Emami Limited (531162) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Emami Limited Conference Call to discuss acquisition of Dermicool brand hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Gupta from IIFL Securities. Thank you, and over to you, Mr. Gupta.

Thanks, Nirav. Good day, everyone, and I'd like to first thank Emami to give us this opportunity to host this call. And we have Mr. Mohanji and Mr. Rajesh Sharma from Emami side, who'll be addressing all your queries regarding this acquisition of Dermicool that they have announced. And without taking more time, I would request Mohanji and Rajesh to address with their opening remarks.

Thank you, Sameer, and a very good afternoon, friends. I welcome you all to this conference call. We are very happy to announce that on 25th March 2022, Emami Limited entered into an agreement with Reckitt Benckiser to acquire the Dermicool brand, which is one of the leading brands in prickly heat and cool talc segment. The transaction envisages purchase of the brand for a total consideration of INR 432 crores, excluding taxes and duties, which has been funded through internal accruals. Emami has always been open for growth through inorganic route. We believe that the right choice of acquisitions not only add value and synergy with the current line of the businesses, but also offer opportunities for the organization to be present in categories that have high growth potential. Zandu, Kesh King and Creme 21 are some of the key brands or businesses acquired by us and successfully integrated over the past decade. This acquisition is, therefore, a part of our aggressive growth strategy, and we plan to leverage the brand with our existing strength to make our presence stronger and deeper in the cooling talc segment. Dermicool was acquired earlier by Reckitt as part of its acquisition of Paras Pharmaceuticals in 2011. It is well known amongst consumers for providing cooling and respite from prickly heat caused during harsh summer and is one of the leading brands in its segment with a 20% market share. The iconic brand has a strong brand equity with a high consumer connect through its vastly popular jingle, Aaya Mausam Thande Thande Dermicool Ka. The brand has clocked net sales of INR 113 crores in the calendar year 2021, and is available across the country with a direct reach of 1.25 lakh outlets and an indirect reach of about 1.8 million outlets. The brand is highly profitable and enjoys 55% gross margin and 38% EBITDA margin. Being a noncore brand to the seller, they wanted to close the deal in this financial year itself, therefore, we grabbed the opportunity and closed the deal in the shortest possible time. We had also roped in McKinsey for doing the business diligence. Brands operating in niche categories with high margins and low multinational presence are a very strong strategic fit for Emami. Therefore, we believe that Dermicool offers great synergy with our existing business, and is a perfect strategic fit for growth in core as well as adjacent categories. It will strengthen our presence to make us the #1 player in the prickly heat and cool talc category. We will leverage our distribution, thereby optimizing trade, consumer and media spreads. It is not only present in a high growth and a low penetrated category, but it is also a highly profitable brand, which will be EPS-accretive in the first year of operations itself. With increasing global warming and soaring summer temperatures, such problem solution niche products are poised for strong growth in the future. I'm also very happy to share that with this acquisition, we are now market leader in 6 categories where we operate in, and we have 8 brands generating revenue of more than INR 100 crores. Though I have covered most of the points in my opening remarks, but still, we have shared the presentation. And I would quickly like to take you through the presentation and then take the Q&A, if any. So I'm on Slide 1. As I said, the brand is Dermicool. It operates in the prickly heat and cool talc segment. We acquired the brand for a total consideration of INR 432 crores, excluding taxes and duties. As I mentioned, McKinsey worked diligently on the business and the commercial diligence. And post their recommendation, we moved ahead to acquire the brand. The size of the total category is almost INR 760 crores, which is the cool and the prickly heat segment. It is growing at almost a 12% CAGR pre-COVID, whereas the talcum powder category is growing at just 5% CAGR. This category witnessed a decline due to COVID because the last 2 years during the peak summer season, COVID was there. 70% of the sales generated is from the rural markets. Most of the consumers in this segment are from the C/D/E, almost 77% of the consumers. The penetration is about 11% to 12%. There is significant headroom for growth as the talcum powder penetration is almost at 45%. The total size of the talcum market is roughly about INR 2,500 crores, and whereas this segment is about INR 750 crores. As I said, this brand has a 20% market share in the INR 760 crores -- the size is INR 760 crores. Last year, net sales were INR 113 crores. Ever-highest sale of this brand has been INR 133 crores, which was in 2019. The gross margin is 55% and EBITDA margin is at 38%. These are some of the variants in which they operate. The largest variant is, of course, the Menthol Regular, which is almost 75% of their business comes from the Menthol Regular. As far as geographical split is concerned, North contributes to almost 40% versus, West is 30%, East is 17%, and South East 13%. And channel-wise, general trade is 84%, modern trade is 12%, and CSD is 3%. What is very, very important that post this acquisition, now we have become the #1 player in the cool and prickly heat segment with a 45% share. Now next to us is Nycil, which has got, I think, 34% share. As I said, we have always believed in niche categories with high margins and with low MNC presence, so it becomes a very, very strategic fit for Emami. We also believe that we were attracted on the valuation side. And I think we have acquired it at a very, very reasonable valuations. Post this acquisition, now we are market leaders in 6 categories, starting from antiseptic cream, cooling oils, male fairness cream, pain balms, Kesh King and prickly heat segment. This is the eighth addition in our portfolio where our revenues is more than INR 100 crores. In this slide, you can see the revenues of Zandu is INR 800 crores, Navratna INR 600 crores; BoroPlus is INR 500 crores; Kesh King, INR 300 crores; Fair and Handsome, INR 200 crores; Mentho Plus, INR 200 crores; 7 Oils in One, INR 100 crores; and Dermicool is INR 100 crores. With this, I now open the floor for Q&A.

