FMCG maker Emami expects ‘Dermicool’ to deliver a ‘good gross margin and Ebitda margin’ going ahead in the prickly heat powder and cool talc category as the company will reap the benefits from the Rs 432 crore acquisition ‘gradually’ from the beginning of the next financial year.
The high-margin category is likely to witness a double-digit growth in the current summer season after sales were impacted in the last two seasons due to pandemic.
Emami’s own Navratna Cool Talc is No. 2 brand in this category.
Talking to FE, Naresh Bhansali, CEO-finance, strategy and business development and CFO, Emami, said gross margins in the prickly heat powder and cool talc category are high. The company would be investing behind the Dermicool brand in marketing. And despite investing behind the brands, it will command ‘good’ Ebitda margin.
At present Dermicool commands 20% market share. Navratna currently has around 25% market share. Combining these two brands, the FMCG maker will have a total market share of around 45% in the prickly heat powder and cool talc category.
“From the beginning of next fiscal, Emami will benefit from the Dermicool acquisition in terms of revenue and cost optimisation. We would promote both the products (Navratna Cool Talc and Dermicool) and we will make marketing investments in both the products. And, both the products are expected to deliver good gross margin and Ebitda margin,” Bhansali said, adding category is likely to witness a ‘double-digit’ growth in the current summer season. Sales had been impacted in the last two seasons due to the spread of the Covid-19 pandemic.
According to Bhansali, the acquisition of Dermicool will help Emami optimising cost as consolidation of the two brands in the same category is expected to give the company ‘more bargain power’. “When you consolidate with larger volumes, you can get more bargain power in terms of marketing inputs and materials. Because with the combined volumes, requirements increase. And, you can also judiciously use trade inputs,” he pointed out.
In a report on Emami, issued on March 27, Prabhudas Lilladher said the company’s Dermicool acquisition, funded by internal accruals, will make it a market leader in cool talc category. “Assuming mid-single digit growth and synergy benefits, we believe it will add Rs 0.16 and Rs 0.22 to EPS (net of interest income loss and ex amortisation). We believe that the move is positive, but not a game changer as it does to change the seasonality impact in the company,” the brokerage firm said.
“Dermicool had reported sales of Rs 110 crore with gross margins of 55% and Ebitda of 36%. We factor in 7% CAGR in sales. Post netting off loss of interest income on surplus funds, we estimate that the acquisition will provide incremental PAT of Rs 10.2 crore and EPS of Rs 0.22, excluding the amortisation impact,” Prabhudas Lilladher said in its report. It also said Dermicool will provide synergy in distribution with strong presence in e-commerce, modern trade and south India versus Emami’s strength in rural and other regions.
“With Emami’s strong rural footprint, direct coverage of 9.4 lakh retail outlets across 26,000 rural clusters, Emami will tap rural markets with the introduction of its small packs,” it added.
On the consolidation of its newly-acquired brand with its own brands, the company said in this summer season (February-July) it would not make any changes and would continue with the Reckitt’s plan. “In the current summer season we will use the distribution channel of Reckitt for Dermicool. We will not be making any changes now,” Bhansali informed.
“Initially, we will not be doing any changes (with Dermicool). But still we would have the benefit of the plants and the sales from the date of the closing (of the acquisition). We expect the date of the closing very soon,” he said.
After the company announced the acquisition on March 25, Harsha V Agarwal, director, Emami, told FE the deal was signed and ‘whatever the little bit of process is left’ would be completed in the next three-four days time.
“During the pre-Covid times till 2019, the segment was growing 10-12% CAGR. During Covid times the category was impacted. We are very hopeful that in the next fiscal the category will grow at the pre-Covid level rate,” Agarwal said.
Bhansali said the company will be working on the possible brand extension for the newly-acquired brand, but the initial priority is to continue the transition and integrate. “Two products in the category address the two different needs of the consumers and the two needs are going to stay at the market. And, with the increasing impacts of the summers, demands for these types of products are going to continue and increase.
These two products are complementary to each other,” he said.
He informed there has been some slowness and sluggishness in offtakes in rural markets for the FMCG products.
“Near term growth remains a concern given slowdown in rural demand and sharp jump in input costs in past month. While we expect 2/3% price increase in April, poor demand and high inflation will impact profit growth in 1H23 on a high base,” Prabhudas Lilladher said in the report on Emami.
“There has been a lot of cost pressure for the FMCG industry overall. Many of the players have already increased prices of their products. We have very judicious in increasing the prices. Over a period of one year we increased prices of our products only upto around 3-4%. But despite this we have been able to maintain decent margins. There would be a pressure in the time to come on the cost. We would remain judicious in price increase,” Bhansali told FE.
Notably, the current acquisition is the Kolkata-based FMCG major’s one of the biggest acquisitions after Kesh King and Zandu.
Emami had reported a 5% year-on-year rise in its consolidate net profit to Rs 219.52 crore for the third quarter this fiscal from Rs 208.96 crore for the corresponding period last fiscal. Revenue from operations grew 4% y-o-y to Rs 971.85 crore from Rs 933.61 crore for the same period last fiscal. The third quarter witnessed high inflation leading to a deceleration in consumer demand, the company had said in a statement after declaring the results.