Buy PG Electroplast Ltd for the Target Rs. 790 by JM Financial Services Ltd
A quarter to forget for PGEL, but we reckon it’s not as bad. With massive order cancellations resulting from the season failing to rebound, the cut in guidance was inevitable. Further, high channel inventory is an industry-wide issue and not that of PGEL alone, liquidation of which hinges upon upcoming festivities. However, with the revised revenue growth guidance of 17- 19%, PGEL is yet likely to outgrow the industry and retain/gain manufacturing market share. It is also quite likely that the stock price correction of 23% (on Friday) and 29% (over last week) prices in a large portion of negatives. We (1) cut our FY26-28E EPS estimates by 13- 27%, (2) trim target multiple to 42x (from 47x earlier), and (3) roll forward to Jun’27E (from Mar’27E earlier). Despite this cut, PGEL offers exposure to a Company gaining market share and deepening capabilities; expected to register a revenue/EPS CAGR of 28/31% with and average RoE of 14% over FY25-28E. Target price stands at INR 790. Retain BUY.
* 1Q performance misses estimates: 1Q revenue at 15bn, rose 14% YoY, 3% lower than estimate. The product business grew 17% YoY, of which, the RAC business grew 15% YoY and the washing machine business grew 36% YoY. EBITDA declined 7% YoY, and stood at INR 1.2bn impacted by slower revenue growth, missing estimate by 13%, while margin contracted 180bps YoY to 8.1%. 1Q PAT at INR 670mn, declined 20% YoY.
* To outgrow industry and gain/retain manufacturing market share despite cut in guidance: The management lowered its FY26 guidance following its 1Q performance. Consolidated revenue guidance was lowered to INR 57-58bn (indicating 17-19% YoY growth) vs. INR 63.5bn (30% YoY growth) earlier. Accordingly, PAT guidance also lowered to INR 3- 3.1bn (3-7% YoY growth) vs. INR 4bn earlier on the back of negative leverage impacting full-year margins and higher finance costs (to finance unsold inventory). However, it is pertinent to note that with this revised growth as well, PGEL is likely to outgrow the industry and retain/gain contract manufacturing market share.
* What went wrong and why the sharp cut in guidance? Through April (+70% YoY) and May (+15% YoY), PGEL saw strong revenue growth. What we understand is that through these months, based on strong hopes of a revival, manufacturing activities continued. But, the lack of any sort of rebound drove cancellations in the order book for the months of June, July, and August, to the tune of 50-70% with brands delaying offtake given high channel inventory. Monsoons spreading across the country left the channel with high inventory, which, in turn indicates that the entire industry was taken by surprise this season, and this is not specific to PGEL.
* Channel inventory levels currently and visibility hereon: PGEL indicated that channel inventory stands at ~2mn units and similar inventory is lying with brands. Amber too indicated total unsold inventory of ~3mn units. Correlating this, with commentary from Voltas, we note that the channel currently holds ~2 months of inventory, while Voltas holds 3-4 months of inventory. Blue Star had similar commentary, indicating ~75 days (~2.5 months) of unsold inventory with it. We understand that a significant revival is expected around October/November, as festivities and the second summer kick in. Only when the channel starts seeing sales pick up, will brands supply from inventory they are holding, and that in turn will drive orders and shipments for PGEL.
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