Emami refocuses for handsome gains

The company puts the spat with multinational Hindustan Unilever behind it as it squares up to fight the pandemic slump

When the Bombay High Court restrained Emami from using “Glow and Handsome” in a temporary court order last month saying that, prima facie, Hindustan Unilever (HUL) appeared to be a prior adopter, it was a jolt for the company.

Emami’s case is that it has been marketing its skin care product under the trademark “Fair & Handsome” and use of “Glow & Handsome” by HUL infringes on its trademark (a separate case is pending before Calcutta High Court). HUL said before the Bombay High Court that it had applied for registration of “Glow & Handsome” in 2018. In the David versus Goliath battle, this is not the first faceoff between the two companies.

Though not one of Emami’s biggest brands, Fair & Handsome is a category creator. It was launched in 2005 when Emami’s consumer research on the segment revealed that men had joined the fairness race and were using HUL’S Fair & Lovely.

In the past 15 years, Fair & Handsome has grown to become a ~200-crore brand. Emami doesn’t want to comment on whether it will continue as “Fair & Handsome” or adopt a new brand, since the matter is sub judice. But it’s not losing sleep over it; the pandemic has put its bigger brands — Zandu and Boro Plus — in focus.

Emami’s top three brands are: the ~700 crore Navratna (therapeutic cooling oils and cool talc), ~550 crore Zandu (balms and ayurvedic healthcare products), and ~450 crore Boroplus (body lotion, prickly heat and hygiene range).

Harsha Vardhan Agarwal, promoter-director, Emami, said, “The FMCG sector is not very complicated, but you have to be in constant touch with consumers to understand their needs, which keep changing. And then you have to figure out how to give it to them in the best possible manner.”

The changing consumer preference was captured in Emami’s first quarter results. The healthcare and hygiene portfolio — which contributes to 43 per cent of domestic business — grew 29 per cent during the first quarter. In contrast, Navratna declined 41 per cent, Kesh King 33 per cent and the male grooming range 70 per cent. Overall, domestic business declined 26 per cent with offtake of the company’s summer portfolio hit by the lockdown.

But Emami refocused; around five per cent of domestic sales came from 12 new launches in the quarter, mostly under the Zandu and Boroplus brands. The hygiene segment under Boroplus, slated for launch next year, was fast-tracked and launched in April.

The momentum is expected to continue as 20-30 launches have been identified; shortly, Emami will be entering the home hygiene segment under a new brand. “We decided we needed to work in health and hygiene areas quickly to see how we can exploit the new emerging opportunity,” said Agarwal.

Emami’s focus on Ayurveda stood it in good stead in the wake of the pandemic and according to an Edelweiss Securities report, more than 80 per cent of Emami’s products have Ayurvedic base. “The therapeutic usage gives customer loyalty, leading to high gross margins, high barriers to entry, strong brand equity, mass acceptance and superior growth opportunities,” the report said.

For any gaps in the portfolio, Emami now has a new healthcare head, Gul Raj Bhatia, who was earlier with Dabur.

The other thing going for Emami is its rural focus: 40-45 per cent of its sales come from rural. Emami is looking to go deeper into its stronghold. “Rural was always important for us. But a good agrarian economy and reverse migration makes it even more so,” Agarwal pointed out.

What is clear is that Emami is going full throttle in FMCG, having put most of its promoter troubles behind. Over the past year and a half, the group’s energies were focused on reducing borrowings and pledged shares.

Abneesh Roy, executive vice president, Edelweiss Securities, said pledging was a big overhang. “In any company where pledging is higher than 20-30 per cent, it becomes a big concern and in Emami, it had increased to 90 per cent,” he said.

In July, the Emami group completed divestment of its 100 per cent stake in Emami Cement to Nuvoco Corporation for an enterprise value of ~5,500 crore; the proceeds were used to reduce debt. Consequently, promoter shares pledged against borrowings have come down from 90 per cent to less than 50 per cent; 10-12 per cent shares are pledged with Nuvoco on account of contingent liabilities that will be released in the near term.

Selling cement, however, was just one of the steps that the promoters had taken. Last year, there were two rounds of stake sale — of 10 per cent each — in Emami Ltd by promoters.

Mid-2019, Emami sold 10 per cent and raised ~1,230 crore; six months prior, it sold 10 per cent and raised ~1,600 crore. The second stake sale was executed at ~271 a share to institutional investors. The Emami stock has appreciated by about 42 per cent since then; in the last three months, however, it increased by about 89 per cent.

A large chunk of debt incurred by promoters was to create assets such as cement and solar power. But at the end of the June quarter this year, the management said in its earnings call that Emami’s borrowing against shares stood at around ~1,130 crore; it was at ~3,300 crore last year.

Still, the Emami group is half-way through its target of reducing pledged shares. It wants to bring down to zero level and may look at divesting other non-core assets for the purpose.

Agarwal, however, doesn’t want to get drawn into what is core and non-core for the group. “Consumer-focused business is core for us,” is all that he is willing to say at this point.