Emami - Expect strong bounceback with volume led operating performance - PhillipCapital

Emami reported robust earnings growth in Q1FY14, significantly ahead of the sector, however sales growth was negatively impacted by certain one off external factors. We expect sales growth to gather momentum in the forthcoming quarters. In our view volume growth, sustenance of operating performance and profitability are the key parameters for the consumer sector to justify rich valuations in FY14E. In this context we believe that Emami is one of the best placed in the FMCG pack to operationally deliver on these factors in the near to medium term. We maintain our BUY recommendation on the stock.

Domestic volume growth at 6% YoY impacted by certain external factors, International business growth reports bounceback: Key factors for disappointment in domestic volume growth were negative impact of early onset of monsoon on key summer brand - Navratna hair oil (9% YoY growth) and strike in Maharashtra state effected Zandu Balm (8% YoY growth) brand. Key growth drivers in Q1FY14 were mainly Fair & Handsome, Navratna Cool Talc and Ethicals which reported growth of 16%, 32% and 27% YoY respectively. International business witnessed a strong recovery to 25% YoY growth, as the management shifted focus to Bangladesh and GCC regions over the weak CIS geography. The management has guided for pick up in growth led by volumes in the forthcoming quarters. We expect volume growth to revert to 12 û 13% in the near term.

Gross margin expansion sharp at 365 bps YoY, Management ups guidance for gross margin expansion in FY14E: Gross margins benefited from sharp deflation in Menthol (-37% YoY) and soft inflation in the other key inputs. Emami has contracted menthol requirement till Q3FY14 and the management has upped gross margin expansion guidance by 50 bps to 250 û 300 bps YoY for FY14. We notice that input cost pressures are increasing for other FMCG peers but Emami is expected to remain in a sweet spot, hence relatively outperforming the sector.

Robust EBITDA growth at 28% YoY: EBITDA margins expanded by 180 bps YoY to 15.4%. Ad to sales ratio moved up marginally by 20 bps YoY to 18.9%, but staff costs increased sharply by 110 bps YoY on account of new hires at the senior management level. The management has guided for increase in Ad spends by 150 û 200 bps YoY in the next few quarters. We expect the increase in Ad spends to provide imperative support to the volume growth in the near term. We believe that input cost savings provides Emami sufficient room to step up Ad spends without disrupting the core operating performance.

PAT growth at 30% YoY, management maintains guidance of 16 - 18% YoY PAT growth in FY14E: Reported PAT at Rs. 607 mn was marginally ahead of estimates. Going ahead, notwithstanding sharp increase in Ad spends, earnings growth rate is expected to remain robust at ~17% for the remaining quarters of FY14E.

Maintain estimates and BUY recommendation: We largely maintain our estimates. We continue to value the company at 26x FY15E with a revised target price of Rs. 500 (Rs. 760 pre bonus share). Emami remains one of our top picks in the Consumer sector on strong fundamentals and attractive valuations. Considering the strong upside from current levels we maintain our BUY recommendation on the stock.

Source : Equity Bulls

Keywords