Street gives thumbs-up to Emami-Kesh King deal

Inexpensive valuations, healthy margins key positives

Most analysts are positive on Emami’s recent move to acquire the hair and scalp care business of Kesh King and allied brands for Rs 1,651 crore.

Inexpensive deal valuations, leading position of the acquired products in the category, higher Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin and growing demand for ayurvedic and herbal products are some reasons behind this optimism. Emami’s successful record of acquisitions (Zandu's products) is another. Overall, the acquisition is likely to be earnings-accretive for the firm by FY18. Analysts at Prabhudas Lilladher believe the brands will post a net loss of Rs 99 crore and Rs 50 crore in FY16 and FY17, respectively, on account of 10 per cent annual amortisation and interest outgo on the debt of Rs 800 crore for the buyout.

Kesh King has about 50 per cent market share in the ayurvedic hair care segment and is the only major national player in this category. Of the Rs 300 crore revenue in FY15, Kesh King has derived 80 per cent from hair oils, 15 per cent from shampoos and the rest from hair care capsules. Analysts believe the acquisition could add about 15 per cent to Emami’s revenues. At about 48 per cent, Kesh King’s Ebitda margin is double that of Emami (24.4 per cent in FY15) and, hence, will boost future profitability of the listed entity. In this backdrop, Credit Suisse raised its target price on Emami by about 13 per cent to Rs 1,220 a  share.

 

The acquisition will strengthen Emami’s presence in the North Indian market and the hair care segment. The deal values Kesh King at 5.5 times the FY15 enterprise value to sales and appears inexpensive.

This acquisition will be an additional growth driver for Emami. The company has an aggressive new launches pipeline and is on track to achieve annual revenue of Rs 5,000 crore over the next three to five years. The international business (14 per cent of the total revenues) is also likely to grow at a healthy pace. The company has delivered consistent financial performance in the past few quarters and, hence, most analysts are bullish on the scrip.

While current valuations seem to capture the positives adequately, quicker turnaround of Kesh King acquisition is a key upside risk. Volatile input costs could, however, play spoilsport.