Emami : Transcript of Analysts/Institutional Investor Meet/Con. Call

"Emami Limited Conference Call"

March 29, 2022

MANAGEMENT:MODERATOR:MR. MOHAN GOENKA - DIRECTOR, EMAMI LIMITED

MR. RAJESH SHARMA - PRESIDENT, FINANCE AND INVESTOR RELATIONS, EMAMI LIMITED MR. SAMEER GUPTA - IIFL SECURITIES

LIMITED

Moderator:Sameer Gupta:Mohan Goenka:

Ladies and gentlemen, good day and welcome to Emami Limited Conference Call to discuss acquisition of Dermicool brand hosted by IIFL Securities Limited. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touch tone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Sameer Gupta from IIFL Securities. Thank you, and over to you Mfr. Gupta.

Thanks, Nirav. Good day, everyone and I would like to first thank Emami to give us this opportunity to host this call and we have Mr. Mohan ji and Mr. Rajesh Sharma from Emami's side who will be addressing all your queries regarding this acquisition of Dermicool that they have announced.

And without taking more time, I would request Mohan ji and Rajesh to address with their opening remarks.

Thank you, Sameer and a very good afternoon friends. I welcome you all to this conference call. We are very happy to announce that on 25th March 2022, Emami Limited entered into an agreement with Reckitt Benckiser to acquire the Dermicool brand, which is one of the leading brands in prickly heat and cool talc segment. The transaction envisages purchase of the brand for a total consideration of INR 432 crore excluding taxes and duties, which has been funded through internal accruals.

Emami has always been open for growth through inorganic route. We believe that the right choice of acquisitions not only add value and synergy with the current line of businesses, but also offer opportunities for the organization to be present in categories that have high growth potential. Zandu, Kesh King and Creme 21 are some of the key brands or businesses acquired by us and successfully integrated over the past decade. This acquisition is therefore a part of our aggressive growth strategy and we plan to leverage the brand with our existing strengths to make our presence stronger and deeper in the cooling talc segment.

Dermicool was acquired earlier by Reckitt as part of its acquisition of Paras Pharmaceuticals in 2011. It is well known amongst consumers for providing cooling and respite from prickly heat caused during harsh summer and is one of the leading brands in its segment with a 20% market share. The iconic brand has a strong brand equity with a high consumer connect through its vastly popular jingle, "aaya mausam thande Dermicool ka". The brand has clocked net sales of INR 113 crore in the calendar year 2021 and is available across the country with a direct reach of 1.25 lakh outlets and an indirect reach of about 1.8 million outlets.

The brand is highly profitable and enjoys 55% gross margin and 38% EBITDA margins. Being a noncore brand to the seller they wanted to close the deal in this financial year itself. Therefore, we grabbed the opportunity and closed the deal in the shortest possible time. We had also roped in McKinsey for doing the business diligence.

Brands operating in niche categories with high margins and low multinational presence are a very strong strategic fit for Emami. Therefore, we believe that Dermicool offers great synergy with our existing business and is a perfect strategic fit for growth in core as well as adjacent categories.

It will strengthen our presence to make us the number one player in the prickly heat and cool talc category. We will leverage our distribution, thereby optimizing trade, consumer and media aspects. It is not only present in a high growth and a low penetrated category, but it is also a highly profitable brand, which will be EPS accretive in the first year of operations itself. With increasing global warming and

soaring summer temperatures such problem solution niche products are poised for strong growth in future. I am also very happy to share that with this acquisition we are now market leader in six categories where we operated, and we have eight brands generating revenues of more than INR 100 crore.

Though I have covered most of the points in by opening remarks, but still we have shared a presentation and I would quickly like to take you through the presentation and then take the Q&A, if any. So, I am on Slide 1. As I said, the brand is Dermicool, it operates in the prickly heat and the cool talc segment. We acquired the brand for a total consideration of INR 432 crore, excluding taxes and duties. As I mentioned, McKinsey worked on the business and the commercial diligence and post their recommendation we moved ahead to acquire the brand. The size of the total category is almost INR 760 crore, which is the cool and the prickly heat segment. It was growing at almost a 12% CAGR pre-COVID whereas the talcum powder category was going at just 5% CAGR. This category witnessed a decline due to COVID because the last two years during the peak summer season COVID was there. 70% of the sales generated is from the rural markets and 77% of the consumers in this segment are from the C, D, & E segments. The penetration is about 11% to 12%. There is significant headroom for growth as the talcum powder penetration is almost at 45%.

