Investor's Eye-Dec26_14.pmd

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December 26, 2014
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Stock Update >> V-Guard Industries
Stock Update >> Kalpataru Power Transmission
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investor’s eye
stock update
V-Guard Industries
Reco: Hold
Stock Update
Rich valuation, downgraded to Hold
Key points
Company details
Price target:
Rs1,200
Market cap:
Rs3,238 cr
52 week high/low:
CMP: Rs1,089
Rs1,147/403
NSE volume:
(no. of shares)
56,742
BSE code:
532953
NSE code:
VGUARD
Sharekhan code:
VGUARD
Free float:
(no. of shares)
1.0 cr
Shareholding pattern
Others, 10
DIIs, 4
FII, 19
Promoters,
66
Price chart
The management of V-Guard Industries (V-Guard) is confident to achieve around
20% revenue growth for the next two to three years. Recovery of business from a
low base in Andhra Pradesh (post division of Andhra Pradesh into two states) and
revival of infrastructure related spending across the country in the next two to
three years should drive growth. However, the performance could be softer in
near term as the improved consumer confidence is yet to reflect in store level.
Crude oil prices have come down drastically in the last couple of months which
could have a positive effect on its margin in two ways: (a) some of its raw
material prices could soften being derivatives of crude oil; and (b) transportation
cost could come down with a sharp decline in crude oil prices. Consequently,
lower crude prices could affect the overall OPM by 40-50BPS, subject to reaction
from its competitors’ pricing strategy.
We have fine-tuned our estimates considering the above mentioned
developments. We believe V-Guard is well on its track to record a revenue
growth of around 18-20% and deliver an earnings growth of ~20-24% in the next
three years (FY2014-17E). Further, positives like high returns ratio and healthy
balance sheet are in favour of the stock; however, after appreciating
substantially in the recent past, the valuation looks stretched now at 30x/25x
of its FY2016-17E earnings. Though we continue to like the story due to its rich
valuation, yet we revise down our rating from Buy to Hold with a revised price
target of Rs1,200 (27.5x FY2016 EPS).
Valuations
Particulars
FY2013
FY2014
FY2015E
FY2016E
FY2017E
Net sales (Rs cr)
1,360
1,518
1,774
2,077
2,448
Y-o-Y growth (%)
41.0%
11.6%
16.9%
17.1%
17.8%
8.1
8.1
8.5
8.7
8.7
Net profit (Rs cr)
62.9
70.1
87.3
107.2
130.1
Adjusted EPS (Rs)
21.1
23.5
29.3
35.9
43.6
23.8%
11.5%
24.5%
22.7%
21.3%
PER (x)
51.6
46.3
37.2
30.3
24.9
P/B (x)
12.4
10.2
8.4
6.9
5.7
EV/EBITDA (x)
29.8
26.2
21.4
17.7
14.9
RoCE (%)
27.8
27.6
31.0
31.9
32.8
RoNW (%)
26.7
24.2
24.8
25.1
25.1
RoIC(%)
28.5
28.2
31.9
34.0
35.6
0.3
0.4
0.5
0.6
0.8
Operating margin (%)
Y-o-Y growth (%)
Price performance
(%)
1m
3m
6m 12m
Absolute
3.0
25.5
87.8 131.2
Relative
to Sensex
7.8
23.2
73.9
75.9
Div yield (%)
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prices and affect the OPM by 20-30BPS. Consequently,
the subject to price reaction from its competitors and
lower crude prices could affect the overall OPM by 4050BPS. In the meanwhile, the management maintains its
OPM guidance of 8.5-9%.
We recently interacted with the management of V-Guard;
the key takeaways are:
Revenue growth guidance retained by the management:
The management of V-Guard is confident to achieve a
20% revenue growth in FY2015 and 2016. Currently, the
company is witnessing a healthy recovery of business from
last year’s low base in Andhra Pradesh after clarity on
the division of Andhra Pradesh. The management expects
substantially better volume from Andhra Pradesh in the
coming months, especially for products like inverters and
water heaters, which will support the revenue growth in
FY2015. Going forward in FY2016-17E, led by a kick in
spending in infrastructure across India should drive the
demand for some of its products. The newly launched
products (mixer grinder, switchgear and induction cooktop) are getting satisfactory response in the southern
markets and are expected to contribute incremental
revenue of Rs40 crore in FY2015. Overall, the management
believes that the revenue growth of 20% is achievable for
the next two years, though in near term the performance
could be softer, as the improvement in sentiment of
consumers has not converted into footfalls yet.
