Emami’s Persistent Bear Hug

Few can boast of a history as dynamic as that of FMCG major Emami Ltd. It was born half a century ago, in 1974, when friends R.S. Agrawal and R.S. Goenka set up a small manufacturing unit called Kemco Chemicals for ayurvedic medicines and cosmetics in
Kolkata. However, it is the impressive growth of the company with strategic and successful acquisitions over more than four decades, juxtaposed with the not-so-impressive run at the bourses for some time now, that makes it a fascinating case study.

The last five years have seen several bull runs on the stock markets. While the BSE 30 index has given 75% return in this period, the NSE 50 index has also increased investors’ wealth by 71%. Despite the blip of Covid-19, most listed companies with a sound business model have given decent returns to investors. But Emami Ltd stands out as an exception. The Kolkata-headquartered company’s stock price has plunged over 20% in the last five years. For a perspective on the opportunity cost to investors, the Nifty FMCG index gained nearly 70% during the same period.

The company’s stock has been trading below the all-time high of Rs 682 that it had touched on January 10, 2018, on the NSE for a while now. On the BSE, the Emami stock has slipped over 19%, compared to a 55% growth in the BSE FMCG index.

“The 2018 level of the stock was result of high valuation multiple as the stock was trading at 2x P/E multiple of the current. Even as the pledged shares went down, the impact of Covid-19 on demand also dragged the share value down. Current valuation multiples are much lower than historical level and hence stock is trading lower,” says Ajay Thakur, research analyst at Anand Rathi Institutional Equities.

Despite the solid performances of FMCG and benchmark indexes and having several popular brands in its portfolio, the fall in Emami’s share price makes one wonder if it is a case of undervaluation or a reflection of underlying issues with the company’s business.

Overshadowed by Rivals

The company’s profit after tax (PAT) has increased from Rs 306 crore in FY18 to Rs 627 crore in FY23. A rise of 104% in PAT would generally be seen as a reason for investors’ confidence in a company’s stock. But the case of Emami shows that the sentiment of investors in the stock market depends on an overall outlook of company’s business.

While the company was able to post growth in some key indicators, it was lower than its competitors in the market. From Rs 2,540 crore in FY18, Emami’s gross sales increased by 34% to Rs 3,405 crore in FY23. Its total income in the same period increased by 32% to Rs 3,474 crore.

However, Emami’s performance pales in comparison with the numbers of competitors Dabur India Ltd, Hindustan Unilever, Nestle and Marico India. In the last six financial years, the company was lagging in terms of growth in all the indicators analysed, except PAT.

Shashwat Grover, senior consultant at financial advisory and valuations services provider Aranca, attributes the plight of Emami to better performance by rival companies. “From FY18 to FY23, Emami’s revenue growth was only modest, while some competitors like Godrej Consumers, Hindustan Unilever and Marico saw much better growth,” he says.

Competitors’ better performance is reflected in the strong growth of their share prices in the last five years, suggesting that they have benefitted from the multiple bull runs and confidence of investors in the stock market.

According to Anita Gandhi, whole-time director and head of institutional business at Arihant Capital Markets Ltd., Emami’s competitors were able to match the pace of the industry’s growth. “HUL has capitalised on increasing consumer demand in segments like personal care, home care and refreshments. Nestle exhibited significant growth, expanding its market presence with diverse products like water, coffee, tea and food. Dabur India, focusing on ayurvedic and personal care products, maintained steady growth and a substantial market share,” she elaborates.

Given the performance of Emami compared to its peers, another factor that weighed on the stock prices of the company was its high price to earnings (PE) ratio. According to data sourced from Ace Equity, the firm’s PE ratio was over 70 in FY18.

“The stock was trading at a higher price compared to its earnings. To justify that kind of value over the long term, a company needs strong growth and stable margins,” Grover explains.

Promoters’ Stake in the Game

While the company’s underperformance in several key indicators translated into lower confidence among investors, analysts point to the decision of pledging a large number of shares by the firm’s promoters as a reason behind the negative sentiment around Emami’s stock.

According to the available data, the promoters’ shareholding that was pledged was as high as 89% in 2020. Pledging of shares refers to the situation when the promoters of a company pledge their shares as collateral to secure a loan or meet their financial requirements. In simple terms, pledging in the stock markets means taking a loan against its securities. A high number of pledged shares is perceived negatively by investors, which in turn reflects in the price of the company on the bourses.

Gandhi believes that the pledging of shares by promoters might have raised concerns among investors, leading to negative market sentiment. According to the BSE website, promoters own 54.52% of the stake in the company currently. To address investors’ concern, the promoters vowed to reduce their pledged shares to zero by hiving off the Group’s assets. In the last few years, they have sold their stake in several businesses. In 2021, the company had sold its cement business to the Nirma Group for Rs 5,500 crore. This deal helped the promoters reduce their pledged shares ratio from 89% to 45%.

Emami’s vice chairman Mohan Goenka had said last year that the number of pledged shares would further be reduced by selling the Group’s hospital chain and real estate owned by the promoters and a few Group companies. Emami is awaiting the West Bengal government’s approval to sell its AMRI Hospitals Ltd to Manipal Health Enterprises. Emami Group owns 98% in AMRI Hospitals, while the West Bengal government owns the remaining 2%. A no-objection certificate is required from the government for the proposed takeover. In May 2023, the Group sold its solar power business to a Canadian investment company, Brookfield Asset Management, through a 100% stake sale. Thanks to these efforts, the number of pledged shares further dropped to 33% in the first quarter of FY24.

Reclaiming the Past

With the Indian markets setting new records and the economy continuing its recovery from the pandemic shock, there are hopes that the company’s stock may finally post positive momentum in the coming years. “We expect the stock to rebound and rerate as many of the concerns are behind us now,” says an optimistic Thakur.

Analysts suggest that the company will have to work on the fundamentals of its Group’s business to gain investors’ trust. “The mixed demand environment, especially in discretionary categories like personal care, has raised uncertainties about the company’s prospects. Improvements in distribution channels and consistent long-term growth may be required to regain investor trust,” says Gandhi.

The company’s inability to gain market share in its product segments has raised worries about its growth prospects, impacting investor confidence. Compared to other FMCG brands like ITC, Britannia, Nestle, Marico, Colgate Palmolive and Hindustan Unilever, Emami has not been able to capitalise on its brand and build upon its past growth. “The Group needs to have a serious relook at its various businesses and regroup its resources towards those businesses where its core strength lies and it sees maximum potential in the years to come,” Amar Singh Deo, head advisory at Angel One Ltd, says.

Emami’s strength lies in its range of products. The firm can boost its market position and growth potential by focusing on marketing the well-known brands in its portfolio and launching new products. According to Kaustubh Pawaskar, deputy vice president, fundamental research at broking house Sharekhan, sustained focus on product launches, distribution expansion, scale-up of emerging channels, a strong pipeline of D2C brands, growth in international business and improved penetration will help to improve its growth prospects in the medium term. With stabilising raw material prices, the margins are expected to improve in the coming years.

The story of the last five years has been one of disappointment for investors of the Emami Ltd, but the ball is in the latter’s court. Whether it is able to capitalise on the several brands it owns and reap the benefits of the sustained investor confidence in the stock market remains to be seen. To its credit, the FMCG major has come a long way from where it started almost half a century ago, but to remain relevant for another half a century, it will have to at least match the performance of its popular competitors if not outdo them.