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

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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.

Godrej Consumer posts weak Q1 results, outlook for the stock remains ‘cautious’

Godrej Consumer’s reported a weak set of numbers for Q1 FY18, partially clouded by GST transition, highlight headwinds of competition reflected in flattish volumes. International operations provided a mixed picture in terms of growth and so at the current elevated valuations, we prefer to remain cautious.

Pricing-led Growth

Godrej Consumer’s (GCPL) Q1 2018 consolidated net sales were Rs 2,172 crore (2.8% YoY) benefitting from the improved pricing and favourable product mix, but partially offset by subdued volume growth. Organic sales at constant currency (excluding Strength of Nature inorganic sales of Rs 44 crore) grew by 6%. Margin pressure was visible in most of the segments and geographies. Consolidated EBITDA margin shrank by more than 200 bps to 15.9% impacted partially by higher advertising cost.

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India Business — Hair Colour Result was Positive

godrej india hair colour biz

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The organic growth of India business was 6%, coming mainly from the pricing effect. Branded volume growth was flattish, reminding us of similar trajectory posted by HUL. Amongst segments, hair colours (14% of India business) witnessed double-digit volume growth (Godrej Expert Rich Crème). Scaling up of BBlunt also aided the same. The performance of Household Insecticides (33% of sales) segment was below expectations primarily due to destocking in the month of June. Soaps (40% of sales) unit witnessed volume decline in high single digit but was relatively less impacted by GST.

India Business Dragged by Indonesian Operations

godrej Indonesia ops

GCPL’s operations in Indonesia (15% of consolidated net sales) continued to face headwinds from the elevated competitive intensity. Sales in Indonesian operations were down by 4% (constant currency basis), partially impacted by higher sales promotion spend. Management sounded cautious on the near-term future for the business but was hopeful that recent initiatives would help in getting better clarity on margins in the next quarter.

Elsewhere, particularly in Africa, sales growth (16% growth CC) was better, aided by hair extensions business.

GST Transition Impact to Wane by End of August

As per management, GST transition impact was high for segments like household insecticides and hair colours. In the case of Soaps, the impact was relatively low. The company mentioned improved offtake for the household insecticides unit in the current quarter. Regarding trade channels, particularly wholesale, the company expects normalcy by the end of August. CSD (Canteen Store Department) purchase is stalled as was noted by other FMCG players.

Patanjali Impact on Soap Category

While in the earlier quarters, GCPL had mentioned about a possible adverse impact of Patanjali in soaps category, this time they sounded unaffected. However, the fact that there was a volume de-growth in the quarter and even in the month of April and May there were no volume improvement points to rising competition in the low-cost category of soaps. Currently, the impact of Patanjali in terms of change in market share is difficult to gauge as the market research firms don’t take Patanjali’s own store sales into account.

Focus on Wet Hair Segment in Africa

Amongst the positive takeaways was the company’s increased focus on wet hair segment. The company is, therefore, focusing on consolidating the business of Strength of Nature (SON) and started local manufacturing of wet hair products in East Africa.

Overall, the quarterly numbers were below expectations on both top line growth and margin front. Godrej Consumer’s efforts to consolidate hair segment — both in India and Africa — is encouraging. Traction in soaps segment is something to be closely watched amid competition from unlisted players. However, a possible trend towards premiumisation can help. The other key factor to watch out for the company is the earnings visibility in Indonesia operations.

While we like Godrej Consumer’s geographically-diversified and de-risked business model, and the growth drivers from other emerging markets, at current valuation (48x 2018 earnings), it prices in most of the near-term positives and leaves little room for upside.


Elantas Beck: Subdued realisation weighs on profitability; long-term outlook intact

Last week, Elantas Beck reported a weak set of numbers on the back of lower realisation in electrical insulation division. Post its result, the stock has sharply corrected by 11% till date.

While we acknowledge the transition effect due to the implementation of GST in the near term and the ongoing headwinds from the low-cost import of electrical machinery from China, long-term drivers are intact, in our opinion.

