Wholesale channel continues as a drag on Emami

Cash-driven channel took a note ban hit earlier; and now, GST may deliver another blow

Kolkata based Emami Ltd, which is undergoing a major distribution overhaul, is likely to post a stressed balance sheet for the first quarter of the current fiscal year, which coincides with the summer sales.

According to Mohan Goenka, director at Emami Ltd, its wholesale channel, which currently comprises 52 per cent of its sales network, has been reeling under stress as an after-effect of demonetisation and this channel can again be hit in the near term once the Goods and Services (GST) tax rolls out.

"Particularly the southern wholesale channel is on a de-stocking mode. Overall, this line of sales channel was hit in the demonetisation period and with cash transactions capped, uptake from this channel has fallen recently", he told Business Standard.

Business transactions on this sales channel is primarily done in cash and with the Centre further tightening its noose on cash transactions, capping it at Rs 2,00,000 from the earlier ceiling of Rs 3,00,000 a day, the wholesale traders are reluctant to pick up further products.

Furthermore, its wholesale channel was saddled with unsold inventory, particularly in the rural markets during the demonetisation era. Though that is now getting cleared, the wholesale traders still have substantial stocks.

"The wholesale channel prefers to clear stock by the end of June when new seasonal and other products are picked up. Thus the opening stock of July will be pretty low", he said.

Although Emami was able to maintain its bottomline in the fourth quarter of the last fiscal year which grew by a marginal 1.5 per cent at Rs. 83.3 crore, its topline felt the pressure registering a 4.4 per cent fall at Rs 577.7 crore.

The after-effects of demonetisation are likely to continue in the first quarter of the current fiscal year as well.

While on the one hand, the company faces stagnancy on account of the currency restrictions on its wholesale channel, Goenka fears that the trade may witness further disruption for a brief while once GST rolls out.

"However, it will be only for 2-3 months post which things will normalise and pick up. In the long term, GST will be good", he said.

Abneesh Roy, senior vice president of institutional equities at Edelweiss Securities is of the opinion that although the summer has been intense but the company's summer related products have seen some pressure.

As per Goenka, the Rs 850 crore Navaratna brand, which has a 61 per cent market share and accounts for 40-45 per cent of the summer portfolio had been the worst hit in terms of uptake. Although the talc products under this brand is registering a growth, the oil has been feeling some stagnancy recently.

"Anticipated recovery in rural demand should be amply led by better monsoon, Seventh Pay Commission, OROP payouts and improving liquidity scenario in wholesale channel. Further, we expect Emami to benefit from further penetration in most segments that it is present in", Roy said.

Realising its dependence on the wholesale channel, Emami Ltd has embarked upon a distribution overhaul strategy.

Business Standard first reported that the company has devised a strategy to reduce its dependence on the wholesale channel from the current 52 per cent to 40 per cent while push for a direct distribution architecture.