Shares of Welspun India plunged 8 per cent in Thursday's trade, a day after rallying over 11 per cent on better-than-expected September quarter results. Nuvama Institutional Equities said risk-reward is unfavourable after 73 per cent rally on the counter year-to-date. The brokerage maintained its 'Hold' rating on the stock even as it upped its share price target by 42 per cent.
On Thursday, the stock fell 7.90 per cent to hit a low of Rs 131.05 on BSE. It is trading at 8 times two-year blended forward EV/Ebitda, which is well above its long-term average of 5.5 times.
"With global demand reviving and cotton prices normalising, we expect margins to improve further. This gives us the comfort to hike the target valuation to 8 times (from 6 times). While we are edging up
FY25E Ebitda by 3 per cent on improving demand, risk-reward stays unfavourable at this valuation," the brokerage said while suggesting a revised target of Rs 148 from Rs 110 earlier.
Welspun India's management has cautiously guided for 10–12 per cent sales growth each in FY24 and 25 with potential Ebitda margin of 15 per cent. Nuvama said upcoming festive demand backed with stable cotton prices should keep margins intact. It noted that net debt for Welspun India declined to about Rs 1,600 crore in Q2 from about Rs 1,800 crore as of June 30.
Welspun India reported a profit of Rs 196.7 crore for the September quarter. Its total revenue grew 19 per cent YoY to Rs 2,542.4 crore. The company said its consolidated quarterly revenues were highest ever in Q2 and that it has reported consistent profitability in the last few quarters, in the face of relatively adverse global economic situation and subdued consumer sentiment.
The company said its flooring business picked up well and clocked highest quarterly revenues and margin. Nuvama said Welspun's YoY Home textile and flooring sales grew 17 per cent and 52 per cent, respectively. Margin for Home textile and flooring segments improved 893 bps and 563 bps, respectively. It believes that demand may revive from H2 led by restocking from large retailers ahead of the festive season.
"Net debt to equity stood at 0.4 times in Q2 (Q1: 0.5x). Welspun India has guided for less than Rs 1m000 crore net debt by FY24E. Net debt to Ebitda improved to 1.2 times in Q2 on better operational performance," Nuvama noted.
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