Note-ban blues not yet over for Emami

But company grows market share across key brands, limits squeeze on operating profit margin

A disappointing showing by global business (16 per cent of overall revenues) pulled down Emami's consolidated revenues by 4.4 per cent from a year ago to Rs 578 crore in March quarter (Q4). Domestic revenues rose only three per cent, similar to the growth in Q3, indicating that note-ban woes may not be over for the company. Emami had posted healthy double-digit growth in domestic revenues before note-ban impact, which started playing out in Q3. Higher dependency on rural as well as wholesale channels (half each of domestic revenues) is a concern as both continue to witness pressure. The management's strategy to step up its direct reach is prudent, given that the wholesale channel will take some time to recover from note-ban blues, but it will bear fruit only gradually. 

Emami's revenues fell short of Bloomberg consensus estimate of Rs 618 crore. Lower spend on advertising and promotional activities limited squeeze on operating profit margin to only 10 basis points even as input costs rose 150 basis points as percentage of revenue. This aided a 1.5 per cent growth in net profit to Rs 83 crore, lower than estimate of Rs 124 crore. 

The good part is Emami gained market share across key brands Navratna Cool Oil, Fair and Handsome Cream, and Kesh King hair oil. In the hair oil segment, for instance, while Marico's enriched products saw double-digit sales volume growth, Bajaj Almond Drops fell 7.1 per cent. Emami also maintained its leadership position in Boroplus and balm (Zandu, Mentho Plus) segments. This is noteworthy, especially when viewed in context of high competition from the likes of Patanjali Ayurved.

Going ahead, given the worsening geo-political situation in the Middle East (West Asia) and Africa, Emami's international business could continue to remain under pressure. With the company stepping up investments in existing brands as well as launching new products, investors will keep an eye on performance of the domestic business. Even as disruption from note ban is yet to fully play out, rollout of goods and services tax in July could further affect the supply chain and domestic sales volume growth for most consumer companies. 

The Emami stock price is 37 times the company's FY18 estimated earnings, higher than its historical average one-year forward price-to-earnings ratio of 25 times. Investors should thus await a better entry point in the stock.