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In its third acquisition over the past twelve months, FMCG company Emami will acquire the hair care product line under the Kesh King and allied brands. In a weak market, the Emami stock is down 4.1 per cent in trade so far.
Synergistic
Over the past year, Emami has adopted the inorganic path to expand product and market presence both domestically and globally. In June last year, for instance, it acquired the sanitary hygiene brand She Comfort. In January this year, it acquired an Australian personal care company.
The latest acquisition fits in well with Emami’s business. One, it beefs up the company’s presence in the hair care segment. Until now it had only the Navratna range of cooling oils, and the newly launched 7 Oils in One in the light hair oil market. Kesh King has hair oils, shampoos, and medicinal health capsules for hair growth.
Two, Emami’s products have a herbal tilt; the Kesh King range has been built on the Ayurvedic platform as well. The herbal and ayurvedic personal care segment is dominated by Dabur and Himalaya Herbals.
Three, Kesh King has a reasonable presence in north India besides Saudi Arabia, Yemen and the Philippines. Emami too has markets across West Asia, Bangladesh, Egypt and so on. With FY-15 revenues of approximately Rs 300 crore, the Kesh King acquisition can add a good amount to Emami’s own consolidated revenues of Rs 2217 crore.
Margin trouble
Kesh King is also among Emami’s largest acquisitions at Rs 1,651 crore, after the Zandu brand acquisition of around Rs 700 crore. Funding the Kesh King purchase, though, will not pose a hurdle, given Emami’s strong reserves of around Rs 1,207 crore, besides cash and investments worth Rs 855 crore (as of end-March 2015). Emami has said it will part-fund the acquisition through debt, but with a debt-equity ratio of close to zero, interest costs will not dent finances much.
What can impact margins is the adspend the company will have to undertake; the hair oil market is already crowded with the likes of Dabur, Marico, Bajaj Corp, Hindustan Unilever and Himalaya.
Emami’s adspend-to-sales ratio is already higher than several peers. Emami’s new product launches such as HE deodorants, Fair and Handsome Facewash, and 7 Oils in One, besides the newly acquired She, had sent adspend up. As a proportion of sales, adspend shot to 17 per cent in 2014-15, up from the 15.2 per cent the year before.
Therefore, even as raw materials turned cheaper, operating profit margins dropped to 24 per cent in 2014-15 down from the 27 per cent the previous fiscal. Operating profit margins may thus still remain subdued, even though raw material prices are benign.
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