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Softer rural demand, all hopes on good winter in Q3

Emami’s Q2FY24 print was ahead of our estimates; consolidated revenue/EBITDA/PAT grew 6.3%/19.6%/1.1% YoY. Domestic value/volume grew at 4.0%/2.0%, yet international business saw 16.0% growth (CC). Management alluded slower growth to, (1) softer demand in rural cut Jul/Aug sales, but picked up in Sept’23, (2) Navratna/Dermicool range grew +12%, Healthcare 4%, Boroplus/Kesh king/Male grooming declined 4%/5%/7%, (3) D2C brands TMC and Brillare grew 63% - 5% of sales, and (4) strong growth in MT/e-com channel at 17%/50% (24% sales). Gross margin at 70.0% (+370bp) aided by lower RM/PM. With higher ad-spends (+9.1%), and employee/other expenses (+8.8%/+4.0%), EBIDTA grew 19.6% to Rs2.3bn settling EBIDTA margins at 27.0% (+301bp). Focus on distribution strategy (Project Khoj) expanded village/chemist coverage to 58k/140k helped top lift sales. HMN aspires to deliver +28.0% EBITDA margin in FY24E. Management said with closure of AMRI Hospital deal the pledge on books now settled ~15%. With weaker 1HFY24 we cut earnings and retain BUY with a revised DCF-based TP Rs621 (implying 28.2x avg. FY25E/FY26E EPS).

Unseasonal rains spoiled sales for summer portfolio; non summer portfolio grew ~16%

Emami’s Q2FY24 revenue grew at Rs8.6bn (+6.3%) driven by domestic business value/volume growing at 4.0%/2.0%, yet international business grew healthy by 16.0% (CC) despite currency depreciations (Bangladesh/Russia) and disrupted geopolitical conditions in Russia. Management said it saw softer rural demand in Jul/Aug but it picked up in Sept’23. With 24.0% revenue contribution MT/e-com channels grew 17%/50%. Category results: Navratna & Dermicool range (+12%, Health-care range (+4%), Pain management (+1%), Boroplus range (-4%), Kesh-King (-5%), and Male grooming (-7%). Management alluded with (1) macro recovery, (2) better winter and (3) strong festive season, it expects good offtake for discretionary portfolio in Q3. Though with normalised base for healthcare/pain management segments, and HMN’s focus on medico marketing/ doctor coverage could yield better results. NPD made up ~4% of sales, while D2C brands Helios Lifestyle (The man Co.) and Brillare contributed ~50% to Q2 revenues together grew 63% YoY.

Contraction in input prices saw uptick in margins; HMN expects +27.0% EBITDA margin

In Q2, despite adverse impact of product mix (weak discretionary portfolio), correction in input prices resulted in gross margin at 70.0% (+370bp). Even though ad-spends grew by 9.1%, higher employee/other expenses (+8.8%/+4.0%) saw 19.6% growth in EBIDTA at Rs2.3bn; EBIDTA margins settled at 27.0% (+301bp). Management said investments in core brands and higher NPD contribution would help revenues in medium term. Management aspires to invest in ad-spends ~18.0% of net sales and maintain +27% EBITDA margins in FY24.

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 through Project Khoj, driving direct coverage – now 1mn, and (3) new product interventions (D2C portfolio and healthcare). Management remains confident to deliver +15% growth in international business led by recovery in SAARC markets, however expect gradual recovery in rural markets led by better MSP and govt. impetus on rural programs. Further with closure AMRI hospital divestment the pledge on books now cut to ~15%. HMN announced interim dividend of Rs4/ share. Though improved rural commentary we remain positive on Emami’s growth story however raise concern on high seasonality impact on the business. With weak 1HFY24 we cut FY24E/FY25E earnings by 2.7%/3.2% and introduce FY26E and retain Buy with a revised DCF-based TP Rs621 (implying 28.2x avg. FY25E/FY26E EPS). Key risks include prolonged rural slowdown and competition.

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