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| Summary of Contents STOCK UPDATE Bajaj Finance
Recommendation: Buy
Price target: Rs2,880
Current market price: Rs2,532 Price target revised to Rs2,880; maintain Buy Key points - Bajaj Finance has appreciated by over 40% since our initiation in May 2014 led by a strong growth and healthy profitability. Going ahead,a revival in the economy, improved consumer credit demand and easing of liquidity (translating into lower funding cost) will have a positive impact on the earnings of the company. We maintain a positive stance on the stock from a long-term perspective, due to a strong growth in the company's earnings (a 24% CAGR over FY2014-17).
- The company has established itself in the consumer finance business and is now focused on the more stable SME mortgages business (~53% of AUMs). While the ongoing festive season will drive the growth in the consumer financing segment, the newer products like rural financing and lifestyle financing have shown a robust growth. Going ahead, these segments will contribute to the overall loan growth and profitability of the company.
- We expect the company to report healthy return ratios (RoA of +3% and RoE of +20%) led by a strong growth in the earnings. The asset quality is expected to remain healthy and conservative provisioning adds to the comfort. Our price target stands revised to Rs2,880 as we roll over our valuations to FY2017 estimates (valuing the stock at 2.1x FY2017E BV). We maintain our Buy rating on the stock.
VIEWPOINT Indo Count Industries
Current market price: Rs172
View: Positive CDR exit would propel earnings growth Key points - Leading exporter in home textiles: Indo Count Industries Ltd (ICIL) has become one of India's leading vertically integrated textile companies. Started in 2007, its home textile division has emerged as the third largest manufacturer and exporter of bed sheets from India in recent times. Its key clients include global retailers like Walmart, Bed, Bath & Beyond, Macy's and JC Penny. Since FY2011 the revenues from this division have increased by 2.5x and reached Rs1,029 crore in FY2014. Backed by higher capacity utilisation and cost controls, the operating profit margin has also improved to 16.2% in the segment from 11.7% in FY2011. The company expects to sustain such level of margins in the coming quarters.
- Exit from CDR expected in next few quarters: During 2007-08, the company incurred losses of Rs130-140 crore on the hedges marked against the export receivables. This coupled with a global downturn led to an erosion of its net worth. In July 2008, the company was admitted into the corporate debt restructuring (CDR) cell and Rs300 crore was spent on restructuring the company's debts. Now, with better profitability and an improving global economic environment, the company is likely to exit the CDR mechanism in the next few quarters. We believe that the exit from CDR would save the interest cost and increase the financial flexibility of the company. Led by a boost in the earnings, the company has reduced its long-term (LT) debt by over Rs100 crore over FY2011-14.
- Trading at 5.5x FY2014 EPS, likely to get re-rated after CDR exit: We believe that the company's capacity expansion plan, focus on R&D, the new government's thrust on exports, reduction in long-term debt and imminent CDR exit are the various positive levers that are likely to boost the company's prospects in the next one to two years. We are expecting the company to post a CAGR of 22% in rough-cut earnings estimates over FY2014-16 on a high base of FY2014. Valuation wise, the company is trading very attractively at 5.5x FY2014 earnings per share (EPS) which is at a 20-30% discount to its industry peers like Welspun India. Hence, in view of the better earnings visibility and discounted valuations, we are expecting a re-rating in the company in the near future. We see a potential upside of 20-25% to the stock price of the company in the next four to six months.
| | | 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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