DIWALI PICKS DIW October 2017 Oct October 11, 2017

Transcription

1 DIWALI PICKS October 2017 October 11, 2017

2 Consumer Durables Symphony Ltd. 1,392 1, % Shares o/s, Cr (FV 2) SYMPHONY SYML:IN 7.0 9,744 30,850 1,570/1, Symphony Ni y A cool bet Incorporated in 1988, Symphony Ltd is the world's largest air cooler manufacturer. Headquartered in Ahmedabad, the Company has acquired global eminence to emerge as an established evaporative air cooler manufacturer. With a pan India network of 1,000+ distributors & 30,000+ retailers, Symphony offers a wide product range across residential air coolers, packaged air coolers and central air coolers. Led by rising disposable income, increasing urbanization, GST implementation and low penetration, we expect the demand environment for air coolers to remain buoyant. Symphony holds a dominant position, commanding ~50% value market share in the domestic organized air cooler space. GST implementation is likely to boost the organized industry, which currently accounts for just 30% of the overall market. With market leadership, widening reach and constant product innovation, the company is likely to be a key beneficiary of structural shift in demand for branded products. Symphony outsources 100% of its domestic production through tie-ups with around 10 established OEMs spread across the country. Different models are allocated to different OEMs. This has enabled it to de-risk its dependence on single source and keep constant focus on product development, design, innovation, brand building, marketing and distribution. Due to its asset light business model and leverage free balance sheet, the company's return ratios continue to remain superior. Acquisition of Chinese air cooler company 'Munters Keruilai Air Treatment Equipment (Guangdong) Co. Ltd (MKE)' has provided Symphony an access to Chinese air cooler market (2nd largest after India) and to other international markets, as China enjoys FTA with most ASEAN countries. Post the restructuring in the first year of operations, we expect improved performance from MKE in terms of revenue and profit growth. Impco's acquisition has benefited Symphony immensely, as it leverages Impco's relationship with the large format stores like Walmart, Home Depot, Lowes, Costco, etc, to market its residential air coolers. Further, Impco's years of expertise has allowed Symphony to execute multiple prestigious centralised air cooling solution projects in India across diverse spaces. Impco has turned debt free and profitable after transposing Symphony's asset light business model. We expect improved revenue growth and margin trajectory from the company going forward. Led by demand uptick, new launches and turnaround in the overseas operations, we expect Symphony's consolidated revenue and PAT to grow by 18.1% & 19.9% CAGR respectively over FY17-20E. Volume offtake is expected to remain healthy. Operating leverage, launch of premium products and improved profits from Impco should result in healthy expansion in margins over FY17-20E. Market leadership, cash rich and debt free status, improving return ratios, high dividend payouts and bright growth prospects justify Symphony's premium valuations. We recommend a Buy on the stock with a target price of Rs. 1,632. Mehernosh Panthaki, CA mehernosh.panthaki@religare.com Financial Summary - Consolidated Net Revenue M M ROE FY17 FY18E FY19E FY20E , ,

3 Building Products Kajaria Ceramics Ltd % Multiple growth levers at work Incorporated in 1988, Kajaria Ceramics Ltd. (KCL) is the largest player in domestic tiles industry. The company has a market share of 10% of overall industry and 20% of organised industry. KCL's advertising and marketing strategy over the years has paved the way for the company's strong brand recall. Asset light business model, strengthening distribution network and innovative design offerings would be key growth drivers for KCL in future. We initiate coverage on KCL with a. Shares o/s, Cr (FV 1) Kajaria Archana Gude archana.gude@religare.com KAJARIACER KJC:IN ,346 4,04, / Ni y Indian tiles industry, with an estimated size of Rs 27,000crs, stands at number 3 globally, in terms of production and consumption of tiles. The industry showed consistent higher single digit growth over FY12-16, however, slowdown in real estate industry (the largest consumer of tiles) in FY17 impacted sales and the industry growth shrank to 3%. The government's demonetisation move in November, 2016 and GST implementation from July, 2017 significantly weighed on tiles sales volume. We believe, the worst is over for tiles industry and various reforms in housing and infrastructure space by the government will propel higher demand for tiles. KCL, being the largest player, would be a key beneficiary of the industry growth. In order to cater to growing demand, the company formed various joint ventures (JVs) with unorganised players. These JVs aided KCL to diversify operational locations and led to margins expansion, helping the company maintain its asset light business model. To strengthen high value products portfolio, the company plans a brown field expansion at its Gailpur, Rajasthan plant with a line of 3.5MSM/ annum to manufacture ceramic walls and floor tiles. KCL forayed into bathware segment in 2014/15 by introducing a range of sanitaryware and faucets products. The company's new venture will benefit from Kajaria's strong brand equity and nationwide dealership network. Though bathware segment contributed only ~4% of total sales in FY17, we expect revenue contribution from this segment to increase gradually over FY18E-20E. The government's push to housing and infrastructure development, consolidation in tiles industry post GST implementation, increasing urbanisation and improvement in discretionary spends would be key drivers of tiles industry growth. KCL has well penetrated distribution reach across the country, strong brand equity and extensive product folio. The company's market leadership in tiles and foray in bathware products, asset light business model would be key catalysts for future earnings growth. We estimate Net sales, and PAT to grow at a CAGR of 10.3%, 15.1% and 17.3% over FY17-20E. We recommend a Buy on the stock with a target price of Rs Financial Summary Net revenue M M RoE PE (x) FY17 FY18E FY19E 2, , , FY20E 3,

