Investor's Eye: Update - Supreme Industries, Finolex Cables

 

Investor's Eye [July 03, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Supreme Industries Recommendation: Hold Price target: Under review Current market price: Rs553   Price target achieved; take home profits   Key points  Given the changing weather conditions, Supreme Industries is unlikely to meet its guidance of a 20%+ volume growth in Q4FY2014 (and that of 6% for FY2014) in its plastic division. The delay in rainfall in its key user markets of Maharashtra, Rajasthan and Madhya Pradesh and little demand from the construction sector could result in a disappointing volume offtake in this quarter as well.  We are also concerned about the rising prices of crude oil and its fall-out on the raw material cost of the company. The operating profit margin of the plastic division is expected to be lower at 14.3% in Q4FY2014 (vs 15.3% in Q4FY2013) due to the increasing crude oil prices which will keep the prices of polymer (a raw material) at higher levels.  Though we continue to believe in Supreme Industries' long-term growth story (because of its leadership in the plastic pipe segment, the incremental growth coming from the execution of orders for composite gas cylinders, a strong balance sheet and a quality management with a good track record), but it would be advisable to take some profits off the table due to the concerns in the near term and the stock price appreciating to our price target of Rs550 (up 32% since January 2014). Consequently, we downgrade our rating on the stock to Hold. We will take a call on the price target after the announcement of the company's Q4FY2014 results (we also await the volume growth guidance for FY2015 from the company).       Finolex Cables Recommendation: Buy Price target: Rs285 Current market price: Rs199   Powering ahead; revised price target to Rs285   Key points  Finolex Cables Ltd (FCL) is among the key beneficiaries of the increased focus of the new government on enhancing the power transmission & distribution infrastructure in the country. The expectations of better demand from the key user industries of power and railways, and other infrastructure projects have considerably increased our confidence that the power cable segment will see a healthy volume growth. FCL is also among our preferred picks due to its continued efforts to leverage its strong brand in its nascent but fast growing consumer product business (switch gears, CFL etc). The scaling up of its business along with superior return ratios and strong free cash flows would ensure further re-rating of the stock.  Maintain Buy; revise price target to Rs285 (12-18 month): Given the re-rating triggers and strong growth outlook, we believe that the stock has the potential to give returns of over 40% even after the strong appreciation seen in its price recently. We are valuing the core business at 12x the average of FY2016 and FY2017 earnings estimates and valuing the company's stake in Finolex Industries at Rs60 a share (a 30% holding discount). Consequently, we maintain our Buy rating on the stock with a revised price target of Rs285 (a time horizon of 12-18 months).  Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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