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Confluence of factors impact quarter performance

Stove Kraft Ltd (SKL) posted an optically extremely poor quarter with Adj PAT decline of 67% YoY/52% QoQ and was 57% below JMFe (66% below consensus). The disappointment was on account of a) strong base (3QFY21 was exceptionally strong due to pent up demand), b) preponement of sales to 2QFY22 (early festivals), c) weak E-Com (large customer underoing transition; restocking did not take place post seasonal offers in Oct), d) RM cost inflation (400bps YoY/-50bps QoQ) company did not pass on as it expected reversal), e) high employee cost (+42% YoY; increasing staff strength for expanding categories/distribution and backward integration), and f) negative operating leverage. Sales grew 1% YoY (+11% 2yr CAGR) while EBITDA margins were at 6 quarter low of 6.2% (-830bps YoY/-500bps QoQ). However, on 9MFY22 basis, the company has reported sales growth of 40% YoY, best among other kitchen appliances companies. We cut our FY22/FY24 EPS estimates by 33%/25%/16% respectively to reflect sales miss, RM cost inflation and negative operating leverage. We continue to value SKL at 28x FY24EPS to arrive at Mar’23TP of INR 950(vs. Dec’22TP of INR 1080 earlier). Retain BUY

3QFY22 results summary: SKL’s 3QFY22 sales grew 1% YoY (-14% QoQ) to INR 2.98bn (14% below JMFe) as growth in offline (+20% YoY;69% of 3QFY22 revenue ) was offset by sharp decline in E-Com (-27% YoY; 26% of revenue) and exports weakness (-13% YoY; 6% of revenue). Gross margins compressed 400bps YoY/50bps QoQ to 31.7% (below management medium term guidance of 33-34%) with rising commodity prices. Employee costs rose 43% YoY as it hired staff for expanding categories/distribution and backward integration of outsourced products) and one time payment to factory staff on festival. A&P spends reduced to 3% of sales in 3QFY22 vs. 3.5% in 3QFY21. As a result, EBITDA margins compressed 830bps YoY to 6.2% (vs. management guidance of 13-14% for FY22). EBITDA declined 57% YoY to INR 186mn (52% above JMFe/65% below consensus). PBT declined 70% YoY/69% QoQ to INR 100mn (67% below JMFe). However, tax provision reversal resulted PAT at INR 111mn, -67% YoY/-52% QoQ and was 57% below JMFe. (66% below consensus).

RM cost inflation continues to hurt: While the company continues to believe into cost plus model and hence argue for sustainable margins of 33-34% (earlier guidance of 34- *35%), 3QFY22 came in at 31.7% given it did not effect any price hike as it expected reversal of commodity prices. However, it has now taken 4% blended price hike across categories and hence expected atleast 150bps improvement in 4Q, provided costs do not inch up further.

Cut estimates; Maintain BUY: We cut our FY22-FY24E EPS estimates by 33%/19%/16% respectively given near term gross margin pressure as well as negative operating leverage (we cut our sales forecast by 4-6%). We roll forward with Mar’23TP of INR 950 (28xFY24EPS). We maintain BUY. Key Risks: Delayed/inability to pass on cost inflation

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