Emami Limited (531162) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Emami Limited Q1 FY '22 Earnings Conference Call hosted by IIFL Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Percy Panthaki from IIFL Capital Limited. Thank you, and over to you, sir.

Hi. Good afternoon, everyone. Welcome to the Emami Quarterly Conference Call. Emami has reported a good set of numbers, sales up 38% and similarly, EBITDA also up by an equal amount. This is better than our estimates. And to take us through the quarterly results, we have from the company, Mr. Mohan Goenka, Director; and Mr. Rajesh Sharma, President, Finance and IR. So without further ado, I would like to hand over to Mr. Goenka.

Yes. Thank you, Percy. Very good evening, friends. I welcome you all to this conference call on Emami's result for the first quarter ended 30th June, 2021. I hope all of you and your loved ones are safe and keeping good health in the current uncertain times induced by the pandemic. As we all know, the second wave of the pandemic had a devastating effect, on not only people's lives, but the industry as well, which affected the momentum of its recovery. While the initial weeks of April witnessed a sustained momentum of growth, May proved to be a challenging month with the subsequent increase in COVID cases. It was unfortunate that the second wave of the pandemic hit during the peak summer months, just like the first wave had hit us during these months last year. This, once again, resulted in impacting the performance of our summer portfolio. Moreover, unlike the first wave, this time rural markets were severely impacted due to the high incidence of cases in the rural areas. Even the demand for immunity and hygiene products were muted compared to the first wave. Notwithstanding the challenges that we continue to face, we are delighted to have been able to post one of our most profitable performances during the quarter. Our profitability was not only higher than the base quarter, which was impacted by the lockdown, but also much superior to quarter 1 FY '20, which was a normal quarter. While our overall revenues, at INR 661 crores, grew by 37% over quarter 1 FY '21, it was higher by 2% over the base quarter of last to last year, that is quarter 1 FY '20, which we believe is robust considering the severity of the impact of second wave and particularly for summer products. During the quarter, our domestic business grew by 42% with our Pain Management range growing by 70%, Navratna by 21%, Kesh King by 53%, Male Grooming by 78%, and 7 Oils in One by 93%. BoroPlus range grew by 96% excluding the sanitizer sales. Our Healthcare business, with its basket of higher Ayurved-based innovative products as well as digital-first products, have continued to witness a robust growth of 59%. Further, our new launches contributed to 3% of domestic revenues during the quarter. If we compare our growth against last to last year, that is quarter 1 FY '20, which was a normal quarter, our domestic business grew by 5%, with both Pain Management and Healthcare range growing by 95%; BoroPlus, excluding sanitizers, by 32%; 7 Oils in One by 17%; and Kesh King by 2%. Navratna, unfortunately declined by 29% and Male Grooming range declined by 47% due to the lockdown in peak summer season and low demand for discretionary product. During the quarter, modern trade grew by 63% and e-commerce continued its robust run, growing by 3.7x. Our own e-commerce portal, Zandu Care, is also growing at a rapid pace, with more than 1 crore visitors since launch. In quarter 1 FY '22, e-comm business increased its contribution by 300 basis points to 5% of domestic revenues now. Our project to increase footprint in rural areas to Project Khoj and focus on stand-alone modern trade is progressing steadily. International business grew by 17% during the quarter. Barring Middle East geographies, all other regions posted strong growth during the quarter. We posted strong profit -- we posted record profits during the quarter despite high input cost pressure, which highlights our resilience. Our gross margins at 66% were lower by just 50 basis points over previous year. We largely protected our margins on account of judicious price increases across the portfolio. EBITDA at INR 170 crores grew by 38% and EBITDA margins at 25.7% grew by 20 basis points. PAT at INR 78 crores grew by 97% and PAT margins at 11.8% increased by 350 basis points. Cash profit at INR 161 crores also grew by 41% and cash profit margins at 24.3% grew by 50 basis points. If we compare our financial performance over last to last year, that is quarter 1 of FY '20, our gross margins were higher by 180 basis points. EBITDA grew by 27%, and EBITDA margins also grew by 500 basis points. PAT grew by 98% and PAT margin grew by 570 basis points, while cash profit grew by 31% and cash margins also grew by 540 basis points. With the graph of COVID-19 at this moment declining steadily, we are hopeful of steady performance in coming months. We will continue to focus on our future-ready business strategies and digitization. We will also continue to expand our footprint across several regions and newer formats of modern trade. Our experience in combating the onslaught of COVID-19 last year, which took everyone by surprise, has made us, today, more war ready, and our committed team which performed and contributed by meeting the challenges head on. We are also working constantly to deliver despite hardships that the second wave of the pandemic brought to each one of us. We will continue to innovate and use our past experience to overcome any future challenges in the future and are confident of achieving desired business objective and deliver great results. With this brief, I now open the floor for Q&A.

