The quarterly results from the FMCG space so far point towards a mid-single digit volume recovery marked by higher growth in rural areas. Revival in international business, particularly in MENA (Middle East North Africa) region, has been an additional growth lever for the sector.
The Q4 FY18 result of Emami largely reflects all these trends. The key positives for the quarter under review are: 1) Revival in the Kesh King portfolio; and 2) Stable operating margin guidance. It however faced challenges on account of raw material inflation.
Domestic volume trend in FMCG space
Q4 weighed by higher raw material cost
Q4 sales were up eight percent year-on-year (YoY) (12 percent if adjusted for Goods & Services Tax) led by nine percent domestic volume growth (versus a 1.5 percent volume degrowth in Q4 FY17) and strong performance in international operations (37 percent YoY). In YoY terms, there has been a steep decline in earnings before interest, depreciation and tax (EBITDA) margins on account of higher raw material cost, employee expense and advertising spending. Net profit has further declined due to one-off reversal in minimum alternate tax (MAT) credit.
Navratna range continue to lead topline growth
Domestic business was aided by Navratna (14 percent YoY, 24 percent of FY17 sales), pain management (13 percent YoY) and male grooming (8 percent YoY). Navratna posted double-digit volume growth in the last quarter and the management expects to continue at a similar rate in current quarter as well. Market share gain was seen in Navratna and male grooming range. Healthcare range remained weak, with a two percent YoY decline, due to lower sales of Pancharistha.
Changing trade channel mix
Among trade channels, Emami witnessed 15 percent YoY growth in rural and retail channels. Sales through the modern trade channel posted 50 percent growth. Canteen Sale Department (CSD) saw a mild recovery of a percent in Q4. The wholesale channel remains sluggish and posted flattish growth due to which the management continues to place emphasis on trade channels like retail (direct reach), modern trade and e-commerce.
The modern trade and e-commerce channel is currently witnessing sales of about six percent and the management expects the same to double in the next three-to-five years. In the last two years, Emami has added 2 lakh sales outlets, taking it a total outlets to 8.5 lakh, to increase its reliance on direct reach.
Recovery in Kesh King
One of the key positive from the quarter gone by has been the sales recovery in the Kesh King portfolio, up six percent YoY. Of this, Ayurvedic Oil sales have been in double-digits. Few of the company’s promotional incentives seems to have worked out and the management is confident of maintaining 45 percent EBITDA margin in this category.
While the reported quarterly numbers of Emami were below the street’s expectations, there were positives like steady performance of Navratna and revival in Kesh King. Improving traction in segments where recent promotional activities have been high, like male grooming range, are also encouraging.
The key factor to watch out for is elevated mentha prices. The management’s guidance of maintaining 28 percent operating margin in FY19 is noteworthy.
With around 52 percent of sales accruing from rural areas, Emami remains our preferred play on the rural led growth in the FMCG sector. The recent under-performance provides an opportunity to enter (37 times FY19e earnings) in our view.moneycontrol