CRISIL assigns valuation grade of 5/5 to Butterfly

SEP 01, 2014 | Money Control

CRISIL Research has come out with its report on Butterfly Gandhimathi Appliances. The research firm has assigned a fundamental grade as 3/5 and valuation grade of 5/5 to the company.

“Butterfly Gandhimathi Appliances Ltd’s (Gandhimathi’s) Q1FY15 revenues and earnings were below CRISIL Research’s estimates. Revenues declined 48% y-o-y to ₹1,081 mn in the absence of orders from the Tamil Nadu government and muted branded product sales. EBITDA margin expanded marginally to 8.4% y-o-y supported by the absence of low-margin government orders. Higher depreciation and interest expenses pulled down PAT to ₹2 mn. Gandhimathi continues to invest heavily in branding and promotional activities to establish its presence in the non-South markets. Although growth in non-South markets has been lower than our expectations over the past two quarters, these investments should gradually translate into higher sales traction in these markets. We maintain our fundamental grade of 3/5.”

“Gandhimathi’s revenues declined, for the second consecutive quarter, by 48% y-o-y to ₹1,081 mn 1) as the company did not execute any government orders compared with ₹1,272 mn in Q1FY14 and 2) due to muted sales of branded products (10.7% y-o-y). In Q4FY14, the company acquired the trademark and distribution rights of ~100 SKUs from its group company LLM Appliances, which posted ₹216 mn sales in Q1FY15. Excluding the acquired products, the retail channel sales declined 14% y-o-y. According to Gandhimathi, institutional channel sales (through oil market companies such as IOCL, BPCL and HPCL, which account for 25-30% sales) declined 23.4% owing to a delay in release of new LPG connections, which was the main reason for decline in branded sales excluding acquired products. As per our calculations, sales through retail channels also declined as the company faced growth challenges in both South and new markets amidst growing competition and weak demand.

Growth revival in Gandhimathi’s branded sales is likely to be gradual and is dependent on the new markets. We expect branded sales to log CAGR of 23% over FY14-16. We have assumed government orders worth ₹2,040 mn in FY15 (same as in FY14). If the actual orders awarded are significantly lower (the annual tender will take place in September 2014) it may pose a downside risk to our FY15 revenue and earnings estimates. Absence of low-margin government products boosted gross margin which, in turn, led to a 20 bps y-o-y expansion in EBITDA margin. However, lower revenues resulted in under-absorption of fixed costs, partially offsetting the impact of higher gross margin. Lower revenues, higher depreciation (owing to commissioning of the new capacity and amortisation of acquired trademarks) and interest costs (assumed debt worth ₹362 mn from the acquisition) translated into 98% y-o-y decline in PAT. We expect EBITDA margin to remain at similar levels for the remainder of FY15.” “Since Q1FY15 results were below our expectations, we have lowered our revenue and earnings estimates. Subsequently, we have lowered our fair value for the company to ₹345 from ₹380. At the current market price of ₹274, our valuation grade is 5/5,” says CRISIL Research report.

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