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Emami Ltd’s results for the three months ended September (Q2FY23) are far from inspiring. The consolidated Ebitda margin drop was more than expected at a whopping 1,120 basis points (bps) year-on-year (y-o-y) to 24%. One basis point is 0.01%. A key factor that dragged Ebitda margin down sharply was the 34% spike in advertising and sales promotion expenses. The drop in gross margin was much smaller at 229 bps. Higher input costs and inferior product mix hurt gross margin.

Further, Emami’s revenue performance was nothing to write home about with y-o-y growth at 3.4%. This comes on the back of sluggish demand conditions last quarter, especially in rural markets, which have a sizeable contribution for the company.

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As a result, domestic growth was 1% in Q2 and volumes fell by about 1%. Pain management and healthcare range declined at a faster rate. These segments had a high base because of covid-19 led gains last year. On the other hand, Helios Lifestyle Pvt. Ltd (The Man Company) became a subsidiary of Emami effective 1 July and contributed 3.5% to Q2 revenues. Growth in international revenues, the share of which is comparatively small, was 17% last quarter.

Post Q2 results, many analysts have trimmed their Ebitda forecasts.

“A significant miss on our expectations and the improbability of a sharp revival led to a reduction of about 8% each in our FY23/FY24 Ebitda forecast. However, because of the 10% tax rate guidance for FY23/FY24 versus its earlier estimate of 17.5%/18%, there is no material change at the earnings per share level for both years," said analysts from Motilal Oswal Financial Services Ltd in a report on 11 November.

The bright spot is that Emami’s valuations are not demanding. The shares have declined by 12.5% so far in CY22, underperforming the broader Nifty 500 index, which has gained 4.4%. The stock trades at nearly 23 times estimated earnings for FY24, according to Bloomberg data.

“We continue to be hopeful of a turnaround in underlying growth trajectory for Emami beyond the near future, improvement in return ratios and expectation of further reduction in promoter pledge," pointed out a report by Nirmal Bang Institutional Equities.

With cooling raw material pressures, margins are expected to recover in H2FY23. However, investors should watch if higher ad spends play spoilsport. From a medium-term perspective, better sales growth would fetch brownie points.

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ABOUT THE AUTHOR

Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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