Equity | India | Forging & Industrials
Initiating September 03, 2012 Coverage BUY
CMP (`) Target (`)
Potential Upside Absolute Rating
Market Info (as on September 3, 2012)
BSE Sensex Nifty S&P
Stock Detail
BSE Group BSE Code NSE Code Bloomberg Code Market Cap (` bn) Free Float (%) 52wk Hi/Lo Avg. Daily Volume (NSE) Face Value / Div. per share (`) Shares Outstanding ( mn)
Shareholding Pattern (in %) Promoters FIIs DII Others
Financial Snapshot (` mn) Y/E Mar FY11 FY12 FY13E FY14E Net Sales EBITDA PAT EPS ROE (%) ROCE (%) P/E
EV/EBITDA
Share Price Performance
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr (%) SENSEX (%)
Source: Company data, GEPL Capital Research
GEPL Capital Research| Diwali Picks 2012 1
Equity | India
Diwali Pick 2012 November 09, 2012
CMP (`) Target (`) Eicher Motors Ltd
2,524 2,987
Potential Upside Absolute Rating Summary Eicher Motors Ltd (EML) operates in two wheeler business through Royal Enfield brand and in CV 18% BUY business through VECV Ltd, which is a JV with AB Volvo in which company holds 54.4%. The CV
Market Info (as on November 09, 2012) business contributes 90% to its consolidated revenues while 10% come from Royal Enfield. EML is
BSE Sensex 18,683 currently the 3rd largest M&HCV (medium & heavy commercial vehicles) manufacturer in India Nifty S&P 5,686 with overall market share of 12.2% in the domestic truck market.
Stock Detail Royal Enfield to improve revenues by CY13 with completion of its new plant.
BSE Group B EML’s two wheeler business sales are set to grow on account of completion of the new plant by BSE Code 505200 Q1CY13 whereby it would increase the capacity to 1,50,000 p.a. & per month from 10,000 to NSE Code EICHERMOT 13,000. Operating costs are set to decline on account of self painting of bikes which was earlier Bloomberg Code EIM IN outsourced by EML. The company has imposed a price hike of 3.3% in 350cc-500cc bikes in Market Cap (` bn) 71.45 Q1CY12 which would improve the top line growth.
Free Float (%) 40% VECV to outperform with increasing distribution network in the Tier 2 & 3 cities. 52wk Hi/Lo 2,636 / 1,376 Avg. Daily Volume (NSE) 28612 EML has outperformed the industry in CV sales by increasing volumes since its JV with AB Volvo. Face Value / Div. per share (`) 10.00 / 16.00 Dealer network is expected to increase to 300 from current 225 by CY13. The company’s Shares Outstanding ( mn) 26.9 strategy is to add more dealers into the smaller cities which will in turn help EML in expanding its distribution network and increasing geographical presence from 50% to 80-90% by CY13. Shareholding Pattern (in %)
Promoters FIIs DII Others Commercial Vehicle’s Sales Volume
55.20 9.08 15.34 20.38 70,000
Financial Snapshot (` mn) 60,000 CAGR Growth 9% Y/E Mar CY10A CY11A CY12E CY13E 50,000 Sales 43,971 56,775 80,423 99,094 Y-o-Y 50.0% 29.0% 42.0% 23.0% 40,000 EBITDA 3,569 5,551 8,444 11,099 Margin (%) 8.0% 10.0% 10.5% 11.2% 30,000 PAT 3,068 4,974 6,849 8,872 Margin (%) 7.0% 8.8% 8.5% 9.0% 20,000 EPS 70.2 114.4 203.0 230.1 Y-o-Y 125.0% 63.0% 77.0% 13.0% 10,000 P/E 17.6 12.9 12.43 10.9 EV/EBITDA 6.1 5.1 6.98 5.3 0
CY09 CY10 CY11 CY12E CY13E Share Price Performance Source: Company data, GEPL Capital Research 160
150 140 Medium duty engine project plant in Chennai to be operational by Q1CY13 130 120 EML’s `3.5 bn MDEP project in Chennai is likely to commence operations by Q1CY13. The 110 capacity will be expanded to 1,00,000 units p.a. This will in turn meet Volvo’s need globally for 100 90 medium duty commercial vehicles in Europe. This will further add steam to the company’s top 80 line and the bottom line. 70
60 VECV to increase market share in its operating niche market segment Jul-12 Oct-12 Jan-12 Apr-12 Jun-12 Sep-12 Dec-11 Feb-12 Aug-12 Nov-12 Nov-11 Mar-12 May-12 VECV currently has a market share of 39% in the CV segment and expects to maintain it in the Eicher Motors BSE SENSEX range of 35-45%. EML has got 6 products in the 16 Ton and above cargo domestic vehicles segment as against only 2 products each from Tata Motors and Ashok Leyland. CV segment of Rel. Perf. 1Mth 3 Mths 6Mths 1Yr EML is expected to grow at 9% CAGR till CY2013E. Eicher M (%) 13.3 22.7 18.0 47.5
SENSEX (%) 0.7 7.1 13.9 7.3
Source: Company data, GEPL Capital Research
GEPL Capital Research| Diwali Picks 2012 2
Equity | India
Diwali Pick 2012 November 09, 2012
EML signs JV with Polaris Industries Inc EML has signed a 50-50 JV with Polaris Industries Inc to enter into the personal vehicle segment. Polaris is a well recognized player in the power sports vehicle segment overseas; this would enable EML to capture market share in that segment in the future. The overall investment in the JV is approx `2.5 bn which would be expended by EML over 3 years. The operational sales would commence by end of CY2015.
