Emami Ltd put up a good show on the EBITDA margin front for the quarter ending September (Q2FY22). The company’s consolidated EBITDA margin expanded year-on-year by 15 basis points (bps) to 35.1 percent. This is at a time when gross profit margin contracted as much as 150bps over the same period to 68.8 percent.
EBITDA beat
The pressure on gross margin was pretty much expected given that most companies are bearing the brunt of the sharp spike in input costs. “Lower-than-expected advertisement spends however, allowed Emami to maintain year-on-year (YoY) EBITDA margins, a better-than-expected outcome driving EBITDA beat,” said analysts from Jefferies India Pvt. Ltd in a report on October 29. Note that advertising and sales promotion (A&P) expenses as a percentage of revenues fell 140bps YoY to 13.4 percent. The company also took price hikes, which supported the margin.
EBITDA is earnings before interest, tax, depreciation and amortization; a key measure of profitability for companies.
One basis point is one-hundredth of a percentage point.
Meanwhile, Emami’s revenues grew by 7 percent to Rs 789 crore, which isn’t particularly outstanding. “Emami's revenue growth at 7% YoY met our expectations and so did the gross margin compression due to unprecedented input price inflation,” said Jefferies.
Emami’s international revenues fell by 6 percent owing to the impact of the second covid-19 wave and high base of personal hygiene sales last year. “(Emami’s) domestic revenue/volume growth was at 9/6 percent YoY, clocking a two-year CAGR of 11/8 percent versus Nestle’s 10/9 percent, Marico’s 15/9 percent, Colgate’s 5/2 percent and Hindustan Unilever Ltd’s 7/2 percent,” said analysts from HDFC Securities Institutional Equities in a report on October 30. CAGR is compound annual growth rate.
For Emami, BoroPlus sales grew by 29 percent, Male Grooming range grew by 15 percent, Kesh King grew by 15 percent and 7 Oils in One grew by 50 percent. On the other hand, Navratna saw 9 percent revenue decline. Sales of the Healthcare range grew at a relatively slower pace of 5 percent. According to Emami, the relevance of immunity has gone down as vaccination has picked up.
Muted outlook
To be sure, the company has told analysts that A&P spends are likely to be higher, going ahead. This means investors can expect pressure on the margin, going ahead. HDFC Securities expects margin to be under pressure in H2FY22 due to the increase in commodity costs and a strong H2FY21 base. “Further, the company has guided for higher A&P spends in H2FY22 as it plans to shift its unused budget from H1 to H2,” added the brokerage firm in their report.
HDFC Securities models EBITDA margin close to 30 percent for FY22-24 (27/26 percent in FY19/20). For perspective: Emami’s EBITDA margin in financial year 2021 (FY21) stood at 30.7 percent.
Meanwhile, shares of Emami have appreciated by around 25 percent so far this calendar year. Apart from margin performance, investors need to watch out for the impact of the recent slowdown from the rural market.
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