Demand revival, enhanced product offerings to drive growth
Nilkamal Ltd's Q3FY18 net revenue grew by 5.5% YoY, which was slightly subdued. However, operating profit & PAT growth of 34.9% & 17.1% YoY were above our projections. Aided by lower material cost and other expenses (as % to net revenue), the EBITDA margins improved by 276bps YoY, which is encouraging. We remain positive on Nilkamal's long term growth prospects, given robust outlook of plastics industry, company's efforts towards brand building and enhanced product offerings. We maintain BUY on the stock with revised target price of Rs 2,231.
Q3FY18 Result Update:
* Net Revenue (standalone) increased by 5.5% YoY to Rs 522.8cr, lower than our estimates. However, the growth was relatively better than YoY growth reported in Q2FY18. The Plastics business reported volume and value growth of 2% & 5% respectively. The performance of retail division '@home' was subdued. However, growth in mattress business was robust at 42% (revenue stood at Rs 15.1cr).
* EBITDA grew by 34.9% YoY to Rs 66.2cr, while EBITDA margins expanded 276bps to 12.7% (highest in last 6 quarters), aided by 353bps YoY decline in material cost and 3bps YoY decline in other expenses as a % to net revenue. However, higher employee cost restricted further gains in margin. PAT growth was relatively lower at 17.1% YoY (Rs 33.1cr), impacted by lower other income and higher effective tax rate (+844bps YoY).
* Other key highlights: i) JV companies achieved marginal growth in turnover and profits, while both subsidiary companies witnessed muted performance; ii) Bubbleguard business (commenced operations a couple of quarters back and has presence in all four regions of country) achieved turnover of Rs 1.5cr in Q3FY18; iii) The company has hired ready factory premises at Hosur for manufacturing its modular furniture range of products, the commercial production of which is likely to start during the current quarter.
Outlook & Valuation:
We estimate Nilkamal's consolidated revenue and PAT to grow by 8.3% & 12.6% CAGR over FY17-20E, led by demand revival and company's efforts towards brand building, distribution expansion and enhanced product offerings. While the overall revenue growth was subdued during the quarter, volume offtake in plastics division was still better than in Q2FY18, which indicates signs of revival post GST transition. We expect further improvement in volumes in the coming quarters, likely to be driven across all segments of plastics and retail division.
Operating leverage and stability in the crude oil prices should result in gradual uptick in margins over the next two years. Leadership position (in material handling & moulded plastic furniture), volume growth revival, better margin trajectory, debt free balance sheet and improving cash flows should result in gradual re-rating in the valuations. Based on 9MFY18 performance, we are revising our revenue estimate lower, but upgrading our profit estimates marginally over FY17-FY20E. We maintain BUY on the stock with revised target price of Rs 2,231.
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