Risk
• Price hike in raw materials such as steel could impact margins • A Slowdown in the Automobile Industry could adversely affect sales. • Since Royal Enfield is a niche product in the 2 wheeler segment, it could be hit badly during an economic downturn as consumers tend to avoid niche products in times of economic difficulty.
Outlook & Valuation
Based on the growth potential emanating from its two JVs; with Polaris Inc and AB Volvo and considering the potential uptick in revenues from Royal Enfield and MDEP plant capacity expansions, we believe that there is considerable revenue visibility for the next 2-3 years. We except revenue to grow at a CAGR of 30% from CY11 to CY13, EBITDA to grow at CAGR of 25% with EBITDA margin of 11%. Profit after tax is also expected to grow at a CAGR of 26% during the same period At the CMP of Rs2,524 EML is trading at 5.3x its CY2013E EBITDA. However, considering the robust growth potential, we value EML at 6.5x EV/EBITDA at its CY14E earnings and arrive at a target price of 2,987, which is a potential upside of 18%.
GEPL Capital Research| Diwali Picks 2012 3
Equity | India
Diwali Pick 2012 November 09, 2012
CMP (`) Target (`) Godrej Industries Ltd
308 471
Potential Upside Absolute Rating Summary Godrej Industries Ltd. is one of the leading business conglomerates in India having businesses in 53% BUY varied segments like Oleo chemicals, surfactants, finance & investments and estate
Market Info (as on November 09, 2012) management. It has substantial interests in several industries including property development,
BSE Sensex 18,683 oil palm plantation, animal feeds and agro-products, poultry, personal care and household care, Nifty S&P 5,686 confectionery, etc., through its subsidiaries, associate companies and joint ventures. Corporate Structure: Stock Detail BSE Group A Godrej Industries Ltd BSE Code 500164 NSE Code GODREJIND Bloomberg Code GDSP IN Own Business : Market Cap (` bn) 103.04 Chemicals, Estate Management, Shareholding % Finance & Investments Free Float (%) 25% 52wk Hi/Lo 327.80 / 168
Avg. Daily Volume (NSE) 407461 Godrej Consumer Godrej Properties Godrej Agrovet Others Face Value / Div. per share (`) 1.00 / 1.75 Products 21.6% 61.5% 75.2% Shares Outstanding ( mn) 334 • Natures Basket (100%) •Other Investment
Shareholding Pattern (in %) Source: Company data, GEPL Capital Research
Promoters FIIs DII Others Growth over the years: 75.00 9.51 3.49 12.00 CAGR - FY08 to FY12 Standalone (%) Consolidated (%) Sales 18.26 17.47 Financial Snapshot (` mn) EBITDA 26.68 7.13 Y/E Mar FY11A FY12A FY13E FY14E PAT 16.68 14.8 Sales 43,498 56,121 60,146 73,879 Source: Company data, GEPL Capital Research Y-o-Y 27% 29% 7% 23% EBITDA 2,239 2,656 3,950 5,560 In Q2FY13, GIL sales grew by 40% Y-o-Y to `19461 mn and the operating profit was `680 mn, a Margin (%) 5.1% 4.7% 6.6% 7.5% dip by 6%. This is due to the sharp increase in the raw material consumed and purchase of stock PAT 2,934 2,916 3,300 4,575 Margin (%) 6.7% 5.2% 5.5% 6.2% in trade on Y-o-Y basis. With an increase in the interest costs and minority interest, the EPS 10.0 8.0 9.9 13.7 reported profit of the company has slumped by 17.6% to `765.2 mn. In the same period GIL has Y-o-Y 55% (19)% 22% 39% divested its 43% stake in Godrej Hershey’s, its confectionery arm. The focus now remains on its P/E 32.1 39.8 32.5 23.4 PEG* -- 4.32 -- 0.78 core competency businesses. *PEG: We have considered 3 years CAGR of EPS i.e. Segment-wise contribution to total revenue: from FY10 to FY12 and from FY12 to FY14E FY11 FY12 Share Price Performance Others, 12% Finance & Others, 10% Finance & 180 Chemicals, Investment, Chemicals, Investment, 2% 160 22% 2% 22% 140 Beverages &
120 Beverages & foods, 3% foods, 3% 100 Estate & property 80 Estate & mngt, 12% 60 property mng t , 13% Jul-12 Oct-12 Jan-12 Apr-12 Jun-12 Sep-12 Dec-11 Feb-12 Aug-12 Nov-12 Nov-11 Mar-12 May-12
Godrej Industries BSE SENSEX Animal Feed, Veg oils, 21% Veg oils, 19% 28% Animal Feed, 30%
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Source: Company data, GEPL Capital Research Godrej Ind (%) 12.9 29.9 24.3 54.3
SENSEX (%) 0.7 7.1 13.9 7.3
Source: Company data, GEPL Capital Research
GEPL Capital Research| Diwali Picks 2012 4
Equity | India
Diwali Pick 2012 November 09, 2012
Standalone businesses: Capacity expansion & introduction of new chemicals to add to revenues Characterised by a strong distribution network, the chemicals business consists of specialty chemicals, fatty acids & fatty alcohol which are key ingredients in personal care, home care & specialized consumer products. A market leader in oleo chemicals and fatty alcohol, this segment is the major contributor to the standalone revenues of GIL. Since FY08, the sales of chemicals business have grown at a CAGR of 17% and EBITDA grew at 10% CAGR. The international presence of chemicals segment is attributed to exports to over 60 countries constituting 44% of total segment revenue in FY12. GIL commands a market leader position in this segment due to absence of any other pan-India competitor. GIL’s product mix is improving with stronger growth in higher margin surfactants and specialty fatty acids.
