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Stock loss hits profitability; healthy outlook to drive H2; retaining a Buy

Astral’s disappointing Q2 performance belied expectations, its revenue, EBITDA, and PAT coming respectively 2.4%, 31.9% and 49.9% lower y/y to Rs11.7bn, Rs1.4bn and Rs708m (ARe: Rs13bn, Rs1.8bn and Rs940m. Continuing higher input costs and stock losses shaved 174bps off the gross margin y/y to 30.2% Higher employee and other operating expenses dragged the operating margin down 534bps to 12.3%. Higher depreciation (42.7% y/y) and interest expense (12.7x y/y) further cut into PAT, bringing it down a huge 49.9% y/y.

Inventory loss spoils Q2 performance. In both categories, plastics and paints & adhesives, profitability was severely curtailed. This was due to losses in inventory as key raw material prices continued to slide. Their EBIT margins contracted respectively 619bps and 727bps y/y to 10% and 7%.

Better performance expected in H2. The need to replace depleted stocks in the channel and affordable prices are expected to boost off-take in H2. Management expects 15%+ off-take in pipes & fittings and 15%+ revenue growth in paints & adhesives, fetching 15% margins for FY23.

SKUs in place, to ramp up network in faucets and sanitaryware. The company has 136 SKUs in sanitaryware and 411 in faucets. It expects 97 showrooms and display centres by end-Q3 (24 in Q2) and aims to scale them up to 500+ by end-Q4 FY23. We have yet to incorporate the potential from this business as we await more clarity and guidance from the management.

Retaining a Buy. Based on the H1 FY23 performance, we lower our FY23e and FY24e earnings and introduce FY25e. We expect 17% and 18% revenue and earnings CAGRs respectively over FY22-25. We maintain our Buy on the stock, with a lower target price of Rs2,488 based on 62.5x FY25e earnings (earlier Rs2,560 on FY24e earnings). Faucets and sanitaryware, when factored in, would increase the potential.

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