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Buy Butterfly Gandhimathi Appliances Ltd For Target Rs.579 - HDFC Securities

Our Take:

Butterfly Gandhimathi Appliances Limited (BGAL) is leading manufacturer of Kitchen and Electrical Appliances. Over the years, the company has diversified from being predominantly an LPG stove manufacturing company and a B2B company supplying majorly to State Govt to a branded ‘kitchen appliances’ company with reasonably diversified product portfolio. BGAL has a solid foothold in the Southern market and an extensive distribution comprising 500+ exclusive distributors catering 25,000+ retail points across India. Better Channel mix and product mix is likely to support improvement in margins going forward. The company manufactures its core products (85%) in-house ensuring better quality, high operating leverage and margins. Management’s recent focus in reducing the working capital cycle would be instrumental in freeing its working capital and thus would have a positive impact on bottom-line numbers.

Valuations & Recommendation:

Strong presence of the Company in all segments of domestic appliances industry including LPG stoves, Mixer Grinders, Cookers and Table Top Wet Grinders, planned new launches and expanded network of dealers will help the Company to consolidate its recent gains further and grow ahead of the Industry in the coming years. We believe rising disposable income (although remains weak in near term), increasing urbanization, number of nuclear households, rise in female working population coupled with increasing consumer preference towards branded products is likely to drive company’s growth going ahead.

Going forward, sharpening focus on branded sales is envisaged to enhance the company’s margin and return ratios, leading to a re-rating. The management indicated that sales has been strong due to pent up demand and WFH related stocking up at home. This is expected to sustain owing to enhanced preference of consumers for home cooked food. The management has been focusing on increasing the share of e-commerce that has been among the fastest growing distribution channel for the company. Sustaining the revenue growth and management of the working capital would remain key monitorables. If the recent performance is sustained, Butterfly could get valuations closer to its peers like TTK prestige/Hawkins. We think the base case fair value of the stock is Rs.529 (21.5x Sept22E EPS) and the bull case fair value is Rs.579 (23.5xSept22E EPS) over the next two quarters. Investors can buy the stock at LTP and add on dips to Rs.428-430 (17.5xSept22E EPS). At the LTP of Rs.481.8 it quotes at 19.6xSept22E EPS.

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