Weak Emami stock looks ripe

Kesh King and recovery in global sales to fuel growth

Emami stock has fallen nearly five per cent over the past one month. The Sensex, by contrast, has gained 4.4 per cent in this period. Worries surrounding note ban, which has affected demand in rural India, as well as wholesale distribution channel (50-55 per cent of sales), have weighed on the stock price. Though Emami did better than expected in the latest October-December quarter, its sales volumes growth remained flat, in a break from 6-10 per cent rate seen in each of the preceding five quarters. The company said it expects note-ban impact to continue in January-March quarter. That looks like the end of bad news for now.

Even as wholesale distribution realigns itself with challenges posed by note ban as well as upcoming goods and services tax, Emami focuses on a ramp-up of its direct outreach. While this process will bear fruit only over the medium term, a continued focus on new launches could help revive domestic sales volume growth. 

The company remains confident of delivering double-digit sales volume growth in FY18. Improvement in international business (13 per cent of revenues) could be another catalyst. 

 

Among businesses, continued rise in sales of high-margin brands BoroPlus and Kesh King (antiseptic cream and hair oil, respectively) has aided profits. On the other hand, sales of Fair and Handsome cream (which is a more non-compulsory purchase) as well as balms (high rural presence) took the heat of note ban and, according to analysts, will take a quarter or two to recover. In fact, after lagging behind Street expectations in the past, the Kesh King portfolio has started doing well and is expected to be a key driver for operating profit margin. Besides, Emami has a successful track record of integrating companies and brands such as Zandu Ayurveda. Ayurveda is a traditional Hindu system of medicine (incorporated in Atharva Veda, the last of the four Vedas), which is based on the idea of balance in bodily systems and uses diet, herbal treatment, and yogic breathing.

Overall, Emami should profit from rising preference for ayurvedic products. It is also focusing on over-the-counter products for heart, diabetes, and digestion. 

With Emami's prospects on the mend, the stock looks ripe for purchase. Consistent and rising market share in most categories, niche product portfolio, and a 40 per cent PLUS return on shareholders' funds are reasons analysts remain positive on the company. On average, experts expect a rise of 15 per cent in Emami stock from current levels over the next one year.