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Margin disappoints in bid to regain lost share; maintain REDUCE

Valuation and view –

1Q saw continuation of industry outperformance which started from Q4FY21. The company has managed to outperform the market by growing faster than the industry. However, this growth has been on the back of a significant margin sacrifice which has resulted in delivery of only marginal EBITDA in its strongest quarter. As per our channel checks, JCHAC is focusing on regaining its lost market share even though it has to sacrifice margins in the process.

We believe JCHAC has a strong parentage, brand equity and now with enhanced distribution, itis well placed to regain its lost market share. However, we would advise caution for now and like to see consistent gains in market share and outperformance from the company in addition to some margin improvement in the coming few quarters before turning positive on the company. We expect FY21‐24E Revenue/EBITDA/PAT CAGR of 16%/28%/51% on favorable base. We roll forward our valuation to FY24E and given minimal upside, maintain our REDUCE rating on the stock, with a revised PT of Rs2,363 valuing it at 45x (from 50x earlier) FY24 EPS as we feel profitability will be impacted in quest to gain share. We will re‐visit our valuation multiple on demonstration of consistent share gains coupled with stronger margins.

Result Highlights

* Quarter summary – JCHAC delivered revenue growth of 84% on base of 72% decline. Favorable base along with entry into mass premium segment has resulted in strong growth. Gross margin contracted 417bps to 30.9% (lowest in past many years) which can be attributable to competitively pricing its products aggressively in quest to gain market share.

* RAC segment grows at cost of margins – Cooling products segments which largely consist of RAC has grown at 87% against industry growth of 55%. JCHAC has managed to regain its lost market share although at cost of margins.

* Commodity inflation impact – Gross margins contracted by 794bps sequentially to 30.9% on back of steep increase in commodity prices. Company has not been able to pass on increased commodity prices fully.

* Market share – As per our channel checks, JCHAC is managing to claw back its lost market share which it had lost in past 18 months.

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