FMCG major Emami acquired ayurvedic hair and scalp care brand Kesh King for Rs 1,651 crore. In an interview to CNBC-TV18, NH Bhansali, chief executive officer- strategic and business development and chief financial officer, Emami Group says the acquisition was funded via internal accruals and debt.
Bhansali expects the new business to be EPS accretive from late 2017-2018 and exepcts modest growth of 10-15 percent from the acquisition.
The company has been acquiring brands domestically and internationally to enter new product categories.
Bhansali says the company has new strategies to grow Kesh King’s business and will look to expand the same in new regions.
Below is the edited transcript of H Bhansali’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: Just tell us first the EPS impact, this year and next year because of this inclusion?
A: As we have also informed earlier it was funded by appropriate mix of debt and also internal approval. So there would not be a great impact on interest. On EBITDA level there would be a substantial growth. From this business itself we expect good EPS accretion to come in second to third year.
Sonia: So, second to third year the business will be EPS accretive. So, that will be around maybe 2017?
A: 2017 or early 2018.
Sonia: This brand if you can just tell us more about what the growth strategy is because this Kesh King has grown at 60 percent CAGR over the last three years and now that you have Emami’s expertise and distribution network what could the growth rate of this brand look like in the years to come?
A: There has been a huge need gap in this category. The scalp and hair problems are always on the rise due to active lifestyle which is increasing and the stress related problems and also the environmental issues. So, this category is going to grow, there has been a huge need gap and we feel that there has been appropriate strategic fit with Emami. So, this would give a good business opportunity to us and we feel a modest growth of at least 10-15 percent even can be expected on this business to start with and then it can be ramped up.
Latha: Let me just finish the financials first and then come to sales and other aspects of Kesh King itself. You said you are financing it with a mix of debt and internal accruals. The cash on your books is what, Rs 800 crore?
A: Rs 800 crore plus.
Latha: And the rest you will raise as debt?
A: Yes, it could be.
Latha: So, it would be Rs 800 crore - Rs 800 crore split to pay for the Rs 1,600 crore.
A: As I said Rs 800 crore plus. I am not precise on the number but as on March 31, 2015 there was surplus funds of Rs 800 crore plus.
Latha: So, what might be the increase in interest cost therefore in the current and next year?
A: There has been an income of interest we expected around Rs 90 crore or so for interest income. So, that would not be there and there would be little impact and there would be a debit of interest.
Sonia: You spoke about a 10-15 percent growth that you are targeting initially for Kesh King, what exactly is the margins that Kesh King is making currently on hair oils, on shampoos and on capsules?
A: Kesh King business has a superior margin than that of Emami. Substantially higher EBITDA margins in the range of 40-45 percent plus.
Sonia: With this integration what would your blended margins look like for Emami next year?
A: We need to work out.
Latha: Company currently has a turnover of Rs 300 crore so what is it in terms of a percentage for you, it is a very small percentage of your total sales?
A: We have a turnover of around Rs 2,200 crore last year. We expect from the FMCG standalone business growth of around 17-18 percent.
Latha: What about outlets, we were told that Kesh King at the moment is present in 5 lakh outlets, will you substantially be able to increase the outlets it is available at?
A: Apart from increasing the outlets, they are not present in many of the states. So, our joining will help this business to expand its distribution to many regions where it is practically not present at all.
Sonia: Have you acquired only the brand or have you acquired the manufacturing facilities as well of Kesh King and what is the capex that you would be putting into this particular product say in the next one year?
A: We have acquired the business. So, it is not the brand only. The business includes everything and they were also outsourcing few of their products so we would be continuing with those suppliers for the time being and then going forward we will finalise our strategies.Sonia: What is your view on the hair oil space in general? We have seen this space become extremely crowded and the hair oil category has been a slightly slow moving category in the last couple of years. What is your own view on how much it could grow in the industry and for you?
A: Precisely this is not the kind of a hair oil, in fact, it is a niche category. If you know Navratna Oil, it is a niche category and we are looking very aggressively since many years.
Sonia: A lot of players are entering this category with value added oils so there are a lot of niche products now coming into the market. Don’t you think it is getting a bit too crowded?
A: You need to identify the gap. We have a point here for the consumer and there is a huge need there as with Navratna Cool Oil. In the same way for this kind of problems solution oil there are national players; there are regional players.
Latha: The other theme on which we wanted your inputs was the sub-power monsoon that might be a reality very soon. If that happens do you see demand getting hit, rural or urban?
A: We are disappointed with the numbers which we have seen yesterday. However, on the ground level you have not seen a huge impact as yet.
Latha: At the moment you are not impacted by rural demand at all?
A: Not really, not that materially.
Latha: How much is your demand from rural and how much is urban?
A: It is almost 50 percent.
Latha: You have not seen any impact on your rural demand?
A: Not material impact.
Latha: So the last time’s poor kharif and poorer rabi has not hurt rural demand for you?
A: Since we are into the categories where the people need those product even at the bottom of the pyramid. So, still it is okay.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
