Chambal Fertilisers; BUY; Target Price: Rs 158
With the sale of shipping assets, Chambal has exited from all non-core businesses and has thus become a pure play on Fertilisers and Agri Inputs. We believe this would trigger a re-rating, as the company’s ROCE profile will improve. Fertiliser segment enjoys higher ROCE at 14-15% compared to the Shipping segment where ROCE is ~5-6%. Due to the huge capex, we expect ROCE to remain depressed over FY18-19, post which it should come back to 15% from FY20E. We assign a BUY rating, valuing the company at 12x FY19E EPS of Rs13.2.
Cholamandalam Finance; ACCUMULATE; Target Price Rs 1,350
Cholamandalam Finance (CIFC) has built a well-diversified and de-risked product portfolio, which has insulated it from the CV downcycle. With 1) growth returning and asset quality improving in Vehicle Finance, 2) low overall Auto Financing market share and 3) expectation of revival in Home Equity (HE; LAP) portfolio post demonetisation, we believe CIFC is better placed than its peers. The stock trades at a premium to its larger peers, but it is justified due to relatively higher earnings growth and better ROE profile
Deepak Fertilisers; BUY; Target Price: Rs 405
Deepak Fertilisers (DFPC) commissioned its new complex fertiliser manufacturing capacity in Q4FY17, which will increase the existing capacity of 0.3mn MTPA to 0.6mn MTPA. The company aims to launch various new grades of Complex Fertilisers, including various fortified grades, which will aid in filling gaps in the product portfolio. DFPC will look to leverage both, its brand names ‘Mahadhan’ and ‘Bhoodhan’, which have excellent brand recall and farmer loyalty in Maharashtra, besides its extensive distribution network to sell new products.
Due to the recent business restructuring, we use SOTP valuation methodology and value the 3 business segments – TAN, Industrial Chemicals and Fertilisers on EV/EBITDA. We assign 10x multiple to TAN business due to the superior margin profile, dominant market share and specialized product offering. We assign 6x multiple to Fertiliser business (15% discount to complex fertiliser industry average) and 8x multiple to Industrial Chemicals business. Our target price based on SOTP stands at Rs 405. We recommend BUY.
Emami India; BUY; Target Price Rs 1,200
Emami is a unique play in Personal and Healthcare, and has created and attained leadership in Cooling Oil, Cooling Talc, Men’s Fairness Cream, Balms and Antiseptic Creams. Positioning its products around the Ayurvedic theme, focus on low unit packs, low competition and aggressive distribution have enabled it to create 5 power brands in respective categories. Mass market focus, product innovation and distribution would ensure 13.4% revenue CAGR over FY17-19E.
We believe that Emami is a good play on the recovery in rural markets
(50% of its sales). Double-digit volume growth is achievable, owing to recovery in rural markets
and strong new product pipeline. The company has guided for a 15% volume growth in 9MFY18. New launches will contribute 2-3% to overall revenue. We retain BUY with target price of Rs 1,200.
Godrej Consumer Products; HOLD; Target Price Rs 985
Low penetration, rising urbanization, shift from need-based to habit-based products and innovative product launches/variants are likely to drive robust growth in HI and Hair Colour segments. Given these drivers, we expect HI and Hair Colour to grow at a CAGR of 11.5% and 13.7%, respectively over FY17-19E.
We expect innovation, distribution expansion and gradual uptick in urban areas to drive volume growth in domestic business, while share gains, innovation and market expansion across LATAM, Asia & Africa will drive growth in international operations. Cost-saving initiatives (Project Pie & Iceberg) are yielding returns. Expect margin trajectory to be led by lower inputs, mix and cost efforts. We have a HOLD rating with target price of Rs 985.
Hindalco; BUY; Target Price: Rs 259
Hindalco has recently won coal linkage of c.4.8 mtpa in an auction. Also, the production from owned mines, Gare Palma 4/4 and 4/5, has been increasing and would contribute 2mtpa. Thus, with the already existing 3.75mtpa linkage, the company has a cost visibility on almost 11mt of coal, out of its total annual requirement of c.16mt. This will help HNDL to rationalize the costs further and help support improvement in OPM.
Focus on cost optimization through rationalization of logistics costs, improving coal security, better product mix, deleveraging and encouraging outlook for LME to be supportive for HNDL’s performance going forward. Novelis is likely to see better performance going forward. At the CMP of Rs231, the stock is trading at 11xFY19 EPS and 6.5xFY19 EV/EBITDA. We continue to value the stock on SOTP basis using EV/EBITDA metric and add value of its investments with 20% discount. We have BUY rating with target price of Rs 259.
Hindustan Unilever; ACCUMULATE; Target Price Rs 1,250
While overall FMCG growth has slowed significantly, HUL has been growing at a faster pace. Management has been taking initiatives to strengthen its brands across categories through sharper focus on core, market development and innovations/renovation. It is also looking to improve throughput from existing distribution. Its strategy of ‘Winning in Many India’ (WIMI), with 5 branches and 14 clusters, is aimed at understanding rapidly changing consumer needs, and has been playing out well, as growth in these market is 1.5x the overall growth.
