MOSL: EMAMI - Annual Report FY17 (Buy)-Building platform for strong long-term growth-Near-term prospects look challenging

​EMAMI (Annual Report FY17): Building platform for strong long-term growth; Near-term prospects look challenging due to high wholesale dependence

(HMN IN, Mkt Cap USD3.8b, CMP INR1073, TP INR1265, 18% Upside, Buy)

Key takeaways from Emami’s (HMN) FY17 annual report:

• Innovation remained the key focus area in FY17
  
• Took much-needed efforts to boost direct reach via Project Race/Project Dhanush
  
• Continued to emphasize on growing the Kesh King franchise
  
• Healthy operating cash flow growth, led by reduction in other assets
  

Right portfolio, low penetration, focused spending brighten growth potential

• ​80% of the portfolio comprises high-demand problem-solving products, and the remaining 20% is discretionary products. This insulates the company from volumes risk in an adverse consumer environment.
  
• Penetration is low in many categories. We note that HMN is the dominant player in its leading categories, which puts it at the forefront to drive category growth.
  
• Brands like Fair & Handsome (now with a wide men’s personal care portfolio) are available in only 1.4m out of the 4.3m outlets that HMN reaches across the country. Balms is another category, where penetration is low at 36% (Zandu balm reaches only 1.6m outlets, and Mentho Plus only 1.2m outlets).
  
• While Zandu is already strong with its balms and Chyawanprash products, it can also emerge as a strong Ayurvedic products brand. Management believes that the company’s strength lies in its ability to validate product efficacy on the basis of data derived from systematic scientific research at NABL and Ministry of AYUSH accredited laboratories.