Stock Review: EMAMI

Emami, the . 1,200 crore company, is a promising business in the fast moving consumer goods (FMCG) industry. The flagship company of the Emami Group is growing steadily on account of its strong brands and presence in niche areas.

Its March 2011 quarter performance was in line with analyst expectations. Its consolidated net sales rose 26.4% and net profit increased 38%. For FY11, Emami's revenues have grown 23% and the net profit has risen 35%. While the pace of growth has come down over the past few quarters, the company is still logging over 20% growth.

Rise in raw material costs has been putting pressure on the profit margins. As a result, the operating margin has been on a decline (on a trailing four-quarter basis) since the past five quarters. As inflation peaks and commodity prices rationalise, this component of the bottom line is likely to recover.

Besides, price hikes effected by the company will also help in improving the margins. In the March quarter, the company has adjusted its advertising expenditure.

 
Amidst the highly competitive domestic consumer industry, Emami has certain niche products like cooling hair oils, pain balms and antiseptic creams with the ayurvedic plank. Strong branding, using celebrities, has enabled the company to command high brand recall of its products. It has a strategy of launching 2-3 products or brand extensions every year within the focus areas of ayurvedic healthcare, hair and skin care. The company has a strong foothold in the rural market. Its international business, contributing 14% to the its consolidated topline, has been growing at above 30%. After Zandu's acquisition, Emami owns one of the strongest ayurvedic brands in the industry. Around 80% of its manufacturing comes from facilities that are which tax-exempt, boosting its profitability. The company has also managed to emerge almost debt-free by the end of FY11.

Emami's stock has been rising since mid-March logging an appreciation of 25% since then. It is trading at a price-to-earning multiple of 29.4 against 32.4 for the ET FMCG Index. These are fair valuations for the mid-sized consumer company.