Cello World targets margin recovery through steelware and glassware capacity ramp-up

Investment View and Recovery Drivers

Motilal Oswal Financial Services retained its Buy rating on Cello World following a muted 1QFY27, while expecting a gradual recovery from 2QFY27. The investment case is supported by higher utilisation and ramp-up at the steelware and glassware facilities, improving contributions from Cello Pens and Cello Stationery, and a medium-term margin recovery led by premium products under the Cello brand.

The broker also noted that Cello World remains open to opportunistic inorganic expansion and diversification into adjacent categories.

1QFY27 Financial Performance

Consolidated 1QFY27 revenue was Rs 5,267m, down 0.4 per cent year on year and 2 per cent below Motilal Oswal's estimate of Rs 5,388m. EBITDA declined 9 per cent year on year and 23 per cent sequentially to Rs 991m, missing the broker's estimate of Rs 1,110m by 11 per cent. EBITDA margin contracted to 18.8 per cent from 20.6 per cent in 1QFY26 and 19.7 per cent in 4QFY26.

Adjusted PAT declined 9 per cent year on year and 19 per cent sequentially to Rs 734m, compared with the broker's estimate of Rs 771m. The earnings miss reflected elevated input costs, subdued consumer demand and reduced scale at the steel-bottle unit because of the non-availability of imported inventory.

Segment Performance and Margins

Consumerware, which represented 64 per cent of revenue, declined 8 per cent year on year to Rs 3,300m, below the broker's estimate of Rs 3,700m. Writing Instruments accounted for 21 per cent of revenue and grew 52 per cent year on year to Rs 1,100m, ahead of the Rs 1,000m estimate, supported by Cello Pens. Moulded furniture and allied products represented 15 per cent of revenue and declined 11 per cent year on year to Rs 800m, above the broker's estimate of Rs 630m.

Segment gross margins were about 55 per cent in consumerware, 54 per cent in writing instruments and 40 per cent in moulded furniture. Price increases across key categories helped consolidated gross margin recover sequentially from about 47 per cent to about 52 per cent, although demand was affected in the near term.

Management Commentary and Capacity Ramp-Up

Management said polymer prices had increased about 12 to 20 per cent and that it had implemented price hikes of about 7 to 20 per cent across product ranges, including about 12 to 13 per cent in consumerware. Management does not expect major additional price action in the coming quarters.

• The steel-bottle business was constrained to about 20 SKUs versus about 150 previously because of inventory availability. New lines should increase this to 50 to 55 SKUs.
• Glassware revenue grew 35 per cent year on year, although utilisation remained about 60 per cent because of Chinese dumping and sales from existing inventory.
• Management reiterated peak revenue potential of Rs 2,000m to Rs 2,500m for glassware and about Rs 3,000m for steelware.
• Opalware utilisation was about 80 to 85 per cent.

Management did not provide FY27 guidance amid macro volatility but remained positive on growth from steelware and glassware ramp-up. Channel inventory was below average. General trade represented 71 per cent of sales, e-commerce 16 per cent, exports 7 per cent and modern trade 5.3 per cent.

Earnings Outlook and Valuation

Motilal Oswal forecasts FY26 to FY28E revenue, EBITDA and PAT CAGR of 10 per cent, 19 per cent and 16 per cent, respectively. The broker revised FY27E revenue up 1 per cent to Rs 25,337m, EBITDA down 2 per cent to Rs 5,093m and adjusted PAT down 3 per cent to Rs 3,541m. FY28E estimates were broadly unchanged.

The target price of Rs 480 is based on 23 times FY28E EPS of Rs 20.5, which is the average P/E multiple of the past four years.

Key Risks

• Continued weakness in domestic and export demand.
• Volatility in polymer and gas costs.
• Limited pricing flexibility amid Chinese import competition.
• Delayed steelware ramp-up.
• Persistently low glassware utilisation.