Green shoots visible;
* The COVID-19 led disruption at start of 1QFY21 has now started to ease out. We believe demand pickup is sustainable. Additionally, the earlier-thanexpected consolidation of Creative Flavors & Fragrances (CFF) should drive earnings.
* On account of positive raw material (RM) pricing scenario and tighter cost control measures, we have increased our earnings estimate for FY21 by 16%. But, we are broadly maintaining our estimates for FY22E. Reiterate Buy.
Demand pickup in sight; RM pricing scenario stable
* 1QFY21 performance: Revenues declined 30% YoY to INR1,925m (v/s est. INR1,921m). EBIDTA declined 33% YoY to INR310m (v/s est. INR196m). EBITDA margins contracted 80bp YoY to 16.1% (v/s est. 10.2%).
* The beat was driven by softer raw material prices (Gross Margin was up 70bp YoY to 43.9%) and cost optimization measures. Adj. PAT declined 17% to INR153m (v/s est. INR41m).
* Strong traction in Fragrances at end-1QFY21: The Fragrances division edged down 28% YoY to INR1,765m. COVID-19 led disruption impacted demand – both overseas business (down 30% YoY) and the domestic business (down 28% YoY). However, demand has started picking up with strong traction from end-May’20.
* Flavors business vulnerable to seasonality: The Flavors division plunged 47% YoY to INR150m (overseas was down 37% YoY while domestic declined 58% YoY), largely due to seasonality of the business. Additionally, the company exited a low margin account, which further impacted growth.
* Outlook: While FY21 growth is likely to remain flat (excl. CFF basis), management has guided for double-digit growth for FY22E. This is expected to be largely driven by demand pickup across business segments and geographies. The Fine Fragrances business is likely to see subdued demand. However, we expect growth to be driven by Personal Care (body-washes, soaps and sanitizers) and Household Products (floor cleaners) due to higher focus on hygiene and cleanliness due to COVID-19.
Key management commentary highlights: (a) On 28th Jul’20, the company acquired the balance equity stake (49%) in CFF for INR1.26b. (b) No major capex planned for next few years. Hence, debt levels should remain stable in FY21. Valuation and view We have increased our FY21E earnings estimates by 16% and have broadly maintained FY22E estimates. We expect revenue/PAT CAGR of 13%/31% over FY20-22E, partly driven by CFF consolidation, better RM pricing environment and improved demand, largely driven by the Personal Hygiene and Home Care segment. We are valuing the stock at 14x FY22E consol. earnings of INR7.3/share. Maintain Buy with TP of INR102/share.
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