Low valuations don't make Emami a cool bet; investors advised caution

In the past 1-2 years, Emami has seen muted volume off-take, thanks to higher dependence on wholesale distribution and competitive pressures

Developments such as those related to share buyback (announced last month) and the Emami promoter’s deal to sell the cement business to Nirma group, have given a fillip to the Emami stock of late.

After seeing a sharp 68 per cent erosion in market capitalisation in the last two financial years, on account of business pressure and promoter share pledging concerns, the stock has gained 16 per cent in FY21 so far, outperforming the 5 per cent rise in the Nifty FMCG index.

Notwithstanding the attractive valuation of 16x its FY21 estimated earnings, there are potential risks that could weigh on investor sentiment.

According to Vishal Gutka, vice-president of Phillip Capital: “Though the stock has seen short-term support and valuations are very low, the overall performance of the firm will remain subdued.”

Over the past couple of years, Emami has seen muted volume off-take, thanks to higher dependence on wholesale distribution and competitive pressure. Given the present situation, the business pressure on Emami will intensify, says Gutka.

 

 

In light of these concerns, analysts at IIFL have sharply revised their FY21 revenue estimates. Compared to a 6.3 per cent growth estimated earlier, they now expect Emami’s revenue to fall 5.1 per cent.

There is little doubt that the lockdown has changed buying behaviour, making the business environment more challenging for firms such as Emami, which earn significant revenue from the sale of discretionary or non-essential products (85-90 per cent, according to analysts’ estimates).

In fact, Emami’s Navratna cool oil and talc, which contribute 20-25 per cent to overall business, are expected to take a hit due to the disruption, given that the June quarter is the peak season.

Analysts believe the seasonal nature of Emami’s products will worsen the situation. Besides, pressure on its international business (12 per cent of revenues) will be a further drag on its top line.

The sale of its cement business to Nirma group provides relief to investors, as it will help promoters reduce their pledge (89.24 per cent as of March 2020) on their shareholding in Emami. Yet, some doubts remain.

“Emami’s cement deal with Nirma group is very positive. However, the deal completion could get delayed,” says Shirish Pardeshi, analyst at Centrum Broking. He also believes that the structural growth story of Emami looks difficult over next two years, given that new product launches may not occur in the near term.

In this backdrop, investors are recommended not to be taken in by the low-valuation trap, until signs of growth revival emerge. The company did not comment on queries sent by Business Standard due to silent period.