MOSL: EMAMI (Buy)-High A&P spends lead to margins miss; growth revival in Kesh King

EMAMI: High A&P spends lead to margins miss; growth revival in Kesh King

(HNM IN, Mkt Cap USD3.7b, CMP INR1086, TP INR1390, 28% Upside, Buy)

• net sales (reported) increased 8.2% YoY to INR6.2b (est. of INR6.3b). Domestic revenue, adjusted for GST/ VAT, grew 10% YoY, while international revenue increased 37% YoY. Domestic volume growth of 8% YoY was in line with our estimate.
• Gross margin contracted 40bp YoY to 65.2% (est. of 62.2%) in 4QFY18. EBITDA margin shrunk 320bp YoY to 28.1% (est. of 30%) due to a 270bp YoY increase in A&P spends and a 30bp YoY rise in employee expenses to sales. Other expenses were down 20bp YoY.
• EBITDA declined 2.7% YoY to INR1.7b (est. of INR1.9b) on a low base. Cons. PAT before amortization declined 15.4% YoY to INR1.2b (est. of INR1.4b).
• FY18 performance: sales, EBITDA and PAT before amortization grew 1.6%, -5.2% and -8.4% YoY, respectively. EBITDA margin shrunk 200bp YoY to 28.3%.
• Comments on balance sheet: Increased receivables in FY18 are on account of higher growth in international business and modern trade sales.
• Concall highlights: 1) Commodity prices should soften in 2HFY19. 2) Dependence on wholesale is reducing (now 38% of sales); HMN expects to bring it down to 35%. 3) A&P spends of 18-18.5% to be maintained in FY19.