View–Positives priced in; downgrade from Buy to Hold:
We have fine-tuned our estimates considering the above
mentioned developments and believe that V-Guard is well
on its track to sustain an appreciable revenue growth of
around 18-20% and is poised to deliver earnings growth
of ~23% in the next three years (FY2014-17E). Though
positives like sustainable high returns ratio (above 30%
return on capital employed [RoCE] and around 25% return
on equity [RoE]) and healthy balance sheet (0.3x DE) are
in favour of the stock, after appreciating substantially in
the recent past, the valuation looks slightly stretched at
30x/25x of its FY2016-17E earnings. Hence, we downgrade
our rating from Buy to Hold with a revised price target of
Rs1,200 (27.5x FY2016 earnings per share [EPS]).
One-year forward PE band
32x
Softer crude prices favours margin: Crude oil prices have
come down drastically in the last couple of months, which
could have a positive effect on its margin as some of the
input costs (derivatives of crudes like polyvinyl chloride
used in cables and plastic used for cabins of some of its
products) are expected to soften. This could positively
affect the operating profit margin (OPM) of V-Guard by
20-30 basis points (BPS). Further, we expect the overall
transportation cost (last year’s cost constitutes to 2.53.0% of its revenue) to come down with declining crude
Sharekhan
26x
20x
14x
8x
Source: Company and Sharekhan Research
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Financials
Profit & Loss account
Cash flow
Rs cr
FY13
FY14
FY15
FY16E
FY17E
Particulars
Net sales (Rs cr)
Particulars
1,360
1,518
1,774
2,077
2,448
Y-o-Y growth (%)
41.0
11.6
16.9
17.1
17.8
1,250
1,395
1,623
1,896
2,234
Change in WC
110
123
151
181
213
Operating CF
4
5
5
6
7
Total cost
Operating profit
Total other income
EBITDA
114
127
156
187
220
11.40
12
14
15
17
20.0
21.1
17.8
17.9
16.3
PBT
82
94
125
154
187
Tax
19.3
24.1
37.4
47.0
57.1
PAT
62.9
70.1
87.3
107.2
130.1
Depreciation
Interest
Y-o-Y growth (%)
FY13
FY14
FY15
FY16E
FY17E
PAT
62.9
70.1
87.3
107.2
130.1
Depreciation
11.4
12.0
13.7
15.0
16.9
(82.1)
9.7
(50.6)
(42.6)
(57.1)
Capex
Investments
Others
(7.8)
91.9
50.4
79.6
89.8
(24.2)
(33.6)
(26.5)
(27.0)
(36.0)
-
-
-
-
-
3.4
3.5
(0.0)
(0.0)
(0.0)
Investing CF
(20.9)
(30.1)
(26.5)
(27.0)
(36.0)
Dividends
(12.2)
(15.7)
(19.5)
(24.5)
(30.4)
52.5
(58.2)
17.8
(10.0)
(10.0)
-
-
-
-
-
Financing CF
40.3
(74.0)
(1.7)
(34.5)
(40.4)
Debt
Equity
23.8
11.5
24.5
22.7
21.3
4.6
4.6
4.9
5.2
5.3
23.4
25.6
30.0
30.5
30.5
Net change
11.6
(12.2)
22.1
18.1
13.4
3.4
15.0
2.8
24.9
43.0
15.0
2.8
24.9
43.0
56.4
Particulars
FY13
FY14
FY15
FY16E
FY17E
Liabilities
Sales growth
41.0%
11.6%
16.9%
17.1%
17.8%
Share capital
Operating margin (%)
8.1%
8.1%
8.5%
8.7%
8.7%
21.3%
PAT margin
Effective tax rate (%)
EPS (Rs)
21.1
23.5
29.3
35.9
43.6
Opening cash
Adjusted EPS
21.1
23.5
29.3
35.9
43.6
Closing cash
Balance Sheet
Particulars
Reserves & surplus
Total shareholder's funds
Ratios
Rs cr
FY13
FY14
FY15
FY16E FY17E
30
30
30
30
30
232
289
356
439
539
Growth in EPS
23.8%
11.5%
24.5%
22.7%
569
Price/Earnings (x)
50.7
45.5
36.6
29.8
24.6
