Markets
Emami stock glows amid signs of rural recovery and a scorching summer
Summary
- Weak rural demand and seasonality have weighed on the company growth in recent years, but management’s comments on a rural recovery and the prospect of hotter summers could turn its fortunes around.
Emami Ltd’s shares hit a new 52-week high of ₹646.20 on the NSE in early trade on Friday. The stock is up about 15% since the company declared its March quarter (Q4 FY24) results on Wednesday even though Ebitda came in slightly under some analysts’ expectations.
Consolidated Ebitda growth stood at 5.6% year-on-year on revenue growth of 6.6% to ₹891 crore. Thus, the Ebitda margin contracted by 23 basis points (bps) year-on-year to 23.67%. This is despite the fact that gross margin expanded by 265 bps to 65.78%. What explains the lower Ebitda margin? An almost 40% increase in advertisement and sales promotion expenses to 20% of revenue (versus 15.5% of revenue in Q4 FY23), weighed on operating performance. What’s more, advertising spends are likely to remain elevated amid a slew of product launches in the coming quarters.
Why the stock is surging
So why are investors thrilled? The answer is easy. The outlook is improving and management’s comments on rural demand recovery has inspired confidence. “Notably, the rural market is also witnessing a recovery which bodes well for our future prospects," said Emami’s management during the earnings call. Emami has a larger presence in rural markets (about 50% of sales) than its peers in the fast-moving consumer goods (FMCG) sector. Under Project Khoj, its distribution initiative centred on expanding rural coverage, Emami has entered 20,000 towns in rural India since FY21, taking its tally to more than 52,000 such towns.
Also read: Unpacking Q4: With green shoots visible, will FMCG stocks finally pick up pace?
Seasonal factors are also working in the company’s favour. Emami is seeing good traction in its summer portfolio in the ongoing June quarter as temperatures rise across the country. Typically, severe summers bode well for Emami’s Navaratna and Dermicool portfolio.
Analysts upgraded their earnings estimates after the earnings call, albeit marginally. Owing to hotter summers, Emkay Global Financial Services has lifted its revenue expectations by 2% and earnings by 3% over FY25-26E. “With hope of a better monsoon, we see seasonality turning supportive for Emami," wrote Emkay’s analysts in a report on 30 May. Overall, for FY25, Emami is looking at 2 to 2.5% price hikes and a modest improvement in the operating margin. In FY24, the Ebitda margin was 26.54%.
Also read: For FMCG, rural markets finally deliver some cheer
Weak rural demand kept valuation low
To be sure, weak rural demand and seasonality have weighed on Emami’s growth in recent years, keeping valuations relatively low. “Management has initiated several steps (team additions, new launches, hiring consultants, marketing spends, etc.) over the last three to four years to revive volume growth; however, the desired result has not yet been achieved," said a report by Motilal Oswal Financial Services dated 29 May. The brokerage expects volume growth acceleration in FY25, driven by rural growth improvement and seasonal tailwinds.
Also read: Emami Group shows a ₹2,000 crore appetite for its food business
Factoring these issues into its target valuation multiple (a 40-50% discount to peers), Motilal has valued Emami at 28 times its projected FY26 for a target price of ₹600 a share. Emami’s shares closed at ₹611.85 on Thursday on NSE and were trading higher on Friday.