4 Textiles Garware Wall Ropes Ltd , % Demand uptick, innovative offerings to drive growth Incorporated in 1976, Garware Wall Ropes Ltd. (GWRL) is one of the leading players in technical textiles in India. With ~1000 employees and three integrated manufacturing facilities in Pune, Wai and Silvassa, GWRL manufactures wide range of products including ropes, nets, aquaculture cages for capturing and breeding fish; nets for sports such as tennis, soccer and cricket; insect, floriculture and shade nets for agriculture; ropes and safety nets for shipping and industrial; coated fabrics for covers, tents, etc and provides geosynthetic solutions for water & waste management and erosion-control applications. Shares o/s, Cr (FV 10) GARWALLROP GWWR:IN 2.2 1,993 18, /487 GWRL has a well-diversified product portfolio with innovative offerings across segments and geographies, which provides stability and hedge against slowdown in a particular sector or geography and competitive edge. The company is a pioneer in the Indian synthetic cordage industry and world's largest producer of polymer cordages. Relatively new segments like Agriculture, Geo-synthetics and Coated Fabrics are gaining healthy traction with GWRL's innovative offerings. Protected farming segment has immense growth potential given low penetration and government's increasing focus on agriculture. CAPEX revival in construction industry and increasing emphasis on environmental protection is likely to drive the Geo-synthetics business The government's 'Make in India' thrust on defence (FDI policy liberalized from 26% to 49%) has opened up room for GWRL to leverage its strength and capitalize on the opportunities in the recently forayed defence sector. The company targets revenues of Rs 100cr p.a. from this segment for the next 4-5 years. The revenue share of exports business has improved from 37% to 47% over FY Demand uptick in segments like aquaculture, agriculture and sport goods and GWRL s value added offerings should lead to healthy growth in exports going forward. The management targets 65% share from exports over the next two years Garware Wall Ropes Ni y We expect GWRL's net revenue & PAT to grow at a CAGR of 12% & 19.4% respectively over FY17-19E, likely to be driven by demand uptick coupled with company initiatives like constant product innovation, entry in fast growing segments and efforts to widen the overseas reach. Segments like agriculture, geo-synthetics and coated fabrics are gaining healthy traction with GWRL's innovative offerings. Further, GWRL, through forging partnerships and developing new products, is looking to establish its presence in the Indian Defence sector. The recent MOU with Israel's Aero-T reflects its intention to combine its capability for manufacturing and supply of advanced aerostats for Indian defence. Improved product mix and cost efficiencies should aid in margin expansion. Stable growth, strong cash flows, low leverage and steady dividend payouts should provide valuation comfort. We recommend a Buy on the stock with a target price of Rs. 1,083. Mehernosh Panthaki, CA mehernosh.panthaki@religare.com Financial Summary Net Revenue M M ROE FY16 FY17 FY18E FY19E ,

