HMN recently announced the acquisition of the Dermicool brand from Reckitt Benckiser India for Rs 4.32 bn. We estimate ~Rs 1.4 bn in FY23 sales for Dermicool, with an Ebitda of Rs 475 m, translating into an acquisition cost of ~3x sales and ~9x Ebitda. COVID-led curbs affected summer sales in the last two years, impacting overall category growth. Hence, its CY21 sales of Rs 1.13 bn are not representative. We feel CY19 sales of Rs 1.33 bn are a better representation. The deal will be funded through internal accruals.
Dermicool is part of the Rs 7.6-bn ‘Prickly Heat and Cool Talc’ category, which registered a 12% CAGR over CY16-19 v/s ~5% CAGR for the broader Talc market (valued at Rs 25 bn). The acquisition of Dermicool, the third largest player in category, gives HMN market leadership and a combined market share of ~45%, surpassing Nycil (Zydus Wellness) which has ~34% market share. HMN’s Navratna Cool Talc is the second largest player in the market.
(a) Driving penetration growth in the Prickly Heat and Cool Talc category (~11% penetration v/s ~45% for the broader Talcum Powder category), (b) share gain from the broader Talcum Powder segment, and (c) increasing geographical expansion of Dermicool are opportunities for HMN. The 38% Ebitda margin for the Dermicool business is margin accretive to HMN’s (FY22e Ebitda margin of 30.4%) existing portfolio. While the brand acquisition is EPS accretive (+6.8%/+6.6% in FY23E/FY24E), its delta is small ~4% of FY23E sales and is unlikely to move the needle significantly, given the likely pace of category growth.
The stock is currently trading at inexpensive valuations. We have a Buy rating. While sales growth over FY20-22e has been better (9.3% CAGR) than the 3.7% CAGR delivered in the preceding five years, HMN, with FY22E sales of rs 32 bn, is much smaller than domestic peers like DABUR, MRCO, GCPL, and BRIT. The re-rating of its P/E multiple will depend on sales growth improving to 15-20%.
Mgmt commentary: Mgmt will ramp up ad spends for Dermicool, but it doesn’t expect a significant impact on the brand’s current Ebitda margin. Both Dermicool and Navratna have common distribution channels. Dermicool and Navratna are manufactured by the same third-party manufacturer and this arrangement will continue.