Emami’s Dermicool buy fails to bring relief

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Emami Ltd’s announcement of its acquisition of the Dermicool brand has not brought cheer, with shares down 4% in the past two days. The stock touched a 52-week low on NSE on Tuesday.

The acquisition is positive as it will make the company a market leader in the prickly heat and cool talc category. Emami already owns a brand, Navratna, and with the Dermicool acquistion for 432 crore, excluding taxes and duties, it is consolidating its position in the sector with 45% market share.

Cool quotient

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Cool quotient

However, Emami’s investors are unimpressed. It is not as if the stock was having a great run before this deal was announced. Until Friday, the stock had lost 13% in value so far in CY22.

This isn’t surprising. The general weakness in the fast-moving consumer goods (FMCG) sector has weighed on the stock because of rising input costs and subdued demand in the rural market. “More so in the case of Emami, which has a higher rural dependence,” said Himanshu Nayyar, analyst at Yes Securities Ltd.

In calendar year 2021, Dermicool’s revenues were 113 crore and Ebitda (earnings before interest, taxes, depreciation and amortization) margin was 38%. As such, this deal is valued at 10x EV (enterprise value)/Ebitda. Valuations are reasonable given that Emami trades about 19x EV/Ebitda based on estimated FY22 numbers.

The acquisition will be funded through internal accruals and is expected to be earnings per share accretive in the first year itself. However, incremental gains may be not be striking immediately. Dermicool’s better presence in south India and modern trade would benefit Emami. “With global warming and soaring summer temperature, such niche products are poised for strong growth,” said a report by Centrum Broking Ltd on 26 March.

Emami’s management believes none of the existing companies is investing in their brands in line with requirement. “With this acquisition, Emami will streamline its efforts in marketing the brand, which would have an impact on Ebitda margins that are currently higher vis-à-vis overall Emami margins,” Nayyar said.

Further, there are other opportunities for growth. “Dermicool currently operates in large stock keeping units (SKUs). A large amount of Emami’s sales come from smaller SKUs and, as such, the company would incrementally look forward to operate the Dermicool brand in smaller SKUs, which would be more acceptable in the rural sector,” said Kunal Vora, head of India equity research, BNP Paribas.

Meanwhile, the correction in Emami’s shares means valuations are relatively undemanding. But in the near-term, demand conditions remain challenging and this can impact volume growth and affect earnings prospects. Overall, these factors may keep sentiments muted for the stock in the foreseeable future, unless raw material costs see a meaningful decline.

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