IGI Logo

Volumes strong; worst margins behind

Greenlam posted strong volume growth of 45% YoY (15% above our estimate) in Q2FY22 led by a jump of 64%/29% YoY in domestic/export volume as the company continued to gain market share. However, sharply higher raw material cost, delay in passing on costs and loss in allied business impacted profit (~20% lower than estimate). Going ahead, while volume growth is expected to remain strong, Greenlam expects margins to improve over coming quarters.

Given the undershoot in Q2FY22, we are cutting FY22E EPS by 16%; however, given sustained market share gains by Greenlam, we are raising FY23/24E EPS by 4%/5%. Maintain ‘BUY’ with a revised TP of INR1,739 (INR1,421 earlier) based on 24x FY23E EPS.

Strong volume growth with weak margin in laminates business

Laminates’ revenue increased 57% YoY/35% QoQ led by strong volume growth of 45% YoY and an 8% uptick in blended realisation. Volume growth was strong in both domestic (64% YoY) as well as exports (29% YoY) led by significant market share gains as smaller players faced raw material constraints and cash flow mismatch. However, EBITDA margin dropped 470bps YoY/190bps QoQ to 11.5% due to a delay in passing on rising raw material costs. Going ahead, the company is confident of continued volume growth while the worst of margins is behind too. We believe Greenlam would see gradual improvement in margins to 17–18% in the laminates segment.

Decorative and allied business continues to drag profitability

The veneer and allied segment’s revenue, up 28% YoY, came in below our estimate of 44% YoY increase. While decorative veneers’ reported a revenue surge of 70% YoY, engineered doors/flooring business continued to drag with revenues falling by 9%/12% YoY. The overall decorative and allied segment also saw an EBITDA loss of INR16mn versus an INR13mn loss in Q2FY21. This segment has seen greater impact due to logistics-related challenges amid container availability issues as movement of raw material and certain export orders were impacted. Furthermore, recovery in this segment is slow due to its discretionary nature.

Outlook and valuation: Exports driving growth; maintain ‘BUY’

Given the miss in current quarter’s numbers, we are revising down FY22E EPS by 16%; however given sustained market share gains and expectation of a gradual margin improvement, we are raising FY23/24E EPS by 4%/5%. Maintain ‘BUY’ with a revised TP of INR1,739 (INR1,421 earlier) based on 24x FY23 EPS.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer