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Seasonality, Demand outlook hold key
Emami reported set of numbers in 4Q due to only 2% Domestic volume growth due to late onset of summers (40% of sales from summer portfolio in 4Q). Emami has given an optimistic outlook for coming quarters led by
1) uptick in rural economy on the back of government stimulus and favorable season
2) good traction in Kesh King post its re-launch in 2Q
3) Strong market share gains in core brands and sustained traction in 7-in-1 hair oil and
4) benefits of corrective steps taken in International business. Strategy for recovery in F&H would be implemented in 2H19, however recovery is unlikely in the near term. We believe that softening of Input cost pressures and 2.5- 3% price increase should enable the company maintain margins. We estimate 16.6% PAT CAGR over FY19-21 and value the stock at 31xFY21 EPS and arrive at price target of Rs475. Retain Accumulate.
Concall key takeaways:
1) Rural sales demand has slowed down in 4Q and has seen more pain than Urban India
2) 4Q Performance remained subdued due to extended winters, weak rural demand and adverse liquidity scenario
3) Input costs pressures have softened in FY20 which is expected to prevent margin decline in coming quarters
4) Overall price increase of 2.5-3% will be taken in FY20.
5) Kesh King volumes grew by 12% in 4Q and 13.5% in FY19. Wholesale still contributes 65-67% of its sales
6) Emami has engaged BCG for consultation in F&H. Male grooming is likely to re-bounce post implementation of revised strategy in 2HFY20
7) Smaller SKUs of HE magic Duo will be launched post stabilization of the product
8) Receivables has increased due to non-payment for CSD sales and increase in exports
9) Tax rate in FY19 remained high due to deferred taxes. Going ahead, the tax rate would be the MAT rate
10) Emami targets to double the E-commerce business on a small base led by Kesh king, HE and F&H
Domestic volumes up only 2%:
Net Sales increased by 3.7% to Rs 6.4bn led by only 2% Domestic volume growth (3% in FY19). International business grew by 19%, CSD sales declined by 1%. Overall volume growth remained flat. Domestic revenues increased by 3% in 4Q and 7% in FY19. Gross margin declined 440bps to 60.8%. EBIDTA declined 10.7% to Rs 1.5bn. EBITDA margins declined 390bps as staff costs increased 120bps despite decline in other expenses and ad-spends by 120bps and 40bps respectively. Adj. PAT declined 6.7% to Rs568mn (Est 675bn) as tax rates increased by 230bps despite decline in interest cost by 8.1% and increase in other income by 699.1%.
Delayed summer impacted performance:
Navratna grew by 1% with 140bps increase in volume market share in cool oils. Pain Management grew 1% and expanded market share by 140bps to 54.8%. Male Grooming declined by 4% (grew by 3% in FY19). F&H Face wash Volume market share grew 90bps to 14.7%. Boroplus grew by 17% while 7 oils in One grew 24%. Kesh King sales increased by 15% with 220bps increase in market share to 26.4%. Healthcare range grew by 9% led by Nityam and Generics & Ethicals.
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