2QFY21 investor call takeaways
Results summary – Revenue up 6% to Rs 53.5bn led by double‐digit volume growth in decorative paints, GMs up 200bps to 44.4%, EBITDA margins up 470bps to 23.6% given savings in other expenses and PBT up 36% to Rs 11.3bn. Paints grew 6% with segment margins improving from 19% to 25% while home improvement declined 3% with losses reducing from 13% to 4%.
View – The stock is currently trading at 51x FY23E earnings. While the stock is trading near peak multiples, we can see it sustaining at these levels given improving growth visibility and strong market share gains coupled with a sustainably higher level of margins. Strong cash accretion can drive a combination of higher dealer support, strong distribution penetration in new markets and products, higher dividends and inorganic growth. Entry into home décor would be viewed with skepticism given the not so good experience with the kitchens and bath business in the past.
* Market conditions ‐ Progressive recovery in demand led by unlocking of economy; supply side concerns also easing incrementally; pent‐up demand helped during 2Q; input prices and currency remained favorable.
* Decorative business – Growth led by Tier 2/3/4 markets; 11% volume and 6% value growth in 2Q with improvement in every month of quarter; better recovery in economy range; strong response to at‐home services; ; GMs supported by stable input prices and sourcing efficiencies.
* Entry into home décor ‐ 1500 SKUs launched in lightings, furniture and furnishing range to provide complete Home Décor solutions.
* Innovations ‐ launched anti‐bacterial multi‐surface paint range, sanitizers, disinfectants, masks, PPE kits.
* International business – Strong volume growth in Africa and Middle East, double‐ digit in Sri Lanka and Bangladesh, Nepal weak; revenue up 8% and PBT 44% in 2Q.
* Industrial business – Recovery in autos drove good growth in OEM business, refinish business still slow; gradual recovery in powder business, industrial liquid paint still slow; margins improved.
* Home Improvement – Kitchen business was flat witnessing strong recovery, PBT Loss of 4.4cr vs 13.5cr loss yoy; Bath business down 4% led by recovery in economy range, achieved EBITDA break‐even vs 7.4cr loss.
* Outlook – Still uncertain if demand will sustain beyond festive season; good monsoon could support rural demand; no worries currently on input costs and currency; continue cost optimization measures due to uncertainties.
* Why enter into other home décor categories – Have vision of becoming a comprehensive home décor player and will leverage the strong service and store network and capture higher consumer wallet share by selling furniture, furnishings and lighting; will also help accelerate the struggling bath and kitchen business ; large unorganized market and lack of a strong national brand should help; no capex as of now as supply outsourced.
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