We believe, it would be tough for Asahi India Glass (AIG) to sustain its present elevated profitability levels amidst steep rise in energy costs. Past 5-year average energy cost/sales has been ~13.5%, which increased to ~17% in Q3FY22. We expect it to surge a further ~400bps by Q1FY23E, assuming present natural gas and crude oil prices. Also, logistics cost to sales is ~5-6%, and ~20% increase in fuel costs would add a further 100bps pressure on margins. We therefore cut our FY23E/FY24E EBITDA margin by ~400bps/~300bps, resulting in an EBITDA cut of ~15%/10% respectively, with revenue estimates largely unchanged. We do not foresee much risk to the realisation levels for domestic float glass industry at least till FY23E, given: 1) limited global supply, 2) rising need from solar panel space, and 3) container shortage issues persisting. Domestic supply addition from GoldPlus and AIG (9-10% of industry capacity addition) will be in FY24E-FY25E, thus allowing AIG to operate at close to full capacity by FY24E. Company is currently operating at ~75%/~90% utilisations in the auto/architectural glass segments, with equal revenue mix. Even post the reduction in EBITDA margin estimates, we expect the margin to be at robust levels of 24-25% as against FY18-FY22E mean of ~19%. Maintain BUY with a revised DCF-based target price of Rs553 (earlier: Rs671), implying 22x FY24E earnings (doubling in FY22E-FY24E).
- Energy cost inflation to drive margin reversion from Q3FY22 highs: EBITDA margin was at ~27% in Q3FY22, and we expect it to be hit in FY23E due to energy cost inflation, though input material costs are not yet an area of concern. With domestic architectural glass prices having inched up by ~25-30% in YTDFY22, we see limited incremental triggers for further price hikes. This would result in profitability succumbing to cost inflationary pressures. Power/fuel costs (~17% of sales) are likely to witness 20-25% increase in next two quarters (~400bps), led by rise in cost of natural gas (~70% of energy cost) and crude oil. Also, logistics cost (~6% of sales) is likely to undergo ~20% inflation, impacting the margin by ~100bps.
- Growth trajectory intact: With residential unit sales growing by ~50% YTD-FY22 and scope for further opening up of the economy, demand for glass in residential segment is likely to witness ~15% CAGR in FY22E-FY24E. In the commercial real estate space, CY21-CY23E supply is estimated to grow at ~6-7% CAGR. In the PV space, we are building-in 14% industry CAGR for FY22E-FY24E, with gradual improvement in chip supply. Thus, we are factoring-in a revenue CAGR of ~19% in FY22E-FY24E, with ~14% volume growth and rest from value mix improvement.
- To operate at RoE in excess of ~20% vs past 5-year mean of ~15%: Despite the cut in margin estimates, we expect AIG to deliver >20% RoE in FY23E-FY24E led by strong revenue CAGR of ~19% and EBITDA margin of ~24%. Post factoring in capex of Rs4bn p.a. to fund the next leg of capacity addition, an EBITDA margin of ~24% (~600bps higher than the FY17-FY21 mean) would help AIG generate FCF of Rs3.5bn p.a. and reduce net debt/equity from 0.8x in FY21 to 0.2x in FY24E. We are not building-in numbers for the Vishakha solar glass JV in FY23E-FY24E.
Shares of Asahi India Glass Limited was last trading in BSE at Rs. 420.85 as compared to the previous close of Rs. 410.40. The total number of shares traded during the day was 88436 in over 3273 trades.
The stock hit an intraday high of Rs. 427.00 and intraday low of 406.50. The net turnover during the day was Rs. 36973937.00.
Source : Equity Bulls