Buy Midwest Ltd for the Target Rs 1300 by Motilal Oswal Financial Services Ltd
High costs lead to earning miss; margins to improve ahead
* Midwest reported 1QFY27 revenue of INR1.9b (in line with our est.), up 35% YoY but down 11% QoQ due to higher realization.
* Combined granite production stood at 26.5k cbm (flat YoY), in which black galaxy granite production stood at 17.2k cbm (+9% YoY) and absolute black granite stood at 9.3k cbm (-12% YoY).
* Combined granite sales volume stood at 27k cbm (+3% YoY), of which the company sold 17.9k cbm of black galaxy granite (+13% YoY) and 9.4k cbm of absolute black granite (-13% YoY).
* The blended granite ASP for the quarter was INR67,500/cbm, up 32% YoY and 11% QoQ, as the company took a price hike during the quarter to offset higher energy and logistics costs.
* EBITDA stood at INR489m (against our est. INR578m), up 25% YoY but down 16% QoQ. This translated into EBITDA Margin of 25.5%, down from 27% in 4QFY26 and 27.4% in 1QFY26, on account of higher cost, especially due to higher diesel prices.
* APAT came in at INR294m (est. INR365m), up 27% YoY but down 17% QoQ
Key highlights from the management commentary
* Management expects FY27 revenue of ~INR8.4b, in which INR7.2b to be contributed from granite and INR1-1.2b from quartz (INR1.8-2b in FY28). The overall EBITDA margin is expected to remain at ~26-27% for FY27.
* In FY28, the granite business is expected to grow at 10-12%, while higher quartz utilization and Phase 2 contribution should drive EBITDA margin closer to 29%.
* Quartz commercial operations have commenced and monthly production is expected to reach 10kt by end-2QFY27 and 15kt by end-4QFY27.
* Management expects quartz operation to break even at ~10kt/month rate in 3QFY27 with profitability starting from 4QFY27 and optimal profitability expected in FY28.
* Quartz realization is currently ~INR10,000/t, with a 65:35 mix between engineered stone and solar-grade product
Valuation and view
* Midwest saw earnings miss mainly due to higher costs. We cut our FY27/28 EBITDA estimates by 16%/31%, factoring in the earning miss in 1Q and deferred contributions from Quartz phase-2 and HSM commissioning to FY29. We expect revenue/EBITDA/PAT growth of 31%/47%/51% for FY26-28E, led by incremental earnings from quartz phase-1 ramp-up.
* quartz and rare-earth critical minerals remains intact.
* At CMP, Midwest trades at 11x FY28E EV/EBITDA. We reiterate our BUY rating on the stock with a revised TP of INR1,300, valuing the stock at 12x FY28E EV/EBITDA
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