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

Congrats. My first question is 2 brands in the same space. So in terms of pricing, brand, regional dominance, could you take us through what will be the differences? Will this be a more premium brand versus your current in-house offerings?

So Abneesh, both the brands are different brands, though they operate in the cooling talc segment. Dermicool is predominantly a prickly heat segment. And Navratna is a general cool segment. So it operates in the cooling talc area, which is into the prickly heat cooling talc area, okay? Secondly, of course, Navratna operates more in the mass segment because Navratna's total contribution comes from the LUPs, the small-sized SKUs. So almost 45% of the revenue comes from below INR 10 SKUs, whereas Dermicool's almost 80% to 90% of the revenue comes from 150 grams SKU. So they operate with 2 different set of consumers. I don't think they overlap that way.

And in terms of market share, you mentioned it is 20%, say -- versus, say, 5, 6 years back when, say, Reckitt would have initially bought out from Paras. Any sense you have on market share? And I was surprised that this is a more specific product for prickly heat but it is a #3 player behind you. So is it because you have 2 brands in that space, that's why you are larger than Dermicool?

No, I'm only talking of Navratna oil because BoroPlus prickly heat is a very small segment for us. But yes, we overtook Dermicool because we were a general talc. And as I said, because of the smaller SKUs, our sales is much, much higher than Dermicool today.

Okay. And Mohanji, you mentioned again and again, you're the #1...

And very honestly, we also believe that Reckitt did not focus so much on this category, whereas Navratna Cool Talc, we were very, very aggressive on our advertising and communications over the last few years. That is also one of the reasons that Navratna overtook Dermicool in a very short time.

So will it be fair to say that initial marketing spends will be on higher side given MNC focus was not there? And in fact, Dermicool, as you said, lost share to your own brand. So will you need to spend much higher? And will you prioritize, say, Dermicool ad spends over Navratna ad spends?

Definitely, we would have to increase our expense because over the last 2 years, none of us have spent so much money because of COVID during the peak summer season. But at the same time, we have done a lot of math. I think even after there is a scope of increasing margins. So we would do that, and we would invest on advertising. So there won't be much pressure on the margin front.

Sir, my second and last question is, if I see earlier acquisitions, Zandu, Kesh King, Creme 21, they added to your overall product capability or brand capability. This acquisition in that way is very different. Ultimately, for consumers, it is in the same prickly heat or whatever, cooling talcum powder. So -- and you said again and again that will become #1. So one, why this is more of an acquisition in the same space? Why did you do this? And when you say you have become #1, what are the ramifications of that? I understand you are now well ahead of Nycil. But what does it get you in terms of medium, long term sales, sourcing benefit, distribution becomes stronger. What is the end result of that?

