EUR 120.00 For Business Accounts Only

MOSL: EMAMI (Buy)-Near-term recovery unlikely, cheap valuations offer comfort

EMAMI: Near-term recovery unlikely, cheap valuations offer comfort

(HMN IN, Mkt Cap USD1.6b, CMP INR256, TP INR310, 21% Upside, Buy)

 

We recently met Emami’s (HMN) management to get an update on its overall business. Key takeaways:

• Demand is yet to pick up after weakening in the December quarter for both the company and the sector.
• Terms of trade to distributors have worsened with credit to general trade now at 10-12 days. This can be attributed to delayed summer offtake (due to extended winter) and trade liquidity concerns.
• However, we find comfort in favorable material costs, demand prospects from Rabi harvest, and strong product pipeline ready for launch when sentiment improves.
• Valuations and view: After coming in at an admirable ~20%/ 34%/35% in the first five years of the decade, sales/EBITDA/PAT CAGR has slowed down significantly to ~5%/ 7%/3% for the five years ending FY20. Sales growth in many of HMN’s key categories has been impacted in recent years due to rural slowdown (52% rural dependency), liquidity crunch (~40% wholesale contribution) and category growth issue (majorly problem-solving portfolio and not everyday use products with the former getting affected more in a weak demand situation). However, none of these are structural issues and thus HMN will be a key beneficiary when the tide turns. Valuations of 20x trailing EPS and 16.4x FY22 EPS (~20x after taking into account amortization) also offer some comfort. Moreover, valuations are at ~60% discount to peer average and ~50%/40% discount to its own 5/10-year average. Maintain Buy with a TP of INR310 (targeting 20x FY22E adj. EPS).