EV/EBITDA (x)
29.4
25.8
21.0
17.4
14.7
261
318
386
469
Total debt
157
99
117
107
97
Total Liabilities
419
418
503
576
666
EV/Sales (x)
RoCE (%)
Gross block
Less: accumulated
depreciation
Net block
CWIP
2.5
2.2
1.9
1.6
1.3
27.8
27.6
31.0
31.9
32.8
189
228
253
278
313
RoE (%)
26.7
24.2
24.8
25.1
25.1
51
62
75
91
107
RoIC (%)
28.5
28.2
31.9
34.0
35.6
138
166
178
188
206
Price/Book value (x)
12.2
10.0
8.3
6.8
5.6
9
3
5
7
8
Debt/Equity (x)
0.6
0.3
0.3
0.2
0.2
Inventories
249
253
289
327
373
Interest coverage (x)
5.1
5.5
8.0
9.6
12.5
Sundry debtors
199
212
241
277
326
Inventory days
73
66
65
63
61
Cash and bank
15
3
25
43
56
Debtor days
54
51
50
49
49
Creditors days
48
46
50
50
50
Loans and advances
45
38
43
52
63
Current assets
508
505
598
699
819
Net WC days
Current liabilities
204
216
232
270
316
Current ratio (x)
25
32
35
38
42
279
258
330
391
462
Provisions
Net current assets
Deferred tax assets
Total assets
(7.9)
(9.5)
(9.5)
(9.5)
(9.5)
419
418
503
576
666
79
72
65
62
60
1.0
1.0
1.0
1.0
1.0
P/CFO
(410.0)
34.8
63.4
40.1
35.5
P/FCF
(99.7)
54.9
134.0
60.7
59.3
FCF yield (%)
-1.0%
1.8%
0.7%
1.6%
1.7%
3.5
4.5
5.6
7.0
8.7
DPS
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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Kalpataru Power Transmission
Reco: Buy
Stock Update
Growth and value unlocking ahead, price target revised to Rs245
The key takeaways of our interaction with the management of Kalpataru Power
Transmission Ltd (KPTL) are as follows:
Company details
Price target:
Rs245
Market cap:
Rs3,315 cr
52 week high/low:
Rs232/71
NSE volume:
(no. of shares)
CMP: Rs216
2.7 lakh
BSE code:
522287
NSE code:
KALPATPOWR
Sharekhan code:
KALPATPOWR
Free float:
(no. of shares)
6.2 cr
Shareholding pattern
 KPTL’s stand-alone business of transmission & distribution (T&D) business remains
healthy with improving outlook for domestic order flow driven by significant
investment in transmission projects from Power Grid Corporation of India
(PGCIL). The management also expects better demand from State Electricity
Board (SEB), especially on PPP projects and opportunities in the proposed
separate feeder lines for agri-based users (similar to Gujarat) and grid
connectivity across SAARC. On the flip side, there is an increased competition
from the Chinese players in the overseas markets especially the African region.
 The agri-logistic subsidiary, Shree Shubham Logistics (SSL), is chalking out
aggressive expansion plans and to fund that we believe the company may look
out for external resources. SSL is riding through a high growth phase currently;
earnings grew by 52% YoY to Rs22 crore in FY2014 and is likely to continue such
high growth in the coming few years and unlock value meaningfully for KPTL.
 The construction subsidiary, JMC Projects (stand-alone) is on the track to achieve
margin expansion by around 200BPS over FY2014-16, which would be
instrumental in improving its profitability and cash flow. However, on the
consolidated basis JMC needs external funds of around Rs150 crore to support
the remaining funding for its road BOOT projects and some losses from the
operational BOOT projects.
