Sales and EBITDA decline as expected; International business the key drag
* Emami's (HMN) 4QFY17 consolidated sales declined 4.4% YoY (est. of -2.1%) to INR5.78b. Domestic volumes fell 1.5% YoY (est. of -4%). Domestic sales grew 3% YoY, but the international business (-38% YoY) was severely affected.
* Gross margin contracted 150bp YoY (est. of -50bp) in 4QFY17, which, along with an increase in other expenses (+70bp) and employee expenses (+30bp YoY), was partly offset by lower ad spends (-240bp YoY). Thus, EBITDA declined 4.7% YoY to INR1.8b (est. of -2.9%), with the margin contracting 10bp YoY to 30.8%. PBT declined 3.6% YoY to INR1.57b (est. of INR1.61b).
* Lower-than-expected tax rate (6.9% v/s est. of 38%) meant that adjusted PAT fell 6.6% YoY to INR1.45b v/s our expectation of over 36% decline.
* International business was severely affected, led by the MENAP region. Consequently, international sales declined 38% YoY in 4QFY17.
* FY17 results: Net sales grew 5.7% YoY to INR25.3b. EBITDA rose 10.5% YoY to INR7.6b, with the margin expanding 130bp YoY to 30%. Adjusted PAT grew 5% to INR6b.
* Concall highlights: a) Sales in traditional channels like wholesale and rural were still affected. b) Guidance for 15-18% revenue growth in FY18 if MENA recovers. c) Target of 0.83m outlets through direct reach by end-FY18.
* Valuation view: Changes to the model have resulted in marginal 2%/3.7% cut in FY18E/FY19E EPS. We continue to like HMN, given its dominant market share in high-growth categories and new products like ‘He’ (Men’s grooming), ‘Kesh King’ and ‘7 Oils in One,’ boosting overall growth further. Consistency in terms of recording the highest A&P/sales in the sector, as well as increasing direct distribution reach will further aid medium-term growth potential. Stock trades at 31.2x March 2019E EPS. We maintain Buy with a revised TP of INR1,250 (36x March 2019E EPS, 5% discount to three-year average multiple).
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