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Good performance, operating margin belies estimates; retaining a Buy

Nilkamal’s Q1 revenue, EBITDA and PAT were up 1.5x, 2.3x and 17x y/y to Rs7.4bn, Rs687m and Rs287m, vs ARe of Rs7.1bn, Rs442m and Rs63m. Revenue was marginally higher, while there was a positive surprise on the operating margin front. Plastics volume sold were 16% higher y/y (at the parent level). Q1 capex was Rs487m, while net borrowings were Rs1.6bn.

Plastics business, the key revenue contributor, however mix changes marginally. Revenue grew 50% y/y, driven by 45% and 221% y/y revenue growth in plastics and lifestyle respectively. The plastics-lifestyle revenue mix changed to 92:8 from 96:4 a year back. Revenue from e-commerce was up 86% y/y; in the mattress business it was up 2.3x.

Profitability improves significantly. Higher input costs continued, leading to a 229bp y/y contraction in the gross margin to 38.7%. Gross profit, however, was up 42% y/y. Economies of scale and better absorption of fixed overheads lifted operating margin 321bps y/y to 9.3%. Operating profit rocketed 130% y/y

Capacity expansion to support high growth momentum. The company is ramping up in-house manufacturing of metal & modular furniture (already bringing 25% to readymade-furniture revenue). This is also expected to reduce, to an extent, import dependency. The company incurred Rs487m capex in Q1 FY23 (injection-moulding capacity increased by 5,120tpa), while net borrowings were Rs1.6bn.

Outlook, Valuation. The demand environment looks encouraging. Input cost tailwinds would provide headroom for margin expansion. Hence, we expect 13% and 54% CAGRs over FY22-24 in revenue and earnings respectively. We maintain our Buy rating, with a higher target price of Rs2,985 based on 22.5x (earlier Rs2,781, based on 20x) FY24e earnings

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