Q1 EBITDA/APAT were 18/27% below our estimates, owing to higher-than-expected employee costs, higher-than-anticipated other expenses, higher-than-expected finance costs, and higher-than-expected tax outgo. Neogen Chemicals: Our BUY recommendation on Neogen Chemicals (NCL) with a target price of INR 1,930/sh is premised on (1) increasing contribution of the high-margin CSM business to revenue (2) entry into the new-age electrolyte manufacturing business (3) capacity-led expansion growth opportunity (4) constant focus on R&D and (5) improving return ratios and strong balance sheet, going forward. We maintain SELL, with a revised DCF-based TP of INR 370/sh (earlier INR 255/sh), implying 15x Jun-24 EV/EBITDA. However, long-term risks to business longevity remain, given the company's direct conflict with deep-pocketed e-tailers.
We've revised our FY24/25 EBITDA estimates (35/33% resp) to account for the new rigour in store expansion and assortment management. Profitability exceeded expectations, led by (1) revival of scale (operating leverage), (2) lower inventory markdowns, (3) higher full price, and (4) improving skew towards private labels. Store additions and pipeline remain healthy.
Key underpinnings: (1) improving footfalls and (2) higher bill sizes (three-year CAGR: 10%).
Revenue grew at 4% CAGR (three-year) to INR9.4bn. Shoppers Stop: STOP finally hit normalcy in Q1.
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