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Growth, mix surprise aids margin improvement

Asahi India Glass’ (Asahi) Q3FY21 operating numbers were a beat as EBITDA margins came in at 24% (up 640bps YoY), while revenues rose 9.3% YoY to Rs7.4bn. The margin beat was driven by improvement of gross margins/ lower fixed costs (both ~160bps) coupled with lower power and fuel costs (~300bps). We remain positive on the stock due to i) strong recovery in auto segment expected in FY22 (expect 15-20% OEM volume growth); ii) continued growth momentum in architectural segment for domestic players on the back of improving housing demand and increased curbs on imports; iii) leaner fixed-cost structure aided by structural measures (e.g. VRS, plant modernisation) and iv) lower gas costs. As asset utilisation rises (e.g. Gujarat auto plant), we expect FCF to improve (to ~Rs10bn over FY22/23) thereby, aiding deleveraging (~Rs4bn reduction over FY22-23). Stock currently trades at ~7% FCF Yield FY22/23. Maintain BUY.

* Key highlights of the quarter: On a segmental basis automotive segment grew 13% YoY to ~Rs4.3bn while architectural segment also rose by 12.6% YoY to Rs3.3bn. On the profitability side, EBIT margins of architectural and automotive businesses came in at 22.9% (up 564 bps QoQ) and 17.2% (up 277bps QoQ), respectively. The QoQ margin increase (432bps) was entirely driven by gross margins (up 218bps) due to superior product mix, better fixed cost management and operating leverage. Reported PAT grew 122% YoY at Rs733mn.

* Fixed cost reduction, growth and pricing to aid margins: Domestic architectural glass industry is likely to be a key beneficiary of the additional CVD/anti-subsidy duty on imports from Malaysia (81% share). Asahi too is expected to benefit from the same and witness better growth, pricing in the domestic market. Efforts of past few years to reduce fixed costs (e.g. headcount rationalisation, wastage reduction) is likely to provide buffer in wake of potential increase in gas prices (Q3 saw 20bps QoQ rise). In auto segment, OEMs have ramped-up production to normalise channel inventory as demand for SUVs remains robust this is likely to drive superior content increase for Asahi. The new Gujarat plant commissioning is also expected to give capacity headroom for growth and aid return ratios as asset utilisation improves.

* 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; 2) is a proxy play to the growing architectural segment demand (e.g. housing, project) where the strategy is to improve product mix by focussing on higher value products; and c) no major capex impending, strong operating leverage is likely to aid RoCEs/deleveraging. We upgrade our earnings by 4%/8% for FY22E/23E, respectively, value Asahi at 12x (unchanged) FY23E (roll forward) EV/EBITDA. Maintain BUY with a revised target price of Rs361/share (earlier: Rs320).

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