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Operating leverage, product mix aid margins

Asahi India Glass’ (Asahi) Q4FY21 operating numbers were a beat on consensus estimates as revenue rose 36% YoY to Rs8bn while EBITDA margin came in at 22.7% (up 703bps YoY). Faster growth in architectural segment (up 46%YoY) has led to superior mix (contribution rose to 42.4%/ up 300bps), thus aiding margins. We remain positive on the stock due to i) strong proxy play for domestic PV recovery coupled with headroom for content increase; ii) play on architectural segment demand growth on the back of improving housing demand and iii) leaner fixed-cost structure vis-à-vis competition (domestic/imports) aided by policy support (e.g. anti-dumping duty). As new Gujarat plant stabilises, we expect FCF to improve (to ~Rs8bn over FY22/23) leading to deleveraging (Net debt: ~Rs8bn in FY23). Stock remains attractive at ~5.0% FCF yield in FY21. Maintain BUY.

* Key highlights of the quarter: On a segmental basis, automotive segment grew 35% YoY to Rs4.73bn while architectural segment rose 46% YoY to Rs3.4bn. On profitability side, EBIT margins (inclusive of segmental other income) of architectural and automotive businesses came in at 25.3% (up 1443bps YoY) and 16.7% (up 712bps YoY), respectively. Asahi reported strong FCF of Rs4.1bn in FY21 as debt was reduced by ~Rs1.5bn. Reported PAT grew 52% YoY at Rs847mn. The company has announced Rs1/share dividend.

* Fixed cost reduction, growth and pricing to aid margins: Given the additional CVD/anti-subsidy duty imposed on imports from Malaysia (81% share), domestic architectural glass industry has witnessed some import respite. Additionally, China production has supposedly witnessed reduction (~40-50 plant shutdowns) due to environmental reasons which has led to global supply shortage. These factors have led to domestic architectural glass pricing improve by ~10-15% (YoY). Asahi, is likely to witness the twin benefit of domestic housing demand rise coupled with pricing improvement. In auto segment, production was impacted by local lockdowns and chip shortage, OEMs are likely to raise production to normalise channel inventory as demand remains strong. The commissioning of new Gujarat plant is also expected to give capacity headroom for growth and aid return ratios as asset utilisation improves. Management’s efforts in the past few years to reduce structural costs, which is visible in other expenditures (down 220bps YoY) and thus aid margins (up 180bps).

* Maintain BUY: We like Asahi’s business as it 1) has a dominant through-cycle automotive market share (~70%) with premiumisation driven content improvement and no EV risk; and 2) is a proxy play to the growing architectural segment demand (e.g. housing, project) where the strategy is to improve product mix. With major capex completed, strong operating leverage and strengthening growth tailwind, we upgrade multiple to 13.5x (earlier: 12x) FY23E EV/EBITDA (Implied PE: 25x FY23E EPS). We revise our earnings ~-2%/14% for FY22E/23E, respectively, and maintain BUY with a revised target price of Rs404/share (earlier: Rs361/share).

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