Emami Limited (531162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Emami Limited hosted by IIFL Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Percy Panthaki from IIFL Capital Limited. Thank you, and over to you, sir.

Hi. Good morning, everybody. Welcome to the Emami results Call. After the pandemic, a lot of FMCG companies are reporting good numbers this quarter. And Emami is no exception. Certainly, the numbers this time have been quite robust. And to take you through what is happening in the business, we have with us Mr. Mohan Goenka, Director; and Mr. Rajesh Sharma, VP Finance. So without further ado, over to you, Mohan ji.

Thank you, Percy. Good morning, friends. I welcome you all to this conference call on Emami's result for the second quarter and first half year ended September 30, 2020. I hope all of you and your loved ones are safe and healthy. I'm very happy to inform you that this quarter has been very positive and witnessed an all-round growth. Emami's performance has been very strong, resulting in double-digit volume-led revenue growth and improved margins in quarter 2 FY '21. Notwithstanding the fact that our plants were not operational for over 20 days, disrupting the supply chain, Emami has registered strong growth, which the company expects to sustain in the coming quarters too. The quarter witnessed a revival of consumer sentiment, which is evident from the company's performance across brands. The domestic business grew strongly by 13%, with volume growth of 10% due to sustained momentum, not only in the Health and Hygiene segment, but also due to robust performance in most of our other power brands. As a result, Emami posted a strong 28% growth in the domestic business in this quarter, excluding the winter portfolio. Offtakes of our winter portfolio were impacted due to the high base of 39% growth in quarter 2 FY '20 due to the early pipeline filling last year. We do believe that BoroPlus is a phasing issue. And as the winter sets in, the brand is expected to do well in the current quarter. Despite the winter phasing and supply chain issues in quarter 2 impacting some primary numbers, Emami performed exceedingly well. With joining of our new sales head and Healthcare division head earlier this year, we had a strong team in place to take the growth momentum forward. Zandu health care range continued its growth momentum across products and grew by 53%. Pain management range grew by 31%, Kesh King grew by 45% and Navratna grew by 14%. However, as I mentioned earlier, BoroPlus range declined by 25% and Male Grooming range declined by 24%. I must impress upon the performance of Kesh King, which stands out strongly. Kesh King has posted a robust performance during the quarter, registering its highest ever sales during the quarter since its acquisition by Emami in June 2015. We are happy that Kesh King has proved its mettle by its strong performance. We are also extremely optimistic about sustaining Kesh King's performance in the future as well, despite the muted consumer sentiment towards premium products in this environment. Further, the Balms portfolio too registered an all-time high quarterly sales in quarter 2 FY '21. Fair and Handsome, which declined during the quarter, has been making sequential recovery since August. The brand is being relaunched in the market in new packaging as Fair and Handsome Radiance Cream and Fair and Handsome Instant Radiance Face wash. During the quarter, rural markets continued to perform better than the urban, aided by relatively lower impact of the pandemic. All the channels posted convincing growth with e-commerce channel tripling its revenue during the quarter. Modern trade, which was impacted due to social distancing norms in the first quarter, has bounced back during the quarter, registering a growth of 9% in this quarter. While it took us along with everyone a while to adapt and adjust to the new normal and find the strategy to battle this pandemic, Emami launched 20 new products in the domestic market with more than 40 SKUs, including 8 new launches in quarter 2 FY '21. The overall contribution to the domestic revenues during the quarter was 4%. For the international business too, we launched 13 new products in first half FY '21. With a continued focus on the Health and Hygiene segment, the company continued to launch innovative products during the quarter. The company launched Zandu Immu Jelly. The company also launched BoroPlus Antiseptic plus Moisturizing Hand Wash and Zandu Amla, Aloe Vera and Karela Jamun Health juices, among others. In this context, I must mention about our very own e-commerce portal, zanducare.com, which was launched during this quarter as a branch store for Zandu Healthcare products. The portal has been well accepted and caters to the e-com audience with existing as well as newly launched multiple e-com-specific products. During the quarter, international business grew by 11%, led by Bangladesh and MENAP. I'm pleased to inform you that 7 Oils in One has become the largest selling brand for us in the international business. We have launched 7 new variants of the brand in the past few quarters. And its popularity has increased significantly in Bangladesh since its ongoing media campaign with a local celebrity. We also introduced a hygiene range for international business as well, which is doing well. Our CSD business, however, declined marginally by 2% during the quarter. In this quarter, Emami increased its profit as well as margins. Gross margins at 70.3%, which are an all-time high, grew by 60 basis points. EBITDA at INR 257 crores, grew by 33%, while EBITDA margin at 35% grew by 570 basis points. Cash profit at INR 233 crore increased by 31% and cash profit margin at 31.7% increased by 480 basis points. This was possible due to stringent cost control measures and benign raw material prices, which helped improve the margins. I'm also pleased to inform that the Board of Directors have declared an interim dividend of 400%, that is INR 4 per share. Emami now has a war chest of growing products and a momentum of growth and recovery that was witnessed from May 2020 onwards, has now culminated in posting very positive numbers by not 1 or 2 brands only, but almost all the brands put together. Fair and Handsome, which was degrowing, is also in sequential recovery mode. This is an extremely encouraging development for us at Emami, and we are confident of taking this momentum forward. As mentioned in my address during the last quarter about our proposed entry into the Home and Hygiene segment, we are now ready to roll out this range nationally in a phased manner post Diwali. We are looking forward to the launch as the segment offers vast potential and has become rather exciting in the current scenario. With the restrictions of the lockdown easing, we continue to maintain a positive outlook for the coming quarters, provided the ongoing health crisis does not escalate further and economic activities revives steadily. Since the last week, winter has set in, in the northern and the eastern parts of India, and the demand for winter portfolio has already picked up. Given that the medium-term potential of the franchisees remain firmly intact, we believe the company is on track to deliver sustained profitable volume-led growth through focus on strengthening the franchise in the core categories and driving the new engines of growth towards gaining critical mass. With this brief, I now open the Q&A. Thank you very much.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Mohan ji, congrats for good performance. My first question is after 2 years, you've seen very good growth come back. This quarter, we have seen companies like Nestlé, Dabur and even Britannia earlier quarter announced capacity expansion program. I understand for you, it might be a bit early, but just to get a sense across your categories, what is the capacity utilization constraint building up, wherever it is building up in the next 2 years, if you could highlight?

