Investor's Eye Sep30_11.pmd DPG110/120 BAJCORP 20110930
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Visit us at www.sharekhan.com September 30, 2011 Index Stock Update >> Bajaj Corp Viewpoint >> Rupa & Co For Private Circulation only Sharekhan Ltd, Regd Add: 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400 042, Maharashtra. Tel: 022 - 61150000. BSE Cash-INB011073351; F&OINF011073351; NSE – INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330 DP: NSDL-IN-DP-NSDL233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Sharekhan Commodities Pvt. Ltd.: MCX10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142) investor’s eye stock update Bajaj Corp Ugly Duckling Stock Update Price target revised to Rs142 Event: acquisition of property for Rs75 crore for its corporate office Company details Price target: Rs142 Market cap: Rs1,563 cr 52 week high/low: Rs146/73 NSE volume: (No of shares) 42,263 BSE code: 533229 NSE code: BAJAJCORP Sharekhan code: BAJAJCORP Free float: (No of shares) 2.2 cr Bajaj Corp Ltd (BCL) has acquired Uptown Properties and Leasing Pvt Ltd (Uptown) for Rs75 crore (including liabilities of Rs49.5 crore). Uptown owns a building in Worli (Mumbai) with a built-up area of 33,600 square feet. The sole reason behind the acquisition is to develop a corporate office on the acquired plot to bring in all the scattered divisions at various locations under one roof to improve the operational efficiencies. Expensive acquisition compared to recent deals Judicious utilisation of free cash on the books to expand its product range or to grow inorganically was one of the key triggers in the stock and the market was enthused by the recent launch of the cooling hair oil, Kailash Parbat, which was in line with the stated strategy. However, the move to spend a substantial chunk of this cash on non-yielding assets such as property, that too at a premium, would dilute its earnings and is seen as a de-rating factor by us. More so, since the company would have to spend additional Rs15-20 crore on either refurbishing the existing property or rebuilding a new structure. Shareholding pattern Others 5% FIIs 5% Buy; CMP: Rs104 Domestic institutions 4% Valuation corrects in response to move Promoters 86% Price chart To factor in the deal, we have downgraded our earnings estimates by 1.6% and 2.4% for FY2012 and FY2013 respectively. The BCL stock has already reacted negatively to the announcement of the property deal and factors in the negative implication of the same at the current market price. Going forward, any initiative on the company’s part to expand its limited product portfolio or strengthen its core business would be the key upside trigger for the stock. At the current market price the stock trades at 13.4x its FY2012E earnings per share (EPS) of Rs7.8 and 11.1x its FY2013E EPS of Rs9.5. We maintain our Buy recommendation on the stock with the price target of Rs142 (15x FY2013E earnings 150 140 130 120 110 100 90 80 70 60 Valuation table Sep-11 Jun-11 Mar-11 Sep-10 Dec-10 Particulars Price performance (%) 1m 3m Absolute 4.1 4.1 Relative to Sensex 2.3 16.1 6m 12m 31.7 -14.3 Net sales (Rs cr) 0.9 FY2010 FY2011 FY2012E FY2013E 244.4 294.9 359.4 464.2 550.4 Operating profit (Rs cr) 51.3 97.7 108.9 126.2 153.5 Adjusted PAT (Rs cr) 46.8 83.9 103.1 115.5 139.7 EPS (Rs.) 3.2 5.7 7.0 7.8 9.5 OPM (%) 21.0 33.1 30.3 27.2 27.9 PE (x) 33.0 18.4 15.0 13.4 11.1 2.1 4.4 4.3 3.3 2.8 Market Cap / sales (x) EV/EBIDTA (x) 49.0 FY2009 9.2 13.2 13.3 8.8 6.5 RoE(%) 181.4 211.0 49.2 26.8 26.6 RoCE(%) 204.9 256.2 59.2 33.7 33.5 Sharekhan 2 September 30, 2011 Home Next investor’s eye stock update as against 16x earlier due to the not so judicious use of free cash on the books). decline by 334 basis points YoY and the operating profit margin (OPM) to decline by 192 basis points YoY in Q2FY2012. However, with a higher other income YoY, we expect the bottom line to grow by 29% YoY to Rs25.7 crore during the quarter. Aiming for an acquisition: The company is looking to carry out an acquisition in the personal care segment in either the domestic market or the international market. The acquisition could be of a brand or of an entity with a decent portfolio of brands that suits BCL’s existing product portfolio. After paying for