Improved outlook, lower promoter pledge positives for Emami stock

All round performance in Q3, attractive valuations add to the optimism, say analysts

A sustainable volume-led recovery driven by healthy rural demand, focus on expanding distribution reach, new product launches and commitment to bring down pledge on promoter shareholding has turned the Street bullish on consumer goods firm, Emami.

In the December 2020 quarter (Q3), Emami reported a second successive quarter of double-digit volume growth – a first since Q1FY19 – led by robust traction in the rural markets. Emami derives close to 55 per cent of its overall revenues from the hinterland. The figure is considerably higher than the industry average of 35 to 40 per cent, according to analysts' estimates.

Rural areas and small towns have been relatively less impacted because of the Covid-19 pandemic as reflected in the pace of recovery in the region. Moreover, strong cropping season aided by healthy monsoons, the government's efforts to support farmers by increasing the minimum support price (MSP) for rabi crops, and improving availability of finance have boosted income of rural households. And, the trend is expected to continue.

The company is also focused on expanding its rural distribution reach and has started a pilot project in top four states in Phase 1 and a further 12 states in phase-2. 

Emami also has a large presence in the ayurvedic products segment under its Zandu brand. It has capitalised on the recent shift in consumer preference to ayurvedic products following the Covid-19 outbreak and has launched a slew of new products. Additionally, the company has launched a new brand 'Emasol', which offers a complete range for home hygiene products.

Notably, operating profit margin, too, expanded by nearly 400 basis points to an all-time high of 36.4 per cent in Q3, aided by overall cost efficiencies. However, some moderation can be expected in the margins due to rising raw material prices (particularly liquid light paraffin) and normalising advertising spends from FY22 onwards, say experts.

Going ahead, the management is confident of extending the strong growth momentum for a third consecutive quarter and hopes to end the financial year with a high-single digit growth.

In this context, analysts have upped their forward estimates and target prices for the stock. Motilal Oswal Securities (MOSL) has increased its earnings per share (EPS) estimates by 9.8 per cent, 12.1 per cent and 11.7 per cent for FY21, FY22 and FY23, respectively, while increasing their 12-month price target from Rs 1,310 to Rs 1,425 per share.

Troubles at the group level due to high debt and promoters pledging their shares have been a key overhang on the stock in recent years. However, the group has been focused on reducing its overall debt and to that extent has managed to sell its cement and solar power assets. With these divestments, promoter debt taken against pledged Emami shares has more than halved and the group plans to further reduce debt by selling other non-core assets. This has helped bring down the proportion of promoter pledged holding from its peak of 90 per cent in June 2020 to 39 per cent as of December.

With the worst of the promoter issues largely behind and pick-up in the company’s core business, analysts at Jefferies believe that Emami – trading at 32 times its FY22 estimated earnings – makes for an attractive bet in the FMCG space. Other FMCG peers trade at a premium of 20-25 per cent.

The stock, which hit a multi-year low of Rs 140.85 on 30 March 2020, has risen 3.4 times since then. On Friday, even as leading indices fell, it was up 1.9 per cent at Rs 484.10. Given this, there could be more gains ahead.
 

Key risks include the seasonality of Emami's winter/ summer portfolio, dependence on rural markets and the wholesale channel, sharp increase in input prices and delay in further resolution of debt issues at the promoter and group level.