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One challenging quarter down; a few more to go
Asahi India Glass’ (Asahi) Q4FY20 results were below estimates as revenues declined ~16% YoY to Rs5.9bn while EBITDA margins shrunk 167bps to 15.7%. We expect steep drop in revenues (~45%) in H1FY21 due to impact of lockdown in Q1FY21 and gradual utilisation ramp-up in Q2FY21. However, the positive levers of: 1) sustainable cost reduction measures (labour, breakeven reduction), and 2) reduction in power and fuel costs, is likely aid margins rebound in H2FY21 and likely to be sustained in FY22. As per management the sales pickup post reopening has been strong yet we remain cautious on sustenance of this pent-up demand. We believe Asahi remains a strong proxy play of PV demand due to its dominant market share (>70%), with capex cycle behind us we expect strong FCF generation (FY20/FY21E/FY22E:Rs1.3bn/Rs3.3bn/4.4bn). Maintain BUY.
* Key highlights of the quarter: Topline declined 16% YoY at Rs5.9bn due to: a) higher decline of 23% in architectural segment revenues to ~Rs2.3bn; and b) lower auto volumes leading to decline in automotive revenues by ~16% YoY to Rs3.5bn. EBITDA margin shrunk 164bps to 15.7% due to higher other expenses (up 598bps) and higher employee expenses (up 173bps). Gross margin improved (up 530bps) primarily as a result of superior fixed-cost absorption increased due to rise in finished goods inventory resulting from the Mar’20 lockdown; On the positive side, power and fuel cost have reduced 77bps aided by reducing gas prices, the same benefit is likely to sustain in H1FY21. Tax write-back of Rs419mn (revaluation of deferred tax liability) aided reported PAT (grew 16% to Rs558mn).
* Focus on margins, cash flow conservation and debt reduction: Asahi is expected to derive margin benefits from cost control measures and reduced spot gas prices. Key focus in FY21 would be on improving productivity and further reducing break-even levels. Gross debt is likely to peak at ~Rs16bn (H1FY21) and we expect a net reduction of Rs2bn in FY22, as the management focuses on deleveraging. For the architectural industry, benefits from extension of anti-dumping duty (ADD) on imports from Malaysia, which were expected in H1FY21, have been delayed due to Covid-19 and is now likely to be decided upon in H2FY21.
* Maintain BUY: Asahi’s business has unique characteristics: a) dominant automotive market share (>70%) with long term mix benefits and no EV risk; b) rising demand and superior product mix play on the architectural side (No.2 in the segment); and c) improvement in cost structures, FCF / RoCEs;. We reduce our FY21E/FY22E EPS estimates by ~75%/25% factoring in the revenue drops due to Covid. Despite the recent price rally (up ~36% since March lows), the stock remains attractive at FY21E FCF yield of 7.1%. We upgrade the multiple to 12x (earlier: 11.5x) FY22E EV/BITDA and maintain BUY with a revised target price of Rs221/share (earlier: Rs238/share).
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