Emmbi Industries Q2FY19 review: Retail foray to drive margins

Sachin Pal
Moneycontrol Research

Highlights:

- Emmbi Industries reports healthy Q2FY19
- Pond liner business gaining strong customer traction
- Enhancing retail presence through farmer connects- Well-positioned to grow in the domestic and international markets

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Emmbi Industries, the manufacturer of woven polyethylene and polypropylene bags, has delivered a strong financial performance in the first half of this fiscal year. The earnings momentum is expected to continue as the company targets market penetration through new product launches, capacity expansion and augmentation of of the distribution network.

Strong operational performance

Revenue growth of 17 percent was aided by revenue contribution from the new food and pharma grade facility. The company also reported a healthy 39 percent jump in exports on a sequential basis. Operating profits increased 23 percent as margins expanded 70 bps on the back on a higher share of exports and change in product mix.

Water conservation vertical going strong

Water conservation and agro polymer verticals together contribute around 25 percent of the sales and have considerably higher margins at 17-18 percent than the other two verticals. In FY18, water conservation business reported a healthy sales rise in excess of 20 percent on the back of pond liners gaining strong traction. The company sees huge potential in the pond liners business that has a market size of around 250,000 ponds. In H1FY19 it completed more than 1,000 ponds compared to 1,300 ponds in FY18. Besides, Emmbi has also entered into banking tie-ups for funding of pond liners to farmers.

To expand the agro polymer business, the company is working towards enhancing brand visibility among farmers by creating awareness about crop protection technology. The products are being marketed under the ’Krishirakshak’ brand name. The company has an aggressive expansion plan for this vertical and expects it to reach 8 percent revenue share (vs 3 percent currently) over the next 2 years.

Change in business mix to drive margins

The company is changing its product mix and focusing on B2C (business to consumer) through an expansion of the retail distribution network. The share of B2C sales has been on a gradual rise and contributed 11 percent to the topline during H1FY19. The company is targeting 25 percent revenue share from B2C sales by FY20. The shift in sales mix towards retail would not only aid business margins but also shorten the cash conversion cycle.

Capacity utilisation nearing 80 percent

The company has completed a 6,000 MT capacity expansion, out of which 3,600 MT is for water conservation and 2,400 MT is for food and pharma packaging. The total installed capacity after expansion stands at 24,200 MT. In FY18, the capacity utilisation was around 75 percent. The same has moved closer 80 percent in the first half of this fiscal year.

Volatility in crude to impact margins

Emmbi uses various grades of polymers as its raw material, the prices of which have a direct correlation with that of crude oil. It is somewhat insulated from oil price movements as it follows inventory management based on the order pipeline.

Besides, rupee-dollar fluctuations also have an impact on the financials as the company generates more than 50 percent of its revenue from exports.

Emmbi’s business has a strong rural focus and so the demand from this segment is dependent on natural factors such as rainfall and droughts.

Outlook and recommendation

Emmbi is a well-established brand in the field of specialised polymer processing and packaging solutions with a prudent track record of over two decades. The company is targeting growth through deeper and wider penetration in agriculture and rural markets, which mains a priority sector for the government. In terms of valuation, the company trades at nearly 12 times FY19 earnings and should be kept on the radar of long-term investors for accumulation in times of correction.