Higher growth, margin expansion likely to drive further gains for Emami

Expectations of revenue growth, margin expansion and reduction in share pledge are other triggers

The stock of consumer major Emami has corrected 3 per cent from its 52-week high of Rs 546.25 on August 23. On Tuesday, the share closed at Rs 521.90 on the BSE, down 0.28 per cent.

After underperforming the Nifty FMCG index for a long time, the stock is now doing a catch up and surged over 13 per cent in the past one month. It has been on an uptrend since its March lows, gaining about 54 per cent during this period. This has helped the stock narrow its underperformance vis-a-vis the sector index seen over the past one year.

The recent gains in the stock have been on the back of robust June quarter numbers, expectations of revenue growth, margin expansion and reduction in promoter share pledge. 

Overall, growth for the company in the June quarter came in at 7 per cent year-on-year (Y-o-Y), and this was broadly in line with estimates.

This is despite sales being dragged down by the sluggish performance of the summer portfolio. Excluding this, domestic business growth was a robust 16 per cent.

The summer portfolio declined by 5 per cent on account of unseasonal rains with the Navratna range witnessing a fall of 8 per cent.

Emami was, however, able to improve sales growth of Dermicool by 9 per cent on the back of distribution initiatives. 

Growth in the quarter was led by pain management (up 13 per cent YoY), healthcare (up 11 per cent) and antiseptic cream BoroPlus (up 19 per cent).

On a low base, modern trade and e-commerce channels, which account for about 10 per cent of sales, posted a growth of 45 per cent and 47 per cent, respectively, during the first quarter. Contribution to revenues increased by 510 basis points (bps) Y-o-Y.

The company expects the two channels to grow by 15-20 per cent. For FY24, the company sees a revenue growth of 8-10 per cent with an operating profit margin expansion of 200-250 bps. This is led by double digit growth in international business, male grooming and healthcare segments. Easing input costs are expected to help boost profitability. 

Most brokerages have upgraded their operating profit estimates over the next two-three years due to expectations of a margin recovery.

Analysts led by Percy Panthaki of IIFL Research, said, “With a higher salience of rural and mass-end discretionary products, Emami has been impacted disproportionately in the high inflationary times. Moderation in the overall price index should bode well for demand recovery for Emami.”

The brokerage, which has a buy rating, increased its operating profit estimates by 4-7 per cent over FY24-26. This is because it sees a margin recovery. 

Nirmal Bang Research, too, has revised its operating profit margin by 7 per cent for FY24 for Emami. This is due to the continued sales momentum and the management guidance of 200-250 bps margin expansion for the ongoing financial year. 

Further, the brokerage believes that the stock, which is trading at 21 times its FY25 earnings estimates, is inexpensive. Therefore, it has maintained a ‘buy’ rating.

Another positive for the stock is the reduction in promoter pledge.

The promoters expect to complete the sale of promoter group hospital (AMRI Hospitals) by the end of this month. They will use part of the proceeds to bring down their share pledge from 33 per cent to 18 per cent.