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| Summary of Contents STOCK UPDATE Maruti Suzuki
Recommendation: Buy
Price target: Rs3,500
Current market price: Rs2,748 Annual report analysis; maintain Buy with a revised price target of Rs3,500 Key points - FY2014 was a difficult year for the automobile industry as weak consumer sentiment and a slowdown in the economy affected the industry. The elevated levels of inflation over the last two years curtailed the disposable income for consumers and dented vehicle sales. The industry contracted by 6.6%, the first decline in over a decade.
- Despite the bleak scenario, market leader Maruti Suzuki India Ltd (MSIL) managed to retain volumes at the FY2013 levels and in the process expanded its market share by 270BPS to 42.1%. The silver lining for the company was the rural sales, which rose by 14.7%. The drive by the company's management to tap the potential in rural areas paid rich dividends in difficult times for the industry and against rising competitive intensity; this reaffirms the resilience of MSIL's positioning and business model.
- MSIL's annual report highlights the turn in consumer sentiment after the election of a stable government at the centre translating in a positive outlook for the industry and the company's preparedness to benefit from the demand revival. The subdued sentiment over the past two years is expected to result in a pent-up demand for the entry-level cars where MSIL is a dominant player. Additionally, the pipeline of launches from the company especially the entry into the compact utility vehicle segment will drive the volumes and result in the doubling of its net profit over the next three years (FY2014-2017).
- Valuation--leading brand franchisee with dominant market share in a structurally growing segment available at valuation of a commoditised business: By building on its leadership position (market share gain of 270BPS) in a difficult macro environment and intense competition, MSIL has amply shown the resilience of its brand franchisee, positioning and business model. However, the company trades at a multiple of 7.4x EV/EBITDA (FY2017), which is lower than the multiple of 9-10x commanded by the leading players in commodity industries like cement, which has much lower RoE (10-15%) as compared with nearly 20% in case of MSIL in spite of its aggressive depreciation policy. Consequently, we believe that the stock should be valued on EV/EBITDA basis (rather than PE) and our revised price target stands at Rs3,500 (10x EV/EBITDA of FY2017 estimate). We retain our Buy rating on the stock and also believe that more clarity on the Gujarat plant issue is an important re-rating trigger for MSIL.
VIEWPOINT CanFin Homes
Current market price: Rs380
View: Positive Opportunity to re-enter post-correction Key points - CanFin Homes has corrected by about 30% in the past one month from its peak and has underperformed the broader market. This was partly contributed by negative sentiment for housing finance companies after the issue of guidelines by the Reserve Bank of India for infrastructure bonds which give an edge to banks in mortgage financing. However, we believe Can Fin Homes is largely in low-ticket mortgage loans (average ticket size of Rs15 lakh) and has a presence in urban and semi-urban areas, which have a strong growth potential and lesser competition.
- The company continues to report a healthy performance as its operating profit grew by 19% YoY in Q1FY2015. The loan book expanded by a robust 44% in Q1FY2015, led by the individual segment. The asset quality also remained among the best in the system (gross NPAs of 0.3%). Going ahead, the company expects to sustain about 25% loan growth over the next couple of years.
- We had recommended Book profit on the stock in May 2014 after 157% appreciation in the stock price from our initiation price (within a period of 18 months). However, the stock's valuations have turned reasonable after a sharp correction in the past few weeks. The company continues to deliver a strong performance and we expect it to maintain healthy operating metrics going ahead. Currently, the stock trades at 1.2x P/BV, which is reasonable considering the nominal NPA risks and steady RoE of about 20%. Investors with a perspective of six to eight months can accumulate the stock for 20-25% returns.
IPO FLASH Sharda Cropchem - Sharda Cropchem Ltd (SCL) is coming out with an initial public offering (IPO) of 2.3 crore equity shares of face value of Rs10 each. Post-issue, the shareholding of the promoters in the company will fall to 75% from 84.13% currently. The issue is priced at Rs145-156 per share and the company intends to raise Rs352 crore at the upper end of the price band. The object of the issue is to get the benefit of listing on the bourses and to carry out the sale of the stake of the shareholders (ie HEP Mauritius, Sharda R. Bubna and Ramprakash V. Bubna).
- At the upper price band of Rs156, the company is priced at a price/earnings (PE) ratio of 13x the upper price band of Rs156 and 12x the lower price band of Rs145 on FY2014 earnings. This seems reasonable, given the company's strong balance sheet, healthy return ratios and earnings growth. Also, the offer price is at a discount to the comparable agrochemical companies (for whom the average PE ratio is around 25x FY2014 earnings). Further, the company's asset-light business model and focus on registration of the molecules make its business strategy unique as compared with its peers (that have a capital-intensive business model).
| | | 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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