Buy Cello World Ltd for the Target Rs 480 by Motilal Oswal Financial Services Ltd
Writing instrument drives overall growth]
* Cello World (CELLO) reported muted performance in 1QFY27, with EBITDA declining 9% YoY, impacted by higher input costs, lower scale of operations at its steel bottle manufacturing unit due to the non-availibility of imported inventory, and subdued consumer demand across categories. The company undertook price hikes across key product categories to mitigate the impact of higher input costs, driving a sequential expansion in gross margins (from ~47% to ~52%).
* CELLO is focused on improving the utilization of its steelware and glassware units, which is expected to be a key driver of growth and profitability going forward. In the writing segment, Cello Pens’ revenue and profitability are expected to improve gradually, supported by initiatives to rationalize the product portfolio. The company remains open to opportunistic inorganic expansion and diversification into adjacent categories to drive future growth.
* We largely maintain our earnings estimates, with revenue/EBITDA/PAT CAGR of 10%/19%/16% over FY26-FY28E. We continue to value the stock at 23x P/E (average of past four years) on FY28E EPS, arriving at a TP of INR480. Accordingly, we reiterate our BUY rating on the stock.
Margin under pressure due to muted topline growth
* In 4QFY26, CELLO's consolidated revenue remained flat YoY at INR5.2b (est. INR5.3b) and declined 19% QoQ.
* Consumerware (64% revenue) declined 8% YoY to INR3.3b (est. INR3.7b). Segmental gross margins came in at 55% vs ~56% in 1QFY26. The company undertook price increases in the consumerware category to mitigate the impact of high input costs, driving gross margin expansion on a sequential basis (48% in 4QFY26).
* Writing Instruments (21% revenue) registered a robust growth of 52% YoY to INR1.1b (est. INR1b), largely driven by rising contribution of the Cello Pens business. Gross margin stood at ~54% vs 59%/48% in 1QFY26/4QFY26.
* Molded furniture & allied products (15% revenue) declined 11% YoY to INR800m (est. INR630m). Segmental gross margin stood at 39.5% vs 40.9%/39.6% in 1QFY26/4QFY26.
* EBITDA declined 9% YoY and 23% QoQ to INR991m (est. INR1.1b). EBITDA margin contracted 18.8% (est. 20.6%), compared to 20.6%/19.7% in 1QFY26/4QFY26, respectively.
* Adj. PAT stood at INR734m (est. INR771m), marking a decline of 9% YoY/19% QoQ.
Valuation and view
* CELLO is currently navigating a challenging operating environment, marked by subdued demand and elevated input costs, which have weighed on both revenue growth and profitability. We anticipate a gradual recovery from 2QFY27 onwards. An improvement in demand should drive higher utilization of glassware and steelware plants, supporting both revenue growth and profitability. Additionally, the recently launched Cello Stationery brand, which started contributing from 4QFY26, is expected to scale up meaningfully over the coming quarters.
* Near-term input cost volatility may persist amid an evolving geopolitical environment. However, improving capacity utilization and a higher contribution from premium products under the Cello brand are expected to support margin expansion over the medium term.
* We forecast revenue/EBITDA/PAT CAGR of 10%/19%/16%, respectively, over FY26-FY28E. At the CMP, the stock trades at 23x/18x P/E on our FY27E/FY28E EPS estimates of INR16/INR20.5, respectively. We continue to value the stock at 23x P/E (average of past four years) on FY28E EPS, arriving at a TP of INR480. Accordingly, we reiterate our BUY rating on the stock.
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