3. FMCG Market India
Market Size (US $ bn) Indian FMCG Market
74
Segments
Baby care
2% Fabric care
12%
22%
Food products
43 Hair care
5% Household
25 4%
OTC products
4%
43%
8% Others
Personal care
2008 2013E 2018E
•The Indian FMCG sector, with a market size of US$ •The boom in various consumer
25 billion (2007–08 retail sales), constitutes 2.15 per categories, further, indicates a latent demand for
cent of India’s GDP. various product segments.
• The FMCG market is set to treble from USD 25.1 •The upper end of very rich and a part of the
billion in 2008-09 to USD 74 billion in 2018. FMCG consuming class indicate a small but rapidly
sector will witness more than 50 per cent growth in growing segment for branded products.
rural and semi-urban India in current fiscal. •The middle segment, on the other hand, indicates
•The industry is poised to grow between 10 to 12 a large market for the mass end products.
per cent annually.
5. Shareholding Pattern
Shareholding Pattern Non Promoter Shareholding Pattern
Banks Fin. Inst. and
3.4% Insurance
8.8% Foreign (Promoter & 4.30% 0.01%
Group) FII's
18.4% Indian (Promoter & 0.04%
Group) Private Corporate Bodies
Non Promoter 4.51% 13.76%
(Institution) NRI's/OCB's/Foreign
69.3% Others
Non Promoter (Non-
Institution) General public
6. Why Emami Versus Other FMCG Companies?
More than 80% of Emami’s products have Ayurvedic base.
High gross margins, high barriers to entry, strong brand
equity, mass acceptance and superior growth Huge brand creator with dominant market share
opportunities. Emami has an established track record of launching
new brands and categories and transforming brands
High growth potential - Performance of Emami’s products to block-buster brands.
has been superior and most of the major categories have
outperformed the industry average by wide margins.
7. Emami Over the Years
Financial Performance
The company has shown stupendous growth in the last two years.
Net Income has risen by 84.6% in the last one year
There has been a healthy ROE. The Assets and Cash has been increasing.
8. BCG Matrix for Emami
Expanding Rural Innovation in
Distribution Existing Products
Celebrity
Stars ? Endorsement to
reach mass segment
Heavy A&P
Growth
MenthoPlus Fair n Handsome Investment
HIGH
Balm (FY 09) – (FY 09) – INR
INR 510 mn 800 mn
Navratna Oil
Market
(FY 09) –
INR 1779 mn
BoroPlus Cream Navratna Oil BoroPlus Cream MenthoPlus Fair n Handsome
(FY 09) – (FY 98) – (FY 98) – Balm (FY 00) – (FY 06) –
LOW
INR 1433 mn INR 1100 mn INR 390 mn INR 35 mn INR 333 mn
Cash Cows Dogs
Focus on products
Operations in with low competitive
Relative Market Share Heavy Categories Intensity from MNC
players
9. GPRV Analysis
The Growth, Profitability, Risk and Valuation Analysis gives the following findings-
• Emami is Valued at Par with the Peers
• However the company is ranked higher than Peers with respect to Growth Potential
• The Profitability too is at the higher side.
• Emami ranks at par with peers w.r.t Risk Free Score
11. Market Multiples
All Values in Millions
Enterprise
Company Name Price EBITDA EPS 2011 EV/EBITDA Forward P/E
value(5)
Marico 133.15 4346.00 4.70 83055.27 19.11 28.33
Godrej Consumer
Products Ltd 417.36 6013.00 14.50 150556.40 25.04 28.78
Dabur India Ltd. 104.30 7710.00 6.90 180183.01 23.37 15.12
Overall Low 19.11 15.12
Overall Median 23.37 28.33
Overall High 25.04 28.78
Emami Ltd. 458.00 2852.42 13.89 70271.60 24.64 32.98
Emami with an EV/EBITDA multiple of 24.64 is fairly valued with respect to its peers.
12. DCF Model Assumptions
Below are the base case assumptions:
Projected 2010-2015 2015-2020 Terminal Year
Net Sales Growth 18% 14% 6.0% DCF Result:
Rate
EBIT Growth Rate 18% 14% 6.0% Firm Value= Rs. 72854 Million
COGS/Net Sales 38% 38% 38% Value of Equity = Firm Value – Debt=
% Rs. 70264 Mn
Tax Rate 20% 25% 30% Value Per Share= Rs. 464/Share
Weighted Average Cost of Capital (WACC)
Notes:
Cost of Equity
(CAPM model) Market Price 354
Risk Free rate – 7.8% ( Auction of
Government Bond 2020)
Shares Outstanding
Risk free rate 7.8% (in mln) 151.300
Beta -0.56 ( Source: Religare Technova)
Market Risk Market
Premium 6% Capitalization 53560
Cost of debt- Interest expense as % of
Beta 0.56
borrowings calculated from income statement
Cost of Equity 10.88% Net Debt 2591
Marginal Tax Rate- Calculated from F Y2010
Cost of debt (pre- income statement
tax) 8.50% Weight of Debt 4.99%
Marginal Tax Rate 20.00% Weight of Equity 95.01%
WACC 10.69%
13. DCF Valuation Sensitivity Analysis
Share Price Sensitivity ( Cost of Share Price Sensitivity with
equity & Terminal growth rate) Revenue Growth Rates
700
520.00
588 499.00
600
500.00
500 464 480.00
420 464.00
400 460.00
Share Price 440.00 432.00 Share Price
300
420.00
200
400.00
100
380.00
0 16% 18% 20%
10.38%, 5.5% 10.88%, 6% 11.38%.6.5
The DCF Share price has high sensitivity w.r.t The DCF Share price has relatively less
to terminal growth rate. sensitivity w.r.t to terminal growth rate.
