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Recovery to take longer than expected; downgrade to ADD

Result Synopsis

Domestic business has faced headwinds in Q3 with high channel inventory, which is expected to continue in Q4 as well. International business (except IMPCO‐Mexico) continues to face challenges in terms of growth. Management expects exports order to Climate Technologies to pick‐up in ensuing quarters. High channel inventory amidst expectation of some delay in the onset of summer season is expected to pose challenges in Q4 as well. Margins are also expected to remain under pressure as company is not planning to increase prices in Q4 despite commodity inflation as it will have to support trade partners in Q4 as well in addition to supporting new growth initiatives. We believe demand recovery will be gradual from 1QFY23 and gross margins are expected to remain under pressure as price increase will be difficult considering high channel inventory and intense competition as new players have entered cooler market given low entry barriers. Also, international business turnaround is expected to take longer than expected. Considering the above reasons, we downgrade the stock to ADD.

We expect only a gradual recovery in domestic air‐cooling market from Q1FY23; furthermore, increased competition will lead to lower than normal margins, which drives the significant cut in our estimate for FY23. We now expect FY21‐24E growth trajectory of 17% revenue CAGR. Considering higher investments in D2C initiatives, we estimate FY21‐24E EBITDA and PAT CAGR of 25% and 24% respectively. We feel complete recovery will take more time than anticipated as environment continues to remain challenging. Given limited upside, we downgrade the stock to ADD from Buy with a revised PT of Rs1,176 valuing it at 40x FY24EPS.

Result Highlights

* Quarter summary – Domestic business saw muted growth of 2.5% yoy on high channel inventory; while international business declined 14.3% yoy as complete recovery is taking longer than estimated and logistics issues also led to some spillover.  

* Margin – Gross margin at 44.4% continues to remain at lower levels as company has not taken price increases as there has been high channel inventory and it had to support channel partner in a difficult period. We believe higher competitive intensity is also a reason for the same.

* Additional Expenses – Company has incurred additional revenue expenses for various initiatives related to Direct to Consumer Sales (D2C), Large Space ventilated air cooler (LSV), exports to USA and new upcoming air cooler models resulting in lower EBITDA margin.

* International business – International business has declined 14.3% with EBIT loss Rs10mn. All the subsidiaries except IMPCO Mexico have seen revenue decline for 9M. Recovery in international business is expected to be gradual.

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