Emami looks attractive after recent correction

Concerns over Kesh King ramp-up, slowing organic revenues could be overdone, believe analysts

The Emami stock has fallen 18 per cent over the past three months, much higher than the two per cent correction in the S&P BSE Sensex in this period.

Weakening organic revenue growth and lower-than-expected ramp-up in the Kesh King business are key reasons. Seasonal products such as cooling hair oils (Navratna) and winter creams (Boroplus), among others, form about 45 per cent of Emami's revenues. While erratic monsoons affected summer sales this financial year, late onset of the winter season could hit demand for winter products of the company and impact organic revenue growth.

Revenues from its recent acquisition Kesh King have fallen short of analysts’ expectations mainly on account of higher unsold inventories with distributors. The management, however, believes the situation will normalise over a couple of months.

Analysts at Credit Suisse too are positive and believe Kesh King revenues will ramp up to its normal quarterly run-rate in the last quarter of this financial year and grow further in FY17. Notably, this brand reported annual revenues of about Rs 300 crore in FY15.

The acquisition could also add about 80-100 basis points to Emami’s FY16 gross margin, as Kesh King’s gross and Ebitda (earnings before interest, tax, depreciation and amortisation) margins of 76 per cent and 45 per cent, respectively, were much higher than that of Emami’s 65 per cent and 24.4 per cent, respectively, in FY15.

Hence, the acquisition can add to both margins as well as earnings. Emami’s track record of successfully integrating acquired companies/ brands such as Zandu also provides confidence. While Kesh King should benefit from the expansion of ayurvedic market in India due to increased activity levels led by Patanjali products, it also means more competition. The jury is out on this.

With Emami's prospects on the mend and given the recent share price correction, analysts say it might be a good time to enter the counter. Emami's consistent market share gains in most categories, niche product portfolio, return on equity ratio of about 40 per cent and strong innovation-led track record are some reasons why most analysts remain positive on it.

The company is also focusing on specific health care over-the-counter products. If successful, these products could be a key growth driver for Emami.