Emami's Mohan Goenka Talks About Inflation Impact And Rural India Demand | Chartbusters | CNBC-TV18

🎥 May 26, 2021 📺 CNBC-TV18 ⏱ 15m

Mohan Goenka, VC & Whole-time Director, Emami talks about the impact of inflation on the company and its demand in rural India ...

Watch on YouTube

Transcript (27 segments)

Host0:00

Have a bunch of other stocks which are making the highs of trade as well. GIC from the cash market currently at the high point. RPG Life as well, in fact up six percent with volumes almost twice of what the company does on a normal day in the last 10 days at least. So RPG Life has surged at the high point. There is a bunch of other stocks as well. We just spoke about GIC, that's the one which is moving well. But at a time like this, it's important to get you some ideas for profit as well. Let's cut across to our colleagues from Moneycontrol. Prone Nitin Agarwal joins in with the stock that he's been tracking. Nitin.

Nitin Agarwal0:37

The overall market correction makes some of the highly valued and fundamentally strong companies look attractive. One such example is Endurance Tech. The stock price is falling around 27 percent from its 52-week high. The overall market correction and the severe shortage of semiconductor chips which led to the production cut by original equipment manufacturers proved to be a double whammy for the company. There are a couple of factors which however make the company very attractive for a long time. Endurance generates most of its India business revenue from the two-wheeler segment and has a very strong position on the back of its technologically advanced product range. It is therefore the best proxy to play the growth in the tubular segment in India. It is important to highlight that the company continues to outperform the industry. In Q1 FY23, the company posted a revenue growth of around 40 percent from the segment whereas the industry grew by around 38 percent. Secondly, we expect Endurance to outperform the industry by acquiring new clients and new business from existing clients. In Q1 FY23, the company generated new business of around rupees 400 crores from Indian companies. This includes EV orders worth 110 crores with a total EV order book of around 480 crores, and it won business worth euros 14.3 million from the Audi, FCA, and Maserati in the European business. Such strong orders give earnings visibility in the near term. Thirdly, the management is focusing on cost efficiencies, higher value added products, and import substitution to improve its margin. Lastly, the company trades at around 24 times FY24 projected earnings, which we believe is very reasonable for a fundamentally strong company like Endurance Tech.

Host2:10

All right, take that point. Thanks a lot for that. We take a short break and on the other side we get chatting with an important guest. We do have the management of Emami joining us. So stay tuned, they will tell us all about demand and the business performance.

Well, it's a day where we've seen a strong recovery in the markets. Though at high levels we're seeing a wee bit of volatility, nothing really to worry about. The Nifty Bank is shuttling between green and red as we speak. It's absolutely at the flat line, but that doesn't take away from the fact that there has been an 800-point recovery from the lows on that index, and the Nifty 50 while sitting with a cut of almost 100 points has still recovered over 170 points from the lows itself. So let's see how the day progresses. Currently hovering around that 17,650 mark. Perfect time to get in a big corporate guest that we have lined up for you today. We have Mohan Goenka, Vice Chairman and Whole Time Director of Emami, to understand where business is headed given inflationary pressures, how demand is shaping in rural India, and what Emami is doing basically to go ahead and capture the demand growth as well as the Indian consumer story. Thanks a lot Mr. Goenka, always a pleasure speaking with you.

Um, the first question is with regards to rural demand as well as the inflation situation. How is that panned out in the second quarter so far and how has it been any different from what you anticipated at the end of the first quarter? What are your thoughts?

Mohan Goenka4:44

We haven't seen the kind of recovery we expected in this quarter. Though the monsoons, barring east, have been good across India, but unfortunately we haven't seen the rural recovery as of now. But we are extremely hopeful that maybe H2 should be a better year than what is in quarter two. So still, if you ask me right now, the demand seems to be weak in the rural markets.

Host5:14

All right. What do you think could be the concern why rural demand hasn't picked up the way you anticipated it to be? And secondly, what kind of expectations do you have in the second quarter with regards to growth in particular? I mean, would that be double digits, or are you targeting high single digits? What are your thoughts there?

Mohan Goenka5:34

So we are definitely targeting about 11 to 12 percent growth as far as H2 is concerned. But as I said, the monsoon is good right now. I still feel that the inflation is heating up in the markets. It still hasn't settled. But going forward, the way we are seeing the prices are correcting, the input side prices are correcting, inflation is moderating. So we are very hopeful that market should correct in the second half.

Host6:05

And what are you doing to ensure that you get a majority of the share that the market gives in terms of improvement in the second half? Because I've seen your conference call, 20 increases what you're looking at your distribution reach in the villages, your OTC coverage as well. With all these things, what can Emami grow like in this year? But more importantly in FY24, what are your thoughts there and what kind of margin profile are we talking about here?

Mohan Goenka6:34

So we are very confident that the kind of investments we are putting in as far as our distribution is concerned, it would definitely yield results in H2 going forward because it's huge investments across the board whether it is rural or in the urban markets as well. Also at the same time, we have gone very aggressive in launching some of the premium products in our existing product basket. So that should also help in getting to double digit growth. As far as forward is concerned, we are very confident of achieving double digit growth in tune of about 11 to 12 percent because we have done the Dermacol acquisition very recently. We have invested in some startups. They should also yield results. So I am not seeing any difficulty in getting to 11 to 12 percent.

Host7:26

Right, 11 to 12 percent growth is for FY23, right? Yeah, and FY24 would you, because by then all the assets that you have invested in will start sweating some returns. In fact, the first half of calendar year 23 you will also see a bigger jump in Dermacol. How much could that be? And FY24 would that mean about over 15 percent growth? Is that a possibility? What are we talking about here?

