Despite weaker-than-expected March 2020 quarter (Q4) results, the stock of Emami has gained nearly 12 per cent since its Q4 analysts’ call on Monday evening, outperforming the sub-1 per cent rise in the Nifty FMCG index during the same period.

The expected decline in pledged promoter shareholding, as indicated by the company management, enthused the Street. However, investors are advised to exercise caution.

According to Emami's management, proceeds from the cement deal with Nirma group is expected in the next 10-15 days and this would almost halve the promoter’s pledged shareholding from 89.2 per cent as of March 2020. With few more divestments, Emami group plans to reduce the pledged shareholding to zero by FY21. While these plans sound good, it should be noted that there has already been some delay in the cement deal.

Importantly, concerns over its operating performance remain and could delay re-rating of the stock, which is trading at 21 times estimated FY21 earnings vis-a-vis over 35 times in case of its FMCG peers.

Vishal Punmiya, analyst at Nirmal Bang, said in a note: “We will wait for signs of consistent improvement in operating performance before becoming more constructive on the stock.” Punmiya has maintained ‘accumulate’ rating on the stock.

Emami’s portfolio, which has already been impacted due to seasonality, competition and high exposure to wholesale distribution, among others, is seeing pressure amid Covid-19 due to its discretionary nature. Recovery, too, is likely to be challenging for Emami due to wash out of the entire peak season for some of its key products. For instance, Navratna cool oil and talc, which is 20-25 per cent of Emami’s business, have lost their peak summer season sales due to lockdown.

While there are some factors such as better rural outlook (around 50 of revenue) and expectations of good performance of new launches in hygiene and healthcare, a few analysts are sceptical of the growth potential of Emami’s core portfolio due to its subdued performance in the past couple of years. In Q4 also, besides Navratna, key products/segments such as Boroplus, pain management and male grooming reported decline in revenue.

Overall, in Q4, while Emami's top-line fell by 16.8 per cent year-on-year to Rs 532.7 crore, its profit before tax and exceptional items plunged by 72.9 per cent year-on-year to Rs 22.8 crore. According to Bloomberg poll, analysts had pegged these at Rs 594.3 crore and Rs 78 crore, respectively.

Analysts, thus, have slashed their FY21 and FY22 earnings estimates for Emami by up to 16 per cent.