Emami pines for rural recovery



Emami has vast rural exposure, contributing about 50% to its revenue. Plus, its product portfolio has a seasonality element.

Emami Ltd’s shares have been flattish in the past year. A key factor that is keeping sentiments muted for the stock is a weak rural demand recovery outlook due to deficient rainfall so far. Emami has vast rural exposure, contributing about 50% to its revenue.

“Caution is warranted especially for companies with high rural salience," said a consumer report by Jefferies India dated 18 September. Weak volume performance could continue for Emami in case of a failed monsoon, they added.

Plus, it has not helped that Emami’s product portfolio has a seasonality element. For instance, Emami’s summer portfolio includes Navratna range, Dermicool, BoroPlus prickly heat powder and Golden Beauty talc. The BoroPlus antiseptic cream is typically a winter product. On the other hand, some products like Zandu, Kesh King, Fair and Handsome and 7 Oils in One are not affected by seasonality. In the second half of FY23, Emami’s sales were negatively impacted by a warmer winter season and unseasonal rains.

The June quarter (Q1FY24) saw some improvement, although Emami’s domestic summer portfolio sales were hurt by unseasonal rainfall in key markets. But, excluding the summer portfolio, domestic sales had grown by 16% year-on-year. Nevertheless, investors were excited, taking the shares up by 9% in two days after the results. As such, the Emami stock has seen a smart bounce back from its 52-week lows in March, rising as much as 53% till now.

Kunal Vora, head of India equity research at BNP Paribas, said, “After a prolonged under performance, Emami’s shares have risen sharply in the past six months owing to a couple of factors. One, there is a renewed interest in mid-cap stocks including mid-cap consumer. Two, first quarter results were slightly better than street expectations and management commentary on margins was positive. Third, the promoter pledge is expected to reduce following the sale of the hospital asset by the promoter group."

Recently, Emami Group divested an 84% stake in AMRI Hospitals to Manipal Hospitals. Helped by this, Emami expects promoter pledge to drop from 33% seen in Q1. According to Emkay Global Financial Services’s estimates the hospital transaction would lead to a cash realization of about 1,150 crore for Emami. “With this proceeding, Emami is looking to reduce the pledge position to 13%. With further land asset monetization, the endeavor is to reduce the pledge to about 10% by Q3FY24," wrote Nitin Gupta, analyst at Emkay in a report on 25 September. Meanwhile, on the margin front, Emami is better placed versus other FMCG companies aided by the discretionary nature of its portfolio and relatively lower competitive pressure. The company expects Ebitda margin to improve by 200-250 basis points in FY24 on a year-on-year basis. In FY23, Emami’s Ebitda margin stood at 25.3%. Ebitda is earnings before interest, tax, depreciation, and amortization.

Be that as it may, investors’ attention would also be on revenue growth, which has been in the range of 1-9% in the past four quarters. However, new age channels including modern trade and e-commerce have been growing faster. In Q1, modern trade and e-commerce contribution to domestic business was 19.4%.

To be sure, even after the recent sharp appreciation in the stock price, Emami’s valuations seem reasonable. Currently, the shares trade at 25.4 times its estimated earnings for FY25, according to Bloomberg data. But all eyes will be on rural recovery where near-term appears rough. “Rural demand has not picked up meaningfully, bottom of the pyramid is still facing inflation in categories such as vegetables and monsoon in eastern region has been slightly weak and that is a worry for Emami," said Vora.

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