First Cut | Potential KKR- Emami deal can help re-rate the FMCG business

February 15, 2019 / 02:22 PM IST
 
 
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Highlights:
KKR-Emami in talks for Rs 2,000 crore structured deal
- Funds to be utilised for debt repayment and release of pledge shares
Deal to be secured through cement and property assets
- Deal can potentially take away a major investors concern for the FMCG business
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Media reports suggest that Emami group is in advanced negotiations with US private equity firm KKR for a structured credit deal worth Rs 2,000 crore, which would be utilised to repay a substantial part of the debt at the group level. The management of Emami's FMCG unit had indicated a private equity deal in its January 31 conference call.

Context

Over the years, the Emami group has diversified in to 11 sectors ranging from edible oil to pharmacy retail with a combined revenue of Rs 16,000 crore. In the last 10 years, it has reportedly acquired 10 companies or brands, which includes the Rs 1,650 crore Kesh King and a heavy investment in the cement sector (upwards of Rs 4,000 crore).

To finance part of this, the promoters have pledged shares in one of the most profitably run business – the FMCG business of Emami. It’s noteworthy that Emami’s profitability (gross margin: 68 percent and EBITDA margin of 28 percent) is one of the highest in the FMCG sector.

As per its last conference call, the share pledge by promoters stood at 47 percent. So, while FMCG unit’s debt-to-equity ratio (0.04) is miniscule, higher percentage of pledged shares have raised investor concerns in recent times. This means that any miscalculated investment decision for other group companies and debt obligations at the group level could have an implication for the FMCG unit business.

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Possible deal structure and business restructuring

The debt facility is expected to be charged in the of 12-15 percent range and would be secured by group’s cement and property business.

Further, the Emami group is also working on rationalising its businesses and giving priority to its core businesses: consumer goods and cement. In turn, it might also get rid of its non-core assets such as healthcare/pharmacies.

Takeaways:

While the FMCG core business in itself is not in fine fettle, there are improving signs of growth. In recent times, the company has been able re-position key products like Kesh King range and Zandu Pancharishta. Further, concerns on account of domestic distribution is easing. Wholesale channel’s share has stabilised at 38 percent and direct reach has improved to near 9.25 lakh outlets, which is 50 percent higher than two years back.

Read: Emami Q3 review: Success in silos but mojo is missing

However, the stock's performance is in complete contrast with the trajectory seen for key FMCG leaders. While Emami has dropped 40 percent from its 52-week high, the market leader is trading close to its 52-week high. Emami is trading at 26 times FY20 estimated earnings, which is a near 50 percent discount to leading FMCG companies (Marico, Hindustan Unilever and Dabur).

If the deal gets through, wherein there is a significant decline in pledge shares and the FMCG business doesn’t participate in the securitisation of deal, then it can potentially re-rate the FMCG business.

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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
Anubhav Sahu

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