There are multiple benefits, Abneesh, because if you would see Navratna is a very -- Navratna was launched almost about 7, 8 years back, and we became quite a dominant player in this segment. We see the overall talcum market, which is almost INR 2,500 crores, whereas none of the players are spending the kind of money that the category needs other than very few. And we have demonstrated that there is an opportunity to have substantial market if somebody takes it aggressively. So we also -- we feel that there is opportunity in Dermicool to take the -- if we advertise and we market it properly, there is a substantial headroom for growth. Secondly, if you would see the normal talc is growing at just 5%, whereas this segment is growing at almost 10%, 11% pre-COVID, so -- and it's not a very small market size. So we believe there is enough scope to take share from general talc, that is one. And there are also opportunities geographically where we see that Dermicool can play a substantial role. Thirdly, we believe there is an opportunity in penetration because Dermicool, as I said, almost 90% revenue comes from a larger SKU. There is no small SKU in Dermicool, whereas Navratna operates in a small SKU, almost 45% revenue comes from a small size. So there are opportunity like those. Also, we found that valuation was very, very attractive because we understand this business, we understand this market. Our distribution is common. Everything is -- we don't have to invest much on CapEx or anything. So we can grow the Dermicool brand at a double-digit growth for few years. That's what it looks like.

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

I just had 3 questions. When Reckitt purchased the Paras portfolio, they bought it at...

Harit, can you be a little louder? I can't hear you literally.

Yes. Mohan, can you hear me now? Is it better?

Slightly better. Go ahead.

Yes. So my question was when Reckitt purchased the Paras portfolio, it was at, I think between 7 to 8x sales, eventually sold out a part, effectively, within a year to Marico. And now this transaction happened at probably 3x to 3.5x peak sales for your brand -- for this brand. I just wanted to get a sense of why do you think that they've underinvested in this space in a portfolio that they paid a tremendous premium for? Any thoughts on your end on why this has been under-leveraged?

Harit, I can't comment on that, honestly, because that is their strategy, why did they underinvest. Whereas Navratna cool talc, we really invested and we -- maybe they didn't believe in the category. There could be multiple reasons from the overall size of Reckitt's, maybe this was too small for them to focus on. So there could be multiple reasons. As I said, we found them to be very attractive. We still believe that the market can grow. Every consumer in India can't consume deo, so talcums are here to stay. And there is a room for 2 players in the market.

And it's fair to assume that your own brand Navratna Cool Talc could have been growing ahead of the pre-COVID CAGR -- 4-year CAGRs that is there for the category, right? Because it continued to gain market share.

Harit, actually your voice is not coming through.

Can you hear me, sir?

Yes. Go ahead.

Yes. I was just saying that would it be fair to assume that you are growing -- your Navratna Cool Talc was growing ahead of this 4-year CAGR of 11% for the category? Your growth would have been much higher, right, because it gained market share?

Yes, yes, absolutely. We were growing the fastest in this category.

The third thing was on the Dermicool side. Any product extension that you can kind of think of upfront that could also be a lever over and above just the fact that you can shrink the SKUs and drive penetration? Could that be also a future thought process in terms of variance?

Yes, 100%, Harit. As I said, we roped in McKinsey and they have given us a lot of levers for growth. So once we settle with the acquisition, when it comes into our fold, we will definitely start looking at further extensions into this category.

Got it. And the last question is any aspect of...

It's a very strong problem solution category because -- we've understood from the consumer. And there are a lot of antifungal benefits associated with Dermicool. So there is an opportunity. As you know, Emami has always believed in problem solution brands, niche categories. So we see an opportunity on that front, particularly in Dermicool.

Got it, Mohanji. Last question was on the -- any assets that come into this or it's completely brand acquisition?

Yes, it is brand acquisition. Also, I would like to mention that, of course, the margins are higher because they are not advertised so much over the last 2 years. But at the same time, just to give a perspective, like Navratna Cool Talc gross margin of this size is almost in the range of 67%, 68%, whereas Dermicool margin is 55%. So we see a headroom for growth in margin there, which we will put it on advertising. So I don't see much pressure on the EBITDA margins going forward.

