Emami posted weak Q1FY16/Q2FY16 results impacted by soft domestic volume growth, lower than expected performance by Kesh King, due to which, the stock plunged by 25%/10% respectively.
We believe current price factors in most concerns making it an attractive long term bet, notwithstanding expected weak Q3FY16 volume growth. Kesh King’s sales are improving (normalised Q4FY16 sales, considering launch of smaller SKUs; FY17 sales estimated at R3.20 bn against R1.8bn in FY16). We believe Emami can bounce back strongly in FY17 taking cue from a strong double–digit volume growth in FY15 after a soft FY14, led by market share gains and innovations (garnered ~1,000bps market share in Navratna oil in FY15). Soft mentha and LLP prices also bode well for margins. Maintain ‘buy’.
Matters concerning Kesh King have largely been resolved, and Q4FY16 will see full sales by Emami’s distributors. The HE deodorant will see change in packaging, and likely entry into the fast growing grooming male market (likely gels, body wash) over long term. Roadmap for SHE rollout has been firmed up and test marketing will commence soon. Emami has been able to sustain market share across its portfolio.
The Q3FY16 will be hit by delayed winter (globally, November 2016 was the hottest November in past 136 years). Rural slowdown has also aggravated on account of erratic monsoon, lower MSP hikes and pockets of food inflation. With 52% revenue coming from rural areas, Emami’s domestic growth is expected to reel under pressure. Seasonality risk is one of the biggest ones for Emami. Sales of summer and winter products depend upon weather conditions.