Dolat Capital's research report on Sterling Tools
Sterling Tools (STRT) numbers were below estimates on profitability parameters as OEM slowdown and cost rationalization by OEMs impacted margins. Revenue were in line at ` 1,233mn. Gross margin declined by 390 bps on YoY basis. Higher other expenditure further impacted operating margins – declined by 680 bps. However, there is some easing of RM prices on a sequential basis. We believe that this trend can continue. With OEM sales expected to recover slowly, STRT will also face top-line growth challenge. Operating margin should recover on a sequential basis aided by decline in RM prices. We rollover valuations to FY21E earnings. With recent correction of nearly 10% in the last few days, we do not expect significant downside from these levels. Bigger risk here will be the delay in revenue growth recovery and that will be the key to watch over next 2 quarters.
Outlook
We had a BUY rating earlier but downgrade to Accumulate considering the revenue growth challenges and limited expansion in margins. Recommend Accumulate with a target rice of ` 369.
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