Four reasons why Motilal Oswal is bullish on Cello World

Cello World shares faced selling pressure in an overall weak market on Wednesday even as Motilal Oswal Financial Services initiated coverage on recently-listed consumer products maker Cello World with a ‘buy’ rating, citing the household brand’s ability to grow faster than the industry. Cello World shares fell as much as 3.5 per cent to Rs 845.2 apiece during the session.

The company can post a robust set of revenue, earnings before interest, taxes, depreciation and amortisation (EBITDA), and adjusted profit after tax (PAT) over a period of four years till March 2026, wrote analysts at the brokerage in a research report.

The brokerage placed its target for the stock at Rs 1,100 per share, which implies an upside of 25.6 per cent from the previous close. 

Here are four reasons why the brokerage is positive on Cello World:

1. Strong brand equity and market penetration

The brokerage reckons that Cello World has a strong brand recall in the consumer products industry, reflecting its extensive experience, continuous product development, and understanding of consumer needs.

The company also has a strong and diverse portfolio which serves as a "one-stop-shop" for consumers, according to Motilal Oswal analysts.

2. Ever expanding business 

Cello has a proven track record of expanding into new businesses and product categories throughout its journey along with strong manufacturing ability which is the backbone of these growing businesses, they wrote.

In-house manufacturing accounted for 79 per cent of its total manufacturing capacity in 9MFY24. Further, the company is likely to increase its capacity with the ongoing expansion (both green field and brown field) of glass capacity by 30,000 MTPA.

3. Growing Total Addressable Market (TAM) across categories

Motilal Oswal Financial Services also highlighted that Cello World generated 92 per cent of its revenue from the domestic market in FY23, on the back of its presence in three major segments, consumer-ware, writing instruments, and moulded furniture and allied products.

The brokerage pegs the total addressable market (TAM) of the three segments, consumer-ware, writing instruments, and moulded furniture, to expand at CAGRs of 11 per cent, 15 per cent and 17 per cent over FY23-27E respectively, fueled by favourable demographics, increased discretionary spending, higher product penetration, innovation, shorter replacement cycles, evolving gifting trends and brand loyalty.

TAM represents revenue opportunity at 100 per cent market share, as if no competition exists.

4. Healthy financials 

Cello has delivered strong revenue growth over the last two years, with a revenue CAGR of 31 per cent over FY21-23, fueled by strong growth across segments. Its margin is expected to improve from the current level of 23.4 per cent to 26.7 per cent by FY26, aided by economies of scale, efficiencies in manufacturing and distribution, and an increasing mix of value-added products, according to Motilal Oswal Financial Services.

On the valuation front, the brokerage believes that Cello World will be able to successfully scale up new businesses, and expand stock-keeping units (SKUs) as well as distribution reach to evolve as a leading brand in its respective industries.

The company is expected to deliver CAGRs of 18 per cent, 23 per cent and 25 per cent in revenue, EBITDA and adjusted PAT over FY23-26, according to the brokerage.

Volatility in key raw material prices, dependence on third-party manufacturers, and intensified competition could be some potential risks, the brokerage added.

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