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Continues to execute well

Emami reported a good quarter with 9% (2-year CAGR: 11%) domestic revenue growth (6.2% volume growth) and almost flattish EBITDA margin print (notwithstanding GM pressure). Healthcare and Pain Management continued to deliver steady performances lapping high bases (2-year CAGR for both 18-26%). Most of the portfolio, except Navratna and Male Grooming, largely continues to do well. GM outlook seems to be a concern but levers exist for overall margin print. Currently, healthcare and pain management are the two rock-steady segments (combination of good execution and pandemic-led tailwinds). Both are seeing expanded opportunity on the back (combination) of (1) new product launches, (2) channel/geographic expansion and (3) post-Covid opportunities. Healthcare continues to see good momentum in existing products as well. We like management efforts on maintaining the momentum for pain management led by recent brand activation measures.

We believe Emami has become much nimbler and has seen a marked improvement in execution over the last few quarters. While some parts of the portfolio did struggle due to Covid-led challenges, several initiatives are being taken simultaneously to drive growth. We especially like the plans (1) to ramp-up healthcare business particularly through thrust on Zandu portal, (2) focus on distribution expansion including rural markets and chemist outlets and (3) thrust on new launches and e-commerce channel (including D2C offerings) to drive premiumisation. Maintain ADD.

* Decent performance despite pockets of weakness: Consolidated revenue / EBITDA / recurring PAT grew 7% / 8% / 21% with domestic volume growth of 6.2%. On a 2-year CAGR basis, revenue was up 9% (consol). International business was down 5% YoY on a high base though with 2-year CAGR up 6.4%. BoroPlus grew 29% while male grooming was up 15% (on a weak base though). The two recent strong performers of Pain Management and Healthcare continued to perform well, up 6% (2-year CAGR of 18%) and 5% (2-year CAGR of 26%), respectively. Navratna recorded a small growth of 2% on 2-year CAGR basis even as it was down 9% YoY. Lastly, Kesh King (up 15% YoY) and 7 Oils in One (up 50% YoY) performed well.

Emami witnessed good growth in MT (up 31% YoY) with e-commerce now contributing to 4% of the domestic revenues. Emami is witnessing the benefits of the recent distribution expansion initiatives – (1) Rural presence – additional 5,200 towns added through Project Khoj in1HFY22, (2) Focused expansion in standalone modern trade outlets and (3) added 22,000 healthcare outlets in 1HFY22.

* Some RM pressure but overall margins healthy for now: Gross margin contracted 151bps YoY to 68.8% due to inflationary RM. YoY EBITDA margin was still strong on the back of operating leverage benefit even as ad-spends have been ramped up in the domestic business. On RM pressure, Emami has already taken price increases for the winter portfolio, the trade stocking for which will start now. It is (1) focused on at least protecting the absolute margins, (2) drive cost rationalization measures and (3) not take deep cuts in ad-spends to support margins. Management highlighted that if the winter portfolio performs well (led by good season) it should aid overall margin performance.

* Valuation and risks: We cut our FY22-23 estimates by ~1%; modelling revenue / EBITDA / PAT CAGR of 10 / 9 / 10 (%) over FY21-23E. Maintain ADD with a DCFbased revised target price of Rs600. At our target price, the stock will trade at 33x P/E multiple March’23E. Key downside risk is slowdown in rural demand.

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