Also read: Specialty chemicals maker Elantas Beck gains from power reforms, delisting buzz

Elantas 1

Sales De-growth on Account of Lower Realisation

In June quarter (Q2 2017), Elantas posted sales of Rs 91.9 crore (-6% YoY) impacted by the lower realisations in the electrical insulation division. EBITDA margin contracted by 200 bps on account of higher raw material and employee cost. Consequently, profit after tax was down 18% YoY basis.

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Working Capital Requirement has Increased

Compared to the end of December numbers, the working capital requirement has risen by 14%. However, delving into the details suggests that inventories have normalised from the elevated level in the quarter impacted by demonetisation. Trade receivables have also come down. However, short-term loan and advances have risen sharply contributing to the working capital requirement.

Long-term Drivers Intact

Government’s focus on the power sector reforms remains positive for the sector in which the company operates. Further, the company’s dominant position in the electrical insulation industry (40% market share), significant barriers to entry and strong clientele should help in generating growth above the industry’s average.

Financial projections adjusted to account for recent results

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Post the latest set of numbers, we have reduced our top line projections for the FY17 and 2018 and pencilled in slightly higher estimates for the raw material costs. The stock is currently trading at a multiple of 23 times 2018 earnings, which is reasonable in our view.

As the long-term investment case of the company is intact, we think recent correction gives an opportunity to add on to the exposure.


ITC hasn’t kicked the butt, but journey from ‘health hazard’ to healthcare is complete

ITC has over the years sought to position itself as a complete consumer company. It tried shedding the “cigarette” tag by diversifying into other businesses, especially in areas with strong linkages to the farm economy. While FMCG has grown to a decent size, the company hasn’t yet commanded the exact valuations of the sector. ITC’s recent AGM further shed light on the company’s future path away from cigarettes.

After successfully establishing packaged food brands, ITC is also foraying into perishable segments and investing in supply chain infrastructure. Is the market taking note of these changes?

Focus on FMCG business drives diversification

In the last 11 years, ITC’s sales from its FMCG business (excluding cigarettes) has increased substantially to Rs 10,512 crore. In 2005-06, the FMCG business used to contribute about 6 percent of gross sales which has now increased to 19 percent. Augmenting the non-cigarettes business is a conscious choice as the company attempts to diversify and capture the entire value chain of the consumption cycle.

Chart: Segment level exposure at gross revenue level

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Prudent capital allocation

Another way to look at it is in terms of the management’s changing priority in capital allocation. In 2006, a third of the capital expenditure was for the cigarettes business and only 14 percent for the FMCG business. In contrast, last year, the company deployed 46 percent of capital expenditure, amounting to Rs 1,153 crore, for the FMCG business.

Branded packaged food leads food

ITC says that consumer spend (FY 2017) on the brands from the new FMCG businesses are now close to  Rs 14,000 crore with major brands such as Aashirwaad and Sunfeast garnering Rs 3,500 crore and Rs 3,000 crore of sales respectively. Branded packaged foods category in particular clocked a CAGR (compounded annual growth rate) of 26 percent during FY17. ITC is targeting a turnover of Rs 1 lakh crore from the new FMCG businesses by 2030.

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In line with the focus on expanding the non-cigarettes business, the ITC management reiterated at the recent AGM their commitment to harnessing value chain of “Farm to Consumer”.

Earlier farm supply chain initiatives help

ITC has been a key player in linking agri-commodities sourcing with the processing industries and delivering food brands such as Aashirvaad, Sunfeast, Bingo! and B Natural. In continuation with that strategy, the company recently launched “ITC Master Chef” brand of spices.

Further, its landmark initiative of e-Choupal in 2000 helped in providing host of services to farmers related to agriculture best practices, know-how and weather-related information.

Need for post-harvest infrastructure

Primed by the huge annual agri-wastage of about Rs 92,000 crore, company has emphasised the dire need for the infrastructure, ranging from post-harvest logistics, processing, and packaging. The company says that about 20 integrated consumer goods manufacturing and logistics facilities are under various stages of development.

Expansion of food business into perishable segments

ITC is also strengthening its focus on food processing. The company now plans to foray into perishable segments such as fruits, vegetables etc. It mentioned that investments are underway to create climate-controlled infrastructure for an efficient supply-chain. In pursuance with this objective, ITC Master Chef Frozen Prawns have recently been launched in select markets. Further, investments have also been made in farming for aromatic and medicinal plants.