The total size of the talcum market is roughly about INR 2,500 crore and whereas this segment is about INR 750 crore. As I said, this brand has a 20% market share, the size is INR 760 crore. Last year, net sales were INR 113 crore. Ever highest sale of this brand has been INR 133 crore, which was in 2019. The gross margin is 55% and EBITDA margin is at 38%. These are some of the variants in which they operate, the largest variant is, of course, the menthol regular, which is almost 75% of their business comes from the menthol regular. As far as geographical split is concerned, north contributes to almost 40%, west is 30%, east is 17% and south is 13% and channel wise general trade is 84%, modern trade is 12% and CSD is 3%. What is very, very important that post this acquisition now we have become the number one player in this cool and prickly heat segment with a 45% share..

As I said we have always believed in niche categories with high margins and with low MNCs present, so it became a very, very strategic fit for Emami. We also believe that we were attracted on the valuation side, and I think we have acquired it at a very, very reasonable valuations. Post this acquisition, now we are market leaders in six categories, starting from antiseptic cream, cooling oils, male fairness creams, pain balms, Kesh King and prickly heat segment. This is the eighth addition in our portfolio where our revenues are more than INR 100 crore. In this slide, you can see the revenues of Zandu is more than INR 800 crore, Navratna is more than INR 600 crore, BoroPlus is INR 500 crore plus, Kesh King is INR 300 crore plus, Fair and Handsome is INR 200 crore plus, Mentho Plus is INR 200 crore plus, 7 Oils in One is INR 100 crore plus and is Dermicool is INR 100 crore plus.

With this, I now open the floor for Q and A.

Moderator:

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.

Abneesh Roy:

Yes. Hi, Mohan ji, congrats. My first question is two brands in the same space. So, in terms of pricing, brand, regional dominance, could you take us through what will be the differences? Will this be a more premium brand versus your current in-house offerings?

Mohan Goenka:

So Abneesh, both the brands are different brands though they operate in the cooling talc segment. Dermicool is predominantly in the prickly heat segment and Navratna is a general cool segment. So, it operates in the cooling talc area and this is into the prickly heat cooling talc area, okay? Secondly, of course, Navratna operates more in the mass segment because Navratna's total contribution comes from the LUPs, the small size SKUs. So almost 40% of the revenue comes from below INR 10 SKUs.

Abneesh Roy:

Whereas Dermicool's almost 80% to 90% of the revenue comes from 150-gram SKU. So they operate with two different set of consumers, I do not think they overlap that way.

And in terms of market share you mentioned it is 20% versus say five, six years back when say Reckitt would have initially bought out from Paras, any sense you have on market share? And I was surprised that this is a more specific product for prickly heat, but it is a number three player behind you. So is it because you have two brands in that space that is why you were larger than Dermicool?

Mohan Goenka:

No, I am only talking of Navratna because BoroPlus prickly heat is a very small segment for us, but yes we overtook Dermicool because we were a general talc and as I said because of the smaller SKUs our sales is much, much higher than Dermicool today.

Abneesh Roy:

Okay. And Mohan ji you mentioned again and again you have become number one.

Mohan Goenka:

And very honestly, we also believe that Reckitt did not focus so much on this category, whereas Navratna Cool Talc we were very, very aggressive on our advertising and communications over the last few years. That is also one of the reasons that Navratna overtook Dermicool in a very short time.

Abneesh Roy:

So will it be fair to say that initial marketing spends will be on higher site given MNC focus was not there and in fact, Dermicool, as you said, lost share to your own brand. So will you need to spend much higher and will you prioritize, say Dermicool ad spends over Navratna ad spends?

Mohan Goenka:

No, definitely we would have to increase our expense because over the last two years none of us have spent so much money because of COVID during the peak summer seasons. But at the same time we have done a lot of maths, I think, even after there is a scope of increasing margins, so we would do that and we would invest on advertising. So there will not be much pressure on the margin front.

Abneesh Roy:

Sure. My second and last question is if I see earlier acquisitions, Zandu, Kesh King, Creme 21, they added to your overall product capability or brand capability, this acquisition in that way is very different. Ultimately for consumers, it is in the same prickly heat or whatever cooling talcum powder and you said again and again that we will become number one. So one, why this is more of an acquisition in the same space, why did you do this? And when you say you have become number one, what are the ramifications of that? I understand you are now well ahead of Nycil, but what does it get you in terms of medium, long-term say sourcing benefit, distribution becomes stronger, what is the end result of that?

Mohan Goenka:

There are multiple benefits Abneesh because if you would see, Navratna was launched almost about seven, eight years back and we became quite a dominant player in this segment. We see the overall talcum market, which is almost INR 2,500 crore, whereas none of the players are spending the kind of money that the category needs other than very few and we have demonstrated that there is an opportunity to grab substantial market if somebody takes it aggressively. So we feel that there is opportunity in Dermicool, if we advertise and we market it properly, there is a substantial headroom for growth.

Secondly, if you would see the normal talc is growing at just 5%, whereas this segment is growing at almost 10%, 11% pre-COVID and it is not a very small market size. So, we believe there is enough scope to take shares from general talc, that is one and there are also opportunities geographically where we see that Dermicool can play a substantial role.