Buy Emami Ltd For Target Rs. 691 - Yes Securities
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Earnings momentum continues, valuations remain attractive; reiterate BUY
Result Highlights
* Growth summary – 38% volume and 42% revenue growth in domestic business, domestic growth 5% above 1QFY20 levels; international business still lagging.
* Brand‐wise performance ‐ Compared to 1QFY20, healthcare and pain management up 95%, Boro Plus up 32%, 7 Oils in One up 17%, Kesh King up 2%; decline of 29% in Navratna and 47% in male grooming.
* Margins ‐ GMs down 50bps yoy but up 180bps vs 1QFY20 at 66%, took 3.5% price hikes, EBITDA margins up 20bps yoy and 500bps vs 1QFY20 at 25.7%; A&P increase of 420bps offset by lower employee and other costs.
* Management commentary ‐ Summer portfolio sales impacted by the pandemic hitting in peak summer months, achieved record profitability, new launches contribute 3% to revenue in 1Q, MT up 63% and e‐commerce grew 3.7x (now 5% of sales).
* Outlook – Confident of maintaining double‐digit growth with stable gross margins around 67% and EBITDA margins above 30% in FY22.
Valuation and view ‐
Emami posted a resilient performance in Q1 despite the pandemic impact on summer portfolio and rural demand, giving a strong outlook for the remainder of the year. Strong focus on MT and e‐commerce channels seems to be helping the company in driving penetration of its core brand. Margins are also holding up quite well given the 3.5% price hike, continued cost efficiencies and softening material inflation. The aggression on new launches via differentiated launches, distribution expansion especially in rural markets and formulation/packing changes also seem to be working well for the company. It is well placed to benefit from structural tailwinds in the healthcare/ayurveda space and a higher rural salience in addition to expectations of a gradual pick‐up in discretionary FMCG categories. Promoter pledge expected to go down to 25% from 30%, improvement in cash flows, digitization initiatives and professionalization of senior management are further positives.
We expect the re‐rating story for Emami to continue as the promoter issues seem to be behind us, valuation remains undemanding and earnings momentum looks like sustaining for the next few quarters. Rolling our valuations to FY24E, we build in revenue/EBITDA/PAT growth of 11%/11%/13% over FY21‐24E for. We reiterate BUY rating with a PT of Rs691 based on 32x FY24E earnings, which is a 25% discount to peers like Marico, Dabur and GCPL. Key risks to our call would be a prolonged COVID disruption, erratic season and unexpected group level issues.
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