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Thanks to a differentiated business model, Emami has been able to enhance shareholder wealth over the decades, says Naresh Bhansali is CEO (Finance, Strategy and Business Development) at Emami.
Naresh Bhansali, CEO (Finance, Strategy and Business Development), Emami

Naresh Bhansali, CEO (Finance, Strategy and Business Development), Emami

The drop in economic growth rate, rising current account deficit and lack of political will is making it difficult for companies to operate. While the economy is passing through trying times, the consumer goods sector has fortunately remained unaffected to a great extent. However, costs of raw materials such as menthol and rice bran oil have risen rapidly in the past two years. Being a player with a differentiated product portfolio in the personal care segment that caters to the masses, Emami is one of the few consumer goods players to have felt the least impact. During these periods, we have done a lot of internal optimization in terms of product formulation, packaging and sourcing techniques.

In terms of sourcing, we went into e-sourcing (reverse auctions). We were earlier buying from a few buyers. Today, we are doing the online reverse auctions for some of our essential ingredients and logistics services. It helps in reducing the cost of procurement. We have also entered into long-term contracts for certain commodities to mitigate the price increase risks.

Emami is a marketing and R&D-driven company. Innovation driven by consumer insight is our forte. We have always come up with something new. Innovations at Emami begin with getting insights on consumer needs and aspirations followed by product development. For instance, we did research in 2005 and found that 30 per cent of men use female fairness creams. We decided to develop a fairness cream only for men and, thus, Fair & Handsome cream was born.

Then comes packaging and marketing. We market our products aggressively through celebrities, even if it costs us much higher than taking any other route. In 2011/12, the company invested around Rs 229 crore in advertisement and promotions.

As a result, a majority of our products enjoy market leadership. For example, Navratna Oil is a market leader with a 55 per cent share in the cool-oil category. So is the case with Boroplus Antiseptic cream, Zandu and Mentho Plus balms, and Fair & Handsome.

The scope of growth for Emami is immense as most of our product categories are under-penetrated. In all categories where we are present, the highest level of penetration is below 25 per cent.

The numbers
#Revenue: Rs 1,454 crore, up 16.5%
#EBITDA: Rs 279 crore, up 9.4%
#Net Profit: Rs 259 crore, up 13%
#ROE: 37.1%
(Figures for 2011/12; Source: Annual Reports)

Highlights
#Moved to advance payment system where 80 per cent of sales are done in cash as against around 50 per cent before.
#Dividend payout ratio increased from 24.22% in 2010/11 to 51% in 2011/12
#Acquired Lakhi Bilas (a local brand in West Bengal), Kings and Co., and M. Bhattacharya, the oldest homeopathy firm in India

Thanks to a differentiated business model, Emami has been able to enhance shareholder wealth over the decades. The initial investors, who invested Rs 4,000 for 400 shares (in 1979/80), are now owners of Emami shares worth over Rs 3.36 crore. The stock price has delivered returns of 300 per cent to institutional investors in the past three years. Emami was listed on Calcutta Stock Exchange around 1980. However, the market capitalisation of Emami was very low and the stock wasn't frequently traded as the company was closely held. We came up with follow-on public issue in 2005, which made Emami a widely held company.

The big turning point for Emami came in 2008/09 with the acquisition of Zandu Pharmaceutical Works. A century-old brand, Zandu had strong brand equity but it had not been marketed properly. At that time, Emami's turnover was around Rs 600 crore with market capitalisation of around Rs 1,500 crore. Zandu, on the other hand, was almost one-fourth of our size. Still, we paid for Zandu a valuation of Rs 1,350 crore, almost equal to our own valuation, in the open offer to public. The reason for assigning such high valuation was because we envisaged a great business potential and were confident of converting this acquisition into a success.

In the history of the domestic consumer goods sector, Zandu was the biggest acquisition in terms of size at that point of time.

All this happened at a time when the economy was reeling under the impact of the global financial meltdown and funds were difficult to get as many banks backed out even after sanctioning loans. We were, however, able to pull it off using a judicious mix of own resources and debt.

After the acquisition, we changed Zandu's manufacturing processes from manual to mechanical and traditional to scientific, and merged its consumer goods business with Emami. After this, all the synergetic benefits in terms of sales and distribution margins, procurement, and administrative cost rationalisation benefits started pouring in and the bet on Zandu started paying off. Within the first full year of operation, Zandu's operating profit (earnings before interest, tax, depreciation and amortization) grew three fold.

Emami's market capitalisation today stands around Rs 9,200 crore. Emami's products are available in more than 60 countries. Last year, our dividend payout was around 50 per cent. On a normalised level, we have maintained 25 to 30 per cent of dividend payout ratio for the past three years.

In 2011/12, major brands Boroplus, Fair & Handsome, Zandu and Navratna Oil contributed nearly 60 per cent of total revenue. All these brands have registered tremendous growth in 2011/12 - Fair & Handsome 35 per cent, Navratna Oil 27 per cent - and expanded the top line by 16.6 per cent in trying times. These products are expected to continue their strong performance. During 2011/12, we spent nearly 16 per cent of the turnover on advertising and promotion. This was higher than other industry players such as Dabur (12 per cent), Hindustan Unilever (13 per cent) and Marico (11 per cent).   

Naresh Bhansali is CEO (Finance, Strategy and Business Development) at Emami. He has been adjudged the Best CFO in the category - Sustained Wealth Creation (Medium)
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