| Summary of Contents
| STOCK UPDATE IL&FS Transportation Networks
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs330
Current market price: Rs167 Expected easing of competitive intensity is favourable Key points -
Preferred bidder for Chongqing Expressway group: The company has emerged as the preferred bidder for acquiring a 49% equity stake in Chongqing Yuhe Expressway Co (Chongqing Yuhe) in China. Chongqing Yuhe operates 58 kilometre of Yu He Expressway in Chongqing, located in southwest China, with the toll concession rights till 2032. The road project has been operational for the last nine years. The expressway is significant because it connects to a major industrial belt in the Chongqing region, thereby allowing the Chinese company to enjoy consistent traffic flow throughout the year and offering a decent growth prospect. Further, the Chongqing municipality has assured an annuity based payment on a certain part of the road the stretch beyond which will be tolled. However, the contours of the deal would be known by the end of this month after the signing of the agreement by both the parties. -
Expected moderation favourable; Maintain Buy: In view of ITNL's leadership in the road vertical, its strong relationship with state governments, its relatively diversified and derisked business portfolio, and strong parentage we remain positive on the company for two key reasons: 1) Given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector; 2) Order inflow is likely to improve on the back of expected moderation in competitive intensity as smaller players are unable to achieve financial closure. On the flip side, the FY2013/14 estimates are at risk if the company is unable to bag decent projects over the next 3-6 months. Currently, its order book stands at Rs8,900 crore, that is 3.5x its FY2011 construction revenues to be executed over the next two to three years. At the