Buy Emami Ltd for the Target Rs 525 by Motilal Oswal Financial Services Ltd
Operationally in line; weak summer portfolio
* Emami’s consolidated revenue grew 15% YoY to INR10.4b (in line) in 1QFY27, aided by the consolidation of Axiom Ayurveda and IncNut Digital. Domestic business delivered 20% revenue growth and 16% volume growth, aided by acquisition. Organic revenue grew 9%, with 8% volume growth.
* Hair Care registered 11% growth, while Skin Care/Healthcare grew 3%/2%. Strategic portfolio remained the key growth driver with 61% LFL growth (contributing 18% of domestic business). International business declined 12% YoY due to supply chain disruptions amid the West Asia conflict. Management expects a recovery in its international business in 2HFY27.
* Gross margin contracted sharply by 360bp YoY to 65.8% (miss), impacted by high crude-linked input costs, a 200bp impact from the West Asia conflict and a 160bp drag from the changing business mix following acquisitions. Consequently, EBITDA margin declined 190bp YoY to 21.8% (miss) despite healthy revenue growth, as the company continued to invest in brands while absorbing near-term cost pressure. Management expects calibrated price hikes, productivity initiatives and easing execution challenges to support margin recovery over the remainder of FY27. We expect ~26% EBITDA margin for FY27 and FY28.
* Core domestic demand remains healthy with 8% underlying volume growth. The strategic investment portfolio continues to scale up rapidly and should provide an incremental growth lever in the medium term. Although nearterm margins are impacted by input cost inflation, management's calibrated pricing actions and productivity initiatives should aid a gradual margin recovery going ahead. With comfort in valuations at 20x/19x FY27E/FY28E EPS, we maintain BUY rating with a TP of INR525 (25x FY28E EPS).
Key highlights from the management commentary
* The operating environment remained challenging, marked by high crude prices, inflationary pressure and disruptions stemming from the West Asia conflict, which led to higher input costs across the sector.
* Domestic business grew by 20%; on a like-to-like basis, growth stood at a healthy 12%, with volume growth of 8% after considering the previous year’s numbers of Axiom Ayurveda and IncNut Digital.
* In 1QFY27, measured price increases were implemented to mitigate cost inflation, but the sharp rise in input costs still impacted profitability.
* Organised channels grew by 19% on LFL basis and now contribute 32% of domestic business.
* Modern Trade and Ecommerce maintained strong momentum. Quick Commerce now contributes 35% of Ecommerce sales.
* Strategic investment portfolio continued to be the standout performer. On a like-to-like basis, this portfolio grew by an impressive 61% and now contributes ~18% of domestic business.
Valuation and view
* We cut our EPS estimates by 3-4% for FY27 and FY28.
* Emami is focusing on rebranding its portfolio to reduce the seasonal dependence. Its strategic subsidiaries are expected to grow in thirties. Moreover, Emami continues to strengthen its distribution reach predominantly in alternate channels (MT, e-com, and QC).
* We believe a steady demand environment, coupled with comfortable valuation, bodes well for Emami. We reiterate our BUY rating with a TP of INR525 (based on 25x Mar’28E EPS)
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