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Revenue growth at cost of margins; downgrade to Neutra

Result Synopsis

JCHAC delivered better than expected revenue growth (lower than peers) with another quarter of significant contraction in margins. Gross margin contracted by 882bps; however, on sequential basis gross margin has contracted by further 612bps. We feel that this gross margin contraction is on account of intense competition in RAC space where other companies have become super aggressive. Our channel checks suggest JCHAC’s aggression in the mass premium segment (multiple new SKU launches) which is 70% of the RAC industry volumes is not yielding results as it is losing market share to players like Lloyd and Blue star. JCHAC has been losing market share as well as margins in this super competitive environment. We feel it would be difficult to gain market share and improve upon the margins at the same time in this hyper competitive RAC market. Considering lower margin profile, we downgrade the Stock to Neutral from ADD and have cut our target multiple to 40x from earlier 45x as it will be uphill task for company to restore peak profitability in this hyper competitive environment.

JCHAC is ramping up its distribution network to cater to tier 2,3,4 cities which are touted to be new growth drivers forthe RAC industry. Recently company has changed its strategy and is now looking for higher volumes. JCHAC has been failing to protect its margin and simultaneously grow its market share. Market share gains and improvement in profitability will need to be watched out for before we become constructive on the stock. We now expect FY22?24E Revenue/EBITDA/PAT CAGR of 19%/53%/163% on favorable base. Given the headwinds company is facing, we downgrade the stock to Neutral rating with a PT of Rs1,646 valuing it at 40x FY24 EPS.

Result Highlights

* Quarter summary – JCHAC has delivered better than expected revenue growth of 105% (lower than peers) on a favorable base. Gross margin contracted 882bps to 22.1% which can be attributable to pricing its products aggressively in a quest to regain market share.

* Margins – Margins in the cooling segment have contracted and company has registered loss of Rs29mn, while in design and development which consist of projects business, margins have expanded 135bps to 12.3%.

* Distribution – Company has been expanding its distribution reach and now with increasing SKUs of mass premium RACs, it is aggressively looking to improve its reach in tier 3,4,5 cities and towns.

* Market Buzz – As per our channel checks, JCHAC is now aggressively focusing on mass premium segment and has been aggressively launching new SKUs at competitive pricing to recoup lost market share.

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