Buy Emami Ltd For Target Rs.625 - Emkay Global
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Rural recovery is key; strategy for scaling-up the urban play is reassuring
Emami generates ~52% of its revenue from rural markets, where it has product offerings that are seasonal and discretionary. Most of its core categories have limited competition and higher gross margin. With rural economic slowdowns affected by macro events, Emami’s structural growth factors have been impacted. Going ahead, Company expects to benefit from any demand acceleration in Rural, where it has expanded its village and outlet reach (indirect channel contribution reduced to ~35% vs. 60% in the past). To bridge the portfolio gap in urban markets, Emami has been innovatively revamping its portfolio which has aided faster growth in modern retail channels (now entail ~19% of revenue vs. ~6% pre-Covid 19). Aligning with the needs of the new-age consumer, Emami has launched direct-to-consumer websites for key brands.
Healthy margin profile to support Management attention to growth
Emami has one of the best margin profiles in the sector, given its discretionary portfolio and low competitive intensity. As raw material prices are witnessing deflationary effects, the company expects margin to see steady expansion going ahead. Unlike in the past when its EBITDA margin peaked at ~30%, the company is now looking to expand margin to 26-27% and redeploy any further benefit towards category-development initiatives. Interestingly, in Emami-focused categories, there is no need for affordable SKUs (as these are not essential products); rather, with affluence, demand for the category rises.
Valuations remain attractive; re-rating to follow, as issues get addressed
Given the double-digit earnings growth momentum resuming and promoter shareholding pledge reducing, we see risk-reward turning favorable for Emami. The last 10-year average forward PER of 31x rightly echoes Emami’s growth potential, with Emami leading initiatives for expanding product relevance, rural slowdown and addressing corporate governance concerns. The recent run-up in the stock has been a factor of gradual easing in business concerns and Company guidance of reduction in the promoter pledge position, and is likely to strengthen, as the rural demand setting revives
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