the acquisition of Uptown, the company would have cash of around Rs325 crore in balance. This combined with debt (if required) can be utilised for a strategic buy-out. Outlook and valuation: To factor in the deal, we have downgraded our earnings by 1.6% and 2.4% for FY2012 and FY2013 respectively. The BCL stock has already reacted negatively to the announcement of the property deal and factors in the negative implication of the same at the current market price. Going forward, any initiative on the company’s part to expand its portfolio or strengthen its core business would be the key upside trigger for the stock. Q2FY2012 to be another good quarter: The company has yet to feel the heat of the current inflationary situation and expect its strong volume growth to sustain in the coming quarters. For Q2FY2012, we expect the company’s top line to grow by 29% year on year (YoY) to Rs105.0 crore with a sales volume growth of around 18% YoY. The prices of the key raw materials such as liquid paraffin and glass bottles remained firm during the quarter. Hence, we expect the gross profit margin to At the current market price the stock trades at 13.4x its FY2012E EPS of Rs7.8 and 11.1x its FY2013E EPS of Rs9.5. We maintain our Buy recommendation on the stock with the price target of Rs142 (15x FY2013E earnings as against 16x earlier due to the not so judicious use of free cash on the books). The author doesn’t hold any investment in any of the companies mentioned in the article. Sharekhan 3 September 30, 2011 Home Next investor’s eye viewpoint Rupa & Co Viewpoint Good brands + strong distribution reach < Valuation CMP: Rs152 We attended the analyst meet of Rupa & Co (Rupa). We present below the key takeaways from the meet. Amongst the listed innerwear players we continue to like Page Industries. brands Rupa, Frontline, Jon and Air are in the basic and mid premium categories while brands like Euro, Macro Man and Macro Man M Series target the premium and super premium categories. Present in fast growing underpenetrated men’s innerwear segment Strong distribution reach—deep and wide The company sells its products through multi-brand outlets, hosiery stores and national chain stores. It does not have any exclusive outlets at present. It has an enviable distribution network, serving one lakh retail outlets through a strong network of 950 distributors. India’s domestic branded innerwear market is currently valued at Rs13,000 crore (CRISIL estimate) of which men’s innerwear segment is worth close to Rs5500 crore. The men’s segment has grown at a compounded annual growth rate (CAGR) of 12.7% over the last four years and is expected to grow at 17.3% for the next three years. Further, the penetration of brands is abysmally low in India, providing huge opportunity for branded players to encash on the strong consumer wave. All set to focus on high-end premium and super premium category Amongst the three listed innerwear players, Rupa earns relatively lower operating profit margin (OPM) in the band of 10-11% vs 18-19% enjoyed by the peers Page Industries and Lovable Lingerie. This is largely due to the fact that the company is present in mainly mass and basic segments because of which it has to compete with unbranded/ regional players. Its margins are therefore low. In an effort to enhance its margins, productivity and move up the value chain the company is now focusing on the premium Largest men’s innerwear company with bouquet of brands Rupa is the largest men’s innerwear player by volume (in FY2011, it sold 168 million pieces). It has presence across the value chain with products in categories ranging from basic to mid premium, premium and super premium (entered into the last category recently). Its flagship Business comparison Particulars Page Industries Lovable Lingerie Rupa & Co Brands Jockey Daisy Dee, Lovable Rupa: Frontline, Thermocot, Rupa Macro Man, Macro Man M Series, Euro and Bumchums Brand status Exclusive licencee; pays royalty @ 5% sales Owned Owned Positioning Premium to mid premium Premium Largely basic and mid premium (80%) Category Largely men’s (85% share), ventured into women's in 2005 Women Largely men’s; >98%, entered the women's segment recently Market share 25% 30% - Competitors Hanes, Chromosome, Fruit of the