Emami: All-round growth

While the growth momentum will remain robust going ahead, margins which have suffered till now are also expected to improve

Unlike most FMCG companies, Emami’s performance in the December 2012 quarter got a boost from strong volumes in the domestic market. Operating profit margin (OPM), however, continued to suffer though the company managed to maintain net profit margin. Analysts expect the OPM to improve in FY14 followed by continued robust top-line growth momentum.

Despite the up move seen in 2012, the stock has been an underperformer year till date (YTD) and its one-year forward valuation of 23 times is attractive. Analysts continue remain bullish on the stock. Says Shirish Pardeshi, analyst, Anand Rathi, in a note, “Less competition and market-share gains could help it retain premium valuations.”

Volume growth

Emami’s consolidated sales growth of 21.3 per cent (highest in past five quarters) was led by brands like Boroplus Antiseptic cream (aided by winter season), Navratna, Zandu, Fair and Handsome (together forming 70 per cent of revenues) and healthcare division in the domestic market.

Despite price hikes (6 per cent YTD in FY13), the company reported strong volume growth and market share improved year on year in Navratna Oil and Boroplus Antiseptic cream. While the international business (9 per cent of Q3 consolidated revenues) reported a higher growth of 25 per cent, Emami’s effort to increase the share of modern trade and rural businesses is also yielding results (up 50 per cent and 31 per cent, respectively).

Says Naresh Bhansali, CEO-Finance, strategy and Business Development, Emami, “With sustained sales momentum, judicious price increases and effective cost management initiatives, we have been able to moderate the impact of high input costs and inflationary pressures. For the next quarter, our focus will be on pursuing similar aggressive and profitable growth strategy. Consumer sentiment in both the rural and the urban sector continued to be positive.”

However, the OPM came down close to 210 basis points to 30 per cent and was impacted due to higher employee costs and ad-spends, which were up a combined 145 basis points as percentage to sales.

Outlook and valuation

Though valuation is close to higher end of the historical price to earnings multiple band of 3-30 times and target multiple of around 25 times, the stock could re-rate further if the company manages to improve and sustain margins since top-line growth is not a worry.

Menthol prices, which form 20 per cent of raw material, are off 44 per cent from peak and are expected to remain depressed. Says an Axis Capital in January 30 visit note, “Gutkha manufacturers are estimated to consume 30 per cent of India’s menthol production. The recent gutkha ban across 18 Indian states has increased the tradable menthol surplus in the market. Further, with a 40 per cent increase in menthe crop this year (flush season in May-July) and rising synthetic menthol availability, we expect menthol prices to remain under pressure in FY14.”

Even liquid paraffin prices (10 per cent of raw material) are down by about 10 per cent year-on-year. Nevertheless, margin risk persists for the company as savings in raw material costs could be channelized and spent on advertising to sustain or improve market share. Analyst at Axis Capital also expect tax rate to rise to 18 per cent in FY14 from 14 per cent in FY13, as goodwill amortization from Zandu acquisition will be exhausted.