So Abneesh, as of now, we have enough capacities, barring 1 or 2 brands, for which, of course, we are increasing our capacity. But at overall level, our capacity utilization is about 70%. We still have at least 2 to 3 years left to fully utilize the capacities.

My second question is on e-commerce. So e-commerce normally is seen as a -- own portal is normally seen as a loss-making business. In your case, currently, short-term offer, there is no minimum size free delivery, et cetera. So I want to understand if it picks up a lot, how would you handle the losses? Is there any loss number you have put here? How do you think this may not have much footfalls, it's more for marketing, more for the brand details, et cetera, to the consumer. So could you discuss that?

So Abneesh, as we all know that the future lies in e-com, and everyone has to invest behind this new channel or this new distribution network. So we have also taken a plunge. Last -- we have built a very solid team behind this e-com. And in the last 40, 45 days, we have seen a very big sales coming, not very big in the sense, a good amount of sales coming from the portal. So we almost have seen -- almost 10 lakh visitors have visited this Zandu portal. So of course, there is investment budget. The losses are not very big, what we have anticipated if the sales continue to rise, the margins are pretty high, even the brands that we are selling through the portal. So I think going forward, in the next 3 to 4 quarters, it should be profitable.

And 10 lakh, how many orders you've got, how are you handling the delivery? Which third-party warehouse or delivery partners you have?

Yes. So we have a third-party delivery system. And of course, we are delivering it now for free because it's an initial -- this advantage we are giving it to the customers. Let us see. I think we are quite bullish. As I said, we have an exclusive head for e-com for this portal. We have a big team, we have recruited very recently. And as I said, in the last 40, 45 days, we have seen a big jump through this e-com, zanducare.com.

One last follow-up on e-com, would there be any dissonance, pushback because it's your own e-commerce, would there be pushback from your kirana guys or even other e-commerce company? Will you do pure e-commerce product, if any?

We are doing exclusive products only for this portal, which are not available in our general market.

You don't think any dissonance at kirana will be there, pushback?

No, I don't think so.

