Butterfly Gandhimathi Appliances Research Report By ICICI-Direct

Strong Turnaround on the cards…

– Butterfly Gandhimathi Appliances (BGAL) reported strong set of Q2FY18 results. Revenues for the quarter grew by 29.6% YoY to | 201.0 crore. The growth was supported by healthy traction in cooker/cookware and appliances segment.

– EBITDA margins for the quarter expanded by 250 bps YoY to 8.4%. The margin expansion was driven by improvement in gross margins (up 136 bps YoY) and positive operating leverage owing to strong topline growth (employee expenses down 139 bps YoY). Subsequently, EBITDA came in at | 16.9 crore vs. | 9.1 crore in Q2FY17.

– Strong operational performance coupled with decline in interest expense (down 45.7%) resulted in PAT of | 11.5 crore vs. | 0.6 crore in Q2FY17.

Worst over, revenue growth rebounds…

Q2 has been a seasonally strong quarter for BGAL as various dealers replenish their inventory a month prior to the start of the new festive season. With normalisation settling in post GST disruption, various traders and Multi brand outlets (MBO’s) are witnessing restocking at a gradual pace. This resulted in revenue recovery for BGAL in the retail space, clocking in revenue growth of 15% YoY. Strong traction in PMUY scheme and low base effect of Q2FY17 led to 45% YoY growth for the institutional sales. Segment per se, cooker/cookware and kitchen appliances grew 38% and 13% to Rs 30.2 crore and Rs 163.3, respectively. We expect strong revenue trajectory to sustain in H2FY18 owing to improvement in consumer sentiment and low base effect (H2FY17 was adversely impacted owing to demonetisation blues). We have introduced FY20 estimates and expect revenues to grow at a CAGR of 20% in FY17- 20E.
Revenue growth & margin improvement to sustain;

Recommend BUY!!

FY17 was a challenging year for the company on account of: a) absence of government orders, b) demonetisation impacting consumer sentiments, c) drought conditions and Vardah cyclones denting sentiments in southern areas. In addition, given the fixed cost nature of the business, low capacity utilisation rates resulted in negative operating leverage leading to losses at the EBITDA level for BGAL in FY17. We believe worst is behind and BGAL is in for better growth rates ahead. The key revenue growth drivers are a) Uptick in consumer sentiments owing to active monsoon in the southern state, b) Foraying into LFS and online distribution channel to provide additional impetus, c) new LPG connections to be released by the government under PMUY scheme and d) favourable base. Subsequently, we expect revenues to grow at a CAGR of 20% over FY17-20E. With strong revenue growth trajectory, we expect operating leverage benefit to kick in. We expect margins to recover from FY18E and touch 7.0% in by FY20E. In addition, management expects to break-even in non-south markets by FY19E. On the balance sheet front, a higher focus on recovery from debtors has led to a significant decline in debtor days from 104 days in FY16 to 74 days in FY17. Efforts to improve the liquidity of the balance sheet has resulted in a reduction in debt to the tune of 35% to Rs 125 crore as on FY17. The stock price has run up nearly 2x since our last update, however we feel there is more headroom given the strong earnings trajectory and attractive valuation (1.1x and 0.9x Mcap/sales for FY19E and FY20E). Hence we assign a BUY rating with a revised target price of Rs 405 (based on 1.0x FY20E market cap/sales).