Worst may not be over for Emami yet, analysts advise against bottom-fishing

Emami reported a revival in products where it was earlier struggling, such as Zandu Pancharishta and Kesh King

Following the dismal performance by Emami in recent quarters, its share price has fallen 30 per cent in the last six months, against a 3-4 per cent fall in the BSE FMCG and Sensex indices. Given Emami’s December quarter (Q3) numbers, things may not change significantly. Net sales grew 7.1 per cent year-on-year (YoY) to Rs 811 crore and net profit (excluding exceptional items) remained little changed at Rs 147 crore in Q3 — a tad lower than the Street’s expectations of Rs 815 crore and Rs 149 crore, respectively.

The lower sales growth was on account of subdued volume growth of 3.5 per cent in Q3. Though it was better than the 4 per cent decline in volumes in the September quarter, it was the weakest among the FMCG peers who have reported their Q3 numbers so far. The firm says a delayed winter impacted sales of products like Boro Plus, which grew a meager 4 per cent. Winter-related products accounted for over 45 per cent to Emami’s domestic business in Q3, hence the impact was evident.

Emami, however, reported a revival in products where it was earlier struggling, such as Zandu Pancharishta and Kesh King. The former grew 18-26 per cent in Q3. However, it lagged in men’s grooming (down 2 per cent) and pain management segments (up just 6 per cent).

To regain investors’ confidence, Emami needs to sustain the revival in key segments like Kesh King and Zandu Pancharishta, besides improvement in other products, say analysts. The management, however, is sceptical of how the March quarter pans out, as a delayed winter could impact its non-winter portfolio.

Moreover, margins are unlikely to improve despite the management indicating its reluctance to fuel volumes at the cost of profitability. Emami’s recent acquisition of Creme-21 will also weigh on margins, say analysts, given that Creme-21 earns 9-10 per cent operating profit margin, way lower than Emami’s 27-30 per cent.

Softening input prices (crude and mentha oil), however, will provide some relief. In Q3, due to higher input prices, Emami’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin fell 209 basis points YoY to 32.9 per cent.

Overall, analysts recommend not to bottom fish even as the stock trades at 29 times FY20 earnings, a 20-30 per cent discount to its peers.