And last question, so Kesh King in range, any specific intervention, you have done, any specific promotion CBs, extra grammage free, what is driving this 45% because if 4 years nothing happened as in not this kind of growth happened? Obviously, 45%, India is not growing. No Indian FMCG is growing at 45%. If you could elaborate what you have done at the promotions level?

Not that we have increased exponential promotion in Kesh King. Over the last, again, 2 months, we have seen a sustained growth in Kesh King. And the feedback we have got from the market is that some of the local players and even some of the other large companies, we have gained shares from them. I don't want to name the brands, but it is a mix of big companies and small companies. Both have got hit...

How much is non-hair oil in this? This growth, how much is non-hair oil?

Both have equal growth, both the shampoo and the hair oil have equal growth.

And shampoo will be now 10% of the portfolio?

Shampoo is about 20% of the portfolio.

The next question is from the line of Manoj Menon from ICICI Securities.

Mohan ji and Rajesh ji, extremely pleasing to see the broad-based performance. Congratulations to you and team for that. That's the most important. I have a few questions actually. A couple of them touched upon, but just a little more detail. On Kesh King, some color on the segment growth. Completely understood and still that there's 1 large player in market share gains, which is accruing currently. Probably that would have started a few quarters back itself, from a trajectory point of view. But some color on adoption because you are one of those large players within that premium segment, with a job of developing that segment as well. So I'm just trying to see how sustainable it is into 2, 3, 4 years into the real medium term.

So Manoj, it would be difficult for me to really say what is the kind of shift that has happened because as I said, the demand for Kesh King has come over the last 2 months. And it continues even in the month of October, where we have seen ever-highest number for Kesh King. So as I said, the market has said that some of the local players have been badly hit in this particular category. And also, the likes of Patanjali what we have heard from the market and even some bit of Indulekha, we have gained some share from these 2 players. So we would have to see that how long this momentum continues. But as of now, there is a huge traction from the rural -- yes, huge traction from the rural markets what we see. We -- actually, we haven't been subscribing to Nielsen data in this year. So we really don't know what is the shift in the market share. But at least what the number says, there should be a significant shift in the market share numbers. Continuously, day-by-day basis, we are seeing a good traction for the brand somehow.

Okay. Okay. Okay. Understood. And secondly, on the channels, the modern trade growth is very pleasing to see, given the headwinds, which you -- like any other player would have actually faced in the market. Some color on the modern trade growth? Is it more to do with the geographical mix of your modern trade exposure? Is it addition of any new player? And that's one. Secondly, on the channel itself, I recall discussing with quite a few years back on e-commerce and maybe you're mentioning that some packaging innovations and structural changes. Some color on what's happening in modern trade currently? And beyond recruiting a new e-commerce head, anything else, any new tie-ups? Again something to just look at the medium term on how the e-com trajectory for you should look like?

So Manoj, both for modern trade and e-com, we have launched a lot of new SKUs only focusing for these channels. In each of these brands, we have launched like a 600 ml lotion or a 500 ml, 7 Oils in One or even 100 grams of face wash. So very specific SKUs have been launched for both e-com and modern trade. Also the new launches that we have done has shown good traction in modern trade, particularly DMart is what we are seeing. Even big size of balms has done very well in DMart and some of the other formats, like 50 grams of Zandu balm, we have done exceedingly well in some of the modern trade format. Some very specific promotions have been run for some of the channels, which has led to this growth. We still see a lot of headroom, particularly in e-com because we are still at just 2.2% of our sales in e-com, whereas others are at 5% to 6%. So with the new team in place with tie-ups with almost everyone in place, we think it can further go up to about 3% and then to 4%.

Understood. Understood. In fact, I would reckon if the targets could be even higher, given that you are largely a personal care and specialized food company, actually. So understood, sir. And a couple of bookkeeping questions, actually only 1 rather. Any -- I saw a line somewhere in the presentation, but still. Anything to call out on primary versus secondary?

So primary and secondaries are more or less the same in this quarter. But on an overall level, we have reduced our -- our secondary sales have been higher in the first half.

Understood. So I mean, how do we look at that? Is it something which is a new equilibrium? Or would you think you would be going back to the previous levels over the next year?

In the sense -- sorry, Manoj?

