Buy Emami; target of Rs 1060: Motilal Oswal

Motilal Oswal's report on Emami

Emami’s (HMN) 3QFY15 performance was ahead of estimates, with 18.4% sales growth to INR6.9b (est. INR6.8b) and underlying domestic volume growth of 10% and overall volume growth of 11%. Domestic sales grew 18% YoY, while International and CSD posted growth of 21% and 16% respectively. New product launches contributed 5% to revenue growth during the quarter.

Sharp gross margin expansion: Gross margin expanded 220bp YoY to 67.3% (highest-ever) led by benign RM prices and price hikes. However, higher ad spends (up 220bp YoY) and staff costs (up 30bp YoY), partially offset by lower other expenses (down 60bp YoY), restricted EBITDA margin expansion to 30bp YoY to 30.6% (est. 29.8%). Thus, EBITDA posted a healthy 19.7% YoY growth to INR2.1b (est. INR2b). Higher other income (up 176.7% to INR337.6m, one-time income of INR90m due to proceeds from key man insurance policy) further aided the PBT growth of 27.5% YoY. Higher tax rate (up 360bp YoY to 20.4%) moderated the PAT growth to 21.9% to INR1.84b (est. INR1.7b).

"We raise the estimates by 15% to factor 3QFY15 beat and also incorporate the benefits of commodity cost correction. We model for robust 25% and 26% EBITDA and EPS CAGR over FY15E-17E. Maintain Buy, with a revised target price of INR1,060 (P/E of 32x FY17E EPS, 20% premium to average three-year P/E, given the strong earnings growth ahead)", says Motilal Oswal research report.

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