IGI Logo

Subdued result trend continues                                                                                                      however, HMN is investing on growth

* Emami (HMN)’s overall volume growth in 1QFY23 stood at 9.6% YoY, while it was 2.4% ex-Dermicool (merged from this quarter). The base of healthcare business along with pain management weakened (v/s good growth in other segments) in 1Q. However, it is likely to be less challenging in subsequent quarters. According to the management, material cost pressures are likely to persist for some more time.

* It is heartening, though, that HMN is investing on growth. Its ad-spends-tosales ratio is expected to increase by over 100bp in FY23 and investments in Project Khoj (to augment rural distribution) will also continue.

* While sales growth continued to be unimpressive for a company of its size (with a five-/three-/two-year CAGR of 5.1%/5.8%/9.7%, respectively), the trend is getting relatively better. HMN’s valuations are also inexpensive. Maintain BUY with a TP of INR520

Sales and gross profit in line; significant miss on EBITDA

* Emami’s consolidated net sales grew 17.8% YoY to INR7.8b (in line). EBITDA/PBT remained flat YoY at INR1.7b (est. INR1.9b)/ INR1.5b (est. INR1.8b), respectively. Adj. PAT before amortization rose 3.5% YoY to INR1.5b (broadly in line with our estimate).

* Domestic volume rose 9.6% YoY. However, ex-Dermicool it stood at 2.4%. ? Gross margin contracted 340bp YoY to 62.6%. (est. 63%).

* EBITDA margin too contracted 340bp YoY to 22.3% (est. 25%) due to higher ad-spends (+90bp YoY) and other expenses (+50bp YoY) partly offset by lower employee costs as a percentage of sales (-140bp YoY).

* Absolute ad-spends grew 24.1% YoY to INR1.4b.

* Overall domestic business improved 13% YoY. Dermicool contributed 8% to domestic sales. Domestic business salience during 1QFY23 was at 85%.

* International sales grew 45% YoY, driven by MENA and SAARC. International business salience during 1QFY23 stood at 15%.

* Domestic segmental performance YoY in 1QFY23: Navratna (+29%), Pain Management (-30%), BoroPlus (flat), Kesh King (+20%), Male Grooming (+32%), Healthcare (-25%) and 7 Oils in One (+45%).

Highlights from the management commentary

* Rural demand was weak and Jun-Jul’22 did not see any incremental uptick. However, good monsoons can potentially perk up demand.

* International business (15% of sales) did very well with a double-digit growth projected in subsequent quarters.

* Margin pressure will be there in 2QFY23 due to high cost of materials purchased in 1QFY23. HMN has taken a 4.5% price increase cumulatively across the portfolio. The management expects margin recovery in 2HFY23.

* The full-year impact on gross margin will be around 200bp. Ad-spends will be 17-18% of sales for the year.

Valuation and view

* The ongoing material cost pressure and near-term rural weakness led to a 7.6% cut in our FY23E EPS, while there is no major change to our FY24E EPS.

* HMN's sales CAGR of 9.7% over FY20-FY22 was far better than the 3.0% sales CAGR over FY16-20. If this trajectory leads to sustainable and strong doubledigit sales growth, a further re-rating is on the cards.

* We maintain our BUY rating on the stock, driven by its: a) inexpensive valuations at 20.5x FY24E EPS (22.5x including amortization), and b) increase in ad-spends along with expansion in rural distribution reach.

* We arrive at our TP of INR520 (valuing the company at 23x Jun’24E EPS, at a 40% discount to its peers on a pre-amortization basis). Maintain BUY.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer