Visaka Industries Rating: buy; FY21 likely to see sharp growth in profitability

Visaka Industries (VSKI) is likely to witness one of the most profitable fiscals (FY21) in the past decade despite the current pandemic. Our channel checks across regions indicate: (i) demand and pricing for VSKI’s ACS (rural-centric product) remains defiant despite Q2FY21 being a seasonally lean quarter; (ii) Vnext (urban-centric product) demand too has recovered sharply post-Jun’20 amid firm pricing; and (iii) sales have recovered 95-100% in Q2FY21 in both ACS and FCB segments.

We expect the sustained growth momentum and firm pricing environment to drive sharp improvement in profitability in FY21e. Stricter working capital management and strong FCF generation is likely to help substantial paring of debt, resulting in improvement in RoCEs as well. At current valuation of 6.9x FY22e earnings, VSKI remains a compelling Buy.

Valuation and outlook: Considering the better than expected performance in a seasonally weak quarter (Q2FY21), we increase our revenue/PAT estimates by 2.3%/2.0% and 15.6%/7.8% for FY21e/ FY22e. We now expect VSKI to report overall revenue and PAT CAGRs of 6.3% and 27.2%. Higher profitability and stricter working capital discipline leading to sizeable paring of debt would aid the company in improving its RoCEs to ~15%. Maintain Buy with a revised TP of Rs 552 (earlier: Rs 512), at 12x FY22e earnings.

ACS segment continues its growth momentum: After reporting a volume/revenue growth of -14.2%/-0.4% in Q1FY21 in the ACS segment, demand has sustained in Q2FY21 driven by firm sales in rural India. While ACS realisations have declined by 4-5% q-o-q in Q2FY21, pricing remains substantially higher y-o-y. We thus expect VSKI to report healthy 8.2%/76% growth in segmental revenue/Ebitda in FY21e.

Vnext making a strong comeback: Vnext demand has also recovered sharply after two months of lull (Apr-May’20). Release of the pent-up demand is in tandem with firm pricing as per our channel checks. With VSKI now planning to put up another greenfield unit in Tamil Nadu, we expect volumes in the segment to sustain their growth momentum. We also expect segmental Ebitda margins to move into the much-anticipated 12-15% range over the next 2-3 quarters.

Balance sheet strengthening to aid rerating: Despite (likely) South India capex, improved FCF generation over FY20-FY22e would help VSKI retire sizeable debt and thus improve its RoCEs to ~15% levels by FY22e. With earnings growth momentum poised to sustain and balance sheet strengthening likely to continue, we expect the stock to witness re-rating in the near term.