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Strong underlying demand with solid margin performance; reasonable valuations warrant maintaining BUY

Our view

Emami posted another quarter of resilient performance on topline and margins front amidst inflationary headwinds, giving a strong outlook for the remainder of the year. 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 well given the 3.5% price hike and continued cost efficiencies. The aggression on new launches via differentiated proposition, distribution expansion especially in rural markets and formulation/packing changes also seem to be working well for the company. Over the medium-term, the company 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. We remain positive on the stock and expect the re-rating story to resume for Emami once the ongoing correction in staples subsides as valuation remains undemanding and earnings momentum looks like sustaining for the next few quarters.

Result Highlights

*Result summary – Revenue/EBITDA/PAT growth of 7.4%/7.8%/56.4%. Revenue growth was slightly below estimate on a base of 11% growth at Rs7.9bn with domestic volume growth of 6.2%. 2-yr CAGR growth at 9% overall and 11% for domestic business.

*Segmental growth – 6% growth in pain management, 29% in Boro Plus, 15% in Kesh King, 15% in male grooming, 2% in healthcare and 9% decline in Navratna and 6% decline in international business.

*Margins – Gross margin at 68.8%, improved 280bps QoQ while declined 150bps YoY, EBITDA margin came in at 35.1% led by tight control on expenses. A&P spend at Rs105cr vs Rs108cr YoY. ▪ Earnings – PAT growth of 56% led by operating leverage coupled with lower interest and higher other income (which has one-off gains of Rs 240mn).

*Dividend – Declared interim dividend of Rs4/share.

*Outlook – Confident of maintaining double-digit growth with stable gross margins around 67% and EBITDA margins above 30% in FY22.

Valuation

We build in revenue/EBITDA/PAT growth of 11%/11%/13% over FY21-24E. We reiterate our BUY rating on the stock with a PT of Rs691 based on 32x FY24E earnings, which is a 25% discount to peers like Marico, Dabur and GCPL. Key risks to our call would be COVID-led disruption, erratic season and unexpected group level issues.

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