5 Iron & Steel Products APL Apollo Tubes Shares o/s, Cr (FV 10) Ajay Pasari, CFA Apl Apollo Tubes ,891 2, % APLAPOLLO Ni y :IN 2.4 4,414 12, / A strong play on capacity expansion and innovation APL Apollo Tubes is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multi-product offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, Pre-Galvanized Tubes, etc. APL Apollo Tubes caters to different sectors of the economy, which includes infrastructure, construction, automobile, energy and agriculture. Factors like continuous government reforms, increasing infrastructure spending, better monsoon, rising income level, introduction of latest products, etc. will ensure steady demand for APL Apollo's products from all the sectors. The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications like structures of new commercial buildings and bridges, liquid petroleum gas cylinders, wind energy structures, water pipes, low-floor buses, metro railway bogies, airports, mobile telecom towers, etc. It has been expanding its capacity across India to cater to the increasing demand. Recently it started a new facility in Eastern region at Raipur with an installed capacity of 0.32 mn tonnes, of which it has commissioned one line out of six lines and expects to start all the lines in the current fiscal. APL Apollo is the first company to bring Direct Forming Technology (DFT) in India for making hollow sections, both square and rectangle. It is also focusing on inlinegalvanizing technology in which tube manufacturing and zinc plating are done at the same time. Thus, technically advanced and upgraded products have enabled the company to differentiate itself from its peers, which we believe will continue to increase its customer base in the future. APL Apollo Tubes is the market leader in the Indian ERW (Electric Resistance Welded) pipe industry with a market share of ~15%. With upcoming capacity expansion, entry into new markets (east India), branding, innovation and technology capability (DFT and in-line galvanizing), it is well placed to benefit from strong demand outlook for its various products. Also with healthy revenue growth in the coming years and improvement in operational efficiency, we expect the working capital cycle of the company to improve with reducing inventory and receivables days. Also debt reduction will reduce the overall interest cost, which will add up to its bottom line. We recommend a Buy on the stock with a target price of Rs. 2,352. Financial Summary Net revenue OPM Adj PAT PATM EPS, Rs RoE FY17 FY18E FY19E 4,545 5,457 6, FY20E 7,

6 Plastic Products Nilkamal Ltd. Shares o/s, Cr (FV 10) Nilkamal 1,606 2, % NILKAMAL NILK:IN 1.5 2,394 57,294 2,275/1, Ni y Mehernosh Panthaki, CA mehernosh.panthaki@religare.com Strong beneficiary of economic revival Incorporated in 1985, Nilkamal is an industry pioneer in the manufacturing business of moulded furniture and material handling products with diversified product profile across various segments along with a strong customer base including household customers, industrial customers and retail buyers. It also has presence in the retail business of lifestyle furniture, furnishings and accessories under its brand '@home' & Nilkamal Mattresses. The Indian Plastics industry provides immense growth potential in the coming years, given the low per capita consumption, anticipated revival in economy, shifting consumer preference towards branded plastic products, rising youth population and increasing usage of plastics by manufacturing segments. Various Government initiatives such as Make in India campaign, Digital India, Swachh Bharat Abhiyan, Skill India, etc are opening up opportunities for more accelerated growth in this industry. By 2020, plastics consumption in India is expected to increase from the current 12mn MMTPA to ~20mn MMTPA. Nilkamal holds leadership position in Material Handling and Moulded furniture segments (key revenue growth drivers). Strong brand recall, diversified product offerings and improving reach puts the company in an advantageous position to leverage its strength and capitalize on the available opportunities in the plastics industry. Economic revival is likely to result in faster growth across all its segments of plastics. Post the integration with furniture vertical, the new business of Mattress has witnessed improved performance and we expect this segment to catch up pace. As regards the retail division '@home', various steps are being taken by the company to re-strategize its business model. We expect the division to witness improved growth over the next three years, aided by revival in consumer spending, GST implementation & company initiatives (by closing down the non-profitable stores). Improving revenue per sq ft, driving growth in new categories, increasing brand reach in E-commerce channel are likely to remain key focus areas, which will drive the growth. Led by demand uptick and company's efforts towards expanding its reach, product offerings and sustained investments in brand building, we expect Nilkamal's consolidated revenue to grow at a faster pace by 9.3% CAGR over FY17-20E. The growth would be largely volume led and is likely to be driven across segments of Plastics and Retail division. The negative impact of GST transition on the volume growth is likely to be short lived. While the operating margins could remain under pressure in FY18E due to higher input prices, we expect a healthy rebound from FY19E onwards, aided by operating leverage and stability in the crude oil prices. Market leadership, leverage free balance sheet, healthy cash flows would provide valuation comfort. We recommend a on the stock with target price of Rs 2,097. Financial Summary - Consolidated Net Revenue M M ROE FY17 FY18E FY19E 2, , , FY20E 2,

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