Due to lower Kesh King sales this year, a delayed winter season and a slower-than-expected pick-up in consumption, we cut our FY16/FY17F/FY18F revenue estimates by 3.9%/4.3%/4.4%. We accordingly lower our EBITDA margin forecasts by 60bps for FY16F to 25.8%, but largely stick with our estimates of 26.3% and 26.6% for FY17F and FY18F, respectively, as sales of Kesh King pick up. We cut our target price to Rs 1,050 and maintain our ‘neutral’ stance as we believe near-term earnings are still at risk despite the strength of core business.
Distribution hiccups in the Kesh King business after the acquisition have caused lower sales for this product in FY16, but the issues should be resolved by 4QFY16. All consumer companies continue to be faced with no recovery in urban consumption and a slowdown in the rural segment. While Emami is faced with this problem, it also has to cater to the seasonality of its product range, especially since winter this year is delayed.
Though valuations have come down from their peak earlier this year after the recent stock correction, we believe near-term earnings are at risk and retain our Neutral call. We arrive at our target price of Rs 1,050 using a SOTP valuation, valuing the core business (ex-Kesh King) using a 32x target P/E multiple and valuing the Kesh King
business using discounted cash flow.