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  • Stock recommendation: Asian Granito India Ltd – ACCUMULATE – TP Rs.255

    Publish date: August 16, 2018

    Result Update

    Asian Granito results were lower than our estimates due to sharp decline in realizations and pressure on margins. Sharp decline in realizations continued in Q1Fy19 and is likely to be seen in Q2FY19 too due to commissioning of almost 100 units in Morbi largely from unorganized players. Volume growth was impacted by delays in receivables as well as lower than expected demand growth. Volumes are likely to be impacted in Q2FY19 too owing to truckers strike in July and festivals in August. Near term outlook looks subdued on both demand and pricing front. However, changes in marketing strategies and dealer incentives are likely to yield benefits in long term in terms of volumes and margin improvement.

    Key Highlights

    • Revenue growth of 6.1% YoY was led largely by volume growth as realization witnessed sharp declines across categories. Operating margins declined sharply sequentially and on yearly basis to 8.6% due to lower realization, higher gas prices and higher proportion of outsourced tiles. Net profit performance stood lower than our expectations and was impacted by fall in margins.

    Valuation & Outlook

    • Stock is currently trading at valuations of 18.4x and 14.4x on FY19 and FY20 estimates respectively. We revise our estimates to factor in the sharp decline in margins led by lower realization and higher gas prices. Since the challenges in the tile sector are likely to remain for another 1-2 quarters, lower realizations, higher gas prices are likely to have an adverse impact on projected financials as well as valuation multiples. There is still continued higher proportion of unorganized sales even after implementation of GST and e-way Bill. Company has also put on hold its expansion plan in AP which will restrict the volume growth to just 15% going forward.
    • We now value the company at 16x FY20 estimates to factor in these challenges and weak performance during Q1FY19. We arrive at a revised price target of Rs 255 based on 16x FY20 estimated earnings. We downgrade the stock to ACCUMULATE from BUY earlier. We, however, believe that the change in the marketing strategies and higher sale of value added products is likely to benefit the company in medium to long term.


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