Mohan Goenka7:52

So that is always our endeavor, that we should grow at about double digit growth. We would be very happy. We have to see how the markets perform because we are still dependent on the rural markets. If the market and seasonality is favorable, then we are very confident of about 14 to 15 percent growth. Acquisitions have also become part of our growth strategy now. You would see that we have invested quite heavily on the Dermacol brand as well as on some startups. So whether it is organic or inorganic combined, we will see a definite 13 to 14 percent growth going forward.

Host8:32

How big can Dermacol be? Because when you acquired it, it was over 110 odd crores. This quarter has done about 60 to 62 crores, but that's on wreckage distribution. On Emami's distribution, how big can it be?

Mohan Goenka8:46

So yes, from first of August, now Dermacol is being distributed by us. Though it is not the season for Dermacol, the season would now start from February. We are very confident that we should get to about 140 to 150 crores in the first year itself. And that's from the core product. You would have some product extensions in Dermacol as well. Not immediately, we are working on some extensions right now. It will take a while. I think another one year we would have to wait for extensions to come in.

Host9:16

You know, one thing that stood out in your second quarter numbers was the kind of new SKUs you launched. You had a couple of bridge packs for Fair and Handsome, Navratna, and sachets in Kesh King as well. Shampoos now account for 25 percent of Kesh King. What is your strategy there? How much of Kesh King will now come from shampoos? What is the additional revenue you think can come from there? And for both Fair and Handsome and Navratna, what kind of numbers are we talking about in terms of annual sales here?

Mohan Goenka9:45

So bridge packs have become very important because of the rural markets. So we launched almost bridge packs in all of our range, whether it is Boroplus, Navratna, Pain Management, KeshKing, all of those. So we expect about seven to eight percent revenues going forward coming from these bridge packs. At the same time, we have launched some bigger pack sizes for e-com and modern trade as well, and we are seeing significant contributions also coming from large packs as far as modern trade and e-commerce is concerned.

Host10:18

So are bridge packs and large packs more margin accretive? I'm trying to get to your SKU mix and what does that do to your margins? Because as compared to the industry, you've always historically had the highest margins, closer to that 30 percent mark. With raw material inflation easing, with you having new SKUs, higher distribution, what kind of margins are we looking at?

Mohan Goenka10:42

So Mohan, we have guided that our margins this year should be about 28 percent as far as margins are concerned. See, historically if you've seen the past, our margins have been hovering in between 26 to 30 percent. Last year was one off because of pandemic, some of the higher margin product sales were very high, so we saw that super normal high margins. But now that the input costs are easing, we are happy that gross margin should not be under so much pressure. So EBITDA should be in the range of about 28 percent, 28 and a half percent. And this would mean ad spends of around 17 to 18 percent, just the way you had guided for earlier.

Host11:23

Absolutely right. You know, I wanted to know a little about your D2C foray as well because you're among the first few companies along with Marico who did make significant investments in male grooming D2C, and now you have entered the pet care category as well with Furball. What kind of portfolio do you think will your D2C business be? Marico is targeting around 450 to 500 crores coming in from these digital first brands. Do you have any target in that?

Mohan Goenka11:52

So we have investment targets. As of now, we have already invested more than 100 crores in these brands. We have invested in four upcoming categories: one is the male grooming, one is very premium salon range, one is pet care, and the other one is on the protein segment. So all these, we think going forward in the next five to seven years should be very, very large. Presently the companies are being run by the existing promoters and they are doing a wonderful job. So we are very optimistic that these companies should yield results going forward.

Host12:30

All right, I would have pressed you a little more on how large they can become going forward, but that's looking too deep into the future. But for now, can you give us a bookkeeping update on promoter's pledge? I mean it's 37 percent right now. You had guided for it to come off significantly. When does it come off and by how much? And secondly, you've always spoken about some non-core assets that you're looking to sell, Amri being one of them too. What are your thoughts on both promoter pledge coming down and the update on the Amri sale?

Mohan Goenka13:02

So as always, I have maintained that our pledge percentages would come down. We are committed to bring it down to significantly low levels from now. Presently I think it is about 34 to 35 percent. Very soon it should come down by about seven to eight percent as soon as the Amri deal happens. We are expecting the deal to conclude maybe in the next one to one and a half months. So post that, we would see about seven to eight percent reduction. Then we have some land parcels. We are definitely looking at offloading some land parcels. As soon as those happen, it should come down to about ten percent.

Host13:41

Amri, you're saying it will happen in one to one and a half months. How much money can you raise from that?

Mohan Goenka13:45

We are expecting about 1500 crores to come from Amri.

Host13:47

All right, 1500 crores to come from the Amri sale, plus some land parcels. And finally, the question on succession and management strategy going forward. You have incorporated a couple of your second generation, third generation so to say, in the company right now as well. Where do you see the company going in terms of leadership going forward? Will that stay with the families or will there be some professionals coming in too?

Mohan Goenka14:18

See, Emami is by and large run by professionals on a day-to-day basis. There won't be a significant change as far as the top management is concerned. It would stay the way it is right now.

Host14:30

All right, take that point. Thanks a lot, always a pleasure speaking with you Mr. Goenka. As you speak, the street does like the fact that over the next month and a half we will hear something on Amri, 1500 crores coming to the promoters, and that would mean the pledge coming down. And as a result of this, there has been a big spike in the stock. Currently at the high point of trade, and importantly business looking good as well. 11 to 12 percent is the revenue that they guide for in terms of growth for this year, and going forward with the investments that they're making in distribution etc., would be anywhere between 13 to 14 percent. So that ladies and gentlemen was the conversation with Emami. Take a short break, come back, get you more on the markets and individual stocks.