Downgrade Emami to neutral but increase our price target to Rs 1,200 on the basis of the upgraded earnings estimates. At our target, the stock would trade at 34.8x FY17e P/E. The stock looks fairly valued at its current level.
There is clear visibility on growth of the power brands in the medium term. The management has guided for 5% of total sales growth to come from new products in the next 2-3 years. While advertising expenses will be high to support the new launches, promotions in the cooling oil segment should come down due to share gain. Commodity and logistics cost correction will aid margin expansion. Accordingly, we have increased our earnings estimate by 4.7%, 5.8%, and 7.1% in FY16e, FY17e, and FY18e, respectively.
Strategic share gain in the cooling oil segment which indicated management intent and sustainability of longer term growth has enthused the investor base. This along with the commitment to innovation and new launches and the high ebitda margin has led to the stock rallying 35% in year-to-date 2015. We believe that there is immense potential for the healthcare segment under the Zandu brand as the entire market seems to be moving towards self-help Ayurvedic products; but the product pipeline is still unknown.
Emami’s management is looking at expansion into mainstream products as well, which could be an area of concern.