Rating Rationale
March 31, 2020 | Mumbai
Emami Limited
Rating Reaffirmed  
 
Rating Action
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Emami Ltd (Emami).
 
Consolidated revenue growth likely to moderate to 3.9% in fiscal 2020 due to adverse environmental conditions and slowdown in rural demand. This was partially offset by better growth of Kesh King and Navratna oil and international business. Operating profitability is expected to be healthy at 26.8%, marginally lower by 200 basis points due to higher selling expenses partly offset by benign raw material (mentha oil) prices. Operating margin is expected to be ~26-28%.
 
Operating performance of Emami in March 2020 and fiscal 2021 is expected to be impacted due to measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to impact the business profile of the company on account of disruptions of the supply chains, restricted discretionary spending by consumers thereby may have an impact on its credit quality, especially liquidity position. While, most of the state government's measures are applicable till 14th April, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19.
 
Emami has strong liquidity of nearly Rs 175 crore in the form of unutilized bank limits, cash surplus and marketable securities to withstand impact on cash flows in the near term. Financial risk profile is expected to remain robust with healthy annual cash accrual of Rs 300-350 crore and low capital expenditure (capex) requirement. Company is likely to pay 60-80% of profit after tax (PAT) as dividend over the medium term as in previous years. Further, liquidity is robust and expected to increase in the absence of any large capex or acquisition over the medium term.
 
CRISIL also notes the increase in pledge of promoter stake over 80% due to debt at group level. The increasing pledge of the stake has impacted financial flexibility of the company. However, the company management is in process of liquidating certain business segments to reduce the promoter level debt in the near term to reduce the pledge to below 20%. The timely reduction of the pledge will remain key monitorable.
 
The rating continues to reflect the company's strong market position in the niche ayurvedic product categories, healthy operating efficiencies, and robust financial risk profile. These strengths are partially offset by intensifying competition in the fast-moving consumer goods (FMCG) industry and susceptibility to volatility in raw material prices.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Emami and its direct and wholly owned subsidiaries. Also, the goodwill of Rs 1600 crore in fiscal 2015 paid by Emami on the Kesh King acquisition have been amortised over five years beginning fiscal 2016.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position in niche product categories
The company's leading position in the niche ayurvedic segment (both personal and healthcare consumer items) is underpinned by the market leadership of its key products, Navratna (66.4% volume market share in the cooling oil segment), Boroplus (74.1% volume market share in antiseptic creams), Zandu and Mentho Plus (54.9% in balms), Kesh King (26.6.% in ayurvedic hair oil), and Fair and Handsome (65.3% in men's fairness creams) as on December 31, 2019. Market share gains for these brands, over the last three fiscals, reflects the strength of its brands and well spread pan- India reach. Further, strong presence acts as an entry barrier and insulates the company from downturns in the fast moving consumer goods (FMCG) sector.
 
For fiscal 2020, estimated volume growth is likely to be flattish due to adverse environmental changes and slowing rural demand. Underperformance compared to industry due to higher rural dependence, dependence on wholesale channel and relatively discretionary nature of products.
 
Acquisition of Creme 21 in fiscal 2019 has boosted and complements Emami's international business and portfolio particularly in MENA, SAARC and Russian markets. This business is expected to grow 21.2% in 2020.
 
* Healthy operating efficiency
Efficient supply chain management, and judicious mix of contract-own manufacturing have led to high capacity utilisation, strong operating profitability and return on capital employed (RoCE). Healthy operating efficiency is reflected in operating margin of 26.8% and adjusted RoCE of 20.1%. Emami also benefits from the large proportion of its production from cost-favourable locations across India (about 60% of production is carried out in tax-exempt zones, four of its nine manufacturing plants enjoy fiscal benefits).
 
The company has also relied on acquisition of brands such as Zandu and Kesh King complementing its existing portfolio to diversify into new segments and strengthen market position. Successful integration of these acquisitions has helped the company to enhance its operating profitability. Working capital management is also efficient as Emami, like peers, operates on a negative working capital cycle. Operating efficiency is sound due to a strong network of 3200 distributors and about 6000 stockists, providing a retail direct reach of >9 lakh outlets and indirect reach of ~45 lakh pan India.
 
* Robust financial risk profile
Financial risk profile is supported by strong and improving cash generation, robust capital structure, healthy debt protection metrics, and prudent capital spending. Debt contracted in fiscal 2016 to acquire Kesh King brand had been completely repaid as on March 31, 2019 using cash accruals. This coupled with the absence of any large capital expenditure (capex) will lead to improved gearing. Company has recently announced a dividend outflow of Rs ~90 crore and buyback of shares worth Rs 192 crore. Liquidity is healthy as reflected in unutilised bank limits and liquid surplus of about Rs 175.
 