[Operator Instructions] The next question is from the line of Shirish Pardeshi from Centrum Capital.

Hearty congratulations. Finally, after 14 years, we have got brand in our portfolio. So I've got 3 specific questions. You mentioned that INR 132 crores is FY '21. What is the revenue size in FY '22?

This year?

This year.

Shirishji, the size of the brand Dermicool was INR 113 crores in calendar year '21. So Reckitt was following the calendar year accounting. So the number INR 113 crores is for calendar year '21. And the next year is still running in third month only.

Okay. Okay. My second question is that if I look at and if we consider the industry experts view, I think both the brands are very strong in the North and West market, while when I look at Navratna is very strong in North and East market. How are we trying to tackle the southern market? Or you think southern market is only a talc market and we will not address at this point of time?

So you are right, Shirish, that we will become a very strong player in the North because Navratna is also very strong in the North. As I said, they don't really overlap because our quite sizable business comes from a small SKU. And both operate differently. One is -- one takes share from a general talc market because Navratna is a general talcum, cooling talc, whereas Dermicool is specific prickly heat. Though it is cooling but it operates into the prickly heat category. So both really don't overlap so much.

I got, Mohanji, what you're saying. I'm saying, how are you going to use penetration of South market? Or primarily, we will have the brand extension in the talcum powder market in the South?

No. So Navratna is not very dominant in South. Navratna sales is predominantly in the West and the North. Whereas Dermicool presence is only 13% in the South. So talcum market is not very large as far as this category is concerned. We will have to, of course, plan something. We will have to see how much can be penetrated in the South. But right now, our strategy would be first to gain what we have lost over the last 2, 3 years or what they lost in the last 2, 3 years. Then we would, of course, go into the penetration, launching SKUs, variants in different geographies.

The other question I had, like you mentioned that Navratna has a smaller SKU, which is contributing the larger share. Like are you planning to bring in a smaller pack for Dermicool in the next 1, 1.5 months?

No. Right now, we can't introduce -- if anything that comes would be for the next season only. Not for this season.

Okay. So how are you going to tackle this season? I mean, now whatever IMD projections are there, we will have the record-break summer this time. So how are you going to leverage in the next 2, 3 months, this brand acquisition?

So right now, the distribution [Audio Gap] them only for this season because we don't want to disturb the season for this year. Otherwise, we might lose out on the consumer base. [Foreign Language], they will distribute themselves.

Okay. Okay. And the last question that when I saw the presentation, the largest part is coming from GT. But, however, when we say that, we also have the large pack. What is the reason why this brand is not getting higher selling in the modern trade?

Shirish, as you rightly said [Audio Gap]

No. For this category, Shirishji, Dermicool is already getting contribution of roughly 12% from modern trade, which is, I would say, very decent for this category.

Okay. Okay. And how much will we get for Navratna from modern trade?

For modern trade, we have a smaller contribution from modern trade for Navratna cooling talcum. So there will also be some opportunity to leverage this channel as far as both brands are concerned.

[Operator Instructions] The next question is from the line of Gaurav Jogani from Axis Capital Limited.

Sir, my first question is with regards to the treatment of this acquisition. I mean, how this brand acquisition is organized? And how many years are there?

So Gaurav, we are amortizing our all brands over a period of 7 years. So this brand will also get amortized roughly during that period. Gaurav, did I answer your question?

The line for the participant dropped. The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

Rajesh, you said 7 years, right?

Right.

Okay, okay. And would there be a substantial difference of taxes and duties or we assume this was [ INR 4.6 million ]?

So on this brand, we have to pay GST, so -- which would be an input for us. So that would be advanced GST input for us. And the rest would be mainly stamp duty impact.

Okay. There will not be any substantial figure, which will change that.

Yes, yes, yes. And GST is 18%, but that is an input, not an expense, but others are a small amount, stamp duty and others.

And one of the rationale was leverage on our Emami distribution. So could you give us some sense of how much is our talcum powder reach, direct, indirect, what has that been? And how does this add to the synergy benefit?

