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Mix, cost reduction measures cushion margins

Asahi India Glass’ (Asahi) Q1FY22 operating numbers were a beat on consensus estimates as EBITDA margin came in at 20.3% (down 242bps QoQ) despite 26% QoQ drop in revenues to ~Rs6bn. Faster growth in architectural segment (down 22%QoQ) led to superior mix (contribution rose to 44.6%, up 279bps QoQ), thus aiding margins.

We remain positive on the stock due to: i) it being one of the best proxy plays (~72% market share) for domestic PV recovery coupled with content rise theme; ii) play on architectural segment demand rise led by improving housing demand; and iii) superior quality/ cost structure vis-à-vis domestic peers further aided by policy support (e.g. ADD/CVD). As the recently commissioned Gujarat plant stabilises, we expect FCF to improve to ~Rs9bn over FY22E/FY23E. Stock remains attractive (~5.0% FCF yield on FY23E). Maintain BUY.

* Key highlights of the quarter: On segmental basis, automotive declined 30% QoQ to ~Rs3.3bn while the architectural segment fell 22% QoQ to Rs2.66bn. On profitability side, EBIT margins (inclusive of segmental other income) of architectural and automotive businesses came in at 23.3% (down 201bps QoQ) and 8.1% (down 857bps QoQ), respectively. Gross margin improved by 691bps QoQ to 72.7%. Reported PAT declined 56% QoQ at Rs274mn.

* Solar entry to boost growth even as existing business outlook remains strong: Asahi has entered into an agreement with Vishakha group to set up a state-of-the-art greenfield solar glass manufacturing facility at Mundra, Gujarat. Phase-1 of the plant will have glass manufacturing capacity of up to 3GW of the installable capacity of solar power plants and is expected to be commissioned within 18-24 months. Asahi will have a minority stake in the solar glass business.

The potential TAM opportunity in solar remains strong as India has set an ambitious target of 450GW of renewable power generation by FY30. In the architectural segment, Asahi is likely to witness the twin benefit of rise in domestic housing demand coupled with pricing improvement (~10-15% YoY). In the auto segment, production in Q1FY22 was adversely impacted by local lockdowns, however, OEMs are likely to ramp up production in H2FY22.

Also the commissioning of the new Gujarat plant is expected to provide ample capacity headroom for growth in the automotive segment. Rising gas costs (currently at ~$9-10/MMBtu) remain a headwind for the industry, however, strong demand and reduced imports lend industry with ample pricing power.

* Maintain BUY: We like Asahi’s business as it: 1) has a dominant through-cycle automotive market share of ~72% with premiumisation-driven content improvement and no EV risk; and 2) is a proxy play to the growing architectural segment demand (e.g. housing, projects) with a strategy further seeks growth in new segments (e.g. solar). We upgrade our earnings estimates by ~14% each for FY22E and FY23E respectively. We raise our multiple to 14x (earlier: 13.5x) FY23E EV/EBITDA. Maintain BUY with a revised target price of Rs471/share (earlier: Rs404/share).

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