Financial Highlights:

Q2FY25 Result Highlights
Cello world Ltd. (CELLO) reported a muted set of numbers for the quarter ended Q2FY25. Consolidated net sales remained flat and stood at Rs.490cr as compared to Rs.489cr in the same quarter of the corresponding fiscal led by consumerware segment that demonstrated positive growth of 5% YoY, whereas Writing Instruments and Moulded Furniture business degrew, which had led to the result being flattish. The gross margins contracted 175 bps and stood at 51.62%. On a QoQ basis the gross margins contracted by 219 bps. The softer performance was mainly on account of a delay in a lot of containers due to the new Russian sanctions and the Red Sea scenario in export, mainly in the Writing Instrument sector. On the operating front, consolidated EBITDA also remained flat, coming in at 119cr, down 1% YoY while margins contracted 40 bps YoY and 162bps QoQ at 24.2% driven by higher employee expenses YoY. PAT remained flat at 87 cr.

Segmental highlights

• Revenue breakdown: 70% from Consumerware, 14% from Writing Instruments, and 16% from Molded Furniture.
• Consumerware business continues to show positive growth of 5% year-on-year, whereas Writing Instruments and Molded Furniture business degrew, which had led to the result being flattish.
• In terms of channel mix, general trade contributed 74.6% of sales, while export and online sales contributed approximately 8.5% and 10.8%, respectively, with modern trade contributing the remaining 6.1%.

Key Conference call Takeaways

Guidance: (i) The Writing Instruments business is expected to grow at a rate of 12% to 15% over the next 2 to 3 years, (ii) The management said the previously given guidance of 15-17% for FY25 now seems uncertain, given the flattish numbers in Q2, (iii) It expects ~15% of revenue coming from e-commerce in the next few years.

Writing instruments segment

• Aiming to increase outlet coverage in the writing instruments segment from 120,000 to over 200,000. Aiming for 1.5 lakh outlets by the end of FY25 and 2 lakh+ outlets over the next 8-9 months.
• Owing to an improvement in domestic demand, we can expect revenues to easily surpass last year’s revenues this FY.
• Plans to introduce more products in this segment.
• Writing Instrument'sgross margins came in at 57% in Q2FY25.
• Softer performance attributed to delays in container shipments due to new Russian sanctions and geopolitical tensions in the Red Sea affecting exports, particularly in the Writing Instruments sector.

Consumerware segment

• 25% of the consumerware revenues in H1FY25 came from Opalware. And 15% from glassware.
• Theconstruction of a state-of-the-art glassware manufacturing facility in Rajasthan is complete, with an installed capacity of 20,000 metric tons.
• The capital outlay was 250cr.
• With the capacity addition, this segment will eventually command a greater share of the overall mix, in addition to being the faster-growing segment among itself, writing instruments, and moulded furniture segments.
• Trial production has commenced, with plans to ramp up production and introduce multiple new product lines over time.The payback period is 5-5.5 years.
• The above-mentioned Glassware plant is expected to contribute significantly to revenues, with projected sales of Rs.230 crores to Rs.250 crores once fully operational.
• Management anticipates that the glassware segment will substitute imports, aiming for a market share of 10-12% in a Rs.2,000 crores market.
• Initial production will start with 40 tons per day. The expected market share of 10-12% is expected to be gained over the next 3-6 months.
• Consumerware gross margin came in at 53.6%. The management expects consumer gross margins to improve with demand recovery in the coming quarters.

Moulded Furniture and Allied Products

• This segment accounted for 17% of the total revenues in Q2FY25.
• Q2FY25 Gross margins came in at 45.4%.

Merger with Wimplast

• In November 2024, Cello Ltd. announced the demerger of Wim Plast’s manufacturing business into Cello Consumer Products and the subsequent merger of Wim Plast with Cello World, under a Composite Scheme of Arrangement.
• Cello already owned 55% of Wimplast. Post this announcement, it will acquire the balance 45% by repaying the Rs 100cr loan to Wimplast .
• Cello world first invested in Wimplast in 2016, by investing ~158cr, acquiring 12 lakh shares at a price of Rs. 1,317/share.
• Post the acquisition, Wimplast will become a 100% wholly owned subsidiary of Cello World.
• The merger has two potential benefits: (i) Wimplast is in the same line of business as Cello World, thus integration will help in increasing scale, (ii) Wimplast has several manufacturing locations across India, where Cello can share manufacturing facilities with other plastic product lines.

Challenges

• Management noted that previous sales losses in exports cannot be fully recovered, especially in regions like Russia.
• Cello has considerable sales exposure to the US. Any imposition of further tariffs by the US government can impact sales for the company.

Future Outlook

• Q3 is expected to begin strongly due to robust festive demand, particularly in the Consumerware segment.
• Management remains optimistic about achieving better results in the coming quarters, particularly with the gradual ramp-up of glassware production.
• The Writing Instruments business is expected to grow at a rate of 12% to 15% over the next 2 to 3 years, with Management expressing optimism about the second half of FY25, expecting improved demand across all business verticals and a recovery in export sales.
• Emphasis on expanding domestic sales and enhancing distribution channels, particularly in the Writing Instruments segment, Management is not considering demerging business verticals but rather focusing on synergies among them.

Other Key Highlights

• Management is exploring inorganic opportunities to complement current business lines, with a focus on smaller companies with complementary products.
• A potential acquisition target identified with revenues between Rs.150 crores to Rs.175 crores.

Outlook & valuation

Cello World Ltd posted flat earnings growth for the quarter ended Q2FY25. However, we believe that with a diversified product portfolio including consumerware, writing instruments, and molded furniture, the company maintains a promising trajectory for sustained profitability. CELLO is launching new products across business segments, and this would aid growth momentum. In the consumer ware business, which contributed 70% of overall revenues, CELLO’s new soda lime glassware facility in Rajasthan, with a capacity of 20,000 tonnes, is expected to generate significant revenues in Q4FY25. This would add about Rs.75-80 cr in the current fiscal. Also, CELLO is launching premium products in the consumerware business with better finish and aesthetics and renovating the entire product range. In the writing instruments, which accounts for 14% of the revenues, CELLO is enhancing the product range by entering new categories such as markers, crayons and geometry boxes. CELLO is also expanding its distribution presence and is rapidly scaling up the e-commerce business.

Considering the company's history, experienced leadership, well-established brand name and strong market positioning, diversified product portfolio, Pan India distribution network, steady market share, strong and consistent track record of earnings, and a robust distribution network positions Cello as a notable player in the Indian consumerware market. Despite short-term supply chain disruptions due to BIS norms, CELLO remains well-positioned to capitalize on evolving market dynamics and emerging opportunities. At a CMP of Rs.821, the stock is trading at 43x FY26E. We maintain a HOLD rating on the stock.