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Good revenue visibility; material costs a concern in the near term

* Sales in 4QFY22 were in line. Its revenue performance was commendable, given the COVID-led disruptions in Jan’22 and a high base of 44.7% in 4QFY21. Two/three-year CAGR was also healthy at 27.5%/15.2%.

* Higher than expected raw material prices eroded gross margin, resulting in a significant miss on EBITDA in 4QFY22. While some price hikes were taken in May’22, the management expects VAM prices to remain elevated over the next three-to-four months before softening in 2HFY23. The rich multiple of 57x FY24E EPS adequately captures the stock’s fair value. We maintain our Neutral rating.

Sales in line; operating margin lower than expected

* Consolidated net sales grew 12.1% YoY to INR25b (in line). EBITDA fell 13% YoY to INR4b (est. INR5.1b). PBT declined by 18% YoY to INR3.4b (est. INR4.4b). Adjusted PAT fell 19.6% YoY to INR2.5b (est. INR3.3b).

* Overall gross margin contracted by 730bp YoY to 43.5%.

* As a percentage of sales, lower employee/other expenses (-60bp/-200bp YoY to 11.1%/16.4%) restricted EBITDA margin contraction to 460bp YoY at 16% (est. 20%).

* In FY22, sales/EBITDA/adjusted PAT grew 36%/10%/6%.

* Segmental | a) Consumer and Bazaar (C&B) segment: Revenue grew 10.6% YoY to INR19.1b, with segmental EBIT falling by 11% to INR4.2b. Segmental EBIT margin fell 530bp YoY to 21.8%. b) B2B segment: Revenue grew 20.6% YoY to INR6.4b, with segmental EBIT declining by 15.3% YoY to INR444m. Segmental EBIT margin declined by 290bp YoY to 6.9%.

* The performance of its subsidiaries: Revenue from overseas subsidiaries grew 10% YoY to INR1.9b in 4QFY22. EBITDA declined by 58% YoY to INR5m in 4QFY22. Revenue from domestic subsidiaries grew 21% YoY to INR3.5b, and EBITDA increased by 34% YoY to INR562m in 4QFY22.

Highlights from the management commentary

* VAM prices are currently at USD2,500-2,600/MT. Consumption cost stood ~USD2,400/MT in 4QFY22 as against USD1,810/MT in 4QFY21. Two major plants around the world has been non-functional w.r.t. VAM.

* Standalone EBITDA margin will remain in the 20-24% range on a steadystate basis.

* Competitive intensity in last 12-24 months has been lesser than normal as small players have been impacted by the increase in input costs.

* PIDI witnessed some amount of strain in rural and semi-urban areas. Urban demand continues to remain resilient.

Valuation and view: Valuation expensive, structural growth story intact

* Changes to our model have resulted in a 5% lower EPS estimate for FY23 as we factor the impact of elevated material cost in the near-term. However, there is no material change to our FY24 earnings estimate.

* Strong revenue growth over the past six quarters is a vindication of the latent growth opportunities in the Core, Pioneer, and Growth categories. Once material costs stabilize (the timing of which is unclear for now), earnings growth could potentially be healthy beyond FY23.

* While the structural investment case remains intact, valuations are expensive at 57.3x FY24E EPS. We maintain our Neutral rating, with a TP of INR2,035 per share (premised on 55x FY24E EPS).

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