Emami: Growing competition may cap the hope for volume driven V-shaped recovery

Emami posted one of the weakest results in the FMCG sector with a volume de-growth of 18 percent. Though company guided to a V-shaped recovery, we see several imponderables which investors should take into consideration.

Quarterly result:  One of the weakest result among peer group

emami_Qtr result

Emami posted a sharp decline in its revenue numbers (-16 percent, YoY) in Q1 FY18 result, mainly on account of GST-led destocking in the India business (85 percent of Q1, FY18 sales). Lower sales were reported for the international operations (-19 percent, YoY) as well, owing to slowdown in the Middle East. EBITDA margin contracted substantially by 800 bps due to higher raw material cost, employee cost and advertising spend.

India business: Except few, most of the brands saw a sharp correction

India business witnessed a volume de-growth of 18 percent with a heavy impact seen in terms of Navratna range (-11 percent, YoY; 24 percent of FY17 sales), Fair and Handsome range (-19 percent YoY; 28 percent of FY17 sales), Kesh King (-28 percent; approx 12 percent of FY17 sales), healthcare range (-23 percent) that was partially offset by improvement seen for BoroPlus (+20%, 16% of FY17 sales) and 7 Oils in One (+16%) categories.

emami_Qtr result2

The company’s performance was much weaker compared to its peer group. Its management attributed this to not providing any trade incentives to channel partners on GST transition leading to sharper destocking.

GST impact and the hope for quick recovery

Though company hopes for a V-shaped recovery in the coming quarters, some of the loss in sales in the seasonal/summer brands like Navratna range may most likely not recover. Sales from CSD (Canteen Stores Department, 4 percent of Q1 sales) remains quite weak and in the current quarter orders are about 40 percent of usual. However, Emami expects to post a growth of 17-18 percent in the balance 9 months of the year on the back of about 15 percent volume growth.

Emami management is more confident of categories like balm, BoroPlus and Fair and Handsome. Low base effect of last year could also be supportive in this regard.

Kesh King: Another iconic hair oil brand struggling through competition

Its management has blamed channel destocking to the weak performance of Kesh King category. Legacy distribution channel for Kesh King is majorly wholesale (70 percent of category sales) wherein destocking has been steeper. Having said that, Emami is working towards reducing the dependence on this channel.

Over time, however, Kesh King’s market share has reduced — 34 percent in May 2017 against 36 percent in 2016 — on account of elevated competition in the ayurvedic hair oil category led by Kesh Kanti of Patanjali. As a percentage of the overall hair oil segment as well, Emami’s market share has reduced from 3.7 percent last year to 3.4 percent in June 2017. The  management has acknowledged intensified competition and intends to recoup market share.

Unlike Marico, Emami has a relatively limited impact of competition in the hair oil business due to its diversified offerings, but this definitely highlights the elevated competition.

We take a note of company’s expectation for a volume led recovery in rest of the year and ability to maintain EBITDA margins of FY17 (approx 29-30%). Emami is banking on a swift rural recovery and faster normalisation of trade channels. On the international operations too it expects the worst is over.

While management sounds quite optimistic about the rebound, valuations are elevated (43x 12m trailing earnings). Though one might take comfort from the fact it offers relative value with respect market leader like HUL (55x) but there are several imponderables. We would, therefore like to remain on the sidelines.

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