Emami 'Dermicool' buyout no game changer but up to 56% upside likely

NEW DELHI: Emami's buying of Dermicool brand for Rs 430 crore will make it the top prickly-heat talc company in India. Analysts said the deal while positive is not a game-changer, at least as far as earnings per share accretion is concerned. Their price targets, nonetheless, suggested a potential up to 56 per cent upside on the stock.

"We believe that the move is positive, but not a game changer as it does change the seasonality impact in the company. Near-term growth remains a concern given slowdown in rural demand and sharp jump in input costs in the past month," said Amnish Aggarwal, Director- Research at Prabhudas Lilladher.

Aggarwal said he expects 2-3 per cent price increase in April but poor demand and high inflation will impact profit growth in H1FY23 on a high base.

"We cut EPS estimates of FY23 by 5.9 per cent and FY24 by 1.3 per cent amidst near term uncertainty. We estimate 11.7 per cent PAT growth over FY22-24 and value the stock at 30 times December 2023 EPS," Aggarwal said in a note while suggesting a target of Rs 607 per share.

The scrip quoted at Rs 446.20 a piece on Monday.

Emami has historically used an inorganic route to growth including the acquisition of Zandu (2009), Kesh King (2015) and German brand Creme 21 (2019). These brands or businesses have over the years emerged as major brands for the company.

The FMCG firm intends to fund the fresh acquisition through internal accruals.

Emami had a net cash position of Rs 700 crore as of December 31, after which it declared an interim dividend of Rs 4 per share, leading to a payout of Rs 180 crore. It also announced a share buyback for an aggregate amount not exceeding Rs 160 crore, Motilal Oswal said.

"The acquisition of Dermicool could be a positive as it catapults Emami to the position of market leader in a niche category and goes on to strengthen its summer portfolio. The acquisition also comes at an opportune time with the summer season having begun early in 2022. There may also be sourcing advantages and cost efficiencies if Emami is able to effectively reap the synergies," Motilal said.

This brokerage has a target of Rs 540 on the stock.

"The fresh acquisition will be negative for Zydus Wellness as its brand Nycil, which is the current market leader, becomes a distant number two player. The acquisition adds to one of Emami core businesses, which will now become a strong number one player from a weaker number two," Edelweiss said.

Reckitt, the present Dermicool owner, has been gradually selling non-core parts of what they bought from Paras, with Setwet and Zatak being sold to Marico earlier.

Edelweiss has a 12-month target of Rs 695 on the stock.

Dermicool reported sales of Rs 110 crore bn with gross margins of 55 per cent and Ebitda margin of 36 per cent. Prabhudas' Aggarwal said net EPS accretion, ex-amortisation, would not be meaningful.

"We factor in 7 per cent compounded annual growth in sales. Post netting off loss of interest income on surplus funds, we estimate that the acquisition will provide incremental PAT of Rs 10.20 crore and EPS of Re 0.22, excluding the amortisation impact," he said.