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Good recovery but priced in; maintain REDUCE

Result Highlights

* Quarter summary – JCHAC delivered lower than expected revenue growth of 34% yoy. Favorable base helped company to achieve best growth in cooling products segment among peers. Gross margins contracted only 92bps which can be attributed to low cost inventory that company would have been carrying given slower pick up in 9MFY21.

* RAC segment makes a comeback – Cooling products segments which largely consist of RAC has made a comeback in 4Q after underperforming industry in 9MFY21. Operating leverage and increased efficiencies have led to margin improvement.  

* Commodity inflation impact – Gross margins contracted by 92bps to 38% on back of steep increase in commodity prices. Company has been able to manage increase in commodity prices better than peers on better product mix and increased localization.

* Market share – As per our channel checks JCHAC has managed to claw back some of the market share that it had lost in 9MFY21.

Valuation and view –

4Q was the first quarter of outperformance after underperforming for first three quarters of FY21. Company has managed to negate most of the impact of negative operating leverage by demonstrating cost control initiatives. Some of the cost reduction is expected to be structural and will be key catalyst for margin expansion going forward. We are building 170bps EBITDA margin expansion in our assumptions considering cost control and higher operating leverage.       

We believe JCHAC has strong parentage, brand presence and now with enhanced distribution, can regain its lost market share. However, we would be cautious and want to see consistent gain in market share and outperformance from the company in coming few quarters before turning positive on the company. We expect FY21‐23E Revenue/EBITDA/PAT CAGR of 28%/50%/97% on a low base and arrive at our PT of Rs2374 valuing the company at 50x FY23 EPS. We maintain REDUCE rating as stock is richly valued at the current juncture.  

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