Others, 9
Institutions,
22
Foreign, 9
Promoters,
59
Price chart
 Overall, the management sounded optimistic on the back of improving demand
environment and order inflows. It retained its revenue growth guidance of
10-15% for FY2015 and above 15% for FY2016. We expect margin in T&D business
to be largely stable, given the sanity in competitiveness unlike few years back.
JMC is on the track to achieve margin expansion and debt should peak-out in
its balance sheet. Further, we see a potential value unlocking from SSL and
monetisation of sizeable investments from two real estate projects.
Consequently, we retain our Buy rating on the stock and revise our price target
to Rs245 (based on SoTP method), while rolling over our target multiple to
FY2017E earnings (introduced in this note).
Valuations (stand-alone)
Particulars
Net sales (Rs cr)
Price performance
(%)
1m
3m
Absolute 14.7
31.4
Relative 20.0
to Sensex
28.9
6m 12m
13.3 130.6
4.9
75.4
FY2013
FY2014
FY2015E
FY2016E
FY2017E
3,335
4,055
4,528
5,241
5,850
10.1
OPM (%)
9.7
9.5
9.7
9.9
Adj net profit (Rs cr)
138
146
177
229
277
Adj EPS (Rs)
9.0
9.5
11.6
14.9
18.1
21.0%
EPS growth (%)
-17.0%
6.0%
21.0%
29.0%
PER (x)
24.1
22.6
18.7
14.5
12
P/BV (x)
1.8
1.7
1.6
1.4
1.3
EV/EBITDA (x)
10.7
9.2
7.8
6.8
5.7
RoCE (%)
13.8
14.4
15.4
17.4
18.5
RoE (%)
7.7
7.7
8.8
10.4
11.5
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Agri-logistic subsidiary, SSL on a high growth path, could
unlock value too
Healthy outlook for core business intact
The order inflow outlook of the transmission & distribution
business remains healthy; in near term, the management
expects a sizeable ordering from PGCIL. Moreover, in the
last two years, PGCIL had given substantial stress on
capitalisation and soon it could again look at project
tendering and ordering. Recently, a significant size of
transmission projects given to PGCIL on nominated basis
will add to the order inflow momentum from PGCIL. The
management also indicated that there are some visible
positive developments from some of the SEBs, after the
elections, especially on public-private partnership (PPP)
projects. We believe the apparent up-coming opportunities
in the form of green transmission corridor and grid
connectivity projects among South Asian Association for
Regional Co-operation (SAARC) countries are highly
encouraging. Therefore, even on long-term basis, we see
better prospects in India, where there is apparently sanity
in competitiveness among the existing players now, after
the mad rush we had seen in the form of irrational bidding
three years back. Hence, we expect the domestic T&D
business margin to be largely stable too.
SSL is among the few early private players to identify the
potential of warehousing and agri-logistics sector and is
now among the largest private players in these fast
growing sectors. SSL provides comprehensive range of agrilogistics services which include procurement, storage,
testing & certification, collateral management for
commodity funding, and domestic and international
trading.
Currently, SSL is operating and managing over 147
warehouses (owned/leased) with a storage capacity of
about 1.7 million MT in the states of Rajasthan, Gujarat
and Madhya Pradesh. The company is now chalking out
the third phase of expansion plan, where it intends to
expand its foothold into four to five more states like
Chhattisgarh, Telangana, Andhra Pradesh, Uttar Pradesh;
to add storage capacity largely on leased mode. Further,
it intends to set up a non-banking financial company under
SSL to widen the collateral management and lending
business as part of the third phase of expansion. We
believe, to fund the aggressive growth plan the company
may need external resources, however the management
has not finalised any plan yet to do the same and may opt
out in appropriate time.
