IGI Logo

Classic case to apply "lifecycle value of customer" approach

A good revenue performance (+29% YoY, 2-year CAGR 26%) was (somewhat) dampened by 24-68% YoY inflation in key RMs (TDI, Polyol); GM contracted significantly to 39.9%, however it was up 440bps QoQ due to some softening of raw material prices and price hikes. The template of new consumer recruitment continues - something which we like - manifested by higher growth in lower-end products (our view). Growth in B2B business was also impressive. Australia business was impacted due to lockdowns while Spain continues to perform 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; scaling up of exports business is on track), (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. Price hikes in branded mattress and effective cost controls are unlikely to completely mitigate pressure from rising input costs in near term and that's the key speed-breaker. Mr Tushaar Gautam, Director is appointed as CEO - India Business effective 01-Feb-2022. BUY.

* Broad based performance: Consolidated revenue / EBITDA / recurring PAT grew by 29% / 3% / 10% YoY respectively. Branded mattresses segment grew by 34% YoY (volume +14% YoY) and continues to perform well driven by change in consumer behavior towards better mattresses and industry formalization. B2B segments in India have also performed well: Foam core (+62% YoY), technical foam (+44% YoY), furniture foam (+15% YoY) and home comforts (+38% YoY). Australia business revenue declined 9% due to covid led lockdowns (has recovered well post lockdowns) while Spain business continues to perform well (+29% YoY).

* Margins continue to be under pressure due to significant commodity headwinds: Gross margin declined 900bps to 39.9% due to input cost headwinds (TDI at Rs173/kg was up 24% YoY; Polyol at Rs200/kg was up 68% YoY). However, gross margins were up 440bps QoQ due to sequential softening of input cost and price hikes taken. Management highlighted that commodity prices have been volatile during the quarter as well. EBITDA margin contraction was limited to 350bps YoY to 14% due to controlled costs (including cut in ad-spends) and operating leverage benefit. Australia and Spain business recorded significantly lower EBITDA margin prints of 8% and 11% respectively due to commodity headwinds. We note that management highlighted that input costs pressure (current prices of TDI and Polyol at Rs237/kg and Rs215/kg are above Q2FY22 levels) is not expected to cool-off soon despite some decline in Q2FY22 sequentially.

* Valuation and risks: We cut our FY22E earnings estimates by 7%; modelling revenue / EBITDA / PAT CAGR of 22% / 23% / 31% over FY21-23E. Maintain BUY with a DCF-based revised target price of Rs2,900. At our target price, the stock will trade at 31x P/E multiple Sep-23E. Key downside risks are (1) adverse movement in prices of key inputs and (2) increase in competition from global players/Indian e-commerce.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

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