Investor's Eye
[February 27, 2013] | | |
| Summary of Contents
PULSE TRACK Economic Survey for FY2012-13 The Economic Survey for FY2012-13 tabled in the Parliament today describes the gravity of the slowdown in the country's economy and the reasons for the same. But it also provides a glimmer of hope and expects the economic growth to revive to 6.1-6.7% in FY2014. The recovery in FY2014 is expected to be driven by fiscal/monetary measures and recovery in the global economy. The survey document also emphasises the need to take steps on an urgent basis to contain the government's expenditure, promote savings and boost investment in the economy. Despite the green shoots the downside risks to the economic growth emanate from the decline in the foreign inflows and the uptrend in the crude oil prices.
THEMATIC REPORT Closure of switch call from Tata Global Beverages to Mcleod Russel India Key points -
Close switch call from TGBL to MRIL: We are closing the switch call from Tata Global Beverages Ltd (TGBL) to Mcleod Russel India Ltd (MRIL) with a positive return of about 5% since our recommendation in July last year. Since the initiation of the switch call, MRIL has outperformed the broader indices with an absolute return of 16%. Hence, we thought it's the right time to exit the call with a net return of about 5% despite the recent pressure on the mid-cap stocks. -
TGBL- margins of stand-alone business plummet as expected but share price firms up on Starbucks effect: As anticipated by us, the stand-alone gross profit margin of TGBL declined by 509 basis points YoY to 33.6% due to firm raw tea prices. However, the share price performed better than expected due to a general boost in sentiment owing to the launch of Starbucks in joint venture with TGBL in India. Moreover, the performance of Tata Coffee's US operations also boosted the consolidated financial performance. Going ahead, we remain bearish on TGBL's domestic business due to its inability to pass on the impact of firm raw tea prices without severely affecting the volumes. We also reiterate our belief that TGBL will require a lot more time and effort than expected by the market to morph into a beverages player from the current avatar of a commodity player with limited pricing power. -
MRIL- firm raw tea prices to keep the stock buoyed: MRIL has outperformed the broader indices in the last one year. This is despite the fact that MRIL's sales volume remained muted in the first nine months of operations due to lower tea production (affected by abnormal rains). The outperformance can be attributed to firm raw tea prices and strong demand for Indian tea in the international markets. With tea prices likely to remain firm due to a favourable demand-supply environment for tea in the global markets, we believe MRIL would see a substantial improvement in profitability (provided its tea production remains stable).
STOCK UPDATE Orient Paper and Industries
Recommendation: Buy
Price target: Rs79
Current market price: Rs71 Court approval for cement business demerger; upgraded to Buy Result highlights -
High Court sanctioned scheme of demerger: Orient Paper & Industries Ltd (OPIL) received the final order of the High Court of Orissa sanctioning the scheme of demerger of its cement business on February 26, 2013. The appointed date for the Scheme of Arrangement is April 01, 2012. The company has completed the process of demerger of its cement business into Orient Cement Ltd (OCL) with effect from February 26, 2013. We believe the approval of the High Court for the demerger is a positive development for the company as the process has already got delayed. -
Structure of the demerger scheme: According to the structure of the demerger, the cement business of the company will be transferred to a newly formed wholly owned subsidiary, OCL. OCL will constitute the cement business of OPIL and OPIL will continue with the paper and electrical businesses. The shareholders of OPIL will get one new equity share of OCL for each share of OPIL held. Hence, the shareholding pattern of OCL will be identical to the present shareholding pattern of OPIL. Further, OCL is proposed to be listed on the stock exchanges. We believe the development is positive for OPIL as it will unlock the value for the shareholders through a direct exposure to a pure cement player. -
Announcement of an ex-date for the demerger is expected in near term; listing could take some more time: As OPIL has already received the approval of the High Court for the demerger of the cement division, it will come out with an ex-date to become eligible for the allotment of shares of OCL. We expect the ex-date of demerger to be announced in the near term. However, there is not much clarity on the time line for listing of OCL and we believe that it could take some more time. -
Outlook and valuation: Given the overhang in terms of continued losses in the paper division and a severe margin pressure in the electrical division, the market was not giving proper valuation to OPIL's cement business, which was available at a discount to the other cement players of similar size. Hence, with the demerger of the cement business into a separate entity, we believe the current valuation discount will narrow down and will act as a value unlocking for the investors. Hence, we are upgrading our recommendation from Hold to Buy with the price target of Rs79. However, in our current valuation, we are not incorporating the impact of a likely re-rating of the cement division and would like to wait till there is some clarity on the listing of OCL. At the current market price, the stock trades at price earnings of 7.7x and enterprise value (EV)/EBIDTA of 4.8x discounting its FY2014 earnings estimate.
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