14. Synergy In Merged Entity
Both HUL and Emami being firms in same industry will lead to following synergies post
acquisition:
•Cost Synergies: Utilizing each other’s distribution channels will help them save costs.
Also, better utilization of manufacturing facilities will further save costs.
•Growth Synergies: Emami utilizing the larger distribution network of XYZ will lead to its higher
revenue growth
Cost Synergies Value of Cost & Growth Synergy
Current EBIT Margin of XYZ= 32% 2020000
Current EBIT Margin of Emami = 23%
Post acquisition EBIT margin of 2010000
combined entity = 32.8%
Selling & Admin expenses = 11.6% (0.3% 2000000
Rs 234/
decrease)
Share
Manufacturing expenses= 4.2% (0.2% 1990000
decrease) Value of Merged firm
1980000 Equity
Growth Synergies 1970000
Increase in revenue growth rate of 1960000
combined firms:
2010-15:16.25% (XYZ Projected: 16%) 1950000
2015-20:12.25% (XYZ Projected: 12%) Without Synergy With Synergy
15. Fair Acquisition Price
Upper Bound: Rs. 699/Share which includes DCF value for emami and 100%
anticipated synergies
Lower Bound- Rs. 458 per share which is the current market price.
Rationale for Fair acquisition Price:
Synergy attributed to emami is in the range of 30-40%
Range of Fair Acquisition Price = Rs.544-572
Proposed Acquisition Structure:
XYZ should go for 51% stake in Emami so as to have a majority stake holding in it.
Following is the proposed structure:
Promoter – 31% buyout
Offer price: 20% to non-promoter Emami investors
Premium
Lower Price – 19%
Higher price – 25%
16. Valuation Summary
The overlapping range of EV/EBITDA is 24.77 to 25.04
Share Price range thus arrived is Rs. 460.5-465.6
After Adding Synergy Value the Share Price range is Rs 544- 572
17. Fund Raising Plan
Current debt:equity = 0.007
Interest Coverage (x)= 67.5
Total Deal Amount = Rs. 4305.6 crores ( 51% stake at Rs 558)
Suggested fund raising:
70% through fixed deposits of 1000 crores
Rs. 3600 crore terminal loan from consortium of banks
( Cost of debt = 6.5-7% { Term loan at 9-10% and Tax rate of 33%) )
21. FMCG Market India
Urban Category wise Growth •A well-established distribution network spread
Rural
across six million retail outlets.
18% 19% 17% •Rural India accounts for close to one-third of the
15%
13% total consumption pie
9%
7% •Food products is the largest consumption category
5%
in India, accounting for nearly 21 per cent of the
country’s GDP
•Demand will be driven by the rise in share of
middle class.
•The BRICs report indicates that India's per capita
disposable income, currently at US$ 556 per
annum, will rise to US$ 1150 by 2015 - another
FMCG demand driver. Spurt in the industrial and
services sector growth is also likely to boost the
urban consumption demand.
•The current share of organized retail is estimated to
be 4 to 5 per cent and is expected to increase by 14
to18 per cent by 2015
22. Indian Consumer Demography
• Large and growing youth population
– India is among the world's youngest nations, with a median age of 25 years
– According to a study by the McKinsey Global Institute (MGI), Indian incomes are likely to
grow three-fold over the next two decades and India will become the world's fifth largest
consumer market by 2025, moving up from its position in 2007 as the 12th largest
consumer market.
• Emergence of organized retail business
– Approximately 315 hypermarkets are expected to come into existence in tier-I and tier-II
cities across India by the end of 2011, riding on the boom in organized retail sector, says a
joint study by consultancy firm KPMG and industry body, ASSOCHAM.
• Growing urbanization
– Indian cities are expected to add 379 million people to the consumer base for FMCG
companies, as the urbanization rate is expected to increase from the current 30 to 45 per
cent in the next 40 years.
• Increasing disposable income
– According to recent estimates, household income in the top 20 boom cities in India is
projected to grow at 10 per cent annually over the next eight years.