We expect volume growth and inflationary trends to result in an improves revenue growth and margin expansion. We estimate a 10% CAGR in revenue and 18% CAGR in PAT during FY17-19E. We currently have ACCUMULATE rating with a target price of Rs1,250 (45x FY19E).
Indian Oil; BUY; Target Price: Rs 496
Stable GRM expectation of +US$5/bbl in the next 4-5 quarters, complimented by robust growth in marketed volume by c5.6% yoy in FY18E and stable marketing margin in FY18E will lead to a c36% yoy growth in FY18E EPS. Moreover, ROE should stay healthy at 21% in FY18.
At Rs 400, the stock is trading at 9.6x FY18E EPS. On EV/EBITDA basis, the stock trades at 5.3x FY18E. We value IOCL at 10.5x standalone FY18E EPS with an investment value of Rs56/share. We arrive at target price of Rs 496, which implies an upside of 24%.
MOIL; BUY; Target Price: Rs 425
MOIL has already increased prices of Manganese Ore in May’17 and July’17 by 10% and 5%, respectively. We believe that firm Iron Ore prices at the current level of US$66/tonne and rise in Silico Manganese prices to Rs66,250/tn (ex-Durgapur) will keep Manganese Ore prices strong.
At Rs 398, the stock is trading at 4.3xFY19E EV/EBITDA and 10xFY19E EPS. Factoring in better volume and prices, we continue to value the stock at 5.5xFY18E EV/EBITDA to arrive at a fair value of Rs 425. Retain BUY. We understand that sustainability of higher prices and stronger volume going ahead would provide further strength to MOIL’s performance.
Motherson Sumi; BUY; Target Price Rs 360
Robust revenue growth will continue on account of new order wins, commissioning of new plants and acquisitions. Standalone business witnessed a strong revenue growth of 21% yoy in Q1FY18, and we believe the momentum is likely to continue with higher PV volumes and increasing content per car. Further, SMP/SMR businesses are also likely to see strong revenue growth momentum, largely driven by new order wins and commissioning of new plants. Moreover, the acquisition of PKC is likely to support revenue growth.
We build in consolidated EBITDA CAGR of 30% over FY17-FY19E, implying a margin expansion of 110bps, led by higher margins in overseas businesses (SMP, SMR, PKC). Retain BUY with target price of Rs 360, based on 25x FY19E EPS of Rs 14.4.
Mphasis; ACCUMULATE; Target Price Rs 725
Relationship with HP has turned from being a low-cost in-house sub-contractor to a strategic partner with preferred service provider status. The scope of business now extends to other HP entities (HPE, HPI and Micro Focus), which gives a significant upside from the existing MSA (managed service agreement) with minimum revenue commitment of $990 million over 5 years starting FY17.
The run-rate at $240 million is well ahead of minimum commitment base, as Mphasis
has guided for progressive growth in the account. New CEO has access to the top HP leadership now and thus could leverage this client relationship significantly. We have ACCUMULATE rating with target price of Rs 725. At Rs 609, stock trades at 12.4x/10.9x FY19/20E P/E.
Orient Refractories; BUY; Target Price Rs 183
ORIENT’s export revenue has clocked 11.6% CAGR over FY12-17; contribution of exports to FY17 revenue stood at 20.2%. Key drivers are direct sourcing of ISO pressed products by parent company and deeper penetration into Europe & Asia through RHI sales network. ORIENT looks a safe bet to ride the Metals recovery and Infrastructure Development narrative. It is trading at an EV/EBITDA multiple of 14.9x FY18E and 11.7x FY19E. We maintain BUY with target price of Rs183 (14.2x FY19E EV/EBITDA).
PI Industries; BUY; Target Price: Rs 998
Over the years, PI Industries
has developed a niche in the CSM business, which is evident from its strong tie-ups with global innovators and a robust order book of $1 billion. The global agrochemical market size is worth US$200bn, which is growing at a CAGR of 3.2%. With more and more innovators outsourcing manufacturing, PI comes becomes a preferred choice due to its state-of-the-art manufacturing facilities, strong R&D team, respect for IP rights and strong tie-up with innovators.
PI has posted 22% revenue CAGR over FY12-17 while the earning has grown at a faster clip of 45% CAGR on the back of improvement in margin profile. Management’s proven track record, strong execution capabilities and close relations with clients in CSM business, along with healthy pipeline of new molecules in the domestic market will drive earnings momentum in the near term. With the global demand environment likely to improve from CY18, we believe its CSM business will revive, as the company has a strong order book. We believe PI will continue to command premium valuation due to its above-industry average EBITDA margin, superior return ratios and sturdy balance sheet.
Raymond; BUY; target price: Rs 1,059
Backed by a legacy of over 9 decades, Raymond has established itself as the leading B2C player in India’s Fabrics industry. Its strong brand equity and continuous innovation (eg. Techno series) have helped the company to sustain growth momentum. Branded Textiles is a cash cow business, generating a cumulative operating cash flow of Rs13bn over the past 5 years.
Strong cash flow generation ability of the Textiles business, bright growth prospects of the Apparel business and turnaround/value-unlocking opportunities in the non-core businesses are likely to drive overall profitability and return ratio uptick. We value Raymond on SoTP basis and maintain a BUY rating with a target price of Rs 1,059.