Wide product portfolio and focus on brands to drive growth:
Although the growth rate in recent years is appearing low, the same can be attributed to strategic move to reduce co-branding business with OMCs and focusing more on its own brands. As per DRHP, RHP and industry reports, its key categories like pressure cookers and non-stick cookware have posted volume CAGR of ~25% and ~20%, respectively over FY17-20. We believe that the other categories can maintain mid to high teens volume growth while scale up of premium segment, product portfolio expansion, geographic diversification and bottoming out of mid-premium segment can aid revenue growth.
Operating leverage and debt reduction to sustain profitability:
~776bp YoY jump in H1FY21 EBITDAM has been due to factors like low promotion (~230bps), conveyance (~110bps) and employee (~300bps) related expenses among others. As per management, the advertisement spends are likely to return to normal levels in FY22E. We expect operating leverage to result in EBITDAM of ~9% during FY22E-23E. Moreover, post debt reduction form net proceeds, the company is likely to be net-debt free which will also aid profitability.
Key Risk Factor:
Numerous Litigations and legal proceeding:
As per the risk factors, the ‘Pigeon’ is the subject matter of litigation, where the company had permitted an associate company to manufacture certain products under the said brand. Also, the same associate company has not filed annual returns for more than three years where the company’s promoter is one of the directors. As per the management the company is not defunct, the independent chairman is taking the necessary steps to file the returns and they believe that they have the necessary exemption with regards to issues pertaining to this associate company. However, there are other various issues criminal complaint for operating the old facility without obtaining the requisite consents under Air Act and failure to obtain requisite approvals for carrying out industrial development program at a portion of land which is part of the Bengaluru facility.
Geographic Concentration:
During the six month periods ended September 30, 2020 and September 30, 2019 and Fiscals 2020, 2019 and 2018, the revenues from sales in southern Indian states accounted for 47.76%, 61.74%, 50.84%, 60.50% and 61.54%, respectively of total income, respectively. Any event negatively affecting these states, including but not limited to economic downturn, natural disasters or political unrest, could have a material adverse effect on our business and results of operations.
Outlook & Valuation:
We believe that focus on own brands, portfolio and geographic expansion can aid overall revenue CAGR of ~10% over FY20-23E. Our margins result in a flattish EBITDA growth while benefits from lower interest cost would get negated by tax incidence in FY23E from nil tax during FY21-22E. The higher price band of ₹385 implies FY23E P/E of ~27x, which is reasonable in our opinion.