Nuvama says 'Buy' Emami stock for 20% upside; eyes strong growth in FY25

Nuvama ups Emami’s target price: Analysts at domestic brokerage firm Nuvama Institutional Equities (Nuvama) have raised the target price of fast moving consumer goods (FMCG) company Emami to Rs 915, indicating an upside of 20 per cent from the previous closing price.

“We are raising FY25E/26E earnings per share (EPS) by 8.8 per cent/1.6 per cent. Despite a sharp up move (approximately 47 per cent in past two months), retain ‘Buy’ with target rice (TP) of Rs 915 (earlier Rs 645), and raise target price-to-earnings (P/E) to 40x (from 30x; average multiple for our coverage, ex-ITC, is 46x),” Nuvama said in a note. 

 

Analysts reckon Emami shall deliver a strong FY25, with near double-digit top-line growth and margin expansion. The company is set to capitalise on the heatwaves in the June quarter (Q1FY25) through its brands ‘Dermicool’ and ‘Navratna’–driven by talcum powder category. 

With expectations of an above-average monsoon, analysts believe, rural is likely to see a good revival while Emami–having approximately 50 per cent salience from rural–shall be a key beneficiary. 

Other factors contributing to the increase in the target price include:

Anticipated benefits from La Niña in Q3FY25

Analysts have pointed out that the expected La Niña effect could lead to above-average rainfall, which is favourable for rural recovery. Following the monsoon, colder temperatures are conducive for the company's winter products and healthcare segments. 

Products like the 'BoroPlus' range, renowned for its moisturising properties, are expected to see heightened demand due to increased skin care needs during colder seasons. 

Additionally, the 'Zandu' brand's immunity products, analysts believe, are well-positioned to address seasonal health challenges associated with cooler weather, supporting consumer well-being.

Expansion of rural touchpoints

During the March quarter of financial year 2024 (Q4FY24), rural growth in the GT channel saw mid-single-digit expansion. The company has been actively enhancing its rural presence through initiatives like increased direct distribution, which is expected to benefit from anticipated above-average rainfall, Nuvama analysts said in a note. 

The KHOJ project has also been instrumental, extending coverage to over 20,000 towns and considerably contributing to direct rural sales growth from new areas. Efforts are now focused on strengthening urban general trade channels as well, it added.

Expected strong performance in Q1FY25

Analysts foresee major demand growth, particularly in talcum powder products (expected double-digit growth) and a reasonable 5 per cent increase in Navratna cooling oil sales due to harsh summer conditions and heatwaves in Q1FY25. 

Emami's acquisition of Dermicool in March 2022, analysts believe, has solidified its position as the leading player in the cool talcum powder segment. 

Furthermore, summer-related products are expected to contribute considerably, with approximately 40 per cent of revenue coming from this category in Q1, positioning the company for robust revenue growth and a strong performance in the consumer pack.

Considering these factors, analysts at Nuvama predict the company to post a revenue of Rs 899.7 crore and domestic volume growth of 7 per cent on a Y-o-Y basis.

Strong show in Q4FY24 

Emami reported a 6.4 per cent year-on-year growth in domestic volumes in Q4FY24 (excluding direct-to-consumer brands, volume growth was in high-single digits). 

Modern trade saw a 17 per cent year-on-year increase, while eCommerce grew 37 per cent year-on-year. 

The contribution from organised channels to the domestic business rose to 26 per cent in FY24 from 22 per cent in FY23. Internationally, the business grew 8 per cent, with constant currency growth at 9 per cent.

Major threats 

Seasonality poses a major risk to Emami, particularly affecting sales of summer products like talc and cooling oil, as well as winter products such as BoroPlus, which are heavily dependent on weather conditions. Any disruptions in weather patterns, analysts believe, could lead to volatility in sales of these products.

Another risk identified is the competitive landscape in Ayurvedic products. Despite Emami's strong position, analysts opined, the market is fragmented with over a thousand small companies in India producing similar products. Therefore, this increases the potential for new competitors to enter the market. 

To maintain market leadership, they said, Emami and other FMCG players will need to consistently invest in advertising and promotion to strengthen brand equity and foster customer loyalty.