Emami: June quarter earnings bring much needed relief for investors

Reduction in promoter pledging and improved revenue visibility can drive re-rating

Emami’s June 2020 quarter (Q1) earnings, announced on Friday, brought much-needed cheer for investors. Besides the better-than-expected results, a sharp reduction in promoter pledging, and better revenue outlook, led by the company’s robust product pipeline (in the health and hygiene segment), boosted investors’ sentiment. The stock of Emami gained over 8 per cent on Friday and 19.3 per cent on Monday, even as the BSE Sensex was up less than 1 per cent over these two days.

According to the firm, with the completion of Emami Group’s cement business sale, its promoter pledging has fallen sharply to 55 per cent, from around 90 per cent earlier, and should further reduce to 50 per cent in the coming months. With this, many analysts expect an expansion in the stock's valuation. After results on Friday, those at ICICI Securities said with worries on promoter debt levels now allayed, the stock's (valuation) discount to the sector may reduce. The domestic brokerage has upgraded the stock to "add" from "hold". High promoter pledging was among the key reasons for the stock’s underperformance over the past few years. Even now, the stock trades at around 26 times its FY22 estimated earnings, as against over 40-45 times in the case of other FMCG majors.

 

 

The firm has increased its focus on the health and hygiene segment with several new launches, which should augur well in the current Covid-19 situation. Dhaval Dama, analyst at Equirus, says: “Besides a favourable base, several new launches in the health and hygiene segment have improved Emami’s near-term revenue visibility.” He also expects Emami’s valuation to see improvement, due to lower promoter pledging and improving visibility.

In Q1, 29 per cent growth in the health and hygiene portfolio (43 per cent of revenue) eased pressure on the overall revenue. On a consolidated basis, net revenue declined 25.8 per cent year-on-year (YoY) to Rs 481.3 crore, led by a 28 per cent fall in domestic volumes. The reported revenue was better than the consensus estimate of Rs 468 crore. The beat in bottom line was sharper. A 13.6 per cent YoY fall in Emami’s pre-tax profit to Rs 49.1 crore, was over 80 per cent higher than the expectation of Rs 27.2 crore. Benign input prices and a sharp cut in advertising spend, as observed in the case of most peers, led to the profit beat. Emami’s Ebitda margin expanded by 487 basis point YoY to 25.5 per cent, versus the expectation of 18-19 per cent.
 

On the whole, Q1 was a pain relief quarter for Emami's investors.