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| Summary of Contents | STOCK UPDATE Gateway Distriparks
Recommendation: Buy
Price target: Rs340
Current market price: Rs310 Will find a gateway through the hike in haulage charges Key points - Railways have announced a steep hike in haulage charges of 25-41% applicable from December 5, 2014, post 14-24% hike done during FY2013. Further, railways have also imposed a 10% congestion surcharge on rail traffic originating in all ports.
- Our analysis of the past; the rail freight players (namely Concor and Gateway Distriparks Ltd [GDL]) have passed on the increased cost to their clients and GDL intends to do the same with immediate effect this time as well. We believe the light-weight cargo (upto 15T) which forms roughly 5-6% of the overall rail volumes for GDL might get affected due to rate hike. Thus, the overall effect on GDL's financial should be limited. However, we are factoring in 30-40BPS negative effect on the margins of GDL's business.
- Over the long term, the outlook of the rail freight business is extremely favourable given the investments in dedicated freight corridors (that would increase railway freight capacities significantly). Moreover, we remain optimistic on the secular growth story of improving macro-economic environment having a positive effect on the logistic companies like Concor and GDL. Major positive triggers for the sector in terms of GST rollout and DFC remains intact. We maintain our Buy rating on GDL with a price target of Rs340 and we have a positive view on Concor.
VIEWPOINT Akzo Nobel India
Current market price: Rs1,385
View: Positive A colourful outlook; discounted valuation Key points - Strong player in premium decorative paint segment: Akzo Nobel India (Akzo) is one of the strong players in the premium decorative paint segment and the fourth largest player in the overall domestic paint segment with a market share of 11%. Its Dulux brand is the recognised brand in the premium to mid-premium decorative paint segment in India. With a better economic outlook and efforts to increase its presence in the mass market segment, the launch of a new brand, Duwel, is expected to drive a high double-digit revenue growth in Akzo's decorative paint business over the next few years.
- Soft raw material prices and operating leverage to support margins: Like most other paint companies, Akzo would benefit from the softness in the prices of some of the key raw materials. It would also get a boost from better utilisation of its Gwalior facility (whose current capacity utilisation is 35%) that provides scope for operating leverage benefits in the coming years. Hence, we expect the company's OPM to improve to 10% from the current level of 8% over the next two years.
- Strong balance sheet with buoyant dividend pay-out: Akzo has one of the strongest balance sheets amongst the peers with no debt and a cash kitty of close to Rs400 crore (after the recent capex programme and strong dividend pay-out of two consecutive years). With improving profitability, the free cash of the company is expected to improve in the coming years. The return ratios have remained strong with the RoE and RoCE remaining in the upwards of 15% and 20% respectively. The company has paid cumulatively a dividend of Rs155 per share in the last two years. With no major capex plan going ahead and cash flow expected to improve, the dividend pay-out is expected to remain strong in the coming years as well.
- Available at a discount to peers; leaves scope for rating: Akzo is among the key beneficiaries of improving consumer sentiment especially in urban India and would achieve an earnings growth of over 20% CAGR in the next two to three years. However, it trades at an unjustified discount to its peers (at 27x FY2016E earnings it is at steep discount of 30-35% to Asian Paints and Berger Paints). Thus, we have a positive view on the stock and expect about 20% returns of the stock from the current levels.
- Key risk: Any disruption in the improvement of the macro environment and rise in competition in the premium paint segment remain the key risks to Akzo's earnings estimates.
IPO FLASH Monte Carlo Fashions - Monte Carlo Fashions (Monte Carlo) is coming out with an initial public offering of 5.43 million equity shares of face value of Rs10 each. This is an offer for sale wherein post-issue the promoter's holding in the company will fall to 63.6% from the current level of 81.1%. The issue is priced at Rs630-645 per share, resulting in an issue size of Rs350 crore at the upper price band. The objects of the issue are to get the benefit of listing on the bourses and to carry out the stake sale of the shareholders (ie the promoter and the promoter company along with Kanchi Investments, which is a 72.26% subsidiary of Samara Capital Partners Fund).
- At the upper price band of Rs645 the company is priced at a price/earnings ratio of 25.3x its FY2014 earnings while it is offered at 24.7x its FY2014 earnings at the lower price band of Rs630.
| | 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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