Contribution to segment revenue
45.0% 40.0% 39.7% 40.0% 35.5% 35.6% 35.0% 33.2% 31.6% 29.2% 30.0% 26.3% 25.0% 24.2% 20.0% 15.0% 10.0% 3.6% 5.0% 0.5% 0.6% 0.0% Specialty Fatty Acids & Fatty Alcohol Others Chemicals Glycerin
2009-10 2010-11 2011-12
Source: Company data, GEPL Capital Research
The chemicals segment revenue in Q2FY13 grew by 2% Y-o-Y to `3466 mn, while the EBITDA plunged by 32% to `243 mn due to the fluctuation in raw material prices. The new oleo chemicals plant at Ambarnath is expected to contribute to higher sales in future.
Another segment which adds to the standalone revenues of GIL is the real estate management arm which is responsible for development of the Vikhroli property under the ‘Trees’ project. It contributed about 5% of total revenue in FY12 and expected to increase once the Trees project is completed.
Robust volumes of animal feed and vegetable oil along with new production plants to increase margins GIL has a presence across animal feeds, agri-inputs, poultry and palm oil plantations via its subsidiary Godrej Agrovet Ltd. GAVL has also started sale of maize, paddy and bajra seeds under the Godrej Seeds & Genetics Ltd since FY12.
Animal Feed segment contributed about 71% of the total sales of GAVL in FY12. The animal feed volumes have increased by 18% Y-o-Y in FY12 to 957,042MT (metric tons). The business is a negative working capital and has low capital intensive operations. It has a high ROCE of 337% in FY12 despite slim margins. The company has a pan-India presence and market leadership in cattle, poultry and aqua feeds. We expect this business to grow at a CAGR of 19% over FY12- 14E.
GEPL Capital Research| Diwali Picks 2012 5
Equity | India
Diwali Pick 2012 November 09, 2012
GAVL also has a presence in the Bangladesh animal feeds market through a JV (ACI Godrej Agrovet) with the ACI group which is currently expanding floating fish feed production capacity. The company has commissioned new animal feed plants in Khanna, Kharagpur & Erode which shall help reduce costs in the future.
GAVL also undertakes oil palm plantation through its subsidiaries and JVs with a current acreage of 45,000 hectares (ha), (an addition of 6900 hectares in FY12) across 8 states in India. The steady margins are attributed to the command area model of plantations which have a market- linked pricing mechanism for palm oil buying. The fresh fruit bunches tonnage increased by 64% in FY12.
GAVL also operates in the processed meat segment through JV with Tyson Foods under the brands – Real Good & Yummiez wherein it has supply arrangements with top brands like Mc Donalds & KFC.
In FY12, the sales of GAVL increased by 30% Y-o-Y and the EBITDA margin grew by 204bps to 5.69%.
The animal feed segment sales in Q2FY13 grew by 55% at `6280 mn Y-o-Y. The Bangladesh agri business has shown a drop in revenue in Q2FY13 by 17% at `860 mn due to bird flu epidemic. The vegetable oil sales have increased substantially in Q2FY13 at `1280 mn, a 60% rise Y-o-Y. Godrej Tyson sales grew by 18% to `800 mn Y-o-Y.
The company is planning to foray into warehousing business with a planned investment of about `70 mn.
Launch of new products and stake in Darling group to give revenue visibility GIL has operations in the FMCG sector via Godrej Consumer Products Ltd (GCPL), a market leader in household insecticides and hair care category. GCPL has a wide international presence through JVs with companies like Rapidol, Kinky, Tura, Megasari, Argencos, Keyline across Indonesia, Africa, Latin America and Europe. GCPL has also acquired a 51% stake in Darling group in Africa thereby increasing its reach in hair care segment in Africa.
