Government order to buoy FY16 performance… • Butterfly Gandhimathi Appliances ::ICICI Securities, report link

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Government order to buoy FY16 performance… • Butterfly Gandhimathi Appliances’ (BGAL) Q3FY15 revenues declined 51% YoY to | 117.3 crore as no government orders were executed during Q3FY15 compared to government orders to the tune of | 123.2 crore in Q3FY14 • The EBITDA margin improved 12 bps YoY to 6.7% owing to the absence of execution of low margin government orders • Owing to a weaker operational performance and high fixed costs, PAT declined 95% YoY to | 0.3 crore Government order to boost FY16 revenues … BGAL has been in the kitchen appliances segment for about four decades. The company has come out of BIFR and managed to record healthy revenue growth led by (a) capacity expansion, (b) government orders, (c) entry into new markets and (d) addition of new SKUs. We expect the last leg of capacity addition, entry into newer markets and the recent acquisition to boost sales. BGAL’s product portfolio has expanded 3x over the last year with the addition of 14 new categories and over 60 SKUs in FY14. Also, the company is now present in 28 states of India, which should aid in penetrating newer markets with an enhanced product portfolio, thereby driving revenue growth over next few years. After a subdued FY15, we expect revenue growth for FY16 to be boosted by the execution of government order to the tune of | 510 crore. Operating margin to improve, going ahead After witnessing an operating margin expansion over the last few years, the operating margin is likely to remain subdued in FY15E owing to the company’s expansion into the non-south region. BGAL needs to extend higher discounts to dealers to push their products. Also, the company has raised its ad spends, thereby pressurising the operating margin. We expect the operating margin to touch 9.0% in FY17E as its products gain acceptance in newer markets. PAT growth to be driven by better operational performance Revenue growth is likely to remain subdued in FY15E owing to weak consumer sentiments and the absence of government orders. However, we expect revenue growth to pick up in FY16E driven by the recent government order, newer products and an enhanced geographical presence. Though PAT in FY15 is expected to decline from | 22 crore to | 5.7 crore, we expect FY16 PAT to grow to | 34 crore. FY16 performance to be strong; maintain BUY with target of | 280 BGAL is trading at a discount to its peers (TTK Prestige, Hawkins Cookers). We believe it is a re-rating candidate considering the strong turnaround that it has made and also growth potential it has. We expect the FY16 performance to improve significantly driven by government orders and better margins owing to increased acceptance of its products in new markets. The company’s expansion in non-south regions is also picking up well and the acquisition of the LLM product portfolio would further boost revenues. We remain positive about the long-term prospects of the company and maintain BUY on Butterfly Gandhimathi with a revised target price of | 280 (based on 14.0x FY17E EPS of | 20). On a cautionary note, considering the various impediments faced by small cap stocks, we believe this should be looked at as a medium to long term investment, which has inherent risks of higher price volatility.


LINK
 http://content.icicidirect.com/mailimages/IDirect_Butterfly_Q3FY15.pdf