Strong revenue growth, however margins disappoint
Nilkamal Ltd reported mix set of numbers for Q2FY19. Its net revenue grew by 32.1% YoY, which was above our estimates. The plastics business reported strong volume growth of 30% YoY, largely driven by a favourable base. However, EBITDA & PAT de-grew 14.5% & 10.6% YoY, below our projections. EBITDA margins contracted 434bps YoY to 8%, impacted by higher material cost and increased sales of low margin products. Going forward, we expect Nilkamal’s revenue growth to remain healthy, led by robust demand environment and company's efforts towards brand building and enhanced product offerings. While margins could remain under pressure in H2FY19, we expect the same to revive in FY20E, led by operating leverage & better product mix. We maintain Buy on the stock with revised target price of Rs 1,981.
Q2FY19 Result Update:
* Net Revenue (standalone) grew by 32.1% YoY to Rs 613.7cr, led by healthy volume & value growth of 30% & 35.6% respectively in plastics business. Such strong growth in volumes was driven by favourable base (growth in Q2FY18 was impacted significantly due to GST implementation) and a few large orders like ballot units, etc. After four straight quarters of de-growth (YoY), the retail division ‘@home’ witnessed an improved performance with a 4.8% YoY growth in revenue. Growth in mattress business stood at 13.2%.
* EBITDA de-grew 14.5% YoY to Rs 49cr, while EBITDA margins contracted sharply by 434bps YoY to 8%, impacted by higher material cost and increased sales of low margin products. Further, the other expenses also remained high (+45bps YoY as a % to net revenue). However, further margin fall was restricted due to lower employee cost (down 136bps YoY). While PAT declined by 10.6% YoY, the fall was relatively lower (compared to EBITDA), helped by higher other income and decline in depreciation and tax expense.
* Other key highlights: i) Both the JV companies viz. Nilkamal Bito Storage Systems and Cambro Nilkamal displayed a strong growth in topline (+99.8% & 47.9% YoY). Further, while one of its subsidiaries in Srilanka displayed subdued performance, the other subsidiary at Ajman posted decent growth; ii) Within the retail segment, all the stores have achieved profits at store level. The company has also opened a new retail store at Rajkot and is in the process of opening more stores over the next 2-3 years.
Outlook & Valuation
We estimate Nilkamal's consolidated Revenue and PAT to grow by 12.5% CAGR each over FY18-20E, led by demand revival and company's efforts towards brand building, distribution expansion and enhanced product offerings. The strong volume growth delivered over the last three quarters clearly indicates signs of revival post GST transition. We expect volume offtake to remain healthy in the coming quarters (though Q2 growth is not sustainable), likely to be driven across all segments of plastics and retail division. While margins could remain under pressure in H2FY19, we expect the same to revive in FY20E, led by operating leverage and better product mix. While we have revised our revenue estimates higher for FY19E & FY20E on the back of better than expected volume growth in H1FY19, we have downgraded our profit growth and margin projections due to significant margin erosion reported in Q2. Nonetheless, we maintain Buy on the stock with revised target price of Rs 1,981.
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