IGI Logo

Weak quarter; pace of recovery in SSSG will be key

EMIL’s 2QFY25 earnings print was weak - while store additions remained on track, sales growth was impacted by extended monsoons, especially in key markets of south cluster (visible from flattish sales in Telangana), resulting in same store sales decline of 0.6% yoy. Gross margin progression was disappointing on account of adverse product mix (lower salience of large appliances); which along with scale deleverage drove a c.10/13% miss on EBITDA/PAT. In terms of guidance, management remains confident about 25-30 store addition target and with festive period so far tracking well, it expects sales growth of 15- 18% for FY25E. Going ahead, given the challenging demand environment (urban slowdown highlighted by consumer companies), pace of recovery in SSSG will be key monitorable in the near term. Factoring weak Q2& challenging demand scenario in urban markets, we have cut our multiple to 36x (vs 38x earlier) and earnings estimates for FY25-27E by c.4-6%. From long term perspective, we believe EMIL has ingredients (operates through LFS, over indexed in large appliances, strong relationship with marquee brands) in place to tap large opportunity in organised electronic retail industry. Maintain BUY with revised TP of Rs.244.

* Inline revenue; south cluster sales tepid owing to extended monsoons in key markets: EMIL’s 2QFY25 sales grew by 5.6% yoy to INR 13.9bn, while EBITDA and PAT declined by 13.1% and 34.3% yoy to INR 839mn and INR 245mn respectively. Net sales were largely inline with our expectations; however, weaker mix and scale deleverage led to c.10%/13% miss on EBITDA/PAT vs our estimate. While store additions remained healthy (+26% yoy, 8 stores added in the quarter), revenue growth for the quarter was impacted by extended monsoons in key markets (Hyderabad, Vijaywada), postponement of buying to festive month (October) due to Shraddh period (in Sep this year). Base quarter also benefitted from extended summer. Same store sales declined by 0.6%, Bill cuts increased by 7% while average ticket size was flat yoy. In terms of region-wise performance, south cluster sales grew by just 4%, impacted by flattish growth in largest market of Telangana. North cluster grew by 56% yoy aided by store additions. Incentive/commission income was flat for the quarter. Management reiterated its store addition guidance of 25-30 stores and sales growth of 15-18% for FY25E.

* Weaker mix and scale deleverage drive overall earnings miss: In terms of product mix, salience of large appliances (high-margin category) declined by 100bps yoy to 36% while that of Mobiles increased by 300bps yoy to 51%. As a result, gross margins declined by 75bps yoy to 14.2% (JMfe: 14.5%). Staff costs and other overheads grew 8.8% yoy and 14.9% yoy, ahead of revenue growth, led by higher store additions. Resultant EBITDA declined by 13.1% to 839mn (10% below our estimates), with a margin decline of 130bps to 6.1% (JMFe: 6.7%). In terms of regional performance, pre-IND AS EBITDA margin for south cluster stood at 7.8% while north cluster saw EBITDA loss of INR 15mn (impact of higher store additions which also includes 7-8 stores for which costs have been incurred but are not operational yet).

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361