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Op. performance impacted by weak overseas performance
* Operational performance below expectation, impacted by weak overseas business: 1QFY20 consol. revenue remained flat YoY at INR6.2b (v/s our est. of INR7.2b), impacted by 18% YoY decline in exports and overseas business (INR350m translational loss in the overseas business). EBIDTA declined 2.8% YoY to INR1.3b (below our est. of INR1.5b). Margin declined 80bp YoY to 20.5% (below our est. of 21.3%) due to (a) raw material price (ammonium nitrate) increase not being completely passed on to the end consumer, and (b) forex loss of INR90m being impacted due to INR appreciation. Adj. net profit grew 5% YoY to INR711m (below our estimate of INR836m). Tax rate for the quarter stood at 25% v/s 34% in 1QFY19 (our est. 31%).
* Domestic business registers healthy revenue growth: Although Consol. revenue remained flat YoY, domestic business registered healthy 12% YoY growth, driven by robust performance in Housing & Infra segment (+30% YoY) and CIL (+19% YoY). Strong growth in CIL was supported by better realizations (+7% YoY) due to higher ammonium nitrate prices. Overseas and export revenues declined 17% YoY due to sales slowdown in Zambia and Turkey and translational loss of INR350m on account of currency volatility. SOIL expects (a) overseas sales in Zambia and Turkey to pick up as the economic scenario improves, and (b) growth from CIL and SCCL to be healthy in FY20 given the improved demand and increase in overburden removal.
* Defense business potential attractive in the long term: Revenue declined 10% YoY to INR252m (v/s INR280m in 1QFY19), impacted by weak execution. Defense order backlog stood at INR3.9b, which it expects to execute by endFY20. Defense opportunities stand robust with potential demand of 1,000 pieces of Pinaka missile annually, and 10lac pieces requirement of multi-mode hand grenade over two years. Finalization of these orders might take time given the nature of the business.
* Maintain Neutral: We cut our estimates by 4%/3% for FY20/FY21 to factor in lower-than-estimated export and overseas sales. We maintain Neutral rating on the stock and cut our TP to INR1,190 from our earlier TP of INR1,230 for FY21. We value SOIL at 28x FY21E EPS (earnings CAGR of 21% over FY19-21) in line with its long-term average multiple of 28x.
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