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Improved performance to script a turnaround

Our interaction with the various dealers and the channel partners is suggesting that the excess inventory in the channel post poor summer has been liquidated, and dealers are now feeling confident of the upcoming summer season as there have been prediction of harsh summer across the country. On the international front performance is expected to see marked improvement as fears of recessionary conditions especially in the US have been abated. On the margin front gross margins are expected to remain strong as company has taken selective price increase with more focus on the premium products. We are now expecting EBITDA margin to improve on back of lower expenses and higher operating leverage. We now turn positive on the stock and upgrade the stock to BUY with TP of Rs1,065 valuing it at 40x on Sep’25 EPS.

Liquidation of channel inventory to benefit domestic air-cooling segment: Our interaction with the various dealers and distributors suggest that the excess inventory was there in the channel post the poor summer sales have been liquidated as weather conditions have been supporting post the monsoon season with October witnessing unusually high temperatures across the country. Demand has been better than expected in month of November especially in the Western and Central part of the country which have been witnessing higher than normal temperatures. Dealers are optimistic of the summer demand going forward as there have been prediction of higher temperatures across the country.

Subsidiaries to witness improved performance: Subsidiaries’ performance was impacted in FY23 on back of de-stocking by one of the large retailers in US as they were fearful of recessionary conditions. Now with the fears of recession receding they are expecting to stock up inventory from the second half of the FY24. We have currently modelled moderate growth 10% growth in CT Australia on improvement in US geography. As far as Mexico is concerned performance have been much better than anticipated and entry into new category of washing machines has been well accepted. GSK China is on the path to recovery with improving performance.

LSV (Large Space venti cooling continues to deliver robust performance: The largespace venti cooling business is also gaining traction, and company efforts in promoting and developing the product category is now bearing fruits. The growth in LSV is in line with the company’s expectation and the category now contributes 15-17% of the consolidated topline.

Higher operating leverage to lead margin improvement: The company has witnessed ~270bps improvement in gross margin in 1HFY24, however the same has not been reflected in the EBITDA margins as investments in D2C initiatives and higher A&P spends along with negative operating leverage has resulted in EBITDA margin remaining flat in the similar time frame. We expect gross margins to remain strong as on favorable product mix towards premium end and there have been selective price increases on few of its model. We expect EBITDA margin to improve from 2HFY24 as gross margins are expected to remain strong and operating leverage will result in higher EBITDA margin.

Our Take: We expect strong revenue growth in 2H of FY24 as liquidation of excess channel inventory will result in inventory stocking in the domestic market and on international front CT Australia will see improved performance from 2HFY24 and growth momentum is expected to be maintained in IMPCO Mexico. We expect EBITDA margin to be 16% and 16.4% in FY25E and FY26E respectively. We are expecting FY23-26 revenue and PAT CAGR to be 10% and 20% respectively and we upgrade the stock to BUY rating with PT of Rs1,065 from valuing the company on SEP’25 EPS.

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