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Domestic demand improves with international business gaining momentum; maintain ADD

Result Synopsis

Domestic business has bounced back well with a strong start to the summer season, with channel inventory getting liquidated in March and strong primary sales in April. Company delivers highest domestic sales in April, and management expects that trend to continue in Q1FY23 with a slew of new launches. International business has seen robust growth with IMPCO Mexico and Climate Technologies growing at 39.2% and 10.1% respectively in FY22 with improved profitability. Operating margins are expected to improve on higher operating leverage, improvement in profitability of international business and stable gross margins. We believe demand recovery has been strong with a pandemic‐free summer season after two years of lost summer sales. Gross margins are expected to remain at current levels considering difficulty in increasing prices on regular basis to offset higher commodity prices. Also, international business turnaround is expected to be gradual. Considering the above, we maintain our ADD rating for now and will become more constructive on the stock once we see consistency in the international business.

We expect a strong recovery in domestic air‐cooling market from Q1FY23, but increased competition and inability to pass on increased commodity prices will lead to lower than normal margins. We expect FY22‐24E growth trajectory of 17% revenue CAGR. Considering higher operating leverage, we estimate FY21‐24E EBITDA and PAT CAGR of 31% and 33% respectively. We feel complete recovery in margins will remain challenging. Given limited upside, we continue to maintain ADD rating on the stock with a revised PT of Rs1,215 valuing it at 40x FY24EPS.

Result Highlights

Quarter summary – Domestic business saw decline of 2.3% yoy on high channel inventory and unfavorable base; while international business recorded strong growth of 29.7% yoy on new launches from India.  

Margin – Gross margin at 46.1% continues to remain in the stable band of 45‐48%, as it is difficult of pass on complete increase in commodity prices. EBITDA margin of 21.4% showed improvement of 672bps qoq on higher operating leverage and improvement in profitability of international business.

Additional Expenses – Company has incurred additional 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 grown 29.7% with EBIT of Rs590mn and EBIT margin of 27.6%. All the subsidiaries except GSK China have seen revenue growth for FTY22

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