A brand new segment

At the AGM, the company also took approval for a healthcare business wherein it targets establishing a multi-specialty hospital for starters. Further, details on the investment outlay and time frame are yet to be finalised. However, the foray into healthcare is seen as another initiative by the company to emerge as a health-oriented business conglomerate.

Overall, the company’s new initiatives to expand the product portfolio particularly in the FMCG and food business should be seen as continuation of the strategy of product diversification. What remains credible is the company’s multi-decade linkages with the farm sector that are now getting integrated with new investments in logistics and food processing. This can go in a long way in establishing ITC as a leading player in the FMCG business. There is no denying that the low=level of food processing in India at 10 percent leaves enough room for growth.

For the long term investors, ITC, in our view, continues to hold a prospect of quality growth and is available at reasonable valuation (30x FY 2018 earnings).


With no support from Trump, global mkts look to monetary policy, earnings for cues


Global markets had cheered the US election outcome with a rally which hasn’t reversed yet. Given Donald Trump’s policy missteps, one would have imagined that the markets would fall. As the political upheavals left no mark, it is perhaps time to pay heed to more fundamental factors like earnings and macro developments.

The upcoming event calendar is chock-a-block with global central banks meetings ahead of the Federal Reserve’s symposium in Jackson Hole (August, 2017). Quarterly earnings season is also picking up steam.

In the backdrop of increasingly low visibility on Trump’s policy actions, equity markets are surprisingly at new highs. We take a look at global cues to assess where we stand.

Global central banks: dichotomy of low inflation and improving economy

As central banks tread a cautious path of normalisation of monetary policy, soft prices are forcing a rethink.

This morning BoJ (Bank of Japan), as expected, kept its monetary stimulus programme unchanged but postponed the deadline for achieving 2 percent inflation rate to April 2019 (earlier April 2018). While this underlines the difficult task for Governor Kuroda to quickly get past the deflationary phase, this is also in contrast to the approach adopted by other central banks, who, in recent past, have been hinting at moving away from stimulus. Yen weakened and gains in Asian equities were the immediate reactions.


Later today, markets would also look up to Mario Draghi’s comments in the ECB policy meet. Recently, ECB affirmed that there is a broadening of recovery in the Euro area. Deflationary worries, at the same time, have died out and the current softness in inflation is seen as transitory. Euro/USD has reacted to such signals from the central bank with a surge of about 10 percent since April 2017.

Fed: Balance sheet unwinding can take precedence this time

Federal Reserve, however, has been signaling continuing monetary policy normalization. However, tools for monetary tightening may shift from rate hikes to balance sheet unwinding in the near-term. Recent speech from Lael Brainard, member of Fed’s board of governors, suggests that Fed’s balance sheet unwinding can start as early as September.

Brainard opined that real neutral rate (fed funds rate minus inflation) is near zero implying rates are neither stimulating nor restraining the economy. This also suggests that the Fed can possibly hold back its rate hike decision in the near-term. This opinion in conjunction with Yellen’s testimony to Congress suggests that the Fed might wait for more data (particularly inflation) to take a call on rate hike. Market participants now largely expect the next rate in the December meeting.

Having said that, monetary policy normalisation remains on course unless there is a large error creeping in the policy models from inflation forecast.

US earnings season: good start but mixed bag from financials

Q2 2017 US corporate earnings have commenced on a positive note. Out of the S&P companies, 6 percent have reported earnings so far and 80 percent of the companies that have reported, have posted earnings ahead of expectations which is slightly higher than the long term average of about 77 percent.

Amongst sectors, technology/media, materials fared well. Netflix reported net addition of 5.2 million subscribers ahead of estimates. Alcoa forecasted an increase in global demand for aluminum (median 5 percent in 2017 vs 4.75 percent earlier). Financials, however, struggled. Fixed income trading revenues were lower for all the major banks, with major weakness seen in Goldman Sachs (-40 percent YoY).

Fading visibility on Trump’s execution

While cues from the earnings season help to judge corporate health amid higher interest and wage cost, it also helps to gauge corporate guidance in light of fading Trump’s policy execution.

