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  1. Buy rating on Emami; Handsome gains: Nomura

Buy rating on Emami; Handsome gains: Nomura

Emami Handsome rating: Results were above our estimates. Sales were 3.5% above our estimates. Profit after tax was 13% above our and 9.6%...

By: | Updated: May 25, 2015 10:00 AM

Results were above our estimates. Sales were 3.5% above our estimates. Profit after tax was 13% above our and 9.6% above Street estimates.

What do the results mean? Volume growth continues to be strong and gross margins continue to move higher on a year-on-year basis. A&P (advertising & promotion) to sales has increased 380 basis points y-o-y to 14.9%, which is why Ebitda margins are down 110 bps y-o-y. However, this is in support of the company’s new product launches last quarter, and hence worries us less.

Key numbers
*  Net sales increased 24.2% to R5.54 bn against our expectation of R5.35 bn and Street expectations of R5.37 bn.
* Domestic business value sales growth of 21%; International business at 48%; and CSD (defence canteen sales) channel at 11% for Q4FY15. New launches contributed 8% of domestic business sales in the quarter.
* Brand-wise value growth performance: Navratna Cooling Oil – 14%, Cooling Talc – 26%, Balms – 10%, Boroplus antiseptic cream – 43%, Fair and Handsome – 9%.
* Ebitda came in at R1.4 bn vs our estimate of R1.4 bn and the Street at R1.4 bn.
* Consolidated gross margin improved 220 bps to 64.4% vs our estimate of a 30 bps y-o-y improvement. This was a notable surprise, as the base for Q4FY14 was also very high.
* Ebitda margin came in at 25.3%, down 110bps y-o-y. We were expecting Ebitda margins at 26.4% and the Street was at 26.7%.

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* A&P to sales came in at 14.9% during the quarter vs. our expectation of 12% and 11.9% in Q4FY14. This was the key reason that Ebitda margins declined y-o-y; however, we do not see this as a long-term negative, as new product launches will require some support for the next couple of quarters, in our view. For the full year FY15, A&P to sales has been 18%, which the company expects to continue into FY16F (forecast).
* PAT came in at R1.38 bn, against our expectation of R1.22 bn and the Street at R1.26 bn, due to a lower tax rate than we expected.

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* Strong performance across key brands: Domestic business value growth excluding new products was 17-18% during the quarter. Value growth in key brands was also strong – Navratna, Boroplus and Fair and Handsome.
* Gross margin should stay stable: Gross margin rose by 220 bps y-o-y, which was higher than we expected. Input prices, particularly mentha oil, have seen some upward movement recently, but as things stand, the management expects to keep gross margins largely stable into FY16F.
* International business: Sales growth in the International business of 48% during the quarter was led by performance in CIS countries. The management expects the issues with International business performance to be in the past, and expect to see strong performance continuing in FY16F.
* New products’ contribution: The company has introduced several new  products in the past few quarters, which contributed 8% to domestic sales in Q4. There is a strong pipeline of line extensions as well as new products being planned for launch in FY16F, which will also help drive top-line growth.  Among these new launches, Zandu Ultra power and Fair and Handsome face wash have been significantly ahead of expectations so far.
* Pricing: The management expects 4% pricing contribution in FY16F partly to offset some of the increase in input costs. This should help drive top-line growth, although the growth will be mostly volume-led.
* Guidance for FY16: The management guided for gross margins to remain stable in FY16, based on current prices of key commodities. While A&P spends are likely to see an increase, management said they will at least  keep margins flat into FY16F, compared with FY15. They expect capex of R1.5 bn each year over FY16/17.

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