Buy Cello World Ltd For Target Rs.700 by Motilal Oswal Financial Services Ltd
Slow start to FY26 amid weak demand environment
Earnings in line with estimates
* Cello World (CELLO) reported a slow start to FY26 with ~6% revenue growth, largely led by a 12% YoY growth in the consumerware segment. Growth was impacted by weak demand and a continued slowdown in the export market for its writing instrument segment (down 12% YoY), while the molded furniture segment remained flat YoY.
* With the onset of festive demand, management expects demand to pick up across categories. The company expects ~12-15% revenue growth with an EBITDA margin of 23%, implying a 14%/15% revenue/EBITDA growth for 9MFY26.
* We largely maintain our FY26/27 earnings estimates and reiterate our BUY rating with a TP of INR700 (premised on 32x FY27E EPS).
Weak demand and incremental cost from new plant hurt margins
* CELLO's consolidated revenue grew 6% YoY, while it declined 10% QoQ to INR5.3b (in line). EBITDA declined 16% YoY/19% QoQ to INR1.1b (est. INR1.2b).
* EBITDA margin contracted 520bp YoY/230bp QoQ to 20.6% (est. 22.9%), largely due to higher employee/other expenses rising 100bp/440bp YoY, while gross margin expanded only 20bp YoY to 54%. The higher costs resulted from competitive pressures and the inability to raise prices, along with increased energy and wage expenses from the new glassware facility.
* Adj. PAT declined 12% YoY/17% QoQ to INR730m (in line). Other income surged 2.9x YoY/33% QoQ to INR173m during the quarter.
* Consumerware segment’s revenue (69% of total revenue in 1QFY26) grew 12% YoY (down 10% QoQ) to INR3.7b. Gross margin expanded 150bp YoY, led by a better product mix.
* Writing instrument segment’s revenue (~14% revenue mix) declined 12% YoY/6% QoQ to INR735m, led by a slowdown in exports and flattish domestic demand, while molded furniture and allied products (~17% revenue mix) remained flat YoY/declined 15% QoQ to INR899m. Gross margins of both categories declined 40bp/470bp YoY.
Highlights from the management commentary
* Guidance: The company has guided for overall revenue growth of 12-15% for FY26, with an EBITDA margin of ~23%. Capex is expected to be ~INR1b for FY26, including INR400-500m for the steel flask facility. The glassware facility’s revenue is guided at INR1.1-1.2b for FY26.
* Competition: The writing instruments market is becoming increasingly competitive, with rivals performing well in art, crafts, and stationery. Aggressive competitor pricing in 1Q pressured margins and delayed the company’s usual April price hikes in the consumerware business. In the opalware segment, new entrants are also squeezing margins, and the brand’s lower visibility in certain segments is slowing growth.
* Demand Outlook: Consumer demand has not fully recovered across categories, with the company experiencing slower demand trends. However, the company saw improved demand trends in July across all categories and expects stronger demand in the upcoming quarter due to the festive season.
Valuation and view
* We expect the writing instrument segment to start showing YoY growth from 2QFY26, supported by an improving demand scenario in both export and domestic markets. The consumerware segment is expected to maintain its current growth rate, with incremental growth driven by the ramp-up of the glassware facility, which should also contribute to improved margins.
* We expect CELLO to register 15%/19%/20% revenue/EBITDA/Adj. PAT CAGR over FY25-27. We reiterate our BUY rating with a TP of INR700 (premised on 32x FY27E EPS)
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