PAT miss in Q4/FY19 (quarterly deviation from estimates of 17%, hence annual miss of 5%) due to absence of normal demand buoyancy in Q4 and uncertainty due to small businesses destocking in domestic markets.
Demand in export markets like Europe, the US was soft due to pre stocking from the Chinese imports which was done to beat the 25% duty. Management cited Q4 demand weakness as an exception. Over the last 20 years, CUMI has never seen Q4 lower than Q3 levels. Weak demand scenario is likely to spill over to Q1FY20, post which the management expects the business to normalise. Inventory at trade channels is under check and receivables days remain healthy. No adverse change witnessed in competitive landscape/market share.
On the call, the management guided for 15% revenue growth in FY20 at more than `3,000 crore, which implies the PAT of more than `300 crore (20% growth). While Q1 headwinds could restrict outperformance in near term, we believe these should normalise from Q2 as we see external demand issue as correctable and not impairing longer-term profitability.
Gross margin of 65% in FY19 remains healthy and stable. With capacities in place, EBIDTA margin of 16% has considerable room to expand once top line growth kicks in, driving 20% PAT growth. CUMI has compounded at 18% per annum for the last 10 years and the stock price can double in four years given 20% PAT CAGR over FY19-21E, 20%+ ROCE, and a debt-free balance sheet with strong FCF:PAT conversion.
Gross margin at 65% compressed 200 bps in FY19 because of higher input costs.