Buy Welspun Corp Ltd For Target Rs.118 - Sushil Finance Ltd
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Highlights from the Quarter (Q2 FY23) :
During Q2 FY23, the top line fell by 15.0% yoy to Rs.2,113.5 cr and on a sequential basis, the top line was up 8.0%. Home textiles reported de-growth of 15% yoy in revenue to Rs.2,011 cr, while flooring revenue reported flat yoy growth to Rs.160 cr. In the US, past inventory of home textiles resulted in subdued performance for Q2FY23. The company expects demand to pick up in a couple of quarters in the US, while in India, it is seeing good demand buildup, with 31% yoy growth in Domestic Home textiles.
EBITDA margin contracted to 6.1% in Q2 FY23. The average cotton cost consumed during the quarter was Rs.83,000 per candy as compared to Rs.48,000 per candy last year same quarter and Rs.75,000 per candy during the last quarter. While the cost of cotton and freight has come down by 15-30%, the company expects a correction in the cost, which would lead to improvement in the margins in a couple of quarters.
According to the management, the demand outlook for the near term is muted. Margins in the near term are expected to be impacted as high-cost inventory would be consumed. The medium to long-term fundamentals remain strong and the cotton prices are likely to see a downtrend as the plantation of cotton is expected to be higher by 7-8% over the last year. As a result, from Q4 FY23, the lower raw material cost would positively impact the company’s margins. The company is planning to put up a 30MW solar power facility at its Anjar location and the Board has approved an investment of Rs.200 cr. This will bring the company closer to achieving 20% renewable energy by FY25.
OUTLOOK AND VALUATION
Raw material cost as well logistic cost have peaked out and will reflect in margins in a couple of quarters. Though demand is lackluster due to the global slowdown, thereby resulting in muted FY23, we expect a pickup due to longterm drivers like China+1 and FTAs with UK and EU. Going forward, we expect the company to deliver an EPS of Rs.6.6 in FY24 and with a P/E of 18x, we arrive at a target price of Rs.118. We recommend a BUY at current levels within the time frame of 18-24 months.
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