Volumes tepid, gross margins spring a strong surprise — maintain LONG
VIP’s 1QFY20 revenues grew 9% yoy to ~Rs 5.64bn, 5% below EE, with volume growth of 7% yoy. Consolidated EBIDTA increased 12% yoy to Rs 1.08bn on like-to-like basis (IND-AS 116 adjusted), significantly above EE, while EBIDTA margins improved 19.2bps yoy to 14.5% (+470bps vs. EE) on product mix changes, lower purchase prices and price hikes. We believe profit growth in FY20/FY21 would be strong as price hikes and slow liquidation of higher-priced inventory aids gross margins. We however pare FY20/FY21 revenue estimates by 6%/8% amid a tepid demand scenario while broadly maintaining EBITDA estimates. Despite expectations of lower revenues, we feel strong earnings and favourable valuations limit significant downside risks. Maintain LONG with a Sep’20 TP of Rs 464 (Mar’20 Rs 500 earlier) set at a 36x TTM EPS of Rs 12.9; our target multiple stands reduced from 40x earlier in view of the lower 1Q revenue growth.
Tepid demand results in lower sales, cost control shores up EBIDTAM: Sales grew 9% yoy to Rs 5.64bn, 5% below EE, on 7% yoy volume growth; tough demand conditions led to below-expected revenue growth. VIP brand, relaunched during the previous quarter, did well during 1QFY20. Given the demand uncertainty, we cut FY20/FY21 revenue estimates by 6/8%. We believe VIP reduced its A&P spends during the quarter, resulting in flattish other expenses on yoy basis. Amid weak demand, we expect other expenses to remain muted during FY20. EBIDTAM adjusted for IND-AS 116 stood at 19.2%/17.5% on consolidated/standalone basis and was significantly ahead of estimates. Absolute EBIDTA on consolidated basis grew 12% yoy to Rs 1.08bn, beating EE.
Gross margins improve sharply; working capital to take some time to normalize: Consolidated gross margins jumped qoq to 50.4%, up 292bps qoq and 8bps yoy, led by price hikes, product mix changes and lower sales of high-cost inventory. We expect gross margins to sustain around the current levels in the near term, given (a) the conscious efforts by management to gradually liquidate higher priced inventory, and (b) a favorable currency. Working capital days would take a few more quarters to normalize vis-à-vis our previous expectations of 2HFY20; hence, we build in a gradual improvement in them over FY20/FY21. Bangladesh capacity expansion starts bearing fruit: VIP has doubled its Bangladesh capacity, which has started yielding results. We believe increasing capacity in Bangladesh is a good move and would aid margins going into FY21E.
Key risks: RM cost inflation, lower demand and currency volatility.
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