In FY12 the sales increased by 32% at `48510 mn while EBITDA margins were stable at 18%. In the domestic business, the sales in FY12 were higher by about 30% Y-o-Y in the household insecticides and soaps segments. However, the hair care segment sales remain muted due to high competition. In the international market, the revenues have soared by a substantial 54% in FY12 due to strong marketing investments, vast distribution networks and increased acceptance of the newly launched products.
In Q2FY13, GCPL reported sales of `16003 mn, a 34% growth Y-o-Y and the EBITDA margins have dipped by 107bps Y-o-Y. This is due to the high advertisement and promotion expenses for the launch of new products and re-launch of some existing products like cinthol bathing range, Godrej hair dye etc. in the home care& personal care segment in India, Nigeria and Indonesia. These are expected to generate higher revenues in the coming quarters. We expect the revenues to grow by at least 35% CAGR over FY12-14E and the EBITDA to grow at a CAGR of 40%, with EBITDA margin of 18-19%.
Spurt in booking values and addition of new projects to drive growth in revenues GIL’s real estate arm Godrej Properties Ltd (GPL) is a leading real estate company having presence in more than 12 cities across India. Characterized by asset light model, the company undertakes project development in JV with local developers under Joint Development
Agreements. It is a substantial contributor to the consolidated revenues.
GEPL Capital Research| Diwali Picks 2012 6
Equity | India
Diwali Pick 2012 November 09, 2012
In FY12, the revenue generated rose by a whopping 70% to `7700 mn and the EBITDA margins soared by 275bps. GPL has also made an entry in the redevelopment segment with the Chembur project for redevelopment of 18 residential buildings.
Till Q2FY13, GPL added 4 new projects YTD. Robust sales growth has been witnessed due to the Godrej Summit Phase 1 in Gurgaon, wherein 1 mn square feet (msf) sales were achieved on a single day. Sales in Q2FY13 grew by 64% at `2073 mn. The EBIDTA margin has also increased in Q2FY13 from 23% to 30% Y-o-Y. Currently there are 34 projects being undertaken by GPL all over India. There has been substantial spurt of 326% in the booking values in Q2FY13 (1.57msf in Q2FY13 vis-à-vis 0.6msf in Q2FY12), especially in the residential projects, giving a revenue visibility in future. We expect the revenues to grow by 50% CAGR over FY12-14E and the EBITDA to grow at a CAGR of 50%.
Expansion of retail food outlets in 5 new cities Nature’s Basket is a gourmet food retailing arm of GIL offering a variety of food products across metros and tier one cities in India. It mainly operates in the premium class segment. In FY12, there was a 49% increase in the sales resultant from the increase in the number of outlets in 5 new cities besides Mumbai. The EBITDA margins, however, remain subdued due to high expenses.
Vegetable oil trading business to continue to add to revenues This is a wholly owned subsidiary of GIL which mainly undertakes trading of vegetable oil worldwide. In FY12, it reported sales of `10440 mn, 45% increase Y-o-Y while the margins are stable at 1% due to high crude palm oil prices.
Concerns: • Volatility in the prices of palm oil, a key ingredient in the chemical business • Higher inventory levels and loss in Bangladesh JV due to rising prices of corn and soya in GAVL • High advertisement costs and packing expenses of GCPL in Q2FY13
• Depleting margins of Nature’s basket
Outlook & Valuation
SOTP target price of `471; BUY We value GIL at `471/share, using the sum-of-the-parts (SOTP) methodology. Our target price includes a sum of `256 for GPL (valued at a 40% holding company discount to the price of `393) and `95 for GCPL (40% holding company discount to the price of `146), together accounting for ~74% of our valuation. We value GAVL at `33 (7x of FY14E earnings), the standalone chemicals business at `87 (9x on FY14E earnings). Hence we initiate a buy rating with a target price of
`471, an upside by 53%.
