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FMCG company Emami delivered broadly in-line results for the March quarter on earnings front but disappointed on sales growth due to fall in International revenues. Emami's domestic business was driven by robust 13% volume growth and its rural focus (55% of domestic revenues) will ensure a strong show by the domestic segment going forward. Most analysts are positive on Emami's prospects and believe improvement in international business will act as a key catalyst for the stock price going forward.
"We believe Emami is well positioned to increase sales at 16-18% for several years and maintain the highest volume growth in our coverage universe. We increase target multiple from 23 times to 26 times and our target price from Rs 680 to Rs 770 and reiterate our Buy recommendation on the stock", says Percy Panthaki,FMCG analyst at IIFL.
Q4: Domestic robust, exports a drag
Falling exports marred strong domestic growth for Emami in the March 2013 quarter. While domestic revenues grew strongly by 17.4%; a 12% fall in international revenues restricted the top-line growth to 13.2%. The consolidated revenues stood at Rs 451 crore, lower than consensus estimates of about Rs 480 crore. Domestic volume growth remained strong at 13% and was driven by good show of most brands and segments. The canteen sales department (CSD, up 68%), Navratna (up 26%), balms (up 18%), Fair & Handsome (up 15%) and Zandu OTC (up 41%). Boro Plus sales remained weak with a fall of 9% over the March 2012 quarter.
Weak mentha oil (forms 25% of Emami's input costs) prices enabled Emami to expand its EBITDA margins by 150 basis points to 22.2% over the March 2012 quarter. While higher other income (up 13%) boosted the company's adjusted net profit to Rs 94 crore, up 20.4%. Going forward, analysts expect the company's profitability to improve.
"We believe the full benefit of lower menthol prices will reflect in FY14. Emami has taken a 4.5% price increase in its summer brands and could take a similar price increase for the winter portfolio. Other costs like liquid paraffin and packaging material are also likely to be stable or lower next year. We build in 200 basis points EBITDA margin expansion in FY14, which could have upsides", says Arnab Mitra, FMCG analyst at Credit Suisse. This margin expansion is expected after considering the higher advertising and promotion spends in FY14.
Emami's international business' (about 17% of consolidated revenues) poor show was a function of company's plan to reduce inventory at distributors’ level and discontinuation of its low margin brands Emita and Bonita. Lower offtake in CIS (Commonwealth of Independent States) and Africa regions also impacted the performance. Management expects sales to be sluggish for another two quarters. For FY14, management expects the international business to grow by 15% due to a lower base. Large part of this growth is likely to be more back-ended.
