Emami strategic portfolio growth supports margin recovery despite input-cost pressure

Investment View and Valuation

Motilal Oswal Financial Services retained its BUY rating on Emami after an operationally in-line 1QFY27 performance, despite weakness in the summer portfolio and significant cost pressure. The broker sees healthy core domestic demand, rapidly scaling strategic investments and a prospective margin recovery as the principal supports for the investment case.

The target price is Rs 525, based on 25x March 2028E EPS. At the report CMP of Rs 392, the broker viewed Emami's valuation as comfortable at 20x FY27E and 19x FY28E EPS.

1QFY27 Revenue and Domestic Demand

Emami reported consolidated net sales of Rs 10,392 million in 1QFY27, up 15 per cent year on year and broadly in line with Motilal Oswal's estimate of Rs 10,206 million. Consolidation of Axiom Ayurveda and IncNut Digital aided reported growth. On a like-for-like basis, revenue grew 9 per cent.

Domestic revenue rose 20 per cent and domestic volume grew 16 per cent, including acquisitions. On a like-for-like basis, domestic revenue and volume growth were 12 per cent and 8 per cent, respectively. International revenue declined 12 per cent year on year because of supply-chain disruptions related to the West Asia conflict. Management expects the international business to recover in the second half of FY27.

Portfolio Performance

Portfolio trends were mixed across Emami's core categories, while the strategic investment portfolio remained the principal growth driver.

Profitability and Earnings

Profitability was weaker than estimated. Gross margin contracted 360 basis points year on year to 65.8 per cent, versus Motilal Oswal's estimate of 67.5 per cent. The West Asia conflict accounted for 200 basis points of the decline and the acquisition-led business-mix change accounted for 160 basis points. Elevated crude-linked and packaging costs also pressured margins.

EBITDA rose 6 per cent to Rs 2,262 million, broadly in line with estimates, but EBITDA margin declined 190 basis points to 21.8 per cent, below the broker's 22.4 per cent estimate. Employee expenses and advertising expenditure increased 14 per cent and 13 per cent, respectively. PBT before exceptional items rose 4 per cent to Rs 1,963 million and was broadly in line with estimates.

Adjusted PAT fell 17 per cent to Rs 1,524 million versus the broker's estimate of Rs 1,837 million, as utilisation of Rs 135 million of MAT credit raised the effective tax rate.

Margin Recovery and Strategic Investments

Management has implemented measured price increases and intends to take further calibrated increases to more than offset absolute input-cost inflation during the rest of FY27. It expects productivity initiatives and easing execution challenges to support a gradual margin recovery. Motilal Oswal forecasts an EBITDA margin of about 26 per cent in FY27 and FY28.

Management expects the strategic investment portfolio to achieve an annual revenue run rate of Rs 7,500–8,000 million by FY27-end and a high-single-digit EBITDA margin within three years. Organised channels grew 19 per cent like for like and account for 32 per cent of domestic business. Quick Commerce represents 35 per cent of ecommerce sales.

Supply-chain planning, Sales Code AI and an Analytical Hub are expected to be completed in FY27.

Earnings Estimates and Key Risks

Motilal Oswal cut its FY27E and FY28E PAT estimates by 3.7 per cent and 3.4 per cent, respectively, while retaining its sales and EBITDA estimates.

Key risks to the outlook evident in the report include:

• Sustained crude and packaging inflation.
• Continued West Asia-related disruptions.
• Acquisition-led margin dilution.
• A higher effective tax rate.
• Weaker seasonal or international demand.