GEPL Capital Research| Diwali Picks 2012 7
Equity | India
Diwali Pick 2012 November 09, 2012
Business Segment % Holding CMP Target Price# Godrej Consumer Products Ltd 21.15% 690 95
Godrej Properties Ltd 61.5% 640 256
Total (A) 351
Business Segment FY14E EPS Exit P/E Multiple Target Price Godrej Agrovet Ltd 4.8 7 33
Standalone 9.7 9 87
Total (B) 121
Grand Total (A) + (B) 471 #Target Price arrived at after giving holding company discount of 40% Source: Company data, GEPL Capital Research
GEPL Capital Research| Diwali Picks 2012 8
Equity | India
Diwali Pick 2012 November 09, 2012
CMP (`) Target (`) Rallis India Limited
149 177
Potential Upside Absolute Rating Summary Rallis India Limited (Rallis), a Tata Group company, is a subsidiary of Tata Chemicals Limited 19% BUY which owns 50.06% in Rallis. It manufactures pesticides, plant growth nutrients and seeds. Rallis
Market Info (as on November 09, 2012) has four direct subsidiaries (Rallis Australasia Pty. Ltd., Rallis Chemistry Exports Ltd., Metahelix
BSE Sensex 18,683 Lifesciences Ltd. and Zero Waste Agro Organics Private Limited) and one step down subsidiary Nifty S&P 5,686 (Dhaanya Seeds Ltd.). Rallis has manufacturing plants at Ankleshwar (3 plants—Dist. Bharuch, Gujarat), Patancheru (Dist. Medak, Andhra Pradesh), Akola (Maharashtra) and Lote Parashuram Stock Detail (Dist. Ratnagiri, Maharashtra). BSE Group B Rallis to benefit from Metahelix’s hybrids: Rallis’ research- based seeds subsidiary, Metahelix BSE Code 500355 Lifesciences Ltd. (Metahelix) has a promising pipeline of products and is carrying out extensive NSE Code RALLIS research on Bt Cotton, Bt Rice and Hybrid Seeds. Its two Bt Cotton hybrids, MH 5125 Bt and MH Bloomberg Code RALI IN 5174 Bt have received approval from the biotech regulator, the Genetic Engineering Approval Market Cap (` bn) 28.88 Committee (GEAC) for commercial cultivation on June 01, 2009. These hybrids incorporate a Free Float (%) 50% synthetic cry1C gene which provides protection against two major pests (bollworm and 52wk Hi/Lo 169.25 / 111.55 spodoptera) which account for more than 60% of the pests that damage this crop. The Avg. Daily Volume (NSE) 241383 regulatory approval permits Metahelix to cultivate the two Bt varieties in the states of Gujarat, Face Value / Div. per share (`) 1.00 / 1.20 Shares Outstanding ( mn) 194.4 Madhya Pradesh, Maharashtra, Andhra Pradesh and Karnataka. Metahelix produces Bt Cotton seeds in India which have a market worth `40 bn. Rallis expects Metahelix to occupy an 8%-10% Shareholding Pattern (in %) share in the Bt Cotton seeds market over the next 3 years, thereby leading to cumulative Promoters FIIs DII Others revenues of close to `4 bn. It has shown a good growth in revenues in H1FY13 clocking 10% more 50.09 11.85 11.47 26.59 revenues than the whole of FY12. Also, it turned profitable on an annual basis in FY12 after a series of losses. Financial Snapshot (` mn) Y/E Mar FY11A FY12A FY13E FY14E Recent acquisition of Zero Waste Agro Organics demonstrates company’s commitment to Sales 10,862 12,749 14,460 17,852 green products: In FY12, Rallis discontinued selling of certain toxic or “red triangle products”. Y-o-Y 23.6% 17.4% 13.4% 23.5% These products formed nearly 10% of its domestic formulations business. In continuance with EBITDA 1,915 2,030 2,429 3,196 this policy, Rallis acquired a 22.8% stake in Zero Waste Agro Organics Pvt. Ltd. (ZWAOPL), a Margin (%) 17.6% 15.9% 16.8% 17.9% PAT 1,260 992 1,369 2,025 Maharashtra-based organic manure and soil conditioners manufacturing company for `100 mn in Margin (%) 11.6% 7.8% 9.5% 11.3% October, 2012. It launched GeoGreen; a bagasse based manure immediately after the EPS 6.5 5.1 7.0 10.4 acquisition. With this acquisition, Rallis has demonstrated its commitment to having more green Y-o-Y (17.2)% (21.3)% 38.0% 47.9% P/E 20.2 23.9 21.2 14.3 products in its portfolio. With companies in the agro-chemicals sector increasingly under EV/EBITDA 13.8 12.4 12.3 9.1 pressure to reduce toxic products from their portfolio, Rallis has already made a start in that direction.
Share Price Performance
120 Increase in MSPs and rising food inflation augurs well for farmer sentiments: Food inflation in
110 India has been steadily rising for the past 6 months. This indicates that farmers have been
100 getting better prices for their produce. The Cabinet Committee on Economic Affairs (CCEA)
90 raised the Minimum Support Price (MSP) for several rabi crops by 3.6% - 20% on 1st November, 2012. This would result in improved farmer sentiment. Other than pest incidence, off take of 80 Agro-Chemicals is directly dependent on farmer sentiment and hence, raising of MSPs augurs 70 well for Rallis. 60
Jul-12 Oct-12 Jan-12 Apr-12 Jun-12 Consistent performance and a strong balance sheet: Rallis has registered a robust 16% CAGR Sep-12 Dec-11 Feb-12 Aug-12 Nov-12 Nov-11 Mar-12 May-12
Rallis India BSE SENSEX growth in Net Sales and 11% CAGR growth in Net Profits over the past 5 years. We expect the strong performance to continue and expect Rallis to register 17% CAGR growth in Net Sales and
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr 37% growth in Net Profits over FY12-FY14E. A Debt-Equity Ratio of 0.2 leaves scope for further Rallis (%) (2.3) 17.2 22.2 (10.7) leveraging of Balance Sheet. With the investments for the Dahej plant in place, no major SENSEX (%) 0.7 7.1 13.9 7.3 Capital Expenditure is expected to be incurred over the next 12-18 months. This would preserve
Source: Company data, GEPL Capital Research margins for Rallis over the next 1-2 years and also eliminate the need for raising any major
debt.
