ICICI Direct is bullish on Rupa and Company has recommended buy rating on the stock with a target price of Rs 370 in its research report dated November 16, 2018.
ICICI Direct's research report on Rupa and Company
On a standalone basis, Rupa reported flattish revenue growth at Rs 247.6 crore (I-direct estimate: Rs 276 crore) despite Q2FY18 being a low base quarter. Oban Fashion’s [which licensees Fruit of the Loom (FOL) and FCUK brands] reported revenues worth Rs 10 crore in Q2FY19 vs. Rs 2 crore in Q2FY18 Despite a decline in revenues, EBITDA margins improved significantly by 430 bps YoY to 19.7% (highest ever EBITDA margins) vs. I-direct estimate of 14.4%. The beat was mainly on account of a significant increase in gross margins by 509 bps YoY to 38.6%. Subsequently, absolute EBITDA increased 27% YoY to Rs 48.8 crore (I-direct estimate: Rs 40.0 crore) Negative impact of increase in finance cost (up 88% YoY to Rs 3.9 crore) was completely negated by higher other income (up 40% YoY to Rs 1.7 crore) and decline in depreciation cost (down 11% YoY to Rs 3.3 crore). Resultant PAT grew 30% YoY to Rs 28.1 crore (I-direct estimate: Rs 22.9 crore).
The H1FY19 balance sheet witnessed some deterioration with substantial increase in inventory and spike in debt by ~85 crore to Rs 200 crore (D/E: 0.4x). The management expects debt levels to remain elevated with pressure on working capital to persist in the near term. With the Indian innerwear market still dominated by unorganised players (50% market share), we expect Rupa to be a beneficiary of the recent GST rollout given its strong brand legacy and robust distribution network. Factoring in the performance of H1FY19, we revise our estimates downwards and expect sales and PAT CAGR of 10% and 14%, respectively, in FY18-20E. Subsequently, we lower our target MCap/sales multiple to 2.0x FY20E revenue vs. 2.5x earlier. With the recent stock correction, we maintain BUY with a revised target price of Rs 370.
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