[Operator Instructions] We have the first question from the line of Abneesh Roy from Edelweiss.

Congrats on a good set of numbers. My first question is on Kesh King. So on 2 years basis, 2% growth versus overall domestic sales growth of 5%. So are you happy with that number? And second is, the brand ambassador of Kesh King is, obviously, currently, the family is going through that controversy and there's a lot of press coverage also. So could that impact the brand negatively? And any plans to change the brand ambassador?

So Abneesh, we are quite happy with the performance of Kesh King. And Kesh King, as you know, is a rural brand, which got a little impacted in the first quarter, but we have seen good growth coming in the month of July. So seeing at the numbers of July, I think the brand is in a very, very solid state. Yes, unfortunately, as far as the celebrity is concerned, we haven't taken any decision as of now. We are just monitoring the situation. Let us see what we decide.

Okay.

But definitely, Kesh King is showing good trends in the month of July.

My second and last question is on the new products. For example, you have put that Navratna Therapy range, et cetera. Are these more for e-commerce? And last year, lot of new products helped every FMCG company. This year, things are very different. So if you could discuss the new product contribution expected this year? And if you could talk about some of the e-commerce-only products also?

So, Abneesh, you would have seen in the first quarter also, our contribution from new products was 3% for domestic. So -- and this is -- on last year sanitizers were very high. This year, sanitizer sales were almost 0. So yes, we have constantly been saying we will be launching a lot of digital-first brands in almost all our portfolios, and we have started with Navratna. We are ready with some of the launches under Fair and Handsome, some of the launches in Kesh King we launched. So let us see how it progresses, but we would be very aggressive as far as the digital brands are concerned.

And any update on your own e-commerce?

Definitely, in my con call, I said since launch, in 9 months, we have got almost INR 1 crore consumers who have visited our site. And we have a huge data of consumers who are buying there. There are a lot of repeat purchases. We are every -- by every passing day, we are strengthening our -- this site, Zandu portal. We have recruited a lot of new faces, young faces for Zandu portal. So new products would come only for Zandu. So I'm very bullish in the next 2, 3 years, this should be an absolute new channel for us, everyone, at least for us.

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

Only just wanted to get some sense on rural growth in the quarter considering that the second wave impacted that segment disproportionately versus the first one?

Yes. So, Tejash, as we have constantly been saying that rural has been a little subdued in this quarter and rural has not grown as much as the urban growth is concerned.

Is it materially low?

Not materially low because some brands have done well in the rural areas. So -- but it is slightly lower compared to the urban growth.

Second question pertains to Male Grooming range recovery struggle there. You called out in your opening remarks that discretionary/grooming categories were under pressure. But when we see your portfolio 7 Oils in One or Pain Management range, which has been more discretionary in nature. Most of those categories have done very well on recovery. So anything specific, which is lagging here?

But if you would have noticed 2 years trend now, even Male Grooming declined by almost 27%, 28% on a 2-year basis, okay? Because last year, the Male Grooming had no base. That's why it grew at 78%, 80%. But on a 2-year basis, it has still declined.

Yes. So my question was on that, why that segment is not bouncing back versus rest of the -- Not explained that there was a seasonality but Male Grooming had no such factors as I can think of.

So if you would notice, Tejash, only 2 brands on a 2-year basis decline. So for summer portfolio, there is a very clear reason that why it declined. And because there were no social events because of the lockdown, particularly the Male Grooming because there were no outings, people were not going to offices or to parties or social events. So that product also suffered. It is complete discretionary. And now in the last 3, 4 weeks, we are seeing the momentum coming in the Male Grooming also.

Okay. And last one, if I may. You spoke about the e-commerce contributing 5%. What will be the constituent of this third-party marketplace versus our own website business?

Our sales in this is about how much percentage, would be about 1%. If 5% is total e-comm, our Zandu portal will be 1%, right? Yes, about 1%.

The next question is from the line of Shirish Pardeshi from Centrum Capital.

Though the results say that we have CAGR, we have done a little lower than expectation, but assume that rural is impacted is much more. But given the scenario, I think rural is -- will come back for our products. But what I can also see is that U.P., Bihar -- this market has a higher selling coming from Navratna, has also seen the lockdowns -- Are you saying that this rural has a fundamental structural issue, and that's why you're worried about rural growth? Or this is purely because of the lockdown and delayed purchase?

No, Shirish, we are more than bullish as far as rural markets are concerned. And as far as our portfolios are concerned, we are even more bullish. So there is no reason why I would ever say that structurally, there is an issue in the rural markets. We haven't done well only because of the summer portfolio. That's why we have seen a slight decline in the rural areas. But the month of July has bounced back. As far as the rural markets are concerned, we are seeing almost every market now functioning. People are visiting those areas, and we are seeing demand coming back. Monsoon has been excellent across India. So if there is no third wave, then I don't see any structural difference or change. We are going ruthlessly as far as our Project Khoj is concerned. Because even before the third wave hits, if it ever hits, we want to establish the maximum rural areas.