Weaknesses
* Exposure to intense competition and volatility in raw material costs
The FMCG industry has both organised and unorganised players across segments. Also, growing popularity of herbal and natural products has led to other established FMCG players launching products with similar positioning. Increase in competition necessitates higher advertising and promotion expenditure. Also, some of its products are seasonal in nature, any disruption in weather conditions can result in volatile sales of these products.
 
* Volatility in raw material prices
Mentha oil and polymers comprising half of the company's raw materials - are crude linked, which exposes it to sharp volatility. Despite significant variation in raw material prices in the past three years, profitability has sustained above 25% due to Emami's market leadership. However, competitive pressure may limit the ability to pass on increasing input costs to customers. Focus on cost efficiencies and continued price leadership will help mitigate the impact of volatility in raw material prices on profitability.
Liquidity Strong

In the absence of long-term debt, expected cash accrual of Rs 300-350 crore per annum over the medium term will support liquidity. Cash and cash equivalents are likely to be at Rs 70 crore as on March 31, 2020. The company has sufficient accrual and cash and cash equivalents to meet capex requirement of Rs 150-200 crore over fiscals 2021 and 2022. Bank limit utilisation is minimal and currently there is no CP outstanding. Liquidity should remain strong over the medium term.

Rating Sensitivity Factors
Downward Factors
* Large, debt-funded capex or acquisition, adversely impacting the financial risk profile with gearing increasing to above 0.5 time.
* Erosion in market share of few of power brands by 10 percentage points.

About the Company

Emami, the flagship company of the Kolkata-based Emami group, was started in 1974 as a partnership firm for manufacturing cosmetic products. In 1995, the firm was reconstituted as a public limited company, and was merged with an associate, Himani Ltd, in 1998; the consolidated entity's name was changed to Emami Ltd. The Emami group, promoted by Mr R S Agarwal and Mr R S Goenka, has diverse business interests, including FMCG, newsprint paper, writing instruments, edible oil and cultivation, biodiesel, hospitals, real estate, retail, cement, and contemporary art. Currently, the promoter group owns about 52.74% stake in Emami as on December 31, 2019, reduced from 62.74% as on March 31, 2019. Of the total promoter holding, 71.58% was pledged as on December 31, 2019.

Emami manufactures ayurvedic personal and healthcare products and currently has more than 300 products that are marketed across India and in more than 60 countries. Main brands include Navratna, Boroplus, Zandu, Fair and Handsome, Kesh King and Mentho Plus. Emami added prominent ayurvedic brand, Zandu, to its portfolio when it acquired around 70% stake in Zandu Pharmaceuticals Works Ltd in 2008 for Rs 710 crore. Emami has a manufacturing plant each in Kolkata, Guwahati, Pantnagar (Uttarakhand), Vapi, Silvassa, and Talasari (Maharashtra). In fiscal 2014, Emami, through one of its subsidiaries, set up a manufacturing plant in Gazipur, Bangladesh.
 
In June 2015, Emami acquired the Kesh King brand of hair and scalp care products from SBS Biotech Pvt Ltd for Rs 1651 crore. The Kesh King portfolio includes hair oil, shampoo, and ayurvedic capsules along with the respective formulations.
 
During fiscal 2018, the company acquired a strategic stake in Helios Lifestyle Pvt Ltd (30%) and Brillare Science Pvt Ltd (26%) in order to foray into professional salon and online male grooming segments. On June 22, 2018, Emami International  FZE, a Dubai based wholly-owned subsidiary of the company, acquired 7.54% stake in M/s Loli Beauty Inc, a US based company dealing in natural and organic personal care products.
 
In January 2019, the company acquired Creme 21, a German brand with strong roots and brand recall. The brand offers skin care and body care products such as creams and lotions, shower gels, sun care range and men's range and has strong presence in the Middle East and other focus markets.
 
For the 9 months ending December 2019, company reported operating income of Rs 2122 crore (2053 for 9 months ending December 2018) and profit after tax of Rs 280 crore (Rs 247 crore).

Key Financial Indicators*
Particulars Unit 2019 2018
Revenue Rs crore  2696  2534
Profit after tax (PAT) Rs crore 229 226
PAT margin % 8.5 8.9
Adjusted debt/adjusted networth Times  0.06  0.18
Interest coverage Times  37.8  24.6
*CRISIL adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Commercial Paper NA NA 7-365 Days 500 CRISIL A1+

Annexure - List of Entities Consolidated
Sr.No Subsidiary Companies Subsidiary/ JointVenture Extent of consolidation
1 Emami Bangladesh Ltd Subsidiary 100%
2 Emami International FZE Subsidiary 100%
3 Emami Indo Lanka (Pvt.) Ltd Subsidiary 100%
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      29-05-19  CRISIL A1+  28-06-18  CRISIL A1+  25-07-17  CRISIL A1+  CRISIL A1+ 
Non Convertible Debentures  LT                  25-07-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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