EUR 120.00 For Business Accounts Only

MOSL: EMAMI (Buy)-Ad spend reduction and other income boosts PAT-weak domestic growth persists

EMAMI: Ad spend reduction and other income boosts PAT; weak domestic growth persists

(HMN IN, Mkt Cap USD2b, CMP INR312, TP INR390, 25% Upside, Buy)

 

• Consolidated net sales grew 5.6% YoY to INR6.5b (in-line). Domestic sales grew a tad (2% YoY) with flat volumes, while International business grew 34% YoY. Cons. EBITDA grew 11.4% YoY to INR1.3b (v/s est. INR1.1b). Cons. PAT before amortization was up 18.1% YoY to INR1b (v/s est. INR747m).
• Domestic business saw flat volumes for the quarter. Within domestic, Kesh King sales grew a strong 30% YoY, Navratna grew 4% YoY and 7 Oils in One grew 31% YoY; Pain management declined 6% YoY, Male grooming declined 7% YoY, BoroPlus declined 7% YoY and Healthcare range declined 3% YoY.
• Gross margins were down sharply (-210bp YoY to 64.2%) in 1QFY20. EBITDA margin expanded 110bp YoY to 20.7% (v/s est. 17.2%), as increase in employee costs (+50bp YoY) was offset by lower other expenses to sales (-30bp YoY) and ad spends as % of sales (-330bp YoY). Absolute ad spends declined 9.5% YoY to INR1.3b.
• Concall highlights: (1) Rural growth was a meager 1% for the quarter v/s 2.3% urban growth. (2) Management remains optimistic about the remainder of the year given the strategic initiatives that it has undertaken.
• Valuation & View: While beat on profits in 1QFY20 leads to a marginal earnings upgrade, underlying numbers on domestic growth were weak and are likely to remain so. Worryingly there was a decline in sales for most key segments, barring Kesh King. So long as growth prospects, even off the low base of recent years remains uncertain, we believe earnings growth will remain muted. PAT has actually declined for the past three years. Valuations are, however, inexpensive at 20.4x. Maintain Buy as well as target price of INR390 (25x Jun’ 21 EPS).