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Focused on driving penetration‐led growth with margins well protected, valuations attractive; maintain BUY

Our view

Emami posted another resilient quarter with flattish volume and 4% revenue growth despite the high base 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 are also holding up quite despite sharp LLP and RBO inflation which was offset by a 3% price hike and continued cost efficiencies. The aggression on new launches via differentiated proposition, distribution expansion seem 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 4%/0.4%/5% on a high base, 2‐yr revenue CAGR of 9.4%. Revenue growth was slightly below estimate on a base of 15% growth at Rs9.7bn. Volume growth was flattish in domestic business.

* Segmental growth – 7% growth in pain management, 2% in Boro Plus, Kesh King was flat,  ‐3% in male grooming, 6% in healthcare and 11% in Navratna and 7% growth in international business.  

* Margins – Gross margin at 67.4%, declined 300bps/140bps YoY/QoQ, EBITDA margin came in at 35.1% led by tight control on expenses. A&P spend increased 50% QoQ.

* Earnings – PAT growth of 5% (2‐yr CAGR of 22%) led by operating leverage coupled with lower interest and higher other income.

Valuation

We build in revenue/EBITDA/PAT growth of 9%/10%/11% after cutting our estimates by 3‐4% over FY21‐24E to incorporate the ongoing growth and margins headwinds. We reiterate our BUY rating on the stock with a revised PT of Rs621 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 disruption, 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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