Okay. Yes. Okay. My second question pertains to the Healthcare range. I think we have seen a significant improvement when we look at 2-year or even Y-o-Y. Tell me, structurally, what are the things -- I mean, we know that there is a change in senior management. You have brought in experienced people to drive the business. But what we can expect, say, next 3 to 4 quarters? You said Zandu Care website is also on. There is traffic which is happening. But I think what I'm trying to understand what the Healthcare business will double in FY '22 or it will take time because we are still not full grown?

No. So we are aggressive as far as this business is concerned. Now things have come in the base because last year, the base was extremely high because of the immunity product, Chyawanprash grew by almost 18, 20x last year. So now that effect has come in. But if you exclude the Chyawanprash, then the other brands are doing exceedingly well as far as the HCD is concerned. So as I said, we have hired a lot of mid-level people, young talent has joined in, in the last 2, 3 months to look after the Healthcare portfolio. And particularly for the Zandu portal. So I don't know if it would double or it would -- what numbers I cannot say. But definitely, we are going aggressive as far as Zandu is concerned.

Okay. I have 2 more questions, sir. The question which I was more interested on the margin front. Have you taken any aggressive price increases in the month of July? I understand you have taken about 3.5% price increase in the quarter one?

No, after that, we haven't taken any price increase.

Okay. So what is the weighted inflation which we are facing at this point of time for the company?

Weighted sorry, inflation?

Yes.

What do you mean by weighted inflation?

And then for the overall company, what is the inflation which we are facing at this point of time? And if you have to move that, how much more price increase we'll have to take?

So for the year, Shirish, I don't think we would go beyond 3.5%. And now the prices for raw materials are also favorable, I would say. -- they are not increasing the day. It was increasing in the month of March or April. So there is no further room of price increase.

Okay. Just last question, if I can squeeze in the international part. I think the growth momentum is picking up, but yet we have seen a little lower growth. So would you be able to tell me what is the expectation, which we can see in the maybe quarter 2, quarter 3 onwards? We did some product improvement and we have added Creme 21 soap also. So what one can expect in the international business once things stabilize?

Shirish, good you asked this question. Unfortunately, the international business over the last 2 months has been a little stressful because a lot of our key markets have gone under lockdown, particularly the Middle East. So that is a slight cause of worry. Same trend we have seen in the month of July also. So let us see when it recovers. So yes, international is not growing, unfortunately, for the last 2 months.

Okay.

But the domestic business has shown a good recovery.

[Operator Instructions] The next question is from the line of Prakash Kapadia from Anived portfolio Managers.

Two questions from my side. Pain Management continues its momentum despite having a good base of last year. So is it just Maharashtra, which is a key market where we are seeing traction? Or these are some newer markets or the higher version and the premium version is doing well, if you could comment on Pain Management?

Yes. Prakash. This time, in the second wave, there we completely developed new markets, particularly the Northern India, where we saw a huge amount of growth, almost sales increased by 3, 4x. So in the last, I think, 3 months, as far as pain balm is concerned, we recruited almost 35 lakh to 37 lakh new consumers who have tried pain balms. So this is a very, very healthy trend. And -- we would have to see how much of them continue, but I'm happy that we could recruit from many consumers.

And because North was a very low market share for us, was that the reason because South and West, we've been fairly strong?

Yes. So we entered a lot of new households in the North. That's what I said. So it is still a very small market compared to West and South, but we almost grew by 4x in the North. And very recently, we have signed Sonu Sood for pain balms. So I think in the rural areas, that should also help the brand to grow. Here the huge connect in the Northern India and the rural markets.

In rural markets, there seems to be room available for growth in terms of lower SKUs and the smaller packs is what we focus on?

On But interestingly, the balms, the bigger packs have shown more growth than the smaller pack. Even the 50 ml pack there was always a short supply, so which is a very, very healthy sign, I would say.

Understood. That is helpful. One question for Rajesh. On the amortization, as I see the notes to accounts, we've reduced the life from 10 years to 7 years for the brand and trademarks as well as malls. So certain what leading to a INR 35 crores, INR 36 crores additional impact this quarter in depreciation? And how do we look at it for the year as a whole and going forward?

Prakashji, so we did this extended amortization since last year we did this month. So earlier, the Kesh King brand was supposed to get amortized over a period of 10 years. Now we have reduced the life to 7 years. So this will continue up to June '22, so another 4 quarters. And roughly INR 60-odd crores would be amortized per every quarter till then.

And then the run rate should drop to around INR 90 crores to INR 100 crores?

No, no, the run rate after June '22 would...