So Dermicool is reaching directly to around 1.25 lakh outlets, as Mohanji mentioned earlier, whereas other reach is slightly higher. We are reaching to 2 lakh outlets directly. Indirect reach is almost similar at 1.8 -- 18 million outlets. And in modern trade, Dermicool is more -- stronger compared to Navratna. So that's something benefit we would get. And we are taking Navratna, which is largely through the LUPs in the rural markets. I think our rural investment will get some synergies when we take Dermicool also. And Dermicool is much stronger in South than us. So some of these distribution benefits over a period, we would be getting.

The next question is from the line of Gaurav Jogani from Axis Capital.

Sir, have you answered the question for the brand amortization? I'm sorry, I missed that part.

Yes, yes. So we would be amortizing it over a period of 7 years, similar to the way we amortize our existing brands.

Sir, will there be any taxation benefits on this? I mean for this because of amortization benefits?

So when -- this amortization is a charge to the P&L. So, obviously, the profits will reduce and accordingly, we would pay taxes on whatever profits we have in our books.

Okay. Sure, sir. And sir, the next question is with regards to, as mentioned earlier that while the overall talcum category is INR 2,500-odd crores whereas the Dermicool -- sorry, the prickly heat or the cooling talc category is only INR 760-odd crores. So what will be the strategy here? Will it be the strategy to grow the overall market? Or will it be dividing share from the talcum market? How will we be approaching growth in this category going ahead?

Yes. So as Mohanji mentioned earlier, Dermicool is a prickly heat powder, which competes more with Nycil. And Navratna is a normal talcum powder with cooling benefits which has created a niche among itself in the category. So Navratna is more towards getting share from the overall talcum powder category. And we would also invest on the Dermicool side to grow the category and -- for the brand as well as the category.

Okay. So my question, actually, sir, was will it be more conversion of the talcum powder user to a prickly heat user? How the strategy would be?

So because of the -- just a second. I think Mohanji is joining from another line. I request the operator to patch him in. And coming to your question, so because of the harsh summer season [Technical Difficulty] Hello?

Yes, sir. Go ahead.

Yes. So this prickly heat category would get benefit because of the harsh summer season. This is a problem solution category. And in case of the intense heat, consumer gets the boils on the body, this prickly heat problems. Then obviously, the usage of this category would grow. And as a result, the category or our specific brands should also grow. So this conversion from normal talcum to prickly heat would happen in case of more problem kind of a scenario, more intense heat. And coming to the normal talcum powder category, Navratna offers the benefit of the cooling. Other talcum powders doesn't have that benefit. So obviously, in the summer season, the benefit of cooling adds lot of advantage and hence, the Navratna talcum gets a good edge over the other normal talcum powders. So that's the idea and to convert more people from that normal talcum to Navratna cooling talcum.

And sir, last question is post the buyback that we have done and post this acquisition...

Gaurav, can you hear me?

Yes, sir. We can hear you.

Yes. So see, the larger point is that the total market is INR 2,500 crores. And what we have been observing in this particular area is that none of the players are really taking this category very seriously or investing that kind of money, whether it is POND'S or whether it is the other players, whereas Navratna identified, and we started advertising very aggressively, and you have seen we have almost become INR 150 crores, INR 180 crore brand over the last few years. As I said, we still believe that the category has immense potential if we advertise both Navratna cool talc and also the Dermicool. This is what is our strong belief. Of course, there would be some consumers who would come in from the general talc. And from -- of course, from Nycil also. That is our first thing that we want to grab on. Then over the period, of course, there would be extensions, there will be multiple things that we can do. There is also an opportunity we can merge with any of our existing brands, why not? So we would evaluate a lot of things and then take a call.

Sure, sure. And then just one last question from my end is post the buyback of INR 162-odd crores and this acquisition, how much cash would be left with us now for this?

So we have used the surplus cash whatever we had. And by the end of March or even currently also, we have some working capital debt of roughly INR 200 crores. So we are -- we don't have any surplus cash. Net cash is not there. There would be some working capital debt of INR 200 crores.

Next question is from the line of Shirish Pardeshi from Centrum Capital Limited.

There are 3 questions, which I would like to ask now. One is that we are taking over the brand. So can you spend a minute or 2 saying, how are you going to manufacture? Are these going to be third party or are we going to manufacture in our own facility?

