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Our Take:

Emami Limited is one of the leading and fastest growing personal and healthcare businesses in India, with an enviable portfolio of household brand names such as BoroPlus, Navratna, Fair and Handsome, Zandu Balm, Mentho Plus Balm, Fast Relief and Kesh King. Emami has a portfolio of over 300+ products based on ayurvedic formulations and has created a growing presence in more than 60 countries with a focused and customized product portfolio. Emami group has a presence across 12 sectors including realty, paper, agro products, media, solar power, etc. Promoters had pledged shares of Emami Ltd. to many of these ventures. At peak in March 2020, 90% of promoter’s holding was pledged. With series of disinvestments including sale of cement business to Nirma Group for Rs. 5,500 Cr, the pledge has come down to 36% and management has committed to bring it further down to zero by hiving off non-core assets. This should lead to rerating of stock.

The company’s performance was subdued in the past few years due to number of factors such as demonetisation and GST, heightened competition in key categories and seasonality. However, with the timely interventions by the management in addition to demand boost to ayurvedic products in wake of Covid-19 has provided tailwinds. Emami seems to have regained growth momentum over recent quarters. Emami introduced innovative brand extensions, strengthening their relevance across the seasons. Emami re-launched a number of products around improved formulations as well which seem to be gaining good traction due to rising consumer preference for ayurvedic products. The company has launched +30 new products during 9MFY21 with +60SKUs. Company has deepened its direct distribution capabilities in four states and intends to extend it in another 12 states – which will help buttress its superior margins. We feel Emami is adequately prepared to capitalize on sectorial opportunities and its power brands possess attractive headroom, which could drive Emami’s growth in a sustainable way.

Valuation and Recommendation:

Emami enjoys gross margins of over 65% and EBITDA margins above 26% which is higher than most listed peers. Emami is a market leader in several categories and with low penetration of key categories, there is more room for double digit growth. Emami is focused on strengthening its direct reach and reduce its dependence on wholesale channel. Wider distribution, new product launches and improving rural demand (>50% of revenue contribution) will be key growth drivers for the company. The promoter pledge has reduced to 36% in the

December quarter from its peak of 90% in March 2020, the management has further guided to reduce it to zero in next couple of quarters which makes Emami a strong case for re-rating. The stock is currently trading at heavy discount to some of its peers. We feel investors can buy the stock at RS.447-454 band (26xFY22E EPS) for the base case value of Rs.476 (28xFY23EPS) and bull case fair value of Rs.553 (32xFY23E EPS).

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