Dollar Industries’ growth pillars are in place driven by project Lakshya. Buy for target price of Rs 708 (56% Gain): SMIFS

Dollar Industries Ltd.
Growth pillars in place driven by project Lakshya

Dollar Industries Ltd (DIL), reported weak performance in Q2FY23, which was lower than estimates in a challenging business environment of volatile raw material prices. Revenues in Q2FY23 declined led by a volume de-growth of ~16.5% YoY (volumes in H1FY23 grew by ~10% YoY). Gross margins in Q2FY23 declined on account of consumption of high cost raw material as company was not able to fully pass on the increase in raw material prices mainly cotton yarn. There was a high cost inventory related loss of ~Rs 120 mn in Q2FY23 and management expects inventory losses to come down significantly on a sequential basis as raw material prices have now started to stabalise in a range. With some stability in cotton prices there has been an improvement in the sentiments of the distribution channel. Management has guided for a topline growth of ~14%-15% YoY with EBIDTA margins in the range of ~13%-14% for FY23e. We expect performance of the company to improve on a QoQ basis from here onwards due to some stability in cotton prices. We remain positive on the company’s mid-to long term potential and thus maintain our ‘Buy’ rating on the stock with a target price to Rs 708 (20xSept’24e EPS).

H1FY23 Earnings Highlights

▪ In H1FY23, the company reported a ~18% YoY increase in sales to Rs 7,034 mn, which was led by a volume increase of ~10% YoY.

▪ Gross margin for H1FY23 declined by ~379 bps YoY at 32.5%. Decline in gross margin was due to increase & volatility in raw material cost, which company was not able to fully pass on to the customers.

▪ EBITDA margin for H1FY23 declined by ~721 bps YoY to 9.6%. Decline in EBIDTA margins was led by decline in gross margin & higher advertisement expenditure.

▪ PAT for H1FY23 declined by ~33% YoY at Rs 443 mn. Tax rate was lower at ~16.8% vs 25.5%.

Project Lakshya on track

DIL is working with Vector Consultants to implement Theory of constraints (TOC), in an attempt to keep a tab on its working capital mainly by reducing receivables and inventories. Company has enrolled ~189 distributors upto H1FY23 under the project Lakshya and target to bring ~70% of its distributor under project Lakshya by FY25. Company has also on-boarded ~205 distributors under channel financing. Going forward, management has maintained its goal to reach sales of ~Rs 20 billion by FY25.

Outlook and Valuation:

▪ DIL’s strong brand recall coupled with deeper penetration and consumers shifting towards affordable branded quality products are strong macro tailwinds for the company. Currently the innerwear industry is witnessing a structural shift from unorganised to the organised sector. We expect DIL to benefit from this trend.

▪ We have valued the stock at 20xSep’24e EPS (rolled over from March’24) of Rs 35.4, to arrive at a target price of Rs 708 per share and maintain our “Buy” rating.