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Softer demand in rural impacted Q2 revenues

Emami’s Q2FY23 print was below our estimates; revenue grew 3.4%, yet EBITDA/ PAT tumbled by 29.5%/3.9% due to (1) softer demand in rural impacting hair oils demand, and (2) correction in pain management and healthcare portfolio. Domestic business grew muted at 1.2%, whilst volumes declined 1.2%. International business saw robust growth of 17.0%, yet institutional business (CSD) grew tepid. MT/ E-com channels grew 28.0%/ 55.0% making up sales of 8.7/7.8%. Excluding pain management/healthcare portfolio, revenues grew at 8.0%. Unprecedented input costs and weaker product-mix cut gross margin to 66.6%. EBIDTA dropped 29.5% to Rs1.9bn led by other expenses (+43.6%), ad-spend (+34.3%) and Employee cost (+13.9%); EBIDTA margins slipped to 24.0% (-1120bp). Focus on distribution strategy (Project Khoj) targets to reach 50k villages by Q4. Management aspire to deliver 27.0% EBITDA margin for FY23. That said, we trimmed earnings and introduce FY25E. We retain by with a revised DCF-based TP Rs642 (implying 29.8x avg. FY24E/FY25E EPS).

Despite softer demand for hair oils Q2 revenue grew 3.4%, international business up 17.0%

Emami reported Q2FY23 revenue growth of 3.4%, driven by 1.2% growth in domestic business, yet volume lowered 1.2%. However international business reported robust growth of 17.0%, led by MENA/SAARC region, contributing to 39.0%/ 38.0% of the revenues. On 3- year-CAGR domestic/international business grew 8.0% each. MT/e-com channels grew 28.0%/55.0%, together contributing ~16.5% to sales. Category growth: 7Oils-in-One (+1.0%), Boroplus (+17.0%) and Male grooming (+2.0%) while sales declined for healthcare (-16.0%), pain management (-13.0%), Kesh-king (-10.0%), and Navratna (-5.0%) respectively. Management said, given macro impact, delayed monsoon in UP/Bihar rural consumption saw softer growth for hair oils, yet urban markets grew healthy. Helios Lifestyle (The man Company) became a subsidiary of Emami contributing ~3.5% of net sales.

Drop in operating margin transitory; management expects deliver 27.0% EBITDA margin

In Q2, adverse impact of product mix (lower sales of healthcare/pain management) and exceptional rise in the RM/PM costs weighed high on gross margin, tumbling to 66.6% (- 340bp). However, EBITDA at Rs1.9bn shrank by 29.5% driven by higher other expenses (+43.6%), ad-spend (+34.3%) and Employee cost (+13.9%). EBIDTA Margins slipped in line to 24.0% (-1120bps). Management believes Investments in core brand along with higher NPD contribution would help the company in the medium term. Management said it saw easing of input costs in Sept’22 expecting recovery in margin in 2HFY23, though said to maintain adspends ~18.0% of net sales, settling margins ~27.0% for FY23.

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 Project Khoj driving direct coverage, and (3) new product interventions (D2C portfolio and healthcare). Management remains upbeat on the international business driven by recovery in SAARC markets, however expect sharp recovery in rural markets in 2HFY23 led by good monsoon and govt. impetus on rural programs. Company declared a dividend of Rs4/ per share. We remain positive on Emami’s growth story however raise concern on margins as ad-spends to remain elevated. That said, we cut FY23E/24E earnings by 2.5%/1.9% respectively and introduce FY25E earnings. We retain by with a revised DCF-based TP Rs642 (implying 29.8x avg. FY24E/FY25E EPS). Key risks – prolonged rural slowdown impacting revenues, erratic seasonality and heighted competition.

Valuations

We expect Emami’s performance to be driven by: (1) high A & P investments, (2) focus on distribution excellence Project Khoj driving direct coverage, and (3) new product interventions (D2C portfolio and healthcare). Management remains upbeat on the international business driven by recovery in SAARC markets, however expect sharp recovery in rural markets in 2HFY23 led by good monsoon and govt. impetus on rural programs. Company declared a dividend of Rs4/ per share. We remain positive on Emami’s growth story however raise concern on margins as ad-spends to remain elevated. That said, we cut FY23E/24E earnings by 2.5%/1.9% respectively and introduce FY25E earnings. We retain by with a revised DCF-based TP Rs642 (implying 29.8x avg. FY24E/FY25E EPS). Key risks – prolonged rural slowdown impacting revenues, erratic seasonality and heighted competition.

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