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Welspun India - Margin guidance pruned, but commendable show; result update Q4FY17; Buy
Welspun India’s (WLSI) Q4FY17 revenue, at INR17.6bn, jumped a commendable 9% YoY and 17% QoQ (14% above estimate). On like-to-like basis (excluding Target) the revenue surge was even stronger. However, as expected, rise in cotton prices dented margin, which led to EBITDA margin contracting ~130bps QoQ to 21.8%. Though WLSI has revised down FY18 margin guidance to 20-21% (from 22-23%) owing to cotton price pressure, the revenue spurt was commendable, driving 4% upwards revision in our FY19E EBITDA estimate. We maintain our 7.0x FY19E EV/EBITDA target multiple yielding TP of INR102 (INR99 earlier). Maintain ‘BUY’.
Robust revenue spurt across segments
WLSI’s revenue jumped 9% YoY and 17% QoQ to INR17.6bn in spite of 18% growth in the base quarter and absence of Target’s revenue during Q4FY17. This quarter, positive currency movement contributed 4% to the revenue jump; balance spurt was driven by double-digit growth in terry towels and rugs volumes as well as higher mix of innovative and branded products. FY17 revenue jumped 12% YoY driven by towel volumes, which surged 26% YoY; bed sheet volumes were flat. Growth in domestic retail sales was also positive—up 21% YoY in FY17. Share of innovative products was higher at 36%.
Surging input prices dent margin; expansion to sustain
Gross margin contracted a sharp 740bps QoQ and 390bps YoY to 50.6% primarily due to spurt in cotton prices. However, savings in other expenses led to EBITDA margin contracting only 128bps QoQ. In FY17, the company incurred INR7.2bn capex towards enhancing capacity by >20% each in towels, bed linen and rugs & carpets. Another INR7.0bn has been earmarked in FY18 to further enhance towel capacity (~10%) and for the ongoing flooring solutions project.
Outlook and valuations: Margin trajectory key; maintain ‘BUY’
WLSI has revised down FY18 margin guidance to 20-21% on account of rising cotton prices. Impact of currency also remains a worry on the company. However, with the Egyptian Cotton issue risk waning along with the robust growth reported in FY17, we have revised up FY19E EBITDA estimate by 4% despite lower margin driven by higher revenue expectations. We retain our 7.0x FY19E EV/EBITDA target multiple yielding TP of INR102 (INR99 earlier). We maintain ‘BUY’.
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