Emami's Q2FY18 LTL revenue and EBITDA came in line and grew 13.9% y-o-y and 14.9% y-o-y, respectively.
Emami’s Q2FY18 LTL revenue and EBITDA came in line and grew 13.9% y-o-y and 14.9% y-o-y, respectively. Q2FY18 recovery was led by core brands. However, wholesale-heavy Kesh King disappointed. Price hikes of 2-2.5% and savings in advertisement spends aided margin. The pace of new launches should pick up in H2FY18, impacting margins. Thus, recovery in wholesale and strong winters, which is higher margin, remains a key monitorable. Maintain ‘hold’ with a target price of Rs 1,190. Emami witnessed a recovery in volumes with 10% y-o-y growth, from 18% y-o-y dip in Q1FY18, helped by re-stocking in the trade.The key positive was that growth was led by core brands, with Navratna, Fair & Handsome and Boroplus all witnessing double-digit, volume-led growth. International business saw 22% y-o-y growth. Kesh King (75% of sales from wholesale) disappointed with 16% y-o-y dip- HUVR’s Indulekha is witnessing good traction. Healthcare range performance was benign with 2% y-o-y growth, though management remains optimistic about growth recovery; performance of upcoming new launches remains a key monitorable.
Despite input price uptick, overall EM basket for Emami remains comfortable. It saw a 82 basis points y-o-y expansion in gross margins, 2-2.5% price hikes taken in winter portfolio also helped. On a comparable basis, overall margins expanded 202 basis points, aided by savings in ad spends, down 127 basis points y-o-y. We expect ad spend to pick up, led by new launches, especially in the healthcare range and entry in the new Crème hair colour segment. Emami maintained guidance of 16-17% y-o-y top-line growth in H2FY18. The recovery trend has been divergent across regions – north India is recovering faster than south India. CSD channel dipped 20% y-o-y but it is stabilising; modern trade saw 40% y-o-y growth. 75% of re-stocking has happened in the trade.
Wholesale dependence has gone down to 42% from 50%. Emami has witnessed recovery helped by stabilisation of trade; going forward, growth would be driven by new launches, seasonality and overall pick-up in rural demand. At current valuations, ~39x rolling 1Y forward, the recovery looks priced in. Hence, we maintain HOLD and PT of Rs1,190 , assign 35x Sep19E EPS, in line with the five-year average. Downside risk: slower-than-expected recovery and adverse season impact or sharp rise in input prices; Upside risk: more-than-expected recovery or decline in input prices. Q3CY17 revenues were down 7% y-o-y due to GST-led disruption and the impact has been termed transitory by the management, likely to normalize in the coming quarters. We incorporate such deferment of revenues into our estimates. We also revise CY2017 margin downward incorporating what we have seen in 9MCY17 so far. Accordingly, estimates for CY2017 are revised downward by 7% while broadly retaining CY2018 estimates. We roll over to Sep 2019E and increase target price to Rs1,230. Retain SELL.