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Profitability impacted severely, need corrective actions to improve margins; downgrade to REDUCE

Result Synopsis

IFBI has seen muted revenue growth in 4Q led by price increase while volumes continued to be lowerto negative in certain product categories. Gross margin contracted by 718bps due to high inflation in key raw materials which was not fully passed on. The company has taken some pricing actions in end of march full impact of which should be realized form Q1. Company has also taken other corrective actions including change in management in certain areas and noticeable improvement in sales have been observed in April and May. We have already built in increased efficiency in home appliances resulting from the higher utilization of AC plant. Currently RAC plant is completely booked for Q1 and there is order visibility of Q2 as well. We however believe company will have to undertake stringent cost reduction activities which is a long‐drawn process to improve margins Aspiration of management to reach double digit margins will take time as competitive intensity remains intense. We therefore downgrade the stock to REDUCE considering lower profitability.

IFB is now slated to clock revenue/EBITDA/PAT CAGR of 12%/139% (on low base) over FY22‐  24E. We build in ~580bpsmargin improvement after the sharp dip in FY22 on account of increased efficiencies and higher utilization from AC plant. Despite scale benefits and increased efficiencies, IFB’s margins are significantly lower than peers. We cut our target multiple to 25x vs 30x earlier as return ratios and profitability are significantly lowerthan peers.We downgrade the stock to REDUCE within a revised PT of Rs807.

Result Highlights

Quarter summary – IFBI delivered 9% revenue growth on yoy basis, with home appliances growing 8.8%; while engineering division growing by just 2.5% respectively. Drop in demand in Jan and Feb has led to muted performance.

Margins – Company has incurred loss in home appliances as been able to pass on increased commodity prices and higher promotion expenses on AC. Engineering margins at 5.4% contracted by 572bps as increased commodity costs will be passed on with a quarter’s lag

Investments in AC plant – Total Capital Investment made in the AC Plant is Rs670mn. In addition, there has been Rs280mn investment in the Stamping facilities‐which cater to both AC and Washer business requirements.

Demand Outlook – FY23 has started on and company is seeing good volumes and schedules from the customers in fine blanking division. New AC range have also received fantastic response and company expects to clock strong AC sales.

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