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MOSL: EMAMI (Buy)-Early signs of recovery in Kesh King & Pancharishta-Inexpensive valuations

Emami: Early signs of recovery in Kesh King & Pancharishta; Inexpensive valuations; Maintain Buy

(HMN IN, Mkt Cap USD2.6b, CMP INR411, TP INR520, 27% Upside, Buy)

 

• Consolidated net sales grew 7.1% YoY to INR8.1b (our est. INR8.3b). Domestic business grew 7% (3.5% volume growth) while International business grew 18% YoY. Cons. EBITDA was flattish at INR2.67b (our est. 2.7b). Cons. PAT before amortization (adj. for exceptional item relating to VRS compensation of INR98m) was down 0.8% YoY to INR2.1b (our est. 2.2b).
• 9MFY19 performance: Sales, EBITDA and PAT before amortization growth stood at 7.3%, 6.1% and 2.8%, respectively. EBITDA margin expanded 30bp YoY to 27.7%.
• Concall highlights: (1) Healthy recovery was witnessed in sales of Kesh King and growth momentum is expected to continue, (2) Management expects gross margins to be maintained YoY in 4QFY19.
• Valuation & View: Results continue to disappoint and there hasn't been double-digit 2-year CAGR sales growth for 10 quarters now. There are early signs of recovery in Kesh King, International business and Pancharishta, but much needs to be done for Fair & Handsome and Zandu. Changes to model have resulted in ~4.6%/7.5% cut in FY19/FY20 EPS. The stock has been an underperformer over the past two years, which is not surprising, as absolute PAT declined by 4% over FY16-18 (and likely 4% EPS growth in FY19) compared to 18% CAGR in the preceding five years. While the near-term path to earnings recovery is unclear, the company seems to have taken the right steps in (a) Kesh King and Pancharishta restaging (to an initially good response); (b) increasing direct reach to nearly 1m outlets (around 25% increase in the past two years); and (c) rapid rural expansion with doubling of villages reaching ~25,000 in FY18 in towns with population less than 5,000 people. Valuations of 28.8x FY20 are inexpensive and at over 30% discount to peer valuations. We maintain BUY rating with a revised target price of INR520 (attributing 33x December 2020 EPS, ~20% discount to 3-year average).