 26.7 23.8 20.1

Cash P/E

20.8 25.0 22.2 18.8 Price / Book Value

9.0 11.7 10.2 8.6

EV/Sales

3.9 5.4 4.6 3.9 EV/EBITDA

19.6 23.0 19.4 16.0

Dividend Yield (%)

1.7 1.4 1.7 1.9 Profitability Ratios (%) RoE 34.8 37.1 42.4 47.0 45.6 46.5 RoCE 31.2 34.6 41.8 48.8 50.2 52.1 Turnover Ratios (%) Asset Turnover (x) 1.4 1.6 1.9 1.9 2.0 2.0 Debtors (No. of Days) 31.8 25.2 24.1 31.6 31.6 31.6 Inventory (No. of Days) 36.1 28.2 24.5 26.6 26.2 25.5 Creditors (No. of Days) 32.8 33.3 28.5 29.1 30.3 31.0 Leverage Ratios (%) Net Debt/Equity (x) 0.3 0.2 0.2 0.1 0.1 0.1

Cash flow statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E OP/(Loss) before Tax 2,512 2,600 3,196 4,090 4,777 5,682 Depreciation 140 188 220 276 323 364 Interest -148 -147 -61 -72 -66 -66 Direct Taxes Paid -404 -401 -540 -740 -1,058 -1,258 (Inc)/Dec in Wkg Cap -1,215 1,830 187 -891 -100 -98 CF from Op. Activity 886 4,070 3,002 2,663 3,875 4,625 (Inc)/Dec in FA & CWIP -358 -1,088 -723 -325 -800 -800 (Pur)/Sale of Invt 550 -737 0 1 0 0 CF from Inv. Activity 192 -1,825 -723 -324 -800 -800 Inc/(Dec) in Net Worth 0 0 0 76 0 0 Inc / (Dec) in Debt -297 -682 -410 0 0 0 Interest Paid 0 0 0 0 0 0 Divd Paid (incl Tax) -618 -1,405 -1,416 -1,779 -2,045 -2,390 CF from Fin. Activity -587 -855 -658 536 -436 -613 Inc/(Dec) in Cash 491 1,390 1,621 2,874 2,639 3,212 Add: Opening Balance 1,614 2,105 2,759 2,817 4,841 6,580 Closing Balance 2,105 3,495 4,380 5,691 7,480 9,792

E: MOSL Estimates

Emami

25 April 2014 29

N O T E S

Emami

25 April 2014 30

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Disclosure of Interest Statement EMAMI 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No

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