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Growth comes off from high base, aggressive marketing spends despite margin pressure a positive; maintain BUY

Our view

Emami posted a resilient quarter with flattish volume and 5% revenue growth despite the high base, weak consumer sentiment and inflationary headwinds, with steady market shares and strong distribution‐led growth in rural markets. Strong focus on MT and e‐ commerce channels seems to be helping the company in driving penetration of its core brands. Margins came off only marginally despite sharply LLP and RBO inflation and higher ad spends given a 4.5% price hike taken in the portfolio in addition to use of low‐cost RM inventory, which indicates some margin pressure for next couple of quarters. The aggression on power brands via aggressive marketing and new launches via differentiated proposition and distribution expansion seems to be working well. Over the medium‐term, Emami seems well placed to benefit from structural tailwinds in the healthcare/ayurveda space and a higher rural salience in addition to expectations of a pick‐up in growth rates of discretionary FMCG categories. Expected reduction in promoter pledge should allay investor concerns and board restructuring to transition the business to the next generation should drive increased aggression and new initiatives. We remain positive on the stock and expect the re‐rating story to resume for Emami once the ongoing correction in staples subsides and growth trajectory starts moving towards double‐digits as valuation remains undemanding in both absolute and relative terms.  

Result Highlights

Result summary – Revenue/EBITDA/PAT growth of 5.4%/0.7%/47% on a high base, 3‐yr revenue CAGR of 6.3%. Revenue growth was in‐line with estimate on a base of 37% growth at Rs7.7bn. PAT growth adjusted for income tax benefit on manufacturing facility at Pacharia. Volume growth was flattish in domestic business

Segmental growth – 9% growth in pain management, 18% decline in Boro Plus, 7% decline in Kesh King, 4% growth in male grooming, 4% growth in healthcare, Navratna was flat and 8% growth in international business.  

Margins – Gross margin at 62.4%, declined 30bps/500bps YoY/QoQ, EBITDA margin came in at 21.3% (vs our estimate of 22%) lower 100bps YoY. A&P spend increased 10.7% YoY however lower QoQ.

Earnings – PAT reported at Rs 3.6bn while adjusted for income tax benefit on manufacturing facility at Pacharia, PAT came in at Rs 1.29bn implying growth of 47% (3‐yr CAGR of 3.2%). Reported/Adjusted EPS is Rs 8.1/2.9 per share.

Valuation

We build in revenue/EBITDA/PAT growth of 8%/9%/6% after cutting our estimates by 4% in FY23E to incorporate the ongoing margin headwinds. We reiterate our BUY rating on the stock with an unchanged PT of Rs590 based on 30x FY24E earnings, which is a 30% discount to peers like Marico, Dabur and GCPL. Key risks to our call would be further Covid‐led disruptions, erratic seasons, category challenges and unexpected group level issues. With margins not being too much of an issue, we would expect the re‐rating to begin once we see high visibility of sustained double‐digit growth for the company.  

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