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Raw material inflation hurts performance

Price increases taken in Jul-Aug’21 to largely absorb full cost inflation

* APTY’s 1QFY22 operating performance was impacted by higher RM cost in its India operations as well impact of the transition in its EU operations. Demand recovery in India as well as consistent price hikes will drive a margin recovery in India. Turnaround in its EU operations and profitability in mid-teens are expected to be structural and sustainable.

* We cut our FY22E consolidated EPS by ~4.6% to factor in RM cost inflation and the transitory impact on its EU operations, but maintain our FY23E estimate. We maintain our Buy rating.

Raw material cost inflation, operating deleverage hurts margin

* Consolidated performance: Revenue declined by 9% QoQ (+59.5% YoY) to INR45.85b. EBIDTA fell by 30% QoQ (+139% YoY) to INR5.7b. Adjusted PAT declined by 55% QoQ to INR1.29b.

* Standalone business performance: Revenue fell 11% QoQ to INR32.2b due to a 14% decline in volume, diluted by a 3% increase in ASPs.

* Gross margin contracted by 440bp QoQ (-430bp YoY) to 34.2% due to RM cost inflation (~11% QoQ), diluted by 3-4% price hikes. EBIDTA margin stood at 10.4%, a decline of 500bp QoQ (-40bp YoY). Adjusted PAT fell 70% QoQ to INR685m.

* Europe performance (manufacturing operations): Revenue from EU operations declined by ~16% QoQ to EUR114m, impacted by transition of operations from the Netherlands. Gross margin improved QoQ, despite a cost push (6-7%), driven by a richer product mix. EBITDA margin declined by 150bp QoQ to 16.3%, impacted by operating deleverage.

Highlights from the management commentary

* India demand: Healthy demand momentum has been witnessed across key segments/key channels (except T&B OEM) since Jun’21.

* RM cost inflation in 1QFY22 stood at 11% QoQ. A further 5% is expected in 2QFY22.

* Pricing action: It took a price increase of 3-4% in 1QFY22 and another 3-4% in Jul’21. It has also announced another hike in Aug’21. This should cover a large part of cost inflation seen till date.

* EU margin outlook: EU EBITDA margin is benefitting from the restructuring at the Netherlands plant. EU operations are showing signs of returning to consistent profitability, similar to 5-6 years back.

* Capex in FY22 is estimated at INR20b at the consolidated level, with India business capex at INR18b (residual for the AP plant ramp-up and maintenance capex) and INR2b for EU (for maintenance). It foresees the next leg of expansion for PCR in FY24 for addressing demand in India as well in the EU.

Valuation and view

* APTY offers the best blend of earnings growth and cheap valuations. The stock trades at 12.3x/9.6x FY22E/FY23E consolidated EPS. We maintain our Buy rating with a TP of INR290/share (12x Sep’23E consolidated EPS).

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