Initiate ‘buy’ on Emami with a target price of Rs 1,500 a share. The stock trades at a FY17e PE of 34 times (excluding Kesh King acquisition-related amortisation), pricing in long-term earnings growth of c12%, which appears modest relative to Emami’s growth ambitions.
A rebound in growth driven by the recent acquisition of Kesh King, new healthcare product launches and sustained growth momentum in the core portfolio are key share price catalysts. Conversely, a lack of progress on the integration of Kesh King, lower-than-expected growth, sustained macro weakness impacting demand and destructive price competition are key downside risks.
Emami aspires to deliver an operating performance in the next five years that would triple its market value, implying a 24% annualised return. This is ambitious, but not unrealistic, considering its strong execution record, in our view
We forecast earnings to grow at a CAGR of c20% in the next five years, or 25% if we exclude the impact of amortising expenses relating to the Kesh King acquisition. Our Ebitda forecast for FY17e is 8% above consensus.
Emami is a home-grown leader in personal care and health care products. Its core brands — Navratna (cooling oil), Zandu (pain relief balms and healthcare), Fair & Handsome (whitening cream for men) and Boroplus (antiseptic cream) — dominate their market segments. In the last decade, its revenue, profits and share price have risen at CAGRs of 21% and 32% and 45%, respectively. While its share price has almost doubled in the past 12 months, its growth story still isn’t fully priced in, in our view.