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Strong medium‐term growth visibility with improving efficiencies; maintain BUY

Our view

STOVEKRAFT delivered industry‐leading revenue growth led by strong volume growth across product categories driven by continued efforts on distribution expansion across all channels. The management remains confident of growing ahead of industry at about 25% CAGR. Gross margin contracted by 291bps due to high input prices of key raw materials. The company has already taken pricing actions which will normalize gross margins. Implementation of DMS will help in improving efficiency and provide inventory management solutions for effective working capital management. We continue to remain positive on the stock and maintain our BUY rating as we see strong growth visibility coupled with increase in efficiencies in the near term. We have been conservative in our growth and margin assumptions given limited track record.

Result Highlights

* Quarter Summary – Q2 saw strong recovery across the channels and product categories. Volume growth has surprised positively as there has been strong demand across all categories and channels including e‐commerce.

* Margin – Commodity headwinds have led to gross margin contraction of 291bps yoy. Gross margin contraction along with higher marketing spends have led to moderation in EBITDA margins.

* Volume and market share trends – Volume growth has been robust across the product categories with Pressure cookers/Gas cooktops/Induction cooktops/Non‐stick cookware/LED/Small Appliances 51%/30%55%,14%/70% 34%. Company continues to gain market share given competitive price points it offers.  

* Investments & Distribution – During the quarter, the Company introduced Distributor Management System and has implemented it successfully at 100% of its outlets across the country. Company has added over 11,400 retail outlets (7,000 for kitchen and 4,400 for LED), that is ~20% of the outlets as of March 2021.

Valuation

STOVKRA is estimated to deliver revenue CAGR of over FY21‐24E of 22% (fastest among peers) despite higher base given capacity ramp‐up driving share gains. We build in EBITDA/PAT CAGR of 20%/18% respectively as we expect sustenance of a strong product mix, aggressive marketing spends to drive some premiumization and scale economies. We foresee a strong growth outlook in the domestic market led by market share gains coupled with increasing exports driving above‐ industry growth rates, with continued backward integration and emphasis on working capital reduction driving stable margins and strong return ratios. We maintain BUY rating with TP of Rs1,217 valuing the company at 30x FY24E EPS.

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