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Restoring peak margins, a long drawn process; downgrade to SELL

Result Synopsis

IFBI revenue has bounced back on account of favorable base and higher growth from RAC on account of strong summer demand. Gross margin contracted by 447bps due to high inflation in key raw materials which was not fully passed on. The company has increased product prices by 3?4% on average basis. Company’s focus on getting higher extraction from channel is now slowly bearing fruit as it has seen volume growth across the product categories which is higher than the market growth. We have already built in increased efficiency in home appliances resulting from the higher utilization of AC plant. Company is expecting to manufacture 0.35? 0.4mn units in FY23 in RAC of which will take its utilization to 80%. 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 SELL considering lower profitability.  

IFB is now slated to clock revenue/EBITDA CAGR of 16%/145% (on low base) over FY22? 24E. We build in ~570bps margin 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 continue to value company at 25x as return ratios and profitability are significantly lowerthan peers.We downgrade the stock to SELL within a revised PT of Rs883.

Result Highlights

* Quarter summary – IFBI delivered 87% revenue growth on yoy basis, with home appliances growing 97%; while engineering division growing by 43% respectively on low base as base quarter was impacted on account of covid related lockdown.

* Margins – Company has delivered EBIT margin of 1.1% in home appliances division on raw material inflation and intense competition. Engineering margins at 4.4% expanded by 342bps on higher operating leverage.

* Investments in AC plant – RAC plant continues to be fully utilized and company expects FY23 volume to be 0.35?0.4mn units off which 0.23mn units will be manufactured under its own brand and balance in OEM. Company has currently tied up with 3 customers for AC manufacturing

* Demand Outlook – FY23 has started on strong note 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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