Nilkamal (NILK) Q1FY22 result was below our estimates on key parameters. After a robust demand recovery in Q4FY21, statewise lockdown amid second wave of Covid-19 weighed on product off take. However, on a low base of Q1FY21, earnings improvement is encouraging.

Net sales shot up by 96% YoY to Rs 4,923 million, while EBITDA came at Rs 299 million, up by 398% YoY. The company reported net profit of Rs 17 million compared to net loss of Rs 289 million in Q1FY21.

Commenting on the result review, IDBI Capital Equity Research said, "We believe the company is poised to rebound as opening up of economies and pent up demand would aid earnings growth in near term.  We have broadly maintained our net sales/PAT estimates for FY22E/FY23E. Maintain SELL with a revised TP of Rs2,266, assigning 17x PER on FY23E."

Key highlights and investment rationale

Higher sales volume supported net sales

NILK reported a robust recovery on YoY led by strong recovery in plastic segment.  The sales of the company's plastic business stood at Rs 4,128 million whereas the retail business at home sales stood at Rs186 million against Rs1,998 million and Rs 154 million respectively. Further the mattress business achieved sales of Rs 143 million as against Rs 72 million. Sales of Bubble-guard improved substantially from Rs 10 million to Rs 40 million. In order to achieve its growth plans as well as for further building its competitive advantage in the business in which it operates, the Company estimates a total Capital expenditure of ~ Rs 2,450 million during FY21-22.

Positive operating leverage aided EBITDA margin

The company reported EBITDA margin of 6.1%, a substantial improvement 1,010bps over Q1FY21. Despite 27% increase in raw material prices from Q4FY21, the company’s strong leadership aided to pass on 85% of the increase in price hike with a lag of couple of months. We expect EBITDA margin to be in the range of 12%-13% in near term.

Expensive valuation, SELL with a TP of Rs 2,266

Though we like NILK owing its strong brand recall, extensive products folio and distribution reach, we believe a sharp run up in the stock price, we believe value is priced in at current level. SELL with a TP of Rs 2,266.

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