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Margin pressure persists

Quick Pointers:

* Volumes increased by 22%.

* EBITDA margin succumbs to 11.4% amid rising competition.

We cut our EPS estimates by 7%/5% for FY26E/FY27E as we fine tune our topline growth assumptions in light of rising competitive intensity. Safari reported an in-line performance with EBITDA margin of 11.4% (PLe 11.3%) as pricing environment has become increasingly competitive (volume growth of 22% resulted in value growth of 14% indicating price erosion). We believe pricing pressure would prevail in the near term given one leading player is undergoing inventory liquidation and e-com channel is becoming increasingly relevant to gain market share. Nonetheless, Safari’s new plant at Jaipur has begun operations and progress on utilization front will be keenly eyed as it can act as growth & margin kicker. Backed by the expansion, we expect sales/PAT CAGR of 22%/46% over FY25E-FY27E. Maintain ‘BUY’ with a TP of Rs2,783 (45x FY27E EPS; no change in target multiple). Near term margin volatility given the ongoing price war is a key risk to our call.

Revenue increased 14.0% YoY: Top-line increased 14.0% YoY to Rs4,427mn (PLe Rs4,465mn). Luggage/backpacks contributed ~85/~15% to the top-line.

GM stood at 45.4%: Gross profit increased 7.9% YoY to Rs2,011mn (PLe Rs1,978mn) with a margin of 45.4% (PLe 44.3%) as compared to a margin of 48.0%/43.8% in 3QFY24/2QFY25 respectively. GM’s have succumbed due to increasing pricing pressure.

EBITDA/PAT margin stands at 11.4%/7.0%: EBITDA declined 26.1% YoY to Rs504mn (PLe Rs505mn) with a margin of 11.4% (PLe 11.3%). The decline can be attributed to a significant rise in both employee and other expenses, which increased by 26.5% and 27.9% YoY, respectively. PAT decreased by 27.4% YoY to Rs311mn (PLe Rs303mn) with a margin of 7.0% (PLe 6.8%).

Key highlights from our interaction with the management: 1) Volume growth for 3QFY25 stood at 22%. 2) HL:SL mix for the quarter was at 75%:25%. 3) GMs improved by 160 bps sequentially on account of improved product mix, reduction in discounts on online channel and benign RM prices. 4) Capacity utilization of Jaipur plant is at ~10%. 5) E-com’s share in channel mix stood at ~40% in 3QFY25. 6) Current share of premium brands (Urban Jungle & Safari Select) is at 5%. Plan is to double the share next year 7) Current EBO count stands at ~150. 8) Backpacks contributed 15% to the topline in the quarter.

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