Emami stock: Analysts worried about new launches and high input costs

The share price of consumer goods player Emami has plunged over 25 per cent in the last one month, outpacing the recent correction in the fast-moving consumer goods (FMCG) space, amidst pricey valuation.

Worries such as fewer new product launches, distribution mix, high input cost, and potential weakness in key markets, have all weighed on the stock, and these perturbations are unlikely to easy soon, say analysts. Thus, even as the current stock valuation of 27.2x the FY20 estimated earnings looks attractive (vis-a-vis peers), the risk-reward is not favourable yet.

With expectations over new launches feeble, it may also reflect on near-term earnings, as existing products in which Emami has leadership position have gained good scale (indicating limitations of being high-growth drivers). Moreover, weak monsoon in northern and eastern parts of the country (key markets) is expected to prove a drag on the overall performance.

According to Nitin Gupta, analyst at SBICAP Securities, barring cooling oil (high seasonal influence), most of Emami’s other core categories are losing relevance. Further, as most of its offerings are premium products for its key rural market, and with around 50 per cent of revenue coming from the hinterland, the scope for growth driven by premiumisation looks limited, he adds.

Although the company is taking corrective measures, heavy dependence on wholesale distribution is impacting performance of its key hair oil brand, Kesh Kish. It could be difficult for Emami to protect market share of the highly profitable Kesh Kish amid competition from the likes of Hindustan Unilever’s Indulekha, which is doing well, says an analyst with a domestic brokerage.

Even Emami’s management had mentioned during the Q1FY19 earnings call the competitive intensity in the category of Kesh King.

Overall, analysts expect Emami to report little change or a decline in volumes (year-on-year or YoY) for the September quarter, amid the high base of last year, and 3-3.5 per cent price hike. 

Edelweiss and Prabhudas Lilladher expect core profits to fall YoY.

Going ahead, Emami is likely to see relatively more margin pain amid high prices (up 40-50 per cent YoY in Q2) of key raw materials, such as mentha oil. The outlook, however, could change if brand investments (advertising spends) are increased to revive growth, while further price hikes could help curtail margin pressure to some extent.

Thus, investors could wait till clarity emerges on wholesale distribution and on the new launches front.