Amrutanjan: Saurabh Mukherjea & Team Marcellus explain why stock deserves place in portfolio

Amrutanjan Healthcare is one of the prominent stocks in the Little Champs portfolio of Saurabh Mukherjea's Marcellus PMS Fund.

Team Marcellus has furnished a detailed note in which they have explained the prospects and risk factors of the stock.

It is pointed out that Amrutanjan Healthcare is the second largest player in the Indian head pain balm category. Over the last decade, Amrutanjan has successfully mitigated the growth challenges in its mature core head pain balm category through new products, targeting the adjacencies (body pain, congestion) and foray into categories like sanitary napkins (Comfy). This success has been underpinned by product innovations (like roll-on), a revamped distribution model (moving away from wholesale dependent to direct model), improved processes (investment in technology/ automation), an effective go-to-market strategy (right target markets, increased advertising) and most importantly through judicious capital allocation (outsourced manufacturing for Comfy, control on working capital). Inability to attract the required talent and any state intervention in the sanitary napkins segment are key potential risks.

It is stated that despite growth challenges in the mature head pain balm category, entry into newer segments like sanitary napkins have enabled Amrutanjan to clock a healthy 12% revenue CAGR over FY10-20, higher than the 5% CAGR clocked over FY2000-10.

Most of Amrutanjan’s products command high gross margin of ~50-60% (gross profit CAGR of 10% over FY10-20). However, in recent years, the Company has invested significantly in advertising & sales promotion spends due to a higher focus on brand building, expansion of distribution in West & North India and entry into new categories such as sanitary napkins (advertising and sales promotion spends as % of revenues increased from 8.5% in FY2014 to 16.6% in FY20). Hence the growth in net profits have lagged that of revenue and gross profit growth. Despite this, Company’s return on invested capital (RoIC) has expanded from 39% in FY10 to 61% in FY20 (despite a hit from Covid in FY20) thanks to improvement in fixed assets turnover (through closing down of loss-making businesses and outsourced manufacturing for Comfy sanitary napkins) and reduction in working capital (from average 40 days in FY10 to 25 days in FY20). Given the accumulation of cash in recent years (net cash of Rs1,050mn at FY20-end), RoCE is lower than RoIC.

One of the many aspects that is beneficial to Amrutanjan is its product innovations and foray into adjacencies to address growth challenges.

It is pointed out that the head balm market in India is relatively saturated with somewhat less salience amongst the younger generations. Further, over the years the category has been witnessing increased competition from allopathic alternatives like paracetamol. Amrutanjan has addressed this issue in two ways. Firstly, by increasing its addressable market by increasing focus on the Body pain management and Congestion management in recent years. Body pain and Congestion are natural extensions of the Head balm market given the key ingredients as well as the supply chain remain largely similar. Secondly, the company has launched innovative formats for all the pain management products such as roll-ons, sprays and pain-patch which find higher traction with the younger generation. Roll-on has been one of the highly successful innovations for the company in Head & Body pain segments and now forms ~10% of the total net sales.

It is also pointed out that Amrutanjan has been improving business processes and thus operating efficiency consistently.

One of the ways it has done so is with a revamped distribution model. Until 2009, Amrutanjan mainly followed a wholesale-oriented and pharma distribution model which offers low visibility and control over the channels as well as the lack of direct relationship between the company and the retailer. In 2009, the Company kicked-off an initiative to move from the pharma model to FMCG model of distribution with an intention to increase its direct reach with the chemists and kirana/grocery stores. The share of wholesale sales has come down from ~50%+ of total sales to ~30% of total sales over the last 10 years and the company has now established its direct reach at ~2.5 lakh outlets. At the same time company has been ramping up its presence in Modern Trade which accounted for ~10% of OTC sales in FY20.

Amrutanjan is also exposed to a number of risk factors. Team Marcellus has meticulously documented these factors and the same can be read on their website.