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Emami finally gets investor love; sustaining recovery momentum is key

After the sale of Emami's cement business, promoter’s pledge has dropped to 55% and will fall to around 50% in the next few days. (Photo: Mint)Premium
After the sale of Emami's cement business, promoter’s pledge has dropped to 55% and will fall to around 50% in the next few days. (Photo: Mint)

It has launched new products during the quarter and is looking at a few more, which should help revenue growth in going ahead. Additionally, a reasonably high rural exposure is expected to boost revenue growth in the medium term

Shares of Emami Ltd have surged as much as 38% since it announced its June quarter results on Friday. It is noteworthy that the stock has been an unloved one in the consumer space for a long time.

In fact, even after the recent outperformance, the stock price has dropped by about 45% over the last five years, sharply underperforming the Nifty 200 index. And, there are reasons for the low investor confidence.

Primarily, for the past few years, growth has eluded the company, which offers Zandu balm and BoroPlus, among other products. Over FY16-FY20, consolidated operating revenues have increased at a compound annual growth rate of just 2.6%. Plus, high pledges of promoter shareholding (90% as on June-end) have also been a worry for investors in the last few quarters.

The good news is that some worries are receding now. During the Q1FY21 earnings conference call last week, Emami’s management said, after the sale of its cement business, promoter’s pledge has dropped to 55%, and will further reduce to around 50% in the next few days.

“This makes the situation comfortable, although ideally, the pledges should be further pared down over the next 6-12 months to give more comfort," wrote analysts from Credit Suisse Securities (India) Pvt. Ltd.

Further, green shoots that were visible in June have bloomed to double-digit growth in July, according to Emami. Healthcare and pain management products boosted growth in July. Needless to say, analysts are enthused by this better-than-expected revival.

Coming to the June quarter, covid-19 led disruptions showed in the numbers with April and May being adversely impacted. For the quarter, Emami’s health and hygiene portfolio did well, in keeping with the pandemic times where demand for these categories has been better. But that was not enough to boost overall revenue, which declined by nearly 26% year-on-year to 481 crore.

However, the company did well on the margin front despite the 1% increase in employee costs. Earnings before interest, tax, depreciation, and amortization (Ebitda) margin expanded by 487 basis points to 25.5%. One basis point is one-hundredth of a percentage point. Emami’s Ebitda margin improvement was one of the best among consumer firms this season. A sharp 54% drop in advertising and sales promotion expenses aided the Ebitda performance.

The company has launched new products during the quarter and is looking to launch a few more, which should help revenue growth in the coming quarters. Additionally, a reasonably high rural exposure is likely to boost revenue growth in the medium term. Meanwhile, based on Bloomberg data, the Emami stock now trades at about 26 times estimated earnings for FY22. Some analysts are cautious.

“Despite strong growth in June/July, we expect core categories to improve gradually," wrote analysts from HDFC Securities Ltd in a report on 8 August. For now, the sharp outperformance in Emami shares since its results announcement suggests that investors are pricing in the near-term tailwinds adequately.

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