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Superior execution to drive rerating

Despite losses in ATUM and muted growth in the synthetic yarn segment, strong rural demand for Visaka’s (VSKI) ACS roofing sheet and sharp demand recovery in its Vnext segment helped the company report an all-time high PAT (Rs1.11bn) in FY21. Strong free cashflow generation (highest in 10 years) led to significant reduction in net debt (down to Rs0.4bn from Rs2.5bn YoY) amid sharp improvement in working capital (down to 83 vs 124 days YoY) leading to >20% RoCE (highest in 10 years) in FY21. While we expect Vnext and synthetic yarn segment to lead recovery in FY22E, ACS is likely to sustain its growth momentum. With strong cashflow generation going forward (despite Rs1bn capex in FY22E), we expect the company to become a net cash company by FY22E. This would maintain firm RoCEs over FY22E-FY23E, which would likely drive further rerating. Maintain BUY.

* Valuation and outlook: Factoring-in the Q4FY21 performance, we increase our FY22E PAT estimates by 6.1% and roll over to FY23E. We now expect revenue and PAT CAGRs of 9.1% and 34.5% over FY20-FY23E. Strong FCF generation would help maintain its high teen RoCEs over FY22E-FY23E despite incremental capex for the new Vnext and ACS plants. Maintain BUY with a revised target price of Rs900 (earlier: Rs705), implying a P/E multiple of 13x FY23E earnings (vs 12x FY22E earlier). Key risks: 1) slowdown in rural demand may impact ACS volumes, and 2) slower recovery in synthetic yarn segment in FY22.

* Sustained demand/pricing tailwinds in ACS/FCB aid outperformance: VSKI reported its Q4FY21 revenues at Rs3.54bn (I-Sec: Rs3.2bn), up 55.5% YoY, led by sharp rise in Vnext revenues and sustained demand for ACS. Synthetic yarn revenues too recovered by a sharp 2% YoY to Rs542mn. Strong rural demand and expected recovery in urban India is likely to drive sustained growth momentum in ACS and Vnext while we expect synthetic yarn to stage sharp recovery going forward. We thus expect VSKI to exhibit an overall revenue CAGR of 9.2% over FY20-FY23E.

* EBITDA margin in-line at 14.9% (I-Sec: 15.2%) led by operating leverage: Despite higher input costs across product segments, EBITDA margin came in at 14.9% (I-Sec: 15.2%), up 590bps YoY led largely by operating leverage in ACS/Vnext segments. Synthetic yarn margin too recovered QoQ to 14.8% driven by recovery post Covid. Going forward, we expect EBITDA margin improvement in Vnext and synthetic yarn segments to offset any contraction in margins of the ACS segment. We thus expect the company’s overall margins to be in the range of 15-15.5% over FY22E-FY23E.

* Balance sheet to strengthen further; VSKI to become net cash company by end-FY22E: With higher FCF generation and consequent reduction in debt, VSKI is likely to become a net cash company by end-FY22E. With likely improvement in profitability of its Vnext segment, sharp recovery in the synthetic yarn segment, and sustained strict working capital discipline, we expect RoCE to remain in high teens despite the company’s planned capex in its ACS/FCB segments.

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