MOSL: EMAMI (Buy)-Largely in line-expect moderate growth, margin pressure in 2H

Emami: Largely in line; expect moderate growth, margin pressure in 2H

(HMN IN, Mkt Cap USD2.5b, CMP INR404, TP INR550, 36% Upside, Buy)

• net sales were flat YoY at INR6.3b (in-line) in 2QFY19. Domestic business growth was flat (volumes down ~4%), while International business grew at just 4% YoY. Consol. EBITDA declined 5.9% YoY to INR1.9b (in-line). Consol. PAT before amortization declined 8.8% YoY to INR1.4b (our estimate: INR1.5b).
• 1HFY19 performance: Sales, EBITDA and PAT before amortization grew by 7.4%, 11.2% and 6.1% YoY, respectively. EBITDA margin expanded 90bp YoY to 25.2%. In 2HFY19, we expect sales, EBITDA and consol. PAT before amortization to increase 10.8%, 7.4% and 7%, respectively.
• Concall highlights: (1) Targets to end the year with double-digit sales growth, not double-digit volume growth (as guided earlier), unless winter sales do extremely well. (2) Likely to face pressure on gross and EBITDA margins in 2HFY19 due to higher mentha cost and rising ad spends (v/s 1HFY19).
• Valuation and view: Changes to the model (owing to moderate growth and likely margin pressures in 2HFY19) have resulted in ~5% cut in our FY19/20 EPS estimates. The stock has underperformed over the past two years, which is not surprising, as absolute PAT declined by 4% over FY16-18 (and likely 6% EPS growth in FY19) compared to 18% CAGR over the preceding five years. While the path to earnings recovery is unclear over the near term, HMN appears to have taken the right steps on (a) Kesh King and Pancharishta restaging (to an initially good response), (b) increasing the direct reach to close to 1m outlets (~25% increase in the past two years) and (c) rapid rural expansion – doubled the reach to ~25,000 (FY18) in towns with population less than 5,000 people.