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Stable showing; margin trajectory key

Welspun India (WLSI) sustained revenue growth (up 26% YoY) with bed/bath/rugs posting volume growth of 4%/16%/29% YoY. However, margin pressure persisted, dragging EBITDA margin to 17% (down 370bps QoQ) given inflation pressure across key raw materials. WLSI also upped its capex plan with announcement of new capacity mainly for the towel segment. Debt increased (Q2FY22: INR25bn), but WLSI remains confident of achieving FY22E net debt target of INR24bn.

We maintain our estimates and roll forward the valuation to FY23E, which yields a revised TP of INR165 (INR145 earlier). Retain ‘BUY’. Improvement in margin trajectory will be a key driver for WLSI.

Overall recovery; increased costs cut margins

WLSI reported strong growth with revenues up 26% YoY/12% QoQ. Home textile was up 23% YoY while Flooring was up 107% and did a revenue of INR1.6bn this quarter (Q1FY22: INR1.2bn), most of which has come from international business. Bed/bath/rugs posted volume growth of 4%/16%/29% YoY. However, cost inflation, which was seen in Q1FY22, also continued into this quarter with gross margins falling to a multi-quarter low of 46%, despite incremental benefits of RoSCTL. As a result, EBITDA margin came in at 16.5% (Q2FY21: 20%) with EBITDA up 6% YoY (down 8% QoQ). WLSI managed to take calibrated price increases, which along with focus on savings helped it in protecting margins.

Capex ramped up; debt increases, but target reduction unchanged

WLSI’s expansion at Vapi and Anjar, announced in Q3FY21, for bed sheet and rugs would be completed by Q4FY22. Additional terry towel capacity of 16,600MT is being installed at Anjar; it was announced in Sep-21 and will be operational by Q4FY22. For FY22/FY23, WLSI is targeting capex of INR7.5bn/INR5.5bn. Though net debt increased to INR25.3bn (Q1FY22: INR22.5bn), WLSI expects it to normalize while the FY22 target of INR24bn remains unchanged.

Outlook and valuation: Margin trajectory key; maintain ‘BUY’

We maintain our estimates and roll forward the valuation to FY23 keeping our target multiple unchanged at 10x EV/EBITDA, which yields a revised TP of INR165 (INR145 earlier). Retain ‘BUY’. Performance ahead will be driven by WLSI taking price hikes, which can drive margins back to its normal trajectory of 20%.

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