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The template is intact - revenues up, margins down (and that's good)

A good revenue performance (+9% LFL 2-year CAGR) was (somewhat) dampened by 51-78% yoy inflation in key RMs (TDI, Polyol); GM contracted to lowest-ever level of 37.4%. The template of new consumer recruitment continues - something which we like - manifested by higher growth in lower-end products (our view). Growth in foam cores and technical foam was impressive at 17-19% (2-year CAGR). As expected, Australia recovered smartly (2-year CAGR growth of 13%) and Spain also did well.

Long-term opportunities are DCF-accretive and embellish the narrative – (a) benefit from China+ strategy of buyers in US, Europe (exports likely to cross Rs1bn in FY22), (b) opportunity in furniture cushioning and manufacturing (under SleepX brand), (c) sustained acceleration in India business growth (competitive edge through 5,000+ EBO network), (d) consumers realizing importance of good quality mattress and (e) focus on growing e-commerce channel (+80% yoy growth in FY21 and reached 10% saliency). Price hikes in branded mattress and effective cost controls are likely to mitigate pressure from rising input costs. BUY; TP Rs2,500.

* Broad based performance: On a LFL basis, adjusted revenue grew 9% (all 2-year CAGR basis). With mix impacting the branded mattresses segment (revenue +5%, volume +10%), other segments of foam core (+19%) and technical foam (+17%) grew well. However, furniture foam and home comfort reported decline of 1% and 7%, respectively. Australia business revenue grew 13% while Spain business continues to perform well (75% YoY). Volume growth in B2C business was driven by change in consumer behavior towards better mattresses and industry formalization. The B2B business growth was driven by good traction in the auto sector.

* GM declined to record low levels: Gross margin declined 1,220bps to 37.4% due to input cost headwinds (TDI at Rs184/kg was up 51% YoY; Polyol at Rs206/kg was up 78% YoY). EBITDA margin contraction was limited to 320bps YoY to 11.5% due to controlled costs (including cut in ad-spends) and operating leverage benefit. Australia and Spain business recorded EBITDA margin prints of 16-17% for FY21 but Q4FY21 margins were weak. We note input costs pressure (TDI, Polyol) is not expected to cool-off soon despite some decline sequentially.

* Valuation and risks: We cut our FY22E earnings estimates by 5%; modelling revenue / EBITDA / PAT CAGR of 21% / 23% / 32% over FY21-23E. Maintain BUY with a DCF-based target price of Rs2,500. At our target price, the stock will trade at 29X P/E multiple Mar-23E. Key downside risks are (1) adverse movement in prices of key inputs and (2) increase in competition from global players/Indian e-commerce.

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