Cello World shares: Motilal Oswal initiates coverage with 'Buy', suggests 31% upside target

Motilal Oswal Securities has initiated coverage on recent debutant Cello World Ltd with a 'Buy' rating and suggested a target price that hinted at 31 per cent upside potential. The domestic brokerage expects Cello, which is into consumer houseware, stationery and moulded furniture segment, to grow faster than the industry.

Cello World is expected to post a robust revenue growth of 18 per cent, an Ebitda growth of 23 per cent and a profit after tax growth of 25 per cent over FY23-FY26, compounded annually.

"This will be driven by the expansion of both SKUs and distribution reach, coupled with strong growth in the glassware segment post-commissioning of the new plant in Rajasthan. Cello is currently trading at 35 times FY26E PE with an RoE/RoCE of 32 per cent/39 per cent in FY26E," Motilal Oswal said while suggesting a target of Rs 1,100 on the stock.

Cello World, the broking firm said, excels in manufacturing a diverse range of products while maintaining optimal inventory levels, enabling it to aggressively expand existing SKUs and venture into new businesses.

"Operating in diverse industries, Cello benefits from an expanding TAM driven by various sector tailwinds, including favourable demographics, increased discretionary spending, greater product penetration, import substitution, innovation, evolving gifting trends, and brand loyalty," it said.

Motilal Oswal said Cello World would be able to successfully scale up new businesses, and expand SKUs as well as distribution reach to evolve as a leading brand in its respective industries.

Cello has delivered strong revenue growth over the last two years, with a revenue CAGR of 31 per cent over FY21-23, led by strong growth across segments. Writing Instruments achieved the highest growth at 60 per cent (on a low base), followed by Consumer ware at 33 per cent, and Moulded Furniture at 11 per cent.

"Margin is expected to improve from the current levels of 23.4 per cent to 26.7 per cent by FY26, aided by the economies of scale (with increase in SKUs), efficiencies in manufacturing and distribution, and increasing mix of value-added products," Motilal Oswal said.

Improving margins coupled with measures such as channel financing are seen helping in easing the working capital days to 138 by FY26 from 154 days in FY23. This will in turn strengthen the cash flow of the company with CFO/Ebitda ratio improving to 68 per cent by FY26 from 54 per cent in FY23, thereby generating a cumulative free cash flow of Rs 920 crore over the next three years, Motilal Oswal said.

Cello World shares, which got listed in November last year, settled at Rs 839 on Monday.

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