Long Term Recommendation Carysil Ltd. Buy for target price of Rs 784 (59% upside)

Long Term Recommendation Carysil Ltd.

Progressing through Expansion and Tie-ups

Carysil Limited (formerly Acrysil Ltd) is a leading manufacturer of quartz sinks in the world using German (Schock) technology. The company also operates in the steel sink and kitchen appliance segments. Over the last three years, Carysil doubled its quartz and steel sink capacity to meet increasing demand. We believe strategic partnerships with large-scale retailers would sustain the revenue growth momentum in exports. Furthermore, strong industry tailwinds, high home-improvement spending and demand for aesthetically appealing products globally would continue to drive growth. We expect Carysil’s EPS to record a 20% CAGR over FY22–25E, led by capacity addition, improved utilisation in quartz/steel sinks and increased penetration in domestic and international markets. We initiate coverage on Carysil with a BUY rating and target price of INR 784.

Well placed to capitalise on consumer shift towards premium sinks

Carysil is the sole manufacturer of quartz sink (using Schock’s technology) in Asia. The technology and knowhow serve as a strong moat for the company and remain an entry barrier in the quartz sink market domestically and internationally. Apart from Carysil, Schock has shared its technology with only two other players in the world (Blanco [US] and Franke [Switzerland]). We believe the global market for kitchen sinks was 80–90mn units in CY21, of which steel sinks constituted 80%, quartz sinks 10% (5–6mn units manufactured using Schock’s technology) and others 10%. A decade ago, the quartz sink segment held only 3% share in the global sink market. However, the management believes this would increase to 20% by CY26. Carysil is one of the world’s lowest-cost manufacturers of quartz kitchen sink (using Schock’s technology). Given the substantial increase in energy and other costs in Europe, the pricing gap between Carysil and other players has widened further (from 20% to 40%). We believe this cost advantage will help Carysil gain market share in the global quartz sink market.

Strategic tie-ups with large retailers to drive revenue growth in exports

Carysil’s robust revenue growth is underpinned by collaboration with global retailers to supply composite quartz sinks. The company undertakes contract manufacturing for brands such as GROHE, Homebase and B&Q as well as retailers such as IKEA and Menards (indirect channels). We believe these partnerships would be a game changer for the company, as it is well-positioned to capture a large pie of the home-improvement market. Orders from IKEA for supplying quartz kitchen sinks has doubled, with supplies commencing from July 2022. The second agreement with the German brand GROHE for supplying stainless-steel sinks is another example of its successful business collaborations. Carysil sees potential in kitchen appliances and bathroom suites for successful collaboration with large retailers. This can accelerate the company’s revenue growth by leveraging its robust product offerings to diverse geographies.

Doubled production capacity to tap growing demand

Carysil has enhanced production capacities consistently to tap growing demand in domestic and international markets. Over the past three years, the company doubled quartz sink manufacturing capacity at its Bhavnagar plant to 10 lakh units annually. It installed a capacity of 90,000 units for steel sinks, 60,000 for press sinks and 30,000 for Quadro sinks. Quadro (designer) sinks cater to high-end segments, wherein customers are willing to pay a premium for superior quality, design and finish. In line with the current trend in home improvement, the company is ramping up its stainless-steel sink capacity to 1,80,000 units (mainly dedicated to Quadro sinks) and manufacturing/assembly line of 200,000 built-in kitchen appliances at a combined capex of INR31cr. The expansion of built-in kitchen appliances will take place in two phases: 100,000 units in Q1FY24 and 100,000 units in Q3FY24, with a peak revenue potential of INR100–120cr. We expect Carysil’s revenue to record a CAGR of 22% over FY22–25E, with the greater benefit flowing in FY25.

Initiating Coverage with a `BUY` rating

We believe Carysil is well-placed for strong growth, supported by industry tailwinds, increased home improvement spending and demand for aesthetically appealing products globally. Although we saw earnings moderation in FY23 on high quartz sink inventories in the channel, we expect revenue growth to recover sharply in FY24E. In the medium term, earnings growth would be driven by improved offtake in quartz sinks, commencement of additional steel sink capacity, strategic tie-ups with large retailers and integration of the solid surface business. We arrive at a target price of INR 784 by valuing the company at 22x of average EPS for FY24E and FY25E. Key risks to our thesis include (i) delay in capacity commissioning/ramp up and (ii) rising inflation and worsening geopolitical tensions.