oodluck
India (GIL) has reported a reasonably decent operating performance in
1QFY18, marginally topping our revenue and EBITDA estimates. Its
consolidated net revenues increased by 16% YoY and 14% QoQ to Rs3.3bn
(vs. our estimate of Rs3.2bn), while EBITDA surged by 52% QoQ (down 4%
YoY) to Rs265mn (vs. our estimate Rs234mn). Notably, steep rise in the
prices of key inputs i.e. steel and zinc led to YoY decline in EBITDA.
Though EBITDA margin contracted by 168bps YoY, it increased by 200bps
QoQ
to 7.9%. As per the Management, GIL could not pass on the entire rise in
key input prices during the quarter, as some contracts were short term
in nature. With the capitalisation of new assets, GIL’s interest and
depreciation cost grew both on YoY and QoQ basis, which along with
higher tax outgo (tax write-back in 4QFY17) led to 50% YoY and 54% QoQ
decline in PAT to Rs38mn, missing our estimate of Rs80mn. Revenue from
Pipe/Steel/Structures segment grew by 33% YoY and 27% QoQ to Rs3.34bn,
while the revenue from Engineered goods fell by 17% YoY (flat
sequentially) largely due to decline in the
forging division. Notwithstanding these short-term headwinds, we
continue to believe that GIL is well-poised to cash in on the imminent
opportunities in key areas like infrastructure, railways and solar power
sectors, going forward. We believe that shifting of focus to
value-added products would improve profitability, while improved
utilisation would boost revenue and stability in the prices of key
inputs would aid margin growth. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs114.
Volatility in Key Input Prices Continues to Drag Performance
Despite
16% YoY rise in revenues, GIL’s EBITDA fell by 4% YoY due to a steep
increase in the prices of key inputs (as a percentage of sales) which
rose by 20% YoY to reach 73.4% of sales compared to 70.8% in 1QFY17. As
per the Management, GST roll-out resulted in lower off-take in Jun’17
and the trend was felt in
Jul’17 & Aug’17 as well, which would have detrimental effect in
2QFY18E. However, with the normalisation in the steel prices and
expected pick-up in volume, we expect a better performance in 2HFY18E.
Outlook & Valuation
Looking
ahead, we believe that stability in the prices of key inputs would aid
GIL to sustain margin growth. We expect GIL to cash in on the imminent
opportunities in Engineering/Structure & Precision Tubes segments
led by increased thrust of government towards infrastructure
development. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs114.
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