Buy EFC Ltd For Target Rs. 465 - Choice Broking Ltd
Growth Coupled with Carefully Calibrated Margin Profile
We maintain our BUY rating on EFCIL with an increased TP of INR 465 (from INR 365 earlier) as we factor in:
1) 20k seat addition in FY26/27/28E taking the total stock of seats leased under management to 120k by FY28E (doubling from FY25 end),
2) Backward integration into Design & Build segment as well as Furniture Manufacturing segments helps keep margins healthy (~30% EBITDA margins), yet be able to beat competition with attractive pricing (INR 6.5-7.5K per seat per month) and high utilization at ~90%,
3) Design and Build segment to grow at a CAGR of 50% over FY25-28E given EFCIL’s first mover advantage and years of experience in executing these turnkey projects in profitable manner (FY26-28E EBITDA margin of 20%),
4) Furniture Manufacturing to grow at a CAGR of 93% (on a very low base) over FY25-28E and an EBITDA margin of 30%,
5) Valuation framework that values the consolidated business based on EV/EBITDA methodology within which the leasing business Adjusted EBITDA is forecast basis unitary EBITDA (EBITDA/seat) methodology and the EBITDA margin driven framework for the rest of the 2 businesses.
We forecast EFCIL’s consolidated EBITDA to grow at a CAGR of 47% over FY25-28E, supported by our assumptions as discussed in the paragraph above. Any gains from REIT IPO launch would be an additional bonus that we don’t factor into our numbers.
Valuation: We arrive at a 1 year forward (FY27E-28E blended) TP of INR 465/share for EFC. We now value EFC on our EV/EBITDA framework, where we assign an EV/EBITDA multiple of 10x/10x for FY 27E/ 28E (consolidated basis), which we believe is reasonable given the growth rate, margin profile. On our target price of INR 465, FY27E implied P/BV multiple translates to 3.5x.
Risks: A broad based slowdown in the domestic economy, cold startup funding, abating offshoring/GCC trend, predatory pricing by larger competitors remain risks to our BUY rating.
Quarterly Performance: In line with optimistic expectations (INR Mn)
* EBITDA (excluding OI) for Q4FY25 was reported at INR 1,093 Mn, up 109% YoY and 18% QoQ vs CEBPL estimates at 1,133 Mn.Q4FY25 EBITDA Margin came in at 51.8% vs 56.1% in Q4FY24 and 52.3% in Q3FY25 vs CEBPL estimates at 53.5%.
* In Q4FY25, Total seats stood at 60,012 vs 57,000 in Q3FY25.
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