Improving outlook, lower promoter pledge positive for Emami stock

All round performance in Q3, attractive valuations add to the optimism, say analysts

Sustainable volume-led recovery driven by healthy rural demand, focus on expanding distribution reach, new product launches and management’s commitment to reduce promoter pledge has turned analysts bullish on consumer goods firm, Emami. 

In Q3, Emami reported a second successive quarter of double-digit volume growth led by robust traction in the rural market. Emami derives close to 55 per cent of its overall revenues from the rural segment. This is considerably higher than the industry average of 35 to 40 percent according to estimates.
 

Rural areas and small towns have been relatively less impacted because of the Covid-19 pandemic as reflected in the pace of recovery in the region. Moreover, strong cropping season aided by healthy monsoons, government efforts to support farmers by increasing the MSP for rabi crops, improving availability of finance have boosted rural income.
 

The company is focused on expanding its rural distribution reach and has started a pilot project in top 4 states in Phase 1 and a further 12 states in Phase 2. Emami has a large presence in the Ayurvedic products segment under its “Zandu” brand. It has capitalized on the recent shift in consumer preference to ayurvedic products following the Covid-19 outbreak and has launched a slew of new products. Additionally, the company has launched a new brand “EMASOL” which offers a complete range for home hygiene products.
 

The management is confident of extending the strong growth momentum for a third consecutive quarter and hopes to end the financial year with a high-single digit growth. 
 

In this context, analysts have upped their forward estimates and target prices. Motilal Oswal Research has increased its earnings per share (EPS) estimates by 9.8, 12.1 and 11.7 per cent for FY21, FY22 and FY23 respectively while increasing their 12-month price target from Rs 1,310 to Rs 1,425 per share.
 

Troubles at the group level due to high debt and promoters pledging their shares have been a key overhang on the stock in recent years. However, the company has been focused on reducing its overall debt and to that extent has managed to sell its cement and solar power assets with plans in place to sell further non-core assets over the coming quarters. This has helped bring down the promoter pledge holding from a peak of 90 per cent in June to 39 per cent as of December last year. With the sharp underperformance keeping valuations depressed, recent developments make the stock an attractive bet given the significant discount it trades at, say most analysts.