On the annual basis.

Yes, INR 40 crores, INR 50 crores. INR 50 crores kind of.

[Operator Instructions] The next question is from the line of Amit Sachdeva from HSBC.

Congratulations for good set of results. My question is broadly on digital and e-commerce, Mohanji. It appears to be that digital e-commerce and the new channels have proved to be quite a blessing in disguise for you and you have built -- I mean, obviously, you had built great brand equity across brands by years of investments. But distribution, perhaps, seems like a bottleneck with wholesale dependence in some brands. So it seems to me that this whole new cycle has worked extremely well, and you clearly have done well across the brand. So my question is that if you could tell us how various brand portfolio are exploiting digital, I would assume that the varying degree this would be sort of working. So can you tell us a little bit more brand-wise thought process on how e-commerce and digital is actually taking that brand to the next level? Like, for example, you said pain balm, was it e-commerce led? Or Navratna or Kesh King, Zandu Healthcare. Can you give us some more color beyond that 5%? How e-commerce is influencing the trajectory of each of these brands, please?

Yes. Surely. Amit, You are right. And we have been very, very aggressive as far as e-comm is concerned. About a year back, our contribution from e-commerce was just 1%, which has now reached to 5%, okay? So you can understand that there has been an all-round effort by the brand team and also with the e-comm team to get it to 5%. And I'm very, very hopeful that we are not stepping -- we are not stopping at 5%. Very soon, the contribution should reach to about 7%, 7.5%, okay? In the next 1 year. That is our target, first target. Now as far as brands are concerned, we have identified a few brands, which can -- which have contributed to this 5%. And to start with, all the large packs, at least the large SKUs of Kesh King, Zandu Balm, Navratna Oil, Fair and Handsome and -- so all the brands, we launched some special SKUs only for the e-commerce, where we give substantial good schemes, say, Navratna 500 ml, which is only on e-comm or Kesh King 300 ml. So something like those, Zandu 50 ml, which doesn't sell so much in the traditional trade. So there we give -- where we give a lot of banded packs, offers, discounts to those consumers, which helps us to get new consumers. And in every category, whether it is Kesh King, Onion oil or Zandu New -- sorry, Zandu new products that we have launched for Zandu Care and -- so there has been an all-round effort in every brand. Each brand, honestly, has a target to achieve only for digital.

Sure. Yes. So that's really great to hear, Mohanji. And it seems to me that some of the distribution gaps of the past are more than adequately being based in this, and it is perhaps giving more momentum and new users are being added, before traditionally not possible to reach -- possibly, it seems so, I'm just putting two and two together.

Absolutely. Absolutely. And I have no hesitation to say we changed our e-comm head also because we wanted to get very, very aggressive and the new guy has really delivered numbers. And he has set an excellent team under him. We have recruited at least 4, 5 people only for e-comm and young guys, who can take it to the next level.

Yes. Great. Very, very good. Your second very quick question, Mohanji, is that on the shaping of the portfolio. Like, for example, now Male Grooming obviously has limited the range with key and Fair and Handsome, but then they also sit within the broader category of beauty and personal care. Now these categories are also expanding as a result of digital and new channels and all those things. So a whole lot of new thought process is also coming into these categories with new consumer brands are coming seeing the gaps, which main FMCGs are keeping or leaving. So in that sense, this whole category is probably up for grabs, probably again, like one of your competitors have acquired a small D2C brand as well. So is there a thought process on broader entry into beauty and personal care or you would just see that as core? Or are you seeing more portfolio shifts coming your way as well in the larger play? Or how do we think about this?

Amit, you also forgot that we also increased our stake in The Man Company last quarter. So that is -- it answers the question that we are moving in that direction that we also want to acquire some digital-first brands in the Male Grooming. We have always been bullish on Male Grooming. Unfortunately, last 1.5, 2 years, Male Grooming has not done so well. We have at least 10 products ready under Fair and Handsome and HE to be launched for digital products -- for digital this thing. Let the market revive, we would very soon come out with a big range under both Fair and Handsome and HE only for digital.

Sure. But you would stick to just Male Grooming part of it, no sort of larger player that you think as personal care and all those things. And you will limit largely to this?

Fair and Handsome is personal care. I don't know what you mean by Male Grooming.

No. I mean, Fair and Handsome still has Male dependence, right? So in some sense, largely.

Yes, yes, Male. We will stick to Male here. Yes, that is true. Okay.

That's exactly what I was asking.

No no. so definitely, I think there is a lot of room for Male Grooming products in India.

The next question is from the line of Prasad Deshmukh from Bank of America.

So a couple of questions. One, what is your current direct reach -- And at what stage are you in terms of increasing this reach in rural? I remember you had discussed some time back about 13 states that you have identified that are critical for rural sales. Just wanted to get a further update on this.