Lovable Lingerie - Strong volume growth; Buy - Anand Rathi

Volume growth remains strong. Lovable Lingerie's reported revenue grew 12% yoy. Volumes grew 18%. On the changed distribution structure and trade margins, realizations were down 6% yoy. Prices of the Lovable brand were hiked 6% in Dec'12 and of Daisy Dee 7% in Jan'13. Lovable and Daisy Dee reported volumes growing 16.7% and 21.3% respectively. Nationwide expansion of distribution helped to strong volumes of the Daisy Dee brand.

Lower other expenditure drives margins up. Other expenditure (as percent of net sales) was 380bps yoy lower. The company had aggressively spent on the nation-wide launch of the Daisy Dee brand in 3QFY12. This had resulted in higher other expenditure in base quarter. This helped the EBITDA margin expand 70bps yoy. The effective income tax rate was down 170bps yoy and net profit was up 13.9% yoy.

Distribution expansion on track. The company has largely completed appointing new distributors. At present, it has 52 distributors of Lovable (with 3,500 outlets) and 120 distributors of Daisy Dee (with ~10, 000 outlets).

Margin expansion ahead. The company expects prices of major raw materials (cotton and packaging material) to hold stable over the next 2-3 quarters. The recent price hikes of ~6% will help expand margins ahead. Though the company plans to increase spending on brand-building activity, it expects margin expansion of ~100bps in FY14.

Our take. Due to expansion of distribution network as well as softer base of FY13, we expect the company will be able to report healthy volume growth in FY14. EBITDA margin is also expected to move upwards due to price hike and stable raw material prices. We expect a healthy, 20%, earnings CAGR over FY13-15 and value the stock at a target price of Rs. 490, at a target PE of 26x FY14e earnings. We assign a target PE of 26x as per Mean PE since listing. Risks. A sharp increase in cotton prices and higher competitive pressure.

Source : Equity Bulls

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