Emami Limited

Buy - EMAMILTD

CMP (NSE) 15:57, 11 Jun

543.10 -11.2-2.02%

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Sector

FMCG

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Reco. Price

205

Period

12-Months

Target Price

241

upside

%

Stop Loss

0

Last updated on

26 May, 2020

Emami Limited is one of the leading Indian consumer goods companies, with presence in niche categories such as cooling oils, pain balms and antiseptic creams and also markets men’s fairness creams and Ayurvedic OTC medicines. Notably, the company does not face any competition from MNCs. All segments contribute less than 25% to revenue, thus providing benefits of diversification. Hence, competition for Emami’s brands has been relatively low, which has enabled superior margins for the business.

Nuvoco Vistas Corporations acquires Emami Cement
On May 21, 2020, CCI approved the acquisition of 100% of the total issued and paid up share capital of Emami Cement Ltd, on a fully diluted basis by Nuvoco Vistas Corporation Limited for an enterprise value of Rs5,500cr. Rising promoter pledge has been the major concern with pledge level rising to 90% of the holdings. Given the doubling of pledge level since March 2019, the stock price has halved during the same time. The Emami Cement deal will likely help the promoters to reduce pledge from current ~90% to ~25%. Monetisation of other promoter group assets will further aid in reducing this to nil by March 2021. Historically, a strong recovery in the stock price is witnessed once the issue of pledged shares gets resolved.

Impact of Covid-19 on the earnings
Given a largely discretionary portfolio coupled with higher wholesale dependence vs. peers will likely result in a disproportionately larger impact for Q4 performance. We forecast sales decline of 12% for 4QFY20. Gross margins to expand by 120bps, in-line with 3QFY20. However, negative operating leverage from lower sales to result in 23% fall in EBITDA, with margins contracting by 308bps during Q4. We expect higher PBT decline of 31%, due of Kesh King amortization; estimate lower PAT decline of 16%, owing to corporate tax rate cut.
As the business is mainly into the b2b segment, depressed ROI of the distributors would impact the revenue growth of Emami in the coming quarters. However, its market leadership in cooling oils, Ayurvedic hair oils, antiseptic creams, etc. will help in retaining cost tailwinds. Additionally, profit performance can find support if the company cuts its ad-spends, which is at ~17% of sales (higher vs. peers).


Outlook & Valuation
The recent price correction in the stock price due to COVID-19 related impact offers an opportunity to invest in India’s leading FMCG company at attractive valuations. Tracking the historical valuations, the PE ratio has contracted drastically since the start of 2018 and is currently quoting around its -1 Standard Deviation level. The PE ratio is trading below its mean and is back to the same levels seen in 2011-2012. Hence, given focus on implementation of the deleveraging plans and cheap valuations, we anticipate a strong recovery in the stock price going forward.

Financial Summary

Consolidated ` m

FY18

FY19

FY20E

FY21E

FY22E

Revenue

25,305

26,929

27,771

29,511

31,861

EBITDA %

28.4

26.9

27.6

27.9

28.2

Pre-exceptional PAT

4,974

4,914

5,704

6,354

7,230

Reported PAT

3,071

3,032

3,741

5,347

6,519

growth (%)

(9.6)

(1.2)

16.1

11.4

13.8

P/E (x)

27.4

27.8

23.9

21.5

18.9

EV/EBITDA (x)

19.1

18.7

17.3

15.6

13.9

ROE (%)

26.4

24.0

26.5

26.9

27.5

OCF/EBITDA (x)

0.8

0.9

1

1

1

Source: Company, IIFL Research


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