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Dermicool acquisition braces #1 position in cool talc

In line with its strategy - strengthening core brand, Emami announced the acquisition of leading brand ‘Dermicool’ in the Prickly heat and cool talc segment from Reckitt Benckiser for a consideration of Rs4.32bn excluding taxes (total 4.5x sales). Further cool talc market has grown CAGR ~14% over past decade except Covid period. More importantly this strategic acquisition provides: (a) market leadership with combined market share of ~45% in Rs7.6bn category size, (b) low category penetration ~16% throws big opportunity, (c) despite ~55% gross margin EBITDA margins is +35%, and (d) strong presence in north and west markets. The acquisition is funded through internal accruals. We reckon, this acquisition would give leg up to Emami as they would be able to extract sales momentum in the forthcoming strong summer season. We retain our Buy rating with a DCF-based Target Price of Rs669 (implied 31.2x FY24E EPS).

Attractive category growth, low penetration throws big distribution opportunity

Management indicated it’s a great strategic fit as it will strengthen and consolidate the company’s #1 market leadership in the prickly heat powder and cool talc category which has grown CAGR ~14% over past decade excluding Covid period. Further cool talc category penetration stands ~16% which throws a large distribution opportunity and being a functional product it has strong demand in North and East markets, and it is growing faster than talcum powder category. We believe, with increasing global warming and soaring summer temperature, such problem solution niche products are poised for strong growth in future. The acquisitions will not only add value and have synergy with the current business spread, but also offer large opportunities for the company to be present in categories that have high growth potential.

Dermicool acquisition to spruce up the market share, yet its margin accretive

The prickly heat powder and cool talc market is estimated ~Rs7.6bn. Dermicool has high consumer connect through its winning marketing communication commanding ~20% market share having high recall value. More importantly, this acquisition will help Emami to become market leader with combined market share of ~45% in cool talc category. Interestingly, despite ~55% gross margin, Dermicool delivers +35% EBITIDA margin in our view. Management has indicated that there is a huge potential to grow Dermicool franchise spreading to adjacent segments with product extensions under the brand

Valuation and risks

Prickly heat market has been growing CAGR 10-11% (pre-Covid). Even though, Nycil held no. 1 position till date, with this acquisition Emami would command market leadership which provides edge in Rs7.6bn category size. Prima facie it appears that Emami has paid ~4.5x sales multiple for acquiring Dermicool brand, but considering +35% EBITDA margin profile it’s a reasonable acquisition in our view. Further the product cycle being short as 95% sales occur in March-June months hence it provides attractive ROI to the company. We reckon, considering IMD’s projections for severe summer now, this acquisition would provide strength to build its distribution in East and South. We retain our Buy rating with a revised DCF-based revised TP of Rs669 (implied 31.2x avg.FY23E/FY24E EPS). Key risks – prolonged rural slowdown, unpredictable seasonality and erratic competition.

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