Emami - Upside/re-rating potential limited; downgrade to HOLD - Religare

Emami's Q4 net sales/EBITDA/adj. PAT grew 13.2%/21.5%/20.4%, with the topline disappointing due to weak exports (-12% YoY). Domestic sales grew 17%YoY as volumes rose 13% YoY. We upgrade our FY14/15 earnings by ~3% each, while revising up our Mar'14 TP to Rs 680 (from Rs 650).However, we downgrade Emami to HOLD given the stock's limited upside potential post its recent outperformance. Valuations (26.2x/22.2x FY14/15 earnings) are reasonable and limit any significant re-rating from current levels.

- Net sales up 13.2% YoY, below estimates: Emami's net sales grew 13.2% YoY to Rs 4.5bn, below estimates due to a 12.3% YoY decline in exports (led by de-stocking in most geographies and lower CIS offtake). Domestic business reported a healthy 17.4% YoY growth driven by 13% YoY growth in volumes, whereas CSD grew by a strong 67.5% YoY off a favourable base. The Navratna brand also reported a healthy 26% growth during the quarter led by the extra cool variant, whereas balms grew by 18% YoY. Boro Plus sales fell 9% YoY while Fair & Handsome products grew by 15% YoY. The Zandu OTC range registered a strong 41% YoY growth in Q4FY13.

- EBITDA margins improve 150bps YoY: EBITDA margins expanded 150bps YoY to 22.2%, leading to an EBITDA growth of 21.5% YoY. Gross margins improved 270bps YoY on the back of soft Mentha Oil prices, which are currently hovering at ~Rs 1,200 - 1,250 per kg (down 20% QoQ); management does not expect prices to soften further near term. Adj. PAT grew 20.4% YoY to Rs 945mn as other income increased 13% YoY and the tax rate fell 50bps YoY to 16.1% for the quarter.

- Downgrade to HOLD with Mar'14 TP of Rs 680: We downgrade Emami to HOLD with a revised Mar'14 TP of Rs 680 and would recommend buying at ~Rs 600 levels.

Source : Equity Bulls

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