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Performance set to improve in ensuing quarters; maintain BUY

Our view

Domestic business has rebounded in Q2 with easing of Covid‐related restrictions with high trade inventory expected to quickly normalize in the upcoming summer season. International business however was subdued during the quarter mainly due to the China subsidiary drag (Australia and Mexico subs did well on margin front) but now with strong orders from markets like USA, export prospects are also looking up.

Company is confident of growth in 2HFY22 even on a high base with further market share gains.  Gross margin improvement during the quarter has been heartening. Company has started focusing on industrial coolers to further improve performance as there is very limited competition. We feel worst for the company is behind and now performance is expected to improve in the ensuing quarters and in coming years, especially with subsidiaries starting to contribute to profits. We continue to remain positive on the stock as company operates with asset light model and generates high return ratios. We continue with BUY on the stock.

Result Highlights

* Quarter Summary – Domestic business saw strong rebound with domestic business growing 29% yoy while international business remained subdued with marginal revenue decline of 1.2%.  

* Margin – Gross margin expanded by 145bps yoy despite commodity headwinds. This improvement is on back of value engineering, selective price increase and premiumization. EBITDA margin improved 359bps yoy on cost reduction initiatives. 1H margins have improved for both Australia and Mexico entities.

* Distribution and D2C channel – E‐commerce continues to remain strong with company’s D2C (Direct to consumer) initiative also gaining strong momentum. Company continues to invest in D2C channel and expects benefits to accrue in coming times.  

* Inventory and operating cashflow – Inventory in the channel is higher than normal; however, large format modern stores are sitting with minimal inventory which is expected to give boost in Q4. Company expects inventory to be liquidated by Q1FY23.

Valuation

We expect FY21‐24E growth trajectory of 17% revenue CAGR. With margins also expected to gradually normalize going forward, we estimate FY21‐24E EBITDA and PAT CAGR of 29% and 28% respectively. We maintain our positive stance on the stock and maintain BUY rating with TP of Rs 1,288 based on 40x FY24E earnings as we feel performance is set to improve from hereon after two difficult years for the company.

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