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Steady momentum

Q4 volumes grew 6% (2-year CAGR) primarily led by healthcare and pain management. Navratna had a decent quarter while Kesh King and BoroPlus were slightly weak; male grooming is the only drag, for now. International business (17% of revenues) is also performing well (+12% in FY21). RM pressure impacted gross margins but price increases are being taken to mitigate the impact. We believe Emami has seen a marked improvement in execution over the last few quarters. While some parts of the portfolio will struggle due to fresh Covid-led challenges, several initiatives are being taken simultaneously to drive growth. We especially like the plans (1) to ramp-up healthcare business particularly through thrust on Zandu portal, (2) focus on distribution expansion including rural markets and chemist outlets and (3) thrust on new launches and e-commerce channel to drive premiumisation. Promoter pledged declined to ~30% largely due to increase in share prices. Maintain ADD.

Strong performance across portfolio:

Consolidated revenue / EBITDA / recurring PAT grew 37% / 65% / 112%. On a 2-year CAGR basis, revenue was up 7%, while domestic volume growth was 6%. International business also performed well, up 10% (2-year CAGR). The strong performance in domestic business was led by (all 2- year CAGRs) Healthcare (21.7%) and Pain Management (+15.3%) followed by Navratna (6.3%), Kesh King (3.4%) and BoroPlus (2.5%). 7 Oils in one continues to do well while male grooming was a drag. There were 40 new launches in FY21, contributing 4% to domestic business. For FY21, revenue / EBITDA / PAT grew 8.5% / 28% / 29%.

RM pressure weighs on margins:

Gross margin contracted 250bps YoY to 62.7% due to inflationary RM (mentha continues to be stable though). YoY EBITDA margin was still strong due to operating leverage benefit. On RM pressure, Emami has already taken price increases for some of the portfolio and is looking at another round of hikes as well. Emami expects price increases to mitigate the inflationary impact and is not keen to cut ad-spends to support margins.

Other highlights:

Cash generation improved driven by better earnings, favorable WC structure (mainly lower receivables) and lower capex intensity. OCF / FCF grew 74% / 139%. Net cash surplus was Rs3.6bn even after the share buyback and two dividends of Rs4/share each.

Valuation and risks:

We increase our FY22-23 EBITDA estimates by ~7%; modelling revenue / EBITDA / PAT CAGR of 10 / 9 / 10 (%) over FY21-23E. Maintain ADD with a DCF-based target price of Rs550. At our target price, the stock will trade at 30x P/E multiple March’23E. Key downside risk is slowdown in rural demand.

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