GEPL Capital Research| Diwali Picks 2012 9
Equity | India
Diwali Pick 2012 November 09, 2012
Risk
1. Demand for agro-chemicals is highly dependent on rainfall and its distribution. In fact, agrochemicals are last to be used in the entire crop life cycle. Hence, any adverse rainfall event in any of its markets in India or abroad could lead to fall in consumption of pesticides for Rallis. However, Rallis geographical diversification provides it a good hedge against adverse climatic conditions.
2. Low pest occurrence delights farmers but it is in fact an adverse event for a crop protection chemicals manufacturer like Rallis. Like rainfall, pest occurrence too is dependent on nature, hence predicting the same or preparing for it is difficult.
3. Metahelix is expected to launch its variety of Bt Cotton in the next couple of years with expected revenues of `4 bn from the same over the next 3 years. Any (adverse) aberration from these targets could affect our revenue and earnings estimates.
4. Agriculture as a sector is dominated by Government policies which are often driven by socio-economic and political compulsions. A policy which benefits farmers may be adverse for an Agro-Chemical company like Rallis.
Outlook & Valuation
At the Current Market Price (CMP) of `149, Rallis is trading at 16x its FY14E EPS of `10.41. With the Capital Expenditure at Dahej behind it and revenue ramp up from Metahelix happening, we expect Rallis to report a robust growth in topline (18% CAGR) over FY12-FY14E. Considering the consistent fundamentals and strong business model, we value the stock at 17x its FY14E EPS to arrive at the target price of `177 with a BUY rating indicating an upside potential of 19%.
GEPL Capital Research| Diwali Picks 2012 10
Equity | India
Diwali Pick 2012 November 09, 2012
CMP (`) Target (`) Tree House Education & Accessories Private Ltd
225 280
Potential Upside Absolute Rating Summary Company was originally incorporated as a private limited company in 2006 under the name Tree 24% BUY House Education & Accessories Private Limited, to take over the proprietorship of pre-school
Market Info (as on November 09, 2012) from its promoter. After witnessing rapid growth, it got listed in August2011.
BSE Sensex 18,683 Tree House education & Accessories Limited (Tree House), operates in Informal & Ancillary Nifty S&P 5,686 Education segment targeting children from the age group of 7 months to 5 1/2 years, by offering
Stock Detail various courses from Mother-Toddler to Senior K.G., making it a complete educational center in Pre-School segment. BSE Group B
BSE Code 533540 Highest Self-Owned Pre School in India: NSE Code TREEHOUSE Tree House Operates in both franchise as well as self-operated, pre-school model. Its focus is Bloomberg Code THEAL IN self-operated pre-school. This distinguishes its business model from some of its peers and as a Market Cap (` bn) 7.55 result 79% of total centers are owned and operated by Tree House, out of total 304 educational Free Float (%) 50% centers. Revenue from such owned pre-schools contribute directly to its top line without any 52wk Hi/Lo 259.00 / 140.05 sharing of its revenue, which gives an edge to company compared to its peers who generally Avg. Daily Volume (NSE) 18843 operate with Franchise model. Face Value / Div. per share (`) 10.00 / 1.00 Shares Outstanding ( mn) 34.1 Organic & Inorganic growth/Expansion: Tree House began with 1 center in 2003, which increased to 177 Centers (108 branches and 69 Shareholding Pattern (in %) franchises) in December, 2010 to 309 Centers by September, 2012. However adding to such Promoters FIIs DII Others growth momentum, management has revised its IPO utilization plan, and increased amount for 29.25 4.88 7.22 58.65 expansion of Pre-School business from `420 mn to `850 mn with member approval which demonstrates management’s intention to grow going forward. To confirm the above, Tree House Financial Snapshot (` mn) has recently acquired Pre-school division, “Global Champs” from “MTEducare Ltd”.
Y/E Mar FY11A FY12A FY13E FY14E Sales 392 772 1173 1603 Revenue Elements: Y-o-Y 83% 97% 52% 37% EBITDA 188 459 651 844 In addition to student fees & fees from franchise, company earns consultancy fees from K-12 Margin (%) 48% 59% 55% 53% segment, on basis of service provided and student enrolled. Currently company provides school PAT 92 217 308 418 management service to 21 K-12 schools in 3 states. Company also provides training course for Margin (%) 23% 28% 26% 26% teachers by charging fees after which they can also be employed by company. Due to this EPS 3.8 6.4 9.3 12.3 Y-o-Y 18% 68% 45% 32% company can employ quality staff by saving training time and cost. Tree House has also EV/Sales 119.5 9.9 6.5 4.7 ventured into “Day-Care” with brand name “Muskaan”, which will also contribute to revenue of EV/EBITDA 40.5 16.6 11.7 9.0 the company going forward. It is also expected that branches which are newly opened, will start
Share Price Performance contributing to revenue going forward, ultimately enhancing company’s profitability going
130 forward.
