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MOSL: INDO COUNT INDUSTRIES (Neutral)-Below-estimate, but reducing destocking intensity offers comfort

Indo Count Industries: Below-estimate, but reducing destocking intensity offers comfort

(inct IN, Mkt Cap USD0.3b, CMP INR102, TP INR117, 14% Upside, Neutral)

 

• Results below expectations, margins contract 520bp: ICNT’s revenue fell 8.5% YoY to INR4,600m (est. of INR5,331m) in 3QFY18. EBITDA margin shrunk 520bp YoY (from 20.3% to 15.1%), with the gross margin contracting 620bp YoY to 44.5%. Employee cost rose 30bp YoY to 5.9% of net sales. EBITDA declined 32% YoY to INR693m (est. of INR901m). Consequently, adj. PAT fell 35.2% YoY to INR364m (est. INR465m) in the quarter.
• Improved US growth prospects provide relief: Home textile industry of late has been plagued by destocking, resulting in off-take deferments from large retailers, especially in the US. ICNT, however, has started witnessing better projections from same retailers and customers who had destocked. Also, as the intensity of destocking is reducing, ICNT is witnessing a marginal pick-up in demand as well. Also, with US business growth expected to increase from 1.9% to 2.5% in 2019, ICNT is set to benefit from better demand.
• Stable outlook on cotton prices: After falling by ~10%, cotton prices have again increased to INR40,000-41,000/candy, eroding INCT’s gross margin by 620bp YoY. Cotton prices were higher because of wastage in crop caused by bollworm, coupled with increased mill use. Going forward, the price is expected to remain stable at ~INR40,000/candy, restricting further pressure on margins. Management expects sustainable EBITDA margins of 15%-17%, considering the recent strengthening of the INR and government incentives.