On the overseas business front, the opportunities remain
promising too, though off late there is concern on the
rising competitiveness (having favourable funding support)
from some of the Chinese players in some pockets of
Africa. However, the company’s management is taking
required measures to counter this. On the positive side,
SAARC and Commonwealth of Independent States (CIS)
regions remain among the focus area, which will continue
to offer growth. Further, even if spending from Middle
East and North Africa (MENA) region would be affected
from crude price meltdown, KPTL would not be affected
much as this region constitutes only 4% of the total order
book currently.
During FY2014, SSL had raised Rs80 crore from Tano India
Private Equity Fund II for roughly 20% of stake; which
translates into value of Rs400 crore for the company. In
the meanwhile, SSL is riding through a high growth phase
currently; earnings grew by 52% year on year (YoY) to Rs22
crore in FY2014 and likely to continue such a high growth
in the coming few years ahead. Given the growth prospect
in store, SSL could unlock meaningful value for KPTL.
JMC on track to expand margin but need to inject funds
for road BOOT projects:
Overall, we found the management optimistic about the
order inflow prospects for the next two years. Investors
to note that during Q2FY2015 conference call, while the
management had retained the revenue growth guidance
for FY2015 at around 10-15%, they had raised guidance
to above 15% in FY2016, which we believe are stemmed
from these above mentioned positive movements and also
expectations of some traction from oil & gas pipeline
business, which was dull for almost last five years. Year
till date, KPTL has received orders worth Rs350 crore to
lay oil and gas pipeline, which is expected to cross Rs500
crore by the end of FY2015.
Sharekhan
The construction subsidiary, JMC Projects (stand-alone)
is on the track to achieve margin expansion by around
200 basis points (BPS) over FY2014-16, despite flattish
revenue. This should improve its profitability and cash
flow substantially. However, on the consolidated basis JMC
Projects needs external funds of around Rs150 crore to
support remaining funding for its road build, own, operate,
transfer (BOOT) projects and a part of losses from these
BOOT projects. On the positive side, the most of the
capital expenditure in the form of BOOT is going to be
over by FY2015; consequently debt should also peak out
in FY2015 and the road BOOT projects should start
contributing gradually.
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Positive development on two real estate projects; could
recover invested capital soon
FY2015 and above 15% for FY2016. We expect margin in
T&D business to be largely stable, given the sanity in
competitiveness unlike few years back. JMC is on the
track to achieve margin expansion and debt should peakout in its balance sheet. Further, we see a potential
value unlocking from SSL and monetisation of sizeable
investments from two real estate projects. Consequently,
we retain our Buy rating on the stock and revise our
price target to Rs245 (based on sum-of-the-parts [SoTP]),
while rolling over our target multiple to FY2017E earnings
(introduced in this note). We value the stand-alone
business at Rs217 (based on 12x its FY2017 earnings)
while the remaining value is ascribed for investments in
subsidiaries and annuity assets.
On another positive development, the management
shared that they expect meaningful realisation from its
commercial real estate project in Thane, which is
expected to be leased out or sold out soon. They expect
to launch the real estate project in Indore in Q4FY2015,
which will help them to realise a large part of their initial
equity into the project.
View—retain Buy; price target revised to Rs245
Overall, the management sounded optimistic on the back
of improving demand environment and order inflows. It
retained its revenue growth guidance of 10-15% for
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This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain confidential and/or privileged material and is not for any type of circulation and any
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confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.
The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such.
While we would endeavour to update the information herein on a reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information
current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment
decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient
of this document should make such investigations as he deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own
advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of SHAREKHAN may have issued other
reports that are inconsistent with and reach different conclusion from the information presented in this report.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject SHAREKHAN and affiliates to any registration or licencing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons
in whose possession this document may come are required to inform themselves of and to observe such restriction. Either SHAREKHAN or its affiliates or its directors or employees/representatives/clients or their relatives may have position(s), make market, act
as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before
publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved
in, or related to, computing or compiling the information have any liability for any damages of any kind. The analyst certifies that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies
and its or their securities and do not necessarily reflect those of SHAREKHAN. Further, no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.
Sharekhan
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December 26, 2014
Compliance Officer: Ms. Namita Amod Godbole; Tel: 022-6115000; e-mail: [email protected] • Contact: [email protected]
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