Avro India Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Revenue surged 67% YoY, but margin mix softened: Q1 FY23 revenue hit ₹20.31 Crores, yet EBITDA margin dipped to ~10.5% from ~14% in Q4 FY22 because of lower-margin plastic compound sales in the quarter.
• Up-cycling is the core margin story: The company crossed 300 metric tons of regenerated polymer output via outsourcing, with recycle granules 30% cheaper per kilo, and plans to scale this to 500 metric tons per month to drive a structural margin lift.
• Distribution is going national, fast: Avro is onboarding ~50 distributors to expand from a 70% Uttar Pradesh base toward a 50:50 geographic mix, while online sales already exceed ₹10 Crores with strong traction in South India.
• Product portfolio broadening aggressively: New launches span almirahs, revolving chairs, imported furniture, and mattresses, all leveraging the existing online and offline distribution infrastructure.
• What to watch next quarter: Whether the 30–40% YoY top-line growth target holds as the base effect normalizes, the pace of up-cycling scale-up toward 500 metric tons per month, and the trajectory of blended EBITDA margins as the lower-margin compound sales mix unwinds.

Up-Cycling: The Margin Engine

• Cost advantage locked in: Recycle granules are 30% cheaper per kilo than virgin polymer, a spread that management says widens when crude prices rise because up-cycled polymer prices move less than virgin, providing a natural buffer.
• Scale-up underway: Already crossed 300 metric tons of regenerated polymer manufacturing via outsourcing in Q1; target is 500 metric tons per month, with a Greenfield plant for up-cycling expected to be operational in four to six months.
• Self-consumption target: Management aims to meet 70% of Avro's entire production requirement from in-house up-cycled polymer, reducing dependence on external raw material sourcing.
• Commercial opportunity beyond self-use: The company plans to sell up-cycled polymer to other firms in the same domain and to service Extended Producer Responsibility requirements of domestic and MNC companies, opening a second revenue stream.
• Margin impact is back-end loaded: Blended margins will rise as up-cycling scales, but the direct 30% benefit will not flow through on 100% of sales because ~30% of raw material will still be sourced externally and there will be direct and indirect expenses; management says Q3 and Q4 will look very different.
• Analyst-math on margin trajectory: Per an analyst's math, 16–17% EBITDA margin is possible two to three quarters down the line, and management responded "you are actually right," citing the up-cycling scale-up and Greenfield plant.

Aggarwal: "if the virgin plastic is going down by Re.1 this will be about 0.50 paisa because it does not directly impact and same way when it goes up possibly does not impact us much let us say if this is Rs.20 rise it will be increases the prices of virgin polymer indeed in the up cycling it will be about Rs.10 only not even Rs.10, Rs.7 Rs.8 only. So that is the benefit and beauty we get"

Distribution & Geographic Expansion

• From regional to national: Currently ~70% of business comes from Uttar Pradesh, the home market where Avro has been embedded for two decades; the remaining 30% is from other northern states. The target over time is a 50:50 split between UP and the rest of India.
• Distributor onboarding in motion: About 10 new distributors already onboarded out of ~50 being acquired; management expects ~40 to be onboarded in the next two to three months, extending reach from Kashmir to Kanyakumari and Bhuj to Assam.
• Online channel pulling national demand: Major buyers on Flipkart and Amazon are from South India, with online plastic furniture sales exceeding ₹10 Crores; Avro holds the maximum ranking and rating on both platforms and Amazon recently certified it as number one in the country in online furniture.
• Warehouse strategy is demand-driven: The company will set up warehouse facilities wherever necessary to reach consumers faster, evaluating locations like Jaipur, Ludhiana, Ahmedabad, and Bhopal, but may not set up where buyers purchase truckload quantities; no fixed timeframe given.
• GST registrations expanding: Already registered in Bangalore and Rajasthan, with more states in process, supporting the geographic push.
• Sales team build-out: New team members onboarded for sales and distribution to reach previously uncovered geographies including Maharashtra, South India, and Orissa; management says the only challenge is onboarding key resources to connect with distributors.

