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Emami’s Q3FY23 print was tad above our estimates; revenue grew 1.1%, (3?year CAGR 6.0%). EBITDA and PAT fell by 13.8%/5.3% due to (1) softer demand in rural impacting value? add hair oils, (2) protracted winter disrupted winter?care portfolio, and (3) adjustment in pain management/ healthcare portfolio. India business grew soft at 1.0%, whilst volumes declined 3.0%. International business grew at 7.0% (3?year CAGR 13.0%), yet institutional business grew tepid. MT/E?com channels grew 20.0%/45.0% making up 18.4% to sales. Unmatched input costs and weaker product?mix cut gross margin to 65.9% (?154bp). EBIDTA dropped 13.8% to Rs2.9bn led by higher employee expenses (+29.1%) and other expenses (+28.4%); EBIDTA margins slipped to 29.9% (?520bp). Focus on distribution strategy (Project Khoj) targets to reach 50k villages by Q4. Management aspires to deliver 27.0% EBITDA margin in FY23. Considering 9MFY23 performance, we have cut earnings and retain BUY with a revised DCF?based TP Rs610 (implying 36.2x avg. FY24E/FY25E EPS).

Delayed winter and continued slowdown cut the domestic growth, international up 7.0%

Emami reported Q3FY23 revenue growth of 1.1%, driven by 1.0% growth in domestic business, yet volume lowered 3.0%. However international business reported moderate growth of 7.0% despite supply chain problem, led by Bangladesh, Russia & UAE region. MENA & SAARC contributed 38.0% each of the revenues. On 3?year?CAGR domestic/international business grew 6.0%/13.0% respectively. MT/e?com channels grew 20.0%/45.0%, together contributing ~18.4% to sales. Category growth: 7Oils?in?One and Healthcare grew 5.0%/2.0%, while Navaratna, Boroplus, Pain management, Male Grooming & Kesh king lowered by 6.0%/ 3.0%/2.0%/1.0%/1.0% respectively. Management said, given macro headwinds, weaker consumer sentiments, and delayed winter in central/north India cut demand for hair oil, and winter portfolio. Yet healthcare and pain management declined on high base. Recently consolidated Helios Lifestyle (The man Co.) & Dermicool contributed 2.2% each in 9MFY23.

Drop in operating margin transitory; management expects deliver +27.0% EBITDA margin
In Q3, adverse impact of product mix (lower sales of healthcare/pain management), delayed winter in major markets and exceptional rise in the RM/PM costs weighed high on gross margin, cut to 65.9% (?154bps). EBITDA lowered by 13.8% to Rs2.9bn led by higher employee expenses (+29.1%) and other expenses (+28.4%); EBIDTA Margins at 29.9% (?520bps). Management believes investments in core brand along with higher NPD contribution would help the HMN in the medium term. Though easing of input costs from Jan’23 could result in margin recovery Q4, said management. That said, HMN aspires to invest in ad?spends ~18.0% of net sales, settling margins ~27.0% in FY23, while it may inch up 200?300bp in FY24E.

Valuation comfort, enhanced sequential performance warrant re?rating
We expect Emami’s performance to be driven by: (1) high A & P investments, (2) focus on distribution excellence through Project Khoj, driving direct coverage, and (3) new product interventions (D2C portfolio and healthcare). Management remains confident to deliver +20% growth in international business led by recovery in SAARC markets, however expect moderate recovery in rural markets led by better MSP and govt. impetus on rural programs. Company declared a second interim dividend of Rs4/ per share (total Rs8/? till date). HMN has recently hired Chief Business Officer to lead the organization. We remain positive on Emami’s growth story however raise concern high seasonality impact on the business. We have cut FY23E/24E earnings by 11.5%/3.1% and retain by with a revised DCF?based TP Rs610 (implying 36.2x avg. FY24E/FY25E EPS). Key risks include prolonged rural slowdown and heighted competition.

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