Buy Welspun India Ltd For Target Rs.118 - Sushil Finance
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Welspun India Ltd. recently announced its performance for the quarter ended June 30 2022. Following are the key highlights.
Highlights from the Quarter (Q1 FY23) :
During Q1 FY23, the top-line fell by 11.6% yoy to Rs.1,957.3 cr and on sequential basis, the top-line was down 12.1%. Home textiles reported de-growth of 13% yoy to Rs.1,852 cr, while flooring reported 39.5% yoy growth to Rs.169.4 cr. The demand for the home textiles products was subdued in Q1 FY23, on account of oversupply in the market and buyer preferences shifting to services as compared to the products. Also, the big retailers are carrying a lot of inventory for home textiles, thereby leading to lower demand.
EBITDA margin contracted by ~240 bps qoq to 7.8% in Q1 FY23. It faced multiple headwinds like an unprecedented rise in key raw material prices, an increase in energy costs and disruptions in the global supply chain, which has further worsened due to the Ukraine-Russia conflict. While the cost of cotton and freight has come down by 15-30%, the company expects some more correction in the cost, which would lead to improvement in the margins.
According to the management, the demand outlook for the near term is muted. Margins in the next quarter are expected to worsen further as high cost inventory would be consumed during the next quarter. 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 5-7% over the last year. As a result, from Q3-Q4 FY23, the lower raw material cost would have a positive impact on the margins of the company.
Outlook and Valuation
Going forward, we expect the company to deliver an EPS of Rs.6.6 in FY24; In light of headwinds being faced by the company in the short-run and volatility in the markets we have reduced our target P/E multiple to 18x, thereby, arriving at a revised target price of Rs.118. We recommend a BUY at current levels within the time frame of 18-24 months.
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