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Topline growth trajectory remains a concern
* 1QFY20 cons. net sales were down 5.2% YoY to INR23.5b (v/s est. INR25.5b). Consol. EBITDA was up 2.2% YoY to INR4.6b (v/s est. INR4.4b), while Adj. PAT was down 6.7% YoY to INR3b (v/s est. INR3b), adjusted for deferred tax gain of INR1.1b. Net profit without exceptions and one-off items declined 3% YoY (according to the press release).
* India branded business volume grew 5%. Sale of Soaps was up 3% YoY; Household Insecticides was down 4% while the Hair Color business sales stood flat YoY. Management attributed the subdued performance to general slowdown in staples consumption and expects gradual recovery in the coming quarters.
* Consol. gross margins were up 130bp YoY to 57.1%. Low ad spends as % of sales (down 20bp YoY to 8.2%) and low staff costs as % of sales (down 40bp YoY to 11.3%) was offset by higher other expenses as % of sales (up 60bp YoY). This led to EBITDA margin expansion of 140bp YoY to 19.5%.
* Concall key highlights:
(1) Management believes that 2QFY20 volume growth in the domestic business should be better than 1QFY20;
(2) Profitability in Africa should be better sequentially, but management does not expect sharp recovery in margins to FY18 levels soon.
* Valuation and view: With topline outlook appearing hazy in both domestic and international business, there is no indication that the earnings slowdown (7% PBT growth in the past three years) will turn around materially to anywhere close to earlier levels. Between FY08-16, the company reported over 20% CAGR growth on all fronts – Sales, EBITDA, PAT and EPS – among the best of breed. Valuations of 32.4x FY21, while cheaper than peer average of around 35x, appears fair, if one considers weaker-than-peer earnings visibility and ROCE of 20%, well below peer average of over 30%. Maintain Neutral with a target price of INR620 (32x FY21, 10% discount to peer average).
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