Everest Industries Research Report

We maintain HOLD on Everest Industries (EVI) with a revised TP of Rs160. EVI has delivered disappointing results for three consecutive quarters. It reported EBITDA/PAT loss of Rs101mn/Rs140mn in Q3FY17, weighed down by lower utilisation and pricing across its three segments, and rising steel prices which nullified the benefits of chrysotile fibre cost savings. Management expects profitability to recover from EVI’s worst ever quarter led by a visible recovery in domestic demand, and a good monsoon led rural demand pick-up. EVI’s increased focus on cost control and utilisation improvement, and ongoing re-negotiations in PEB to pass on cost increases should further boost earnings recovery during FY18/19E.

 Revenue decline continued in Q3FY17: EVI’s net sales declined 11% YoY (third consecutive quarter of decline) driven by poor offtake across all three business segments – ACS, CBP and PEB. Currency demonetisation hit ACS sales recovery QoQ, which fell ~11%. Management highlighted that poor demand in the north and east markets has hit sales the hardest. In addition to the impact of currency demonetisation, CBP utilisation also suffered on a continued slump in export demand from the gulf region. Subsequently, BP segment’s (ACS+CBP) revenue declined 13% YoY. In the PEB segment, while volumes/ revenue recovered 37%/25% QoQ, it remained 7%/8% lower YoY.

 Lower offtake and higher costs drive EBITDA loss: Lower utilisation and weak realisation more than offset the benefits from the drop in the price of chrysotile fibre YoY. Subsequently, BP segment’s OPM contracted 1,086bps YoY to -6.6% in Q3 (one of the worst quarters ever). Competitive pressure continues to constrain EVI’s cost pass through capability (rising steel prices) in the PEB segment, resulting in EBITDA loss for three consecutive quarters (-0.5% OPM), down 675bps YoY. Management highlighted that stable/ lower steel prices are critical for segmental profitability going forward.

 Outlook: Management highlighted that its building product demand (in the domestic market) is fast recovering which should help improve utilisation and profitability QoQ. Further, we expect ACS demand in FY18 to benefit from increased rural cash-flow on better crop harvesting YoY. EVI is also implementing cost control measures across the organisation in its bid to recover from a quarter with the worst profitability ever. In PEB segment, EVI is trying hard to re-negotiate with customers to pass on the steel price hikes and remains hopeful to turn positive (at OPM level) in Q4. In CBP segment, amid a weak export outlook, the company would focus on improving domestic sales. It is enhancing its domestic CBP capacity by ~25% to ~150K MT by end of FY17 (incurring capex of Rs250-300mn). These should help EVI recover its profitability going forward.

 Valuation and view: We cut our EBITDA estimates for FY17/18E by 57%/42% respectively to account for business impact in FY17 and amid slower recovery going forward. We also introduce FY19 estimates. We cut our TP to Rs160, valuing it at 8x FY19E EPS (from our earlier TP of 270 at 10x FY18E EPS) to factor in significant compression in its return ratios. We maintain HOLD as we expect the company to turn a corner over the next few quarters led by its ongoing cost improvement initiatives and on expected demand recovery. Key upside risks: sharp reduction in steel prices, strong sales recovery across all business segments and vice versa on the downside.

YAARON

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