Buy Cello World Ltd For Target Rs.800 by Motilal Oswal Financial Services Ltd
Muted Q3 performance; consumption-led rebound on the horizon
Earnings below estimates
* CELLO reported ~5% revenue growth in 3QFY25, driven by festive demand in the first half of the quarter. However, this was offset by a slowdown in consumption and discretionary spending later in the quarter.
* Growth in Consumerware (up 9% YoY) and Moulded Furniture & Allied products (up 7% YoY) was partially impacted by a decline in the Writing Instrument segment (down 11% YoY), despite export markets showing sequential recovery.
* Despite short-term headwinds, the company anticipates a rebound in consumption-driven demand due to the revised income tax policies in the new budget and untapped growth potential in quick commerce (currently ~1.5%-2.0% of e-commerce sales)
* Factoring in the weak 3Q performance, we cut our FY25/FY26/FY27 EPS estimates by 6%/19%/11% due to a delay in the ramp-up of Glassware, along with low revenue and margin for Writing Instrument caused by subdued export demand. We reiterate our Buy rating with a TP of INR800 (premised on 34x FY27E EPS)
Higher RM and discounting continue to hurt operating performance
* Consol. revenue grew ~5.7% /13.6% YoY/QoQ at INR5.6b (est. INR5.7b). EBITDA declined 3.6% YoY, while it grew 7% QoQ to INR1.3b (est. INR1.4b).
* EBITDA margins contracted 220bp YoY/130bp QoQ to 22.9% (est. 25.1%) as gross margins contracted 180bp YoY/190bp QoQ to 49.7%, led by discounting in the competitive market along with a rise in raw material costs.
* Adj. PAT grew 1.8%/6% YoY/QoQ to INR864m (est. INR939m).
* Consumerware segment’s revenue (69% of total revenue in 3QFY25) grew 9% YoY/13% QoQ to INR3.9b.
* Writing Instrument segment’s revenue (~14% revenue mix) declined 11% YoY, while revenue grew 11% QoQ to INR773m. On the other hand, the revenue of Moulded Furniture and Allied products (~17% revenue mix) grew 7% YoY/19% QoQ to INR931m.
* In 9MFY25, revenue/EBITDA/adj. PAT increased 4%/1%/3% to INR15.5b/ INR3.7b/INR2.5b.
Highlights from the management commentary
* Guidance: The company expects 12-14% revenue growth in FY26, with an upside to 15-17% if demand improves. EBITDA margins for FY26 are expected to remain stable, despite short-term pressures, primarily due to the ramp-up of Glassware (maximum impact likely to be ~100bp).
* Glassware Expansion: The newly commissioned glassware plant is currently at 50% capacity utilization and is expected to reach 75-80% in six months. It is expected to generate INR1.5b in FY26, scaling to INR2.5b in FY27 at peak capacity utilization.
* Demand Outlook: While exports remain challenging, early signs of recovery are visible. E-commerce and quick commerce are growing at 15-20%, driving revenue growth. New product launches contribute 15% of revenue, with further expansion in Writing Instruments and Premium Consumer Houseware. Additionally, higher e-commerce penetration and a capacity ramp-up in Glassware and Opalware are expected to support growth and margin recovery
Valuation and view
* We expect the Writing Instrument segment to witness muted growth on a YoY basis in 4QFY25, followed by a recovery starting 1QFY26, led by a recovery in the export business. The Glassware facility began commercial production in Feb’25, and we anticipate a ramp-up in commercial production from 1QFY26 onwards.
* The inventory levels in consumer houseware have normalized, as festive demand helped clear excess stock. As a result, we expect healthy growth in the segment.
* Factoring in the weak 3Q performance, we cut our FY25/FY26/FY27 EPS estimates by 6%/19%/11% due to a delay in the ramp-up of Glassware and lowering revenue and margin for Writing Instrument caused by subdued export demand. We reiterate our Buy rating with a TP of INR800 (premised on 34x FY27E EPS).
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