Street cheers Emami's plan to cut pledged shares despite tepid Q4 show

Rerating hinges on structural step-up in business

Despite weaker-than-expected March 2020 quarter (fourth quarter, or Q4) results, the stock of Emami has gained nearly 12 per cent since its Q4 analysts’ call on Monday, outperforming the sub-1 per cent rise on the Nifty FMCG index over the same period.

The expected decline in pledged promoter shareholding, as indicated by the company management, enthused the Street. However, investors are advised to exercise caution.

According to Emami’s management, proceeds from the cement deal with Nirma Group are expected in the next fortnight and this would almost halve the promoter’s pledged shareholding from 89.2 per cent as of March.

With a few more divestments, Emami Group plans to reduce pledged shareholding to zero by 2020-21 (FY21). While these plans seem impressive, there has been some delay in the cement deal.

More importantly, concerns over its operating performance remain and could delay rerating of the stock, which is trading at 21x its estimated FY21 earnings vis-à-vis 35x its FMCG peers.

 

 

Vishal Punmiya, analyst at Nirmal Bang, said in a note: “We will wait for signs of consistent improvement in the operating performance before becoming more constructive on the stock.” Punmiya has maintained an ‘accumulate’ rating on the stock.

Emami’s portfolio, which has already been impacted due to seasonality, competition, and high exposure to wholesale distribution, among others, is seeing pressure amid Covid-19 due to its discretionary nature.

Recovery, too, is likely to be challenging for Emami due to washout of the entire peak season for some of its key products. For instance, Navratna Cool oil and talc, which is 20-25 per cent of Emami’s business, has lost its peak summer season sales because of the lockdown.

While there are other factors, such as better rural outlook and expectations of good performance of new launches in hygiene and health care, a few analysts are sceptical of the growth potential of Emami’s core portfolio due to its subdued performance in the past few years.

In Q4, besides Navratna, key products/segments such as BoroPlus, pain management, and male grooming reported decline in revenue.

Overall, in Q4, while Emami’s top line fell 16.8 per cent year-on-year (YoY) to Rs 532.7 crore, its profit before tax and exceptional items plunged 72.9 per cent YoY to Rs 22.8 crore. 
 

According to a Bloomberg poll, analysts had pegged these at Rs 594.3 crore and Rs 78 crore, respectively.

Analysts have slashed their FY21 and 2021-22 earnings estimates for Emami by up to 16 per cent.