Emami's strong run to continue

Expected to sustain sales growth backed by volume growth over next two years

Emami’s stock has outperformed the BSE FMCG index in the last three months, with the scrip gaining 20.5 per cent compared to a 12.5 per cent rise in the sector index—it’s also done better than the Sensex’s seven per cent rise. This is mainly due to strong sales performance reported by the company over the past quarters, backed by robust volume growth, unlike the price hikes for many FMCG players. Notably, future prospects remain good. Thus, analysts expect the outperformance to sustain.

For the September quarter, Emami posted its highest sales growth of 18 per cent in four quarters, thanks largely to a robust 16 per cent volume growth in its domestic operations, which accounts for 95 of the company’s revenue. At the consolidated level, the company’s sales grew by 16.1 per cent in the first half of the current financial year, a tad lower than 16.6 per cent achieved in FY12. The company, which owns well-known brands like Emami, Zandu and BoroPlus, however, expects better times ahead with strong growth over the next couple of quarters. Revenues will get a boost from a 20 per cent growth in the winter season, with momentum being maintained on account of a robust and diversified brand portfolio.

Historically, Emami has had a better second half than the first, on account of its winter products like Boroplus. However, with contributions from other products like talcum powder, balm, Navratna cooling oil and Fair and Handsome picking up, the seasonality factor is slowly ebbing.
 

STRONG GROWTH OUTLOOK
In Rs crore	FY12	H1’FY12	FY13E
Revenue	1,453.5	699.5	1,698.8
% change y-o-y	16.6	16.1	16.9
Operating profit	381.0	157.6	360.0
% change y-o-y	7.2	10.5	-5.5
Net profit	259.0	105.8	312.0
% change y-o-y	13.2	14.8	20.5
Consolidated financials                                             Source: Capitaline, Bloomberg

Emami is doing well in its new focus areas while growth in the domestic market, including rural areas, remains strong. But if its international business delivers to desired levels, growth rates could still be better. Nevertheless, analysts expect growth momentum to continue over the next two years (see table).

High sales have, however, come at a cost. The margins have suffered and are likely to remain under pressure in the near-term, due to high employee costs (on account of senior people taken on board to fortify its international business), research and development and capacity expansion in Egypt, Bangladesh and India. The company is also affected by high menthol prices (till high priced contracts expire in March 2013) and continued focus on advertising and promotions, especially in the winter season (over 30 per cent jump year-on-year estimated by the company).

Positively, analysts expect margins to improve in FY14. Analysts at Religare Institutional Research expect Ebitda margins to perk to 22.1 per cent in FY14 from an estimated 20.8 per cent in FY13 due to flattening of inputs costs. They expect revenue to grow 18.5 per cent and earnings per share by 22.4 per cent in FY14.