For example, so your secondaries have grown faster, which means your channel inventory is lower today. So is this a new equilibrium the way you're seeing for better ROIs in the channel? Or is there an opportunity to, let's say, have more primaries in the next 6 months to 1 year?

So we would love to maintain this hygiene at the distributor level. Currently, as of now, our distributors holding stock is about 15 days, which you remember had gone up to almost 25, 30 days. So yes, so we would not want to fill up the channels unnecessarily.

Understood, sir. And maybe last question. One comment which I heard from particularly unlisted companies in the sector was that, yes, new product launches are necessitated -- I mean it's a necessity at least in some segments currently. But many of them commented about the difficulty in actually placing the products because the retailer is not really doing those offtakes. And second is even from a consumer's browsing ability or willingness point of view, it's also constrained currently. What's been your experience, actually, on the new products, the full throughput?

So Manoj, I think we have good clout in kiranas and the chemist outlet. So we haven't found much difficulty in placing the new products because all the new products have -- are mostly brand extensions in BoroPlus, and BoroPlus has a fairly good equity. So we haven't found that challenge, to be very honest.

The next question is from the line of Arnab Mitra from Crédit Suisse.

Mohan ji and Rajesh ji, congratulations on very good performance. My first question was on the health care business. I mean this includes the OTC as well as the balm. So you've seen the traction continuing very strongly in 2Q. Now as the COVID fear kind of goes down, which we are seeing, are you seeing the traction kind of starting to ebb off? Are you seeing still very high demand for these products? And especially in the non-balm portfolio, if you could highlight some products which you think are very high potential, where you're seeing a scope of a permanent kind of a reset in the category sizes, including things like chyawanprash where you are a small player. So any kind of thoughts on this overall sustainability of the health care growth?

So as we speak, Arnab, we are still seeing strong momentum for the entire health care range, including the balms. Even the month of October and the first 5 days of November have gone up well for the entire health care range. I really don't know if the momentum would fall off once the pandemic is over because balms or Pancharishta or any of these products have always been in existence. And the need for these products would always rise. Consumers who are using these products, the amount of new consumers we have gained in the last 4, 5 months, I don't see any reason why they should go back to their earlier medications. So this is one. Chyawanprash has been doing well in this health care range. Plus some of the new launches that we have done, whether it is in the juices or in new jelly, we would have to wait and watch, Arnab, how these perform because these are absolutely new launches that we have done in the last 2, 3 months. But as of now, retailers are very excited. Retailers are very excited to keep these products. We are also advertising some of the products. Pancharishta has also grown almost 24% in this quarter. So overall, I think we are very confident that the health care still has a lot of headroom to grow, honestly. We should not feel complacent that we are going at 30%, 40%. This was long overdue. And I think still there is room to grow.

Right. And just one related question on Chyawanprash, given that it is a large category already within health care, and it is also seeing a huge growth. So we know there's 1 large player. Do you see this as an opportunity to set yourselves as a #2 player in this category in the long-term, or do you think because this already has a very large player, it's better for you to put your efforts in other new segments where possibly there is no strong player currently in the health care space? And anything specific you are doing to kind of capitalize on this opportunity that seems to be coming?

So definitely, see, we will take all our efforts to ensure that our Chyawanprash range grows. In this quarter, we have almost done more than 3x just in Chyawanprash. So let us see, now the peak season has started, we have got an aggressive number for Chyawanprash, even for the third quarter, which is a peak quarter. So definitely, we would be a good challenger. We are spending a good amount of money to ensure that it becomes a large brand for us. And because of the Zandu's brand name, there is good traction in Zandu Kesari Jivan and Zandu sugar free Chyawanprash also.

My second question was on the BoroPlus, sir, you mentioned that -- and I think HUL also mentioned in the call the pipelining delay, which has happened this time. So has the pipelining happened in October, what we would have expected to happen in September? Or it is going to happen almost along with the offtake, which possibly will now pick up due to the winter?

So this is very heartening, Arnab, that in the last 7, 8 days, we have seen a good amount of pipeline filling happening for the entire winter range. So we had expected this should happen post Diwali. But because the winter has set in very well in the entire northern and the eastern part of the country, so we are seeing a good demand for all winter products. And this has happened in the last 7, 8 days.

