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Greeting the world with Cello!

Cello World Limited (Cello) is a household brand with presence across categories, such as consumer houseware (FY23 contribution: 66%); writing instruments & stationery (16%); and moulded furniture & allied products (18%). The company has over six decades of experience in scaling up new businesses and carving out leaders among them.

* Cello has a strong pan-India brand recall supported by its diverse product portfolio (~15,841 SKUs) and deep distribution network (3,300+ distributors and 1,26,000+ retailers), which help it expand its existing product categories and scale up new product categories quickly (launched Glassware in 2017, and Writing Instruments in 2019).

* Cello’s expansion of its SKUs is facilitated by its robust manufacturing capability (~79% in-house manufacturing), with 13 plants spread across five locations. In response to the growing demand and to minimize reliance on glassware imports, Cello is building a new glassware plant of 20,000MTPA at Falna, Rajasthan. Further, the company is expanding its opalware capacity by 10,000MTPA at Daman, thereby enhancing the company's self-sufficiency in production.

* Cello, with a presence across diverse product categories, benefits from the growing total addressable market (TAM) of each of its category. The overall TAM of Cello is expected to record a 13% CAGR over FY23-27 (to INR1,229b by FY27 from INR743b in FY23). Of this, the opalware and glassware segments (under consumer houseware) are likely to report the highest CAGR of 18% and 15%, respectively.

* We estimate CELLO to grow faster than the industry. The company is expected to post a robust revenue/EBITDA/Adj. PAT CAGR of 18%/23%/25% over FY23-FY26. This will be driven by the expansion of both SKUs and distribution reach, coupled with strong growth in the glassware segment post-commissioning of the new plant in Rajasthan. Cello is currently trading at 35x FY26E P/E with an RoE/RoCE of 32%/39% in FY26E. We initiate coverage on the stock with a BUY rating and a TP of INR1,100 (premised on 45x FY26E P/E).

* Key downside risks: a) volatility in key raw material prices; b) dependence on third-party manufacturers; and c) intensified competition.

Strong brand equity and market penetration to fuel sustainable growth

* Cello has a strong brand recall in the consumer products industry, reflecting its extensive experience, continuous product development, and understanding of consumer needs.

* Cello has built a strong brand portfolio, including "Cello" and "Unomax," with several sub-brands. The company focuses on meeting evolving consumer needs by leveraging its experience and innovation. It continually introduces new product ranges across various categories, totaling around 15,841 SKUs, demonstrating its commitment to innovation and expansion.

* Cello’s diverse product range at different price points allows it to serve as a "one-stop-shop" for consumers of all income levels. The wide spectrum of product offerings caters to a broad range of consumer needs.

* Cello’s increasing product portfolio is supported by its pan-India distribution network of over 3,300+ distributors and 1,26,000+ retailers. This is backed by its nationwide 721-member sales team as of Jun’23, up from 683 in Mar’23.

* The company has been constantly optimizing its distribution strength and efficiency by: i) increasing the number of distributors and limiting their coverage areas for better focus; ii) investing in technological advancements for its sales force, equipping them with an automated order tracking mobile app; and iii) rationalizing SKUs with distributors using ERP systems, and ensuring efficient catering to area-specific demands.

Building winning businesses and products

* Cello has a proven track record of expanding into new businesses and product categories throughout its journey. Cello is one of the most diversified companies in its industry, offering products across various categories. This has been made possible by strong pillars such as extensive distribution reach and efficient manufacturing capability.

* For instance, the company launched its glassware and Kleeno segments (cleaning products) in 2017. Since then, the segments have generated revenues of INR2.8b and INR0.66b, respectively, in FY23, representing a CAGR of 36% and 17% over FY21-23. Similarly, Cello relaunched the writing instrument segment under the 'UNOMAX' brand in 2019 and quickly scaled it to a revenue segment of INR2.9b by FY23, achieving a 60% CAGR over FY21-23. These recently launched businesses already contribute 35% of the revenue in FY23.

* Cello’s strong manufacturing ability with well-spread plants (13 plants across five locations) is the backbone of these growing businesses. The in-house manufacturing accounted for ~79% of its total manufacturing capacity in 9MFY24. Further, the company is likely to increase its capacity with the ongoing expansion (both greenfield and brownfield) of glass capacity by 30,000MTPA.

* This expansion aims to reduce dependence on glassware imports and cater to the increasing demand for opalware.

Growing TAM across categories

* Cello is a diversified company with a presence in three major segments: Consumerware, Writing Instruments, and Moulded Furniture & Allied Products. The company generated 92% of its revenue from the domestic market in FY23. The domestic market has experienced a healthy CAGR of ~9% during FY15-FY23.

* The combined Indian TAM of all the three segments was ~INR743b as of FY23, which is expected to increase to INR1,229b by FY27 (at a CAGR of 13%). Of this, Consumerware had the largest TAM of INR348b in FY23, followed by Writing Instruments at INR280b, and Moulded Furniture at INR142b.

* All these three segments’ TAM is poised to register a strong CAGR of 11%/15%/ 17% over FY23-27E, fueled by favorable demographics, increased discretionary spending, higher product penetration, innovation, shorter replacement cycles, evolving gifting trends, brand loyalty, et al.

* Further, a shift towards branded products is one of the key factors driving growth for Cello. As of FY23, the branded market mix for Consumerware/ Writing Instruments/Moulded Furniture stood at 61%/78%/59%, which is anticipated to increase to 67%/84%/63% by FY27.

* Hence, we expect Cello to register a CAGR of 18% over FY23-26, which is higher than the industry CAGR of 13%. Moreover, Consumerware, Writing Instruments, and Moulded Furniture are likely to post 18%, 27%, and 8% CAGR over the same period, respectively.

Strong track record of healthy financials

* Cello has delivered strong revenue growth over the last two years, with a revenue CAGR of 31% over FY21-23, fueled by strong growth across segments. Writing Instruments achieved the highest growth at 60% (on a low base), followed by Consumerware at 33%, and Moulded Furniture at 11%.

* Margin is expected to improve from the current levels of 23.4% to ~26.7% by FY26, aided by the economies of scale (with increase in SKUs), efficiencies in manufacturing and distribution, and increasing mix of value-added products.

* Improving margins coupled with measures, such channel financing, are likely to further help in easing the working capital days to 138 by FY26 from 154 days in FY23. This will in turn strengthen the cash flow of the company with CFO/ EBITDA ratio improving to ~68% by FY26 from 54% in FY23, thereby generating a cumulative FCFF of INR9.2b over the next three years.

Valuation and View

* Cello is a leading player across its product categories, renowned for its strong brand reputation and extensive distribution network.

* The company excels in manufacturing a diverse range of products while maintaining optimal inventory levels, enabling it to aggressively expand existing SKUs and venture into new businesses.

* Operating in diverse industries, Cello benefits from an expanding TAM driven by various sector tailwinds, including favorable demographics, increased discretionary spending, greater product penetration, import substitution, innovation, evolving gifting trends, and brand loyalty.

* We estimate Cello to deliver a revenue/EBITDA/Adj. PAT CAGR of 18%/23%/ 25% over FY23-26.

* Cello is currently trading at 35x FY26E P/E with a RoE/RoCE of 32%/39% in FY26E. We believe that the company will be able to successfully scale up new businesses, and expand SKUs as well as distribution reach to evolve as a leading brand in its respective industries. We initiate coverage on the stock with a BUY rating and a TP of INR1,100 (premised on 45x FY26E P/E).

* Key downside risks: a) volatility in key raw material prices; b) dependence on third-party manufacturers; and c) intensified competition.

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