120 Well-established player in rapidly-growing sector: 110 Government to achieve its goal of “Education for Every child”; spending on education is 100 expected to be increased to $100 bn in the 12th Five year plan (2012-2017). India is among the 90
80 top 10 Markets by Education Spending, but price of education in India is 1/6th of the world
70 average price leaving scope for revenue increase for educational companies in times to come.
60 Tree House expanded its presence to 37 states, with its 304 educational centers, in period of
Jul-12 only 9 Years, which signifies its quality of education and trusted brand name. With awareness Oct-12 Jan-12 Apr-12 Jun-12 Sep-12 Dec-11 Feb-12 Aug-12 Nov-12 Nov-11 Mar-12 May-12
Tree House Education BSE SENSEX regarding importance of education and rise in disposable income of population, there is an increased need for quality education, which will result in volume growth for the company. Tree
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr House is operational in an unorganized sector where it has least government interference, with THEAL (%) 2.4 (2.6) 9.1 13.8 regards to fees charge to students, curriculum to be taught, minimum pay to teacher etc. which SENSEX (%) 0.7 7.1 13.9 7.3 gives the company liberty in its operation. As a result of this company gets different revenue in
Source: Company data, GEPL Capital Research different geographical locations.
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Equity | India
Diwali Pick 2012 November 09, 2012
Risk
At present there is no government regulation for informal educational sectors. Any introduction of policy may affect the company. Due to low entry barrier competition might inflate in such business.
Outlook & Valuation
As the company operates in high growth oriented sector, P/E multiples are bound to be higher to compensate its growth. Hence we have valued the company by discounting Enterprise Value to its sales (EV/Sales) as we believe that education is still the sunrise sector in the Indian markets. We expect revenue to grow at a CAGR of 44% from FY12 to FY14, EBIDTA to grow at CAGR of 36% with EBITDA margin of 43%. Profit after tax is also expected to grow at a CAGR of 39% during the same period. At CMP the company is valued at 9.9x as per EV/sales method. Looking at the secular growth which the company is going to witness and aggressive growth drive undertaken by the management, we apply an exit EV/Sales multiple of 6x. With which we arrive at the target Price of `280, implying the potential upside of 24% from current levels.
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Equity | India
Diwali Pick 2012 November 09, 2012
CMP (`) Target (`) TV18 Broadcast Ltd
28.15 36.68
Potential Upside Absolute Rating Summary TV18 Broadcast Ltd (TV18) is part of the Network18 Group, operating one of India’s popular 30% BUY television broadcasting network. It operates five news channels CNBC-TV18, CNBC Awaaz, CNN
Market Info (as on November 09, 2012) IBN, IBN-7 and IBN-Lokmat (a Marathi regional news channel in partnership with the Lokmat
BSE Sensex 18,683 group). The company has recently launched CNBC-TV18 in high definition i.e. CNBC-TV18 Prime Nifty S&P 5,686 HD. It also operates general entertainment channels – Colors, Colors HD, MTV India VH1, Nick, Sonic and Comedy Central (through Viacom 18, a joint venture with Viacom Inc.) and Stock Detail HistoryTV18 (through AETN18, its subsidiary, in which it holds 51% interest and the remaining BSE Group B 49% interest is held by A&E Television Networks LLC). TV18 also operates in film entertainment BSE Code 532800 business through Viacom18 Motion Pictures, division of Viacom18. The news and entertainment NSE Code TV18BRDCST segments are engaged in the programming, production and broadcasting of news and general Bloomberg Code TV18 IN entertainment and the acquisition, production, syndication, marketing and distribution of films. Market Cap (` bn) 48.27 Focus on improving distribution Free Float (%) 40% So far neglected distribution issue on the part of TV18 was on the part of expanded channel 52wk Hi/Lo 35.95 / 15.09 bouquet which increased to 12 channels (at present) as compared to only 2 (in 2005). TV18 is Avg. Daily Volume (NSE) 1082851 suffering loss on distribution side as compared to its peers like ZEE, despite similar Face Value / Div. per share (`) 2.00 / Shares Outstanding ( mn) 362.0 Advertisement revenues. We believe that TV18 will accumulate more strength in distribution after the acquisition of ETV in addition with digitization of cable TV, profitability would flow in Shareholding Pattern (in %) for TV18. With DAS (Digital Addressable System) getting implemented in next 3 years, the entry Promoters FIIs DII Others cost to broadcasters will come down significantly which were extremely high during the 59.76 5.45 6.63 28.16 dominance of analogue cable, as analogue cable use to impose severe costs of entry for new broadcasters. DAS, we believe, shall ensure lower carriage cost and increase in subscription Financial Snapshot (` mn) revenues.
