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| Summary of Contents STOCK IDEA Technocraft Industries (India)
Recommendation: Buy
Price target: Rs270
Current market price: Rs173 Crafting value; global leader at attractive price Key points - Global leader in drum closure space; remains a cash cow: Technocraft Industries India Ltd (TIIL; a diversified player with interests in drum closures, scaffoldings, yarn and garments) is the second largest player globally in the drum closure manufacturing space with an estimated market share of 35%. Thanks to its dominant presence in the existing markets and efforts to penetrate newer markets, the company has been able to report a steady growth in its high-margin cash cow business of drum closures. Drum closures contributed almost 50% of its operating profit in the last fiscal. The revenues from the business are set to grow at 8-10% annually with an OPM of close to 35%.
- Scaffolding & formwork--the growth driver: While the drum closure business is the cash cow, the scaffolding & formwork (S&F) business, has emerged as the key growth driver for the company. Till now, the company was focused on the overseas markets for the S&F business and was catering to the needs of the oil & gas and other corporate clients globally. However, TIIL has also started witnessing a growing demand for S&F among the domestic users especially the infrastructure sector. Thus, the business segment is likely to grow at 22-25% annually for the next couple of years.
- Potential value unlocking to lead to stronger financials: The financial health of TIIL is steadily improving; its earnings are on a strong growth trajectory and cash generation has stepped up of late. This has helped it to achieve a leaner balance sheet and very healthy returns on equity. Going ahead, we expect value unlocking from the hive-off of its low value-added and non-core businesses of yarn manufacturing and garments (23% of the capital is deployed in these low-margin, low-return businesses). The move would have a favourable impact on the return ratios and is likely to result in the re-rating of the valuation multiple of the stock.
- Attractive valuation; a value Buy: At the current market price, the stock is attractively trading at 5x FY2016E earnings and 2x FY2016E EBITDA which is quite attractive for a debt-free company with healthy cash flow and potential to improve return ratios through the hive-off of the non-core businesses. Thus, it is an attractive value pick for patient investors (TIIL is not a growth story). We initiate coverage on TIIL with a Buy recommendation and price target of Rs270.
- Key risk: As reported in the first quarter, the exceptionally robust margin seen in the yarn business in FY2014 is not sustainable and lower profitability of the yarn business would drag the overall growth in the earnings in FY2015. Thus, the stock might not get re-rated to the extent expected if the management does not hive off the yarn business and increase focus on the other two major businesses of drum closures and S&Fs.
STOCK UPDATE Eros International Media
Recommendation: Hold
Price target: Rs256
Current market price: Rs227 Below expectations, maintain Hold Key points - For Q1FY2015 EIML reported a 29.6% Y-o-Y growth in revenues to Rs241.5 crore, helped by a low base of Q1FY2014, when the revenues had declined by 28% YoY to Rs186 crore (due to a lack of big releases). There was no big release in Q1FY2015 either and the company released nine films (five in Hindi and four in Tamil) as compared with 12 films released in Q1FY2014 (seven in Hindi and five in Tamil).
- The EBITDA margin improved by 297BPS YoY to 24.2% driven by a higher contribution from the high-margin business of television syndication and catalogue sales, whose contribution increased from 12% in Q1FY2014 to 18% in Q1FY2015. While the stand-alone OPM was flat at 24%, the EBITDA margin of subsidiary Ayngaran doubled from 12.4% in Q1FY2014 to 25.1% in Q1FY2015. The net income for the quarter was up by 22% YoY to Rs35.8 crore.
- The movies slate for FY2015 has improved on the back of the addition of big-starrer regional movies and mid budget Hindi movies. We are positive on the EIML strategy of incremental focus on the regional movies mainly Telugu movies for which the market size is improving meaningfully. However, the improvement in free cash flow and utilisation of cash at parent Eros Plc still remain a concern. We retain our Hold rating on the stock with a price target of Rs256.
SECTOR UPDATE Q1FY2015 Auto earnings review Key points - The automobile sector reported an improved performance in Q1FY2015 with a volume growth across segments except CVs. In the CV segment too, the rate of decline reduced and a drop in the discount levels enabled the OEMs to report an improved performance. Our auto universe ex TAMO reported a 9.8% increase in revenues and a healthy 14.1% growth in the net profit.
- The stand-out performances for the quarter were by TAMO, Eicher Motors and M&M. TAMO's net profit more than tripled on the back of an impressive performance by the Jaguar Land Rover business. Eicher Motor reported a 70% increase in the PAT on the back of a strong volume growth and profitability of the motorcycle division, ie Royal Enfield. M&M despite lacklustre volumes and the merger of its loss-making CV division reported a margin expansion and profit higher than our as well as the Street's expectations.
- The favourable outcome of the general election has had a positive impact on consumer sentiment. The two-wheeler industry has picked up pace and the PV segment has reported a growth since May 2014 which is also reflected in the positive commentary from the market leader Maruti Suzuki. The outlook for the CV segment too is positive going forward as it would be a key beneficiary of a pick-up in the economy.
- Preferred picks--biggest alpha in CV segment now: In the two-wheeler space our preferred pick is TVS Motor (because of a strong product portfolio in the fast growing scooter segment; price target revised to Rs201). In the PV space we are positive on M&M (the leader in the UV and tractor segments, strong OPM) and Maruti Suzuki (the leader in the PV market and a strong product pipeline; price target revised to Rs3,025). However, the alpha in the auto sector would come from the CV segment now (the industry has declined by close to 30% in the last couple of years and the recovery would be equally strong over the next two to three years). Our preferred picks to play the revival in the CV segment are TAMO, Ashok Leyland, Apollo Tyres and Gabriel India for exponential gains over the next two to three years.
Q1FY2015 Capital goods & engineering earnings review Key points - The top line performance of the capital goods and engineering companies under our coverage was a mixed bag in Q1FY2015. While KPTL, V-Guard, Crompton Greaves and Bajaj Electricals reported a revenue growth in the range of 10-20% YoY, the power equipment manufacturers like BHEL and Thermax continued to witness a declining trend in revenues YoY.
- The trend in margins was similar. The margins of most of our coverage companies improved, with only BHEL and Thermax reporting a margin contraction. Below the operating level, a higher depreciation cost coupled with a lower other income adversely affected the growth in the earnings. Nevertheless, excluding BHEL, the adjusted profit showed a growth of 8% YoY during Q1FY2015.
- In terms of outlook, the expected economic recovery is yet to reflect in the order inflow. However, we see optimism in the management commentaries across the board with hopes of a visible improvement in the next two to three quarters.
- After the recent re-rating of the capital goods stocks, we advise investors to turn selective. Within our universe we prefer L&T among the large-caps and have a positive stance on Crompton Greaves, Finolex Cables, KPTL and V-Guard among the mid-cap stocks.
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| Regards,
The Sharekhan Research Team |
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