Okay. And my last question is on the margin. So you've seen this reduction in staff cost, say, about 100 basis points, other expenses have gone down. So what part of this is something which you think can sustain, which has come out of your cost-saving plan and what part of this could be transient and as business kind of normalizes, costs will come back in that part of the equation?

Most of it is sustainable because you remember, we had done a project with ATK, which is still ongoing on war on waste. So with that, whatever benefits we are getting would be sustained. The only thing that would increase is honestly the travel costs because travel cost is still very, very minimal, which is not very large. So there should be some room of margin expansion.

And you would expect...

Because sales is also growing, and so staff cost also be -- at least 100 basis points, there should be a reduction in the staff cost expenses. And even in the administrative cost, because of the cost reduction measures that have been taken, those are quite sustainable.

The next question is from the line of Harit Kapoor from Investec.

So I just had a couple of questions. One was on the sales and distribution side. So you mentioned in your remarks that you had a new sales head come in about 6, 7 months back. I just wanted to know any initiative efforts that you could call out, specifically on the sales and distribution part, which you've done over the last few months, which have -- which are bearing fruit?

So Harit, because -- see we are an ongoing concern. So we don't change too many things. But of course, there is stability at the top which brings in a lot of confidence at the zonal manager and the area manager level. But what has happened is that because rural has always been a strong hold for Emami, and we also have a strong presence in the wholesale. So we did some bit of extra initiative, both for rural and wholesale, which really gave us this growth. So we tweaked some of the incentives, particularly for these 2 channels.

Got it. Got it. And just a follow-up on that. What's your wholesale contribution, as we speak? I know it has come down over the last few years. But what's your wholesale contribution now? And do you see that now being largely stable that the channels have more or less stabilized now?

No. So we are still seeing growth coming in from the wholesale market and retail still declining. Even in this quarter, wholesale grew by 21%, whereas retail degrew by 14%. So the contribution from wholesale, which had come down to 38%, I think now has gone up to about 44%, 45%.

Got it. My second question was on the advertising spend part. So we have done 20 new launches in the first half, 8 in the second half. I just wanted to know that the ad spend growth, obviously, this quarter is just about 3%. So is it a function of just having lower media rates but actually doing more volume spend? And also whether this should see a material acceleration going forward, given that you have this pipeline and you're kind of putting out new products?

So yes, we have got some advantage of the media rates in the first half, which would continue also in the second half. But yes, we have taken aggressive budgets for our new launches, particularly in the second half. That should increase our advertising cost by about 200 basis points.

So 200 basis points for the second half for advertising?

Yes. Yes. But despite of that, because of the other cost benefits, we still see a -- and benign raw material cost, we still see a margin expansion going forward.

Got it. Got it. Last question was on the...

The product mix -- because it depends on the product mix. The high-contribution or high-margin brands,are -- have taken off very well, particularly the Kesh King range, the balm range, even BoroPlus is the peak season, Navratna, Fair and Handsome also has taken off in the last 2 months. So due to the product mix, the margins are not under pressure.

Very good, sir. The last question was on the amortization part. So what prompted the change in accounting? And do we expect this INR 90-odd crores a quarter number now to continue going forward? Is that the number we should take?

No, we have changed the life of the intangible assets from 10 years to 7 years this quarter. And going forward, roughly INR 55-odd crores should be the amortization every quarter. So this Kesh King would now get completely amortized by June '22 against June '25, which was envisaged earlier.

So Rajesh ji, from next quarter, it's INR 55 crores and goes up to June '22. Correct?

June '22. And post that, we would be left with another intangible asset, Creme 21, which is a very small one. So that would continue for another 4 years.

Okay. Okay. And how much is the quantum of that, that will be very small, right?

Yes, very small, around INR 15 crores per annum.

The next question is from the line of Tejash Shah from Spark Capital.

Mohan ji and Rajesh ji, congrats on a good set of numbers. Mohan ji, if we look at the current crisis at a slightly -- from a trade flow channel mix perspective, it is opposite to demon, where GT was gaining market share versus modern trade. And we have been historically underrepresented in modern trade versus GT. So do you believe that we are a beneficiary of this tailwind, and once modern trade bounces back, perhaps we'll do some of this momentum?