An interesting insight from Factset mentions that there is a significant reduction in mention of “Trump” in the earnings conference calls in Q2 2017. It clearly indicates that Trump’s administration/policy references are increasingly finding less attention in the corporate calls.


An excerpt from the transcript of Accenture underlines the increasing frustration of corporates, “…The fact of the matter is that would – I would say this to be honest, three months ago, because just reading the observers and all the analyses, we believe that these four reforms (the healthcare reform, the tax reform, the trade reform, infrastructure) would happen reasonably rapidly in the US. And, fact of the matter, they are not yet being announced or executed, and so we are in this zone where the business is still waiting..”

Should equity investors worry at this juncture?

Weak visibility in the legislative approval and execution of Trump policies can potentially de-rate US equities. However what, partially, comes to rescue for US equities is the traction in US corporate earnings. US earnings sentiments (analyst upgrades – downgrades) have improved to ~4 percent (vs global earnings sentiments of 2 percent) recently.

Nevertheless, US policy uncertainty remains high and in the backdrop of elevated valuations, caution is warranted.

For the Indian investors, a short-term risk-off phase is not ruled out which could emanate from portfolio outflows. However, improving global macro data supports the case for lower risk of a contagion.

HUL: Robust Q1 show but poor volume growth & stiff competition are worries


Hindustan Unilever‘s (HUL) quarterly result was a positive surprise. Benign raw material costs and lower promotional expense aided earnings amid a GST transition. Although the topline was boosted by price improvements, the underline volume growth was flattish. While GST was definitely a factor, given the expensive valuation of the stock, a few questions do present themselves.


In light of the good numbers, should investors look at the stock with excitement? Let’s have a check.

Sales Growth Fueled by Pricing Initiatives


HUL reported a domestic sales growth of 6 percent YoY driven by better traction in refreshments (10.8 percent) and home care (5.9 percent) divisions. Sales growth came from pricing growth (6 percent) with the underlying volume growth remaining flat. A subdued volume growth was anyways expected by the Street given the GST transition hurdles.

Lower Promotion and Raw Material Costs Help Margins

On the profitability front, EBITDA margins (21.9 percent) were ahead of expectations and posted a 175 bps improvement led by gross margins (+79 bps) expansion, lower employee and advertisement costs.

Lower raw material costs and the company’s initiatives in cost savings like ZBB (Zero Based Budgeting) have been key drivers. In the medium-term, the management expects savings in the range of 6 percent of turnover through these initiatives, which is partly getting reflected.

Segments – Home care and Refreshments



On product segments, home care segment revenues were supported by continued improvement in both mass and premium categories of detergents wherein the company’s focus remains on the latter. The company expects upgradation from bars to detergents to continue, though it is likely that this trend is pushed a bit due to differential GST rates with higher rates of 28 percent for detergents.

Growth in personal care segment was reportedly impacted by channel destocking and lack of offtake in CSD or canteen store departments (last 45 days) as there is lack of clarity on GST reimbursement on this sale. As per the management, lack of CSD offtake impacted sales to the tune of 2 percent.

After a recent rejig of product segment categories, “refreshments” segment (constituting tea, coffee, icecream products) have reported a handsome sales growth of 10.8 percent, mainly due to volume growth in tea products.

Volume Growth: More weakness before we witness a pick-up

The slowdown wasn’t completely unexpected as our channel checks had earlier suggested. However, the impact on the volume front is expected in the current quarter as well due to the gradual pick-up in GSTN coverage. So, the flattish volume growth observed in Q1 of 2018 can further deteriorate in the current quarter.

Competitive Factors Remain the Key Worry

While GST impact may be transitional, there are some structural trends that deserve attention. The key factor being competitive pressures. Subdued performance in oral care should not be overlooked.

Key FMCG players like Dabur and Patanjali are increasingly able to assert themselves in this category in terms of market share.

In this context, there are other product categories, like soaps and detergents, dish-washing products, wherein competitive intensity can increase.

That said, HUL is making its own efforts to increase its presence in categories that are witnessing interest from other FMCG players – Naturals/Ayurveda being a case in point. The company recently launched new products (skincare brand Citra) in this space.

