Emami stock: Management sees margin pressure amid a decline in net profit

Emami's stock valuation, in terms of price-to-earnings ratio, may be at the lower end of the fast-moving consumer goods pack, but it is unlikely to improve any time soon. While the rise in proportion of promoters' pledged shares, which the management expects to reduce in next 2-3 weeks, has weighed on sentiment so far, the disappointing September 2018 (Q2) performance announced on Tuesday could add pressure on the stock.   

The skin and healthcare major's consolidated top-line was flat at the year-ago level of Rs 6.3 billion, while net profit fell 16 per cent to Rs 826.8 million in Q2, and came below analysts' estimates.

With a sharp deceleration in growth of key brands, Emami's domestic volumes declined four per cent in Q2. This can also be gauged from the 40 per cent year-on-year surge in closing inventory (mainly finished goods, as per the management) as of September 2018, which was mainly due to a delayed winter season. Volume growth was also weighed down by last year's high base when volumes grew by 10 per cent, besides higher dependence on wholesale channel (38-40 per cent of overall revenues). Though the management expects double-digit revenue growth with the rejuvenation of Kesh King and relaunching of Zandu Pancharista, achieving double-digit volume growth in FY19 would be challenging. Analysts do not see any sharp pickup in growth of key businesses in the near term. 

This, along with high input prices, would keep margins under pressure amid absence of pricing power due to strong competition. The management also indicated that there will not be any strategic actions (such as price hikes) at the cost of growth. With input cost pressure, expect gross margins to witness pressure to the extent of 2-2.5 per cent in rest of FY19.

Even in Q2, Emami's gross profit margin contracted by 33 basis points year-on-year to 68.6 per cent and its operating profit margin fell by 191 basis points to 30.2 per cent as all components of operating expenses increased. Going ahead, control on some other operating expenses may help restrict the fall in operating profit margin to one per cent.

Clearly, the road ahead looks challenging in terms of growth as well as margins.  

In this backdrop, investors should avoid bottom-fishing in the counter.     

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