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Operating leverage to aid margin improvement…

About the stock: Butterfly Gandhimathi (BGAL) is one of the leading manufacturers of kitchen & electrical appliances in India and sells its products branded as ‘Butterfly’.

* The company is a market leader in India for SS LPG stoves & table top wet grinders and major supplier of mixer grinders & pressure cookers

* Over the last three years, BGAL has enhanced its focus on modern trade/online distribution channels to capture higher revenue growth

Q3FY22 Results: BGAL reported subdued revenue growth on a high base with raw material inflation leading to pressure on gross margins.

* Revenue de-grew 13% YoY to | 258 crore on a significantly high base

* Gross margins declined 189 bps YoY to 39.8% on account of higher raw material cost. Higher employee cost (up 250 bps YoY) led to EBITDA margin decline of 380 bps YoY to 8.2%

* EBITDA de-grew 41% YoY to | 21.2 crore. Consequently, net profit declined 51% YoY to | 9.1 crore

What should investors do? Over the last three years, the stock price has appreciated at a CAGR of 75%.

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value BGAL at | 1620 i.e. 2x FY24E EV/sales.

Key triggers for future price performance:

* The company is planning a capex of | 30 crore to enhance the plant capacity. The new capex would enable BGAL to have a peak revenue potential of ~ | 1500 crore over the next two years

* Over the next four to five years the company is targeting revenue of ~| 2000 crore with early double digit margins

* BGAL has shown consistent improvement in financial performance parameters with working capital days, return ratios getting significantly enhanced in FY21. We expect it to maintain RoCE of ~30%+ in FY23E

* Expect sustained revenue growth and improved margin, going ahead. We model revenue, earnings CAGR of 18%, 40%, respectively, in FY21-24E

Alternate Stock Idea: Besides BGAL, we also like TTK Prestige

* TTK Prestige, over the years, has maintained its balance sheet strength with strong cash reserves (~| 500+ crore) and healthy RoIC of 30%+

* We have a BUY rating with a target price of | 1270

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