It could be a third-party manufacturing. In fact, both Dermicool and Navratna are produced at third parties. We will continue from there only.

Okay. And is there any different raw material what we are using in Navratna than in Dermicool?

Yes, there are some ingredients which are, of course, different because Navratna being a general cooling talc, whereas Dermicool is specifically on the prickly heat side.

So what difference in the raw material? Is it that menthol?

No, menthol is common, but there are certain ingredients, which I would not be able to comment on. I'm not an expert into that. But there are some ingredients, which are specifically to deal with antifungal.

So it is more medical in terms of properties.

No, I'm just asking because Mohanji did mention and you said that there is a scope for improvement on gross margin. So I just wanted to understand how this gross margin...

Yes, because we also have BoroPlus prickly heat powder, Shirish, and we know the margins of BoroPlus prickly heat powder. BoroPlus prickly heat powder has higher margins than compared to Dermicool.

Okay. Okay. And the last question on the rural part. We do have a higher synergy from the revenue from rural part. How much Dermicool enjoys in the rural share?

So Dermicool is also similar...

Dermicool also enjoys a big rural penetration. Dermicool share from rural, if I'm not mistaken, Rajesh, is more than, what, 65%?

Yes, kind of. Because it is also largely sold through wholesale and super stockist model, so it will be in the similar range.

Actually, that was the question you have preempted. I just wanted to understand because you have a short season. And in the beginning of the season, say, in the month of February or March, we lowered the trade. So both the cases, what is your understanding? How much the wholesale contribution comes for this particular category?

So wholesale for Dermicool would be around 35%.

And for us? From Navratna?

So Navratna is slightly higher, 38% to 40% kind of levels.

Okay. So you mean to say you still have a distribution dominance in the GT than wholesale?

Right. Right.

[Operator Instructions] The next question is from the line of Tejash Shah from Spark Capital Advisors.

Just one question. I'm not sure if you answered this question earlier, but in terms of seasonality in revenue here, which is like prepaid much in favor of 1Q or 4Q?

Yes, yes, it is a highly seasonal brand. It sells mostly from February till April, May.

So what will be the proportion roughly coming from these months of overall, this annual revenue?

Almost 89%, 90% of the revenue comes from these months.

Okay. Okay. And as we actually neutralize or as you said, you want to expand the value proposition to non-prickly heat also, then perhaps this can distribute over a period of time.

Even Navratna Cool Talc is highly summer, though it is a non-prickly heat, but it sells during this season only.

[Operator Instructions] The next question is from the line of [ Harsh Shah ] from [ Ensyl Capital Financial Service ].

Sir, just one question. So when you acquired Zandu, Kesh King and Creme 21, you would have made some internal estimates for the next 5, 7 years. So how are the actual results for those brands compared to your internal initial estimates?

We're, of course, very happy with most of our acquisitions that we have done in the past. Zandu has, of course, surpassed all our expectations that we had expected. Of course, there were some challenges for Kesh King, which is fairly well known now. And same for Creme 21. Since we acquired there has been this COVID impact and all that. But now Kesh King is doing extremely well. We have seen it over the last 1 year. Here [Audio Gap] multiple things. One, we believe that none of the larger players are investing on the category, so there is substantial room for growth if we keep right focus. The margins are very, very high, so we can invest on the brand. And so there is ample room for growth for the first 5 years, at least a double-digit growth is what we expect to come in Dermicool for the first 5 years.

The next question is from the line of Kunal Shah from Jefferies India Private Limited.

I have just one small question. So is there any specific appointed date for this acquisition? Or would it be applicable right away and we'll get -- we'll be booking the revenue in April and May, which comes for FY '22?

Yes, so we will be getting our revenues from 1st of April.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Sameer for closing comments.

So I'd like to thank Emami management for coming out with all the clarifications. I hope that all the participants have got their clarifications that they intended to, and thanks again for giving IIFL the opportunity to host this call. I'd like to hand over now to the management for any closing remarks.

Thank you, Sameer. Thank you all the participants for joining us today. Thank you. Have a good day.

Thank you, everyone. Thank you.

Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.