loom Triumph, Enamour, Amante VIP, Amul, Lux and regional players in basic; Jockey in premium Channel mix MBOs, EBOs, Hosiery, and national chain stores MBOs, EBOs, national chain stores MBO’s, hosiery, national chain stores Distributors 400 100 950 Retail reach 20,000 8,500 100,000 EBOs 72 - - Sharekhan 4 September 30, 2011 Home Next investor’s eye viewpoint Financial comparison and super-premium brands like Macro Man, Macro Man M Series and Euro. Particulars Page Top line FY11 Raw material sensitivity high: Its basic products constitute around 40% of its overall top line. Thus Rupa’s margins and volumes are most sensitive to the vagaries of the raw material prices (cotton yarn), as the brands/products compete with the regional/unbranded players. Thus any sharp movement leads to a constant revision in the price of the final product and in the margin. Rupa 492 104 639 36.7 20.1 22.2 Operating profit (FY11) 93.0 19.5 66.8 Operating profit CAGR (FY08-11) (%) 36.1 38 31.2 Operating profit margin (%) 19.1 18.70 10.5 Net profit (Rs cr) 58.6 14.1 32 Net profit CAGR (FY08-11) (%) 34.9 53.1 40.0 0.9 - 1.1 Sales CAGR (FY08-11) (%) Debt equity We prefer Page Industries: Amongst the listed innerwear players, we continue to be bullish on Page Industries, given its superior growth levels, brand equity strength (which is creating strong entry barrier for new players), enviable margins, return ratios (best in the industry, averaging 45-48%), and proactive management approach (it has now entered the swimwear and sportswear categories by bagging the exclusive Speedo licence for Indian operations). Lovable RoCE (%) RoE (%) Market cap PER (x) EV (x) 47 22 22 52.7 17 22 2,827.0 749 1264 48.3 53.1 39.5 2,942.2 749 1282 EV/EBITDA (x) 31.6 38.4 19.2 No of pieces sold (mn pcs) 62.7 8.7 168 Realisation per piece 78.4 119.6 38.0 9.3 16.2 1.9 Profit per piece The author doesn’t hold any investment in any of the companies mentioned in the article. Sharekhan 5 September 30, 2011 Home Next Sharekhan Stock Idea Emerging Star Evergreen Axis Bank (UTI Bank) Cadila Healthcare Eros International Media Greaves Cotton IL&FS Transportation Networks IRB Infrastructure Developers Max India Opto Circuits India Patels Airtemp India Thermax Yes Bank Zydus Wellness Housing Development Finance Corporation HDFC Bank Infosys Larsen & Toubro Reliance Industries Tata Consultancy Services Apple Green Apollo Tyres Bajaj Auto Bajaj FinServ Bajaj Holdings & Investment Bank of Baroda Bank of India Bharat Electronics Bharat Heavy Electricals Bharti Airtel Corporation Bank Crompton Greaves Divi's Laboratories GAIL India Glenmark Pharmaceuticals Godrej Consumer Products Grasim Industries HCL Technologies Hindustan Unilever ICICI Bank Indian Hotels Company ITC Mahindra & Mahindra Marico Maruti Suzuki India Lupin Piramal Healthcare (Nicholas Piramal India) PTC India Punj Lloyd Sintex Industries State Bank of India Tata Global Beverages (Tata Tea) Wipro Ugly Duckling Ashok Leyland Bajaj Corp CESC Deepak Fertilisers & Petrochemicals Corporation Federal Bank Gayatri Projects Genus Power Infrastructures India Cements Ipca Laboratories ISMT Jaiprakash Associates Kewal Kiran Clothing NIIT Technologies Orbit Corporation Polaris Software Lab Pratibha Industries Provogue India Punjab National Bank Ratnamani Metals and Tubes Selan Exploration Technology Shiv-Vani Oil & Gas Exploration Services Subros Sun Pharmaceutical Industries Torrent Pharmaceuticals UltraTech Cement Union Bank of India United Phosphorus V-Guard Industries Cannonball Allahabad Bank Andhra Bank IDBI Bank Madras Cements Phillips Carbon Black Shree Cement Vulture’s Pick Mahindra Lifespace Developers Orient Paper and Industries Tata Chemicals Unity Infraprojects To know more about our products and services click here. 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Each recipient of this document should make such investigations as it 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 its 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. 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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. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of SHAREKHAN.” Sharekhan 6 September 30, 2011 Home Next
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