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Aarati Krishnan

INVESTORS may refrain from subscribing to the public offer of equity from Emami. At the two extremes of the price band, the asking price for this offer translates into a price-earnings multiple of 16 and 20 times Emami's trailing earnings. Growth in the company's sales and profits has been sedate over the past three years. Prospects for a ramp-up in growth in the coming years also appear uncertain. The company's brands, with their Ayurvedic positioning, are strong in various niche segments. But expanding this presence may be difficult in the face of intensifying competition in personal and health care, both from domestic companies and MNCs. That the company is focussed on manufacturing, with the marketing and distribution functions farmed out to a group company, may also curtail the stock valuation.

Emami's public offer comes at a time when Indian FMCG companies such as Dabur India, Marico Industries and Godrej Consumer have enjoyed a sharp mark up in their valuations. These stocks now trade at valuations of 20-24 times their trailing earnings — double that a couple of years ago. But this re-rating comes on the back of higher sales and profit growth rates over the past couple of years that have seen them outpace the rest of the sector. In contrast, Emami's sales have registered a modest annual growth rate of about 7 per cent over the past three years, while operating profits have been stagnant.

Emami's product basket features brands such as Boroplus anti-septic cream, Navratna cooling oil, Boroplus prickly heat powder, Sona Chandi Chyawanprash and Mentho Plus pain balm. Several of these products occupy niche segments. The bulk of Emami's products are classified as Ayurvedic medicines and, thus, enjoy concessional rates of tax. In 2003, the company invested in a new manufacturing facility in Guwahati and will enjoy income-tax, excise and sales-tax exemptions for a ten-year period.

It is not easy for Emami to break into bigger categories in personal care such as shampoos, talcum powders or hair oils. But, on the other hand, an increasing number of players are targeting the niche areas that Emami's brands occupy. For instance, Boroplus prickly heat powder now has a 22 per cent share of the prickly heat category. But at Rs 93 crore, this is a relatively small sub-segment of the talcum powder market. Brands such as Dermicool and Nycil are Boroplus' competitors.

The Boroplus antiseptic cream holds 59 per cent of a market valued at Rs 139 crore, but a number of new players in the OTC segment have now rolled out antiseptic creams which will compete with Emami's offerings. The cooling oil category, where Emami's Navratna Oil is the leader, has attracted a slew of competitors, which already have a presence in hair oils such as Dabur and Marico.

The Ayurvedic association of Emami's products, which has helped the company retain its dominant market shares, has been a differentiating factor so far. However, domestic companies with an equally strong Ayurvedic base, such as Dabur, Himalaya Drugs, and Zandu Pharma, have been regrouping for an aggressive foray into these segments. And a good number of FMCG and pharma companies have also lined up forays into OTC drugs and healthcare, as these offer greater opportunities for growth than the home-care segment.

Emami plans to drive growth in its business through increased focus on affordable pack sizes, new product forays and a focus on exports. Of these, an expansion into pan-Asian markets may offer promise.

However, any effort to expand domestic presence through low unit packs could lead to erosion in pricing power. New product forays will require heavy outlays on product promotion and brand-building expenses. Emami's relatively small size when compared to several of its rivals, may be a constraint when it comes to funding heavy outlays on brand building. That the bulk of the proceeds from this offer will not go towards investment in the core business or brands, is also a negative factor.

Another factor that could trim valuations for the stock would be Emami's status as a pure manufacturing entity. The company's marketing and distribution functions are handled by a group company - JB Marketing. Apart from leaving the company with lower profit margins vis-à-vis FMCG peers, this arrangement could also place the listed company in a situation where shareholder interests conflict with those of the group company.

The stock could offer opportunities for investment at a future date, if the company's plans of breaking into new products or markets succeed; or if it becomes the target of a takeover attempt. However, investors can wait for the stock to list, as there could be opportunities for entering the stock at a better price than the one available during the IPO.

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