Y/E Mar FY11A FY12A FY13E FY14E Sales 8,090 13,930 16,900 19,500 Rights Issue to reduce debt Y-o-Y 34% 72% 21% 15% The company recently raised `27 bn via rights issue where share outstanding will increase by EBITDA 420 (1,320) 1,437 3,120 Margin (%) 5.2% (9.5)% 8.5% 16.0% around 373% to 1712 mn vs. 362 mn. The purpose of issue of rights was to lower the debt and PAT (170) (740) 473 1,658 acquisition of varying degrees of stake in ETV channels. Broadly, TV18 shall acquire 50% in all Margin (%) (2.1)% (5.3)% 2.8% 8.5% ETV channels (except Telugu, where acquisition is 24.5%). EPS (0.8) (2.0) 0.28 0.97
EV/Sales 7.47 4.34 3.58 3.10 IMT which is indirectly controlled by Reliance Industries had worked an arrangement with EV/EBITDA 143.96 - 42.09 19.38 Network 18 (parent company of TV18) whereby IMT shall provide the capital to the promoters, Share Price Performance via subscribing companies, to subscribe to the portion allotted as well as the unsubscribed
120 portion of the rights issue.
110
100 In terms of the ZOCD Investment Agreement, IMT shall subscribe to such number of Zero coupon
90 Optionally Convertible Debentures (ZOCD) face value `100 each, which hold 36.9% of Network 80 18. Following the transaction, IMT shall have the option of converting their ZOCDs into equity 70 shares of the subscribing companies, in the ratio of 1:10. The same has potential to change the 60 ownership structure of Network18/ TV18 significantly. 50
40 Positive view going forward Jul-12 Oct-12 Jan-12 Apr-12 Jun-12 Sep-12 Dec-11 Feb-12 Aug-12 Nov-12 Nov-11 Mar-12 May-12
TV18 Broadcast BSE SENSEX We believe TV18 Broadcast (TV18) is headed towards profitability in the medium-term, on account of growth in subscription revenues, improvements in margin, improving distribution and
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr reduction in interest payments. Acquisition of ETV would enable the group to join the league of TV18 (%) 17.6 59.4 34.1 (20.7) large broadcasters such as Zee and Star. We also expect following points to be positive for the SENSEX (%) 0.7 7.1 13.9 7.3 company:
Source: Company data, GEPL Capital Research
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Equity | India
Diwali Pick 2012 November 09, 2012
1. DAS will play positive role for broadcasting companies in reducing competitive in Metros 2. Since no new Hindi GEC launches planned in near future, entertainment assets will see upward revision as uncertainty regarding earnings reduces. 3. Post Digitization we expect re-rating of broadcasters and in lieu of that TV18 Broadcast's news assets shall be valued better.
Losses would be washed-out We believe that TV18’s revenue to grow at a CAGR of 18% from FY12 to FY14E. Operational losses of `1,320 mn in FY12 with EBITDA margin of -9.5% will be converted into operating profit of `3,120 with a whopping EBITDA margin of 16% in FY14. Net losses of `740 mn in FY12 will be Net Profit of `1,658 mn in FY14.
Risk
1. Higher Debt is possible if company plans to acquire balance 50% stake in ETV Network. 2. Higher time taken in turnaround of loss making ETV Network 3. Sectoral risks like delay in digitization, competition from other channels remain.
Outlook & Valuation
The ongoing stress on its profitability is expected to conclude once subscription revenues of the company become substantial, as being recurring in nature, it tends to lend high stability to the overall profitability of the broadcasters in difficult ad spend environment. We value the company on EV/Sales basis as we believe that media is still the sunrise sector in the Indian markets. Using FY2014 sales estimate post the rights issue completion and the ETV acquisition.
FY14 Sales Target Valuation Business Segment (RS mn) EV/Sales (` mn) Media Operations 16,575 3.83 55,567.69
Film Production and 2,925 0.68 9,806.06 Distribution
Total Sum of The Parts (SOTP) 65,373.75
Net Debt 2,578
Target Market Capitalization 62,795.56
Target Price per share 36.68 Source: Company data, GEPL Capital Research
Since the company operates in 2 major segments, Media Operations and Film Production & Distribution, we value the company on an SOTP basis to arrive at the target price of `37 per share indicating a potential upside of 30%.
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Equity | India
Diwali Pick 2012 November 09, 2012
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Equity | India
Diwali Pick 2012 November 09, 2012
NOTES
Recommendation Rationale Recommendation Expected Absolute Return (%) over 12 months
BUY >20%
ACCUMULATE <20% and >10%
NEUTRAL <-10% and <10%
REDUCE >-10% and <-20%
SELL >-20%
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation.
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Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report:
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