Aggarwal: "we are one of the rare companies which has now taken a bit lead and right from Kashmir to Kanyakumari they reaching out even Bhuj to Assam Guwahati we are reaching out to almost every sector of the country"

Product Portfolio & Competitive Positioning

• Design moat: Avro has more than 28 designs registered, providing product exclusivity that management says drives strong reception in new markets; three new molds already acquired this year with four more expected by FY2023.
• Price aggression enabled by cost structure: Avro's products are ~40% cheaper than national brands like Nilkamal, Supreme, and Cello; management says the 30% raw material cost reduction from up-cycling provides the leverage to become "very predatory" on pricing to capture market share.
• New categories launched: Almirahs, steel almirahs, revolving chairs, imported furniture from China, and mattresses have been introduced, all leveraging the existing online and offline distribution infrastructure.
• Revolving chairs: Sourcing and trials are underway; management expects sales growth to begin from Q3 or Q4.
• Mattresses: Will be branded under Avro's own company brand and sold through offline and online channels; will be outsourced rather than manufactured in-house; FY2024 is the safe timeline for launch.
• Almirah business: Already in a core start; this year the company will amplify that business model.
• No pending order book by design: Orders are dispatched in less than 24 hours to prevent distributors from going to competitors, so the company does not maintain a quantifiable order backlog.

Aggarwal: "our price is about 40% cheaper than Nilkamal and Supreme or Cello... they created this industry and they created this product segment and category so we have a lot of pride in that saying that yes they are the leaders but nevertheless today because of our aggressive predatory pricing plus distribution plus let us say our approach and reach out..."

Financial Performance & Efficiency

• Top-line growth of 67.3% YoY: Q1 FY23 revenue of ₹20.31 Crores, driven by expanded offline distribution to Pan India and strong online presence.
• Profit turnaround: Net profit of ₹1.04 Crores versus a net loss of ₹36 lakhs in the corresponding year, which was impacted by COVID; net profit margin at 5.12%.
• EBITDA margin mix effect: Q1 FY23 EBITDA margin was ~10–10.5% versus ~14% in Q4 FY22, because Q1 included sales of plastic compounds that carry lower profitability than manufacturing; this mix effect is expected to unwind.
• Inventory efficiency: Inventory turnover ratio is more than 24 times, indicating high operational efficiency.
• Low leverage: Long-term debt is only about ₹1.5 Crores, with debt-to-equity under 0.8%, providing significant headroom for expansion.
• Working capital normalization underway: Last year the company extended significant credit to buyers facing COVID challenges; this year management plans consolidation and expects the working capital cycle to come down to reasonable levels, with additional cash flow helping to mitigate capital needs.
• Price hike taken: About 6% increase in selling prices implemented during the quarter to mitigate inflationary pressure, though raw material prices escalated drastically overnight due to supply chain disruption and the war.

Seasonality & Growth Outlook

• Q1 and Q2 are seasonally subdued: These quarters lack festivals, which are the primary demand drivers; Q3 and Q4 are the best quarters due to festive uptake, with traction picking up from Q2 onward.
• Top-line growth expectation: Management believes the company should grow about 30% to 40% YoY, "unless otherwise something unwarranted happens," with bottom line growing correspondingly because of up-cycling benefits.
• Transformational two-year outlook: Management states that the entire results of FY2023 and FY2024 will show "a very different company altogether" due to forward integration via product enhancement and backward integration via up-cycling.
• Up-cycling plant phased: First phase is a 1,000-ton project; the second phase is a larger Greenfield plant exclusively for up-cycling products, with benefits accruing in FY2024.

Aggarwal: "I believe that we should be able to grow about 30% to 40% is my take at this point unless otherwise something unwarranted happens."

Guidance & Commitments

Key Metrics