Emami stock: Margin pressure could persist, given high input costs

Emami is among the few consumer companies to be trading close to its 52-week low, at a time when investors have been lapping up shares in the segment. Concern over volume growth and margins are keeping the Street sceptical about the company's performance in the coming quarters. 

After a muted volume growth in the March 2018 quarter (around 9 per cent despite last year's low base, when volumes fell by 1.5 per cent), some analysts expect a revival in the rural economy to help improve Emami's volume performance. But the seasonality factor (as many of the company’s key brands/products are dependent on weather conditions - for example winters see an increased sale of cold cream , etc) and strong competition suggest that maintaining a high volume growth may not be easy.

Moreover, gains arising out of the demand recovery in rural India, which accounts for half of the company's sales, may not play out fully if Emami's wholesale channel continues to remain under pressure. "Although Emami's wholesale dependence has reduced to 38 per cent (from 50 per cent), it has a reasonable impact on the overall growth. 

The company's rural growth could also be compromised owing to the wholesale channel issue, as majority of rural business is dependent on that," said analysts at Nirmal Bang, in a report last month. Notably, brands such as Kesh King get 75 per cent of sales through the wholesale channel.

No doubt, Emami is expanding its other businesses such as retail and modern trade, but it may not move the needle much immediately, given their relatively smaller size compared to the overall portfolio.

Secondly, margin pressure owing to high input costs (though menthol prices have softened sequentially, they are still high year-on-year) would weigh on its earnings. Also, considering the subdued growth trajectory (single-digit revenue growth for seven quarters), it needs to be seen if Emami opts for further price hikes (already taken 2-2.5 per cent). Moreover, the company also expects ad spends to remain high in FY19 (at 18-18.5 per cent of sales). "High advertising expenses on new products, besides input cost pressure, would weigh on Emami’s operating margins," said Sachin Bobde, analyst at Dolat Capital. 

The management, however, sounds confident about maintaining margins at the current level with the recent price hike. 

Against this backdrop, investors can wait for a few quarters to get clear signals on volumes and margins.