Why lowering promoter pledging is not enough to fire up Emami stock

Sale of group's non-core assets is a plus, but sustainable growth is vital to command higher valuation

A few months after entering into a binding agreement with Nuvoco Vistas Corporation (formerly Lafarge India) to sell its cement business, Emami Group is now divesting its solar power business (Emami Power is owned 100 per cent by promoters) to Brookfield Asset Management.

While deal-value details are not known and Emami Power is a separate entity from Emami Limited — the group’s listed fast-moving consumer goods company — it will have some bearing on the latter.

The latest deal is part of the group’s non-core asset sale programme to lower promoter debt. Given that higher promoter pledging (89.2 per cent as of March 2020) is one of the reasons for Emami’s lower valuation, the stock on Monday gained 4 per cent to close at Rs 205.1, following the news, taking the total gains to 34 per cent from its March lows.

While the news is a positive, analysts believe lowering promoter pledging alone is not enough for Emami’s stock to rerate, even as it is currently trading at just 17x its 2020-21 estimated earnings, compared to over 40x in case of its peers.

 

 

“Emami is moving in the right direction as far as reducing promoter pledging is concerned. However, it has to deliver sustainable growth to command higher multiples,” says an analyst with a domestic broking house. He believes factors such as seasonality, increased competition, and higher share of wholesale distribution are key concerns for the company.

Notably, seasonal divergence has been playing spoilsport for Emami in recent times. For example, the delayed onset of winter took a toll on its December quarter domestic volumes, which were down 2 per cent.

As is the case with others, now Covid-19-led disruptions are likely to have impacted its summer-centric products, such as Navranta Cool Ayurvedic Oil and Himani Navratna Cool Talc (20-25 per cent of revenue). Unless Emami improves its portfolio mix, in terms of seasonality, structural growth looks bleak, say analysts.

Shirish Pardeshi, analyst at Centrum Broking, differs somewhat. He says although 40 per cent of Emami’s portfolio is seasonal in nature, the rest should help its overall numbers; the next two-year performance will get support, as the muted show will be in the base. He, however, agrees with the point that structural growth is missing in Emami and it requires strong revival strategy.

Finally, how long it takes to complete the deals (cement and solar power) in the current situation also needs to be seen. According to the Emami management, “The finalisation of the sale of the group’s cement business is on schedule and is expected to be completed soon.”

Overall, investors should not get lured till Emami’s performance improves.