Company Hopes on Quick Restocking and Rural Recovery

The company deserves kudos for its financial performance and the quick transition to GST at the manufacturer’s level in a rather difficult quarter. Lack of volume pick-up amid GST transition in the lower end of supply chain makes it difficult to assess sustainable improvement in business as was hinted in the last quarter.

HUL is increasingly driving sales reach through direct distribution and thus contributing to a growing industry practice among main FMCG manufacturers. The impact of these changes on the volume performance will be clearer in the second half.

While current quarter grapples with the burden of the GST transition, investors got to focus on the business traction in coming days to gain conviction. Company’s key priority in the near-term is to restock channel pipeline in the next few months.

A large part of the recovery also hinges on growth in rural FMCG markets, which has been challenging for the company in the recent past. HUL expects a gradual recovery in rural demand as rural wages improve.

Expensive Valuation Keeps the Investment Case Weak

On the valuation front, stock is trading at 49x its expected earnings of FY18, implying an earnings yield of 2 percent, which is expensive view given the growth challenges.

We would prefer to wait for a sustainable traction on volume growth and advise investors to remain on the sidelines in the near-term and watch out how each of these variables namely, GST roll-out, continued disruption from competitive intensity and rural recovery, pan out.

Jubilant Foodworks: A case of irrational exuberance?

Jubilant Foodworks, yesterday, posted a strong set of numbers for the quarter ended June 2017, driven by same store sales growth of 6.5 percent that was ahead of expectations. With three quarterly results in FY17 witnessing negative organic growth, latest numbers bring some relief. Should investors get excited?

However, while the improvement in margins is commendable, sustenance of the same remains a question in light of growing competition and weak urban consumer sentiment.

Quarterly results guided by “everyday value” strategy



Q1 2018 sales (Rs 678.8 crore) witnessed 11.5 percent growth on YoY basis guided by higher transaction volume resulting from the “everyday value “strategy. Management acknowledged the marginally positive impact of increased footfalls in malls due to advancing of the sales season, as well. On the gross margin front, a decline of 40 bps (YoY) was on account of higher offers during the season. However, EBITDA margin improved (+225 bps) thanks to lower employee costs and rent costs as well as productivity improvement that helped offset the raw material cost increase (+13.5 percent).

Lower drag from Dunkin Donuts

Management mentioned that there has been substantial reduction in margin drag from Dunkin Donuts. In Q1 2017, there was negative impact of 255 bps points which has been reduced to -145 bps now. The company expects Dunkin Donuts business to break even in FY19.


Net store opening slows down in the consolidation year

The company opened 13 new stores for Domino’s in the last quarter and closed 5, citing ongoing evaluation of store continuation. The management reiterated its store expansion guidance of 40-50 stores in the current fiscal. In case of Dunkin Donuts, 9 stores were closed and only one new store was opened. In the year of consolidation, the management’s cautious approach to store addition deserves kudos.

What should you do with the stock?

While the management was confident about sustaining the momentum seen in recent results, we feel that the company has clearly come off the trajectory of high growth era when organic growth was in lower double digits.

As a ballpark figure, store expansion growth of about 6 percent (CAGR FY16-18E) and a SSSG(same store sales growth) of 6 percent would translate into a nominal topline growth of 12 percent, which is nowhere close to what got investors excited about in the past (FY13 at +40 percent).

With increasing competition and new product launches visible in the quick service restaurants segment, sustaining the growth might require continuous revamping in product categories. Though we take note of improvement in margins in the latest quarter, the company is still way off from the margin range of 17-18 percent visible a few years ago.

In light of this, we aren’t sure of the sustainability of the valuation premium (85x FY18 estimated earnings) compared to other consumer-oriented business multiples of 40-50x. We are of the view that such elevated valuation are not warranted in a business getting into a lower growth trajectory.

Further, urban consumer sentiments are still fragile. The management of Jubilant also admitted to a lack of broad based recovery in consumer sentiment.

Given this context, we would be cautious about Jubilant FoodWorks at this price level and advise investors to look at other opportunities in the consumption space having a better growth visibility and valuations.