Goodluck India - Decent Quarterly Show; Headwinds to Persist in the Short-term

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.