Home / Markets / Mark To Market /  Margin pain lingers for Emami after a soft Q4

Emami Ltd’s results for the fourth quarter of financial year 2022 (Q4FY22) are not particularly striking. The company’s consolidated earnings before interest, tax, depreciation and amortization (Ebitda) increased by 0.7% year-on-year at a time revenues increased by 5.4% to 770 crore.

As such, revenue and Ebitda are more or less in line with analysts’ expectations. The Ebitda margin contracted by 100 basis points (bps) to 21.3%, a multi-quarter low. This is primarily led by an increase in advertising and sales promotion expenses as a percentage of sales. One basis point is 0.01%.

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Emami’s domestic revenue growth stood at 3% in the quarter and volumes were flat. “Revenue and volume growth on three-year CAGR (compound annual growth rate) was at 6% and 3%, versus Dabur India’s 5% and 3%, Hindustan Unilever’s 8% and 3% and Marico’s 10% and 7%," said analysts from HDFC Securities Ltd.

The Q4FY20 operations were impacted by the covid outbreak and, hence, a three-year CAGR offers a better comparison. “Volume came in muted due to continued demand pressure in rural India and discretionary portfolio impacted by covid in Q4," said HDFC Securities analysts.

There are near-term difficulties. Inflation is a headwind for Emami as it is for many companies. There should be pressure of about 200 bps in gross margin in Q1FY23 as it will have to buy material at prevalent prices, its management said in a call. This is after considering the price hikes taken. In Q4, Emami’s gross margin drop was curtailed to 30 bps.

Demand pressures are also likely to persist in the foreseeable future with rural markets remaining subdued. Plus, the high base of Emami’s pain management segment is a challenge. On the other hand, it helps that the company is seeing good traction in its summer portfolio.

Meanwhile, Emami’s shares touched a 52-week low on the NSE on Friday during trading hours. So far this calendar year, the stock has declined by nearly 18%, meaningfully underperforming the sectoral Nifty FMCG index, which has declined by 2%. The silver lining is that valuations are undemanding. Emami shares are now trading at 21 times estimated FY24 earnings, according to Bloomberg data.

Investors would do well to track the sales momentum.

As analysts from Motilal Oswal Financial Services Ltd said in a report on 13 May: “Emami’s sales CAGR of 9.7% over FY20-FY22 was far better than the 3.7% sales CAGR over FY16-20. If this trajectory sustains and strong double-digit sales growth continues, a further re-rating is possible." The ongoing material cost pressure and near-term rural weakness has led to a 5.1% cut in the broking firm’s FY23E earnings per share.

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