Emami looks attractive post recent correction

Emami’s stock has fallen 19% per cent over the past three months, much higher than the 2% correction in the S&P BSE Sensex in the same period. Weakening organic revenue growth and lower-than-expected ramp-up in its Kesh King (an Ayurvedic hair and scalp care brand) business are key reasons for this under-performance. Seasonal products such as cooling hair oils (Navratna) and winter creams (Boroplus), amongst others, form about 45% of Emami's revenues. While erratic monsoons affected summer sales this fiscal, late onset of winter season could hit demand for winter products and impact its organic revenue growth.

Revenues from its recent acquisition of Kesh King, too, have fallen short of analysts' expectations mainly on account of higher unsold inventories with distributors. The Emami management, however, believes the situation will normalise over a couple of months. Analysts at Credit Suisse too are positive and believe Kesh King revenues will ramp up to its normal quarterly run-rate in the last quarter of this fiscal and grow further in FY17. Notably, this brand reported annual revenues of about Rs 300 crore in FY15. The acquisition could also add about 80-100 basis points to Emami's FY16 gross margin as Kesh King's gross and EBITDA margin of 76% and 45% were much higher than that of Emami's 65% and 24.4%, respectively in FY15. Hence, the acquisition can add to both its margins as well as earnings.

Emami's track record of successfully integrating acquired companies/brands such as Zandu also provides confidence. While Kesh King should benefit from the expansion of ayurvedic market in India due to increased activity levels led by Patanjali products, it also means more competition. The jury is out on this.

Going ahead, with Emami's prospects on the mend and given the recent share price correction, analysts say it may be a good time to enter the counter. Emami's consistent market share gains in most categories, niche product portfolio, return on equity ratio of about 40% and strong innovation-led track record are some reasons why most analysts remain positive on the company.

Going forward, company is also focusing on specific healthcare over-the-counter (OTC) products for health issues such as heart care, diabetes and digestion. These are some of the common health issues growing at a fast pace due to changing lifestyles. If successful, these products could be a key growth driver for Emami. Improvement in consumption demand and favourable rub off from the seventh pay commission could also aid Emami's prospects in the medium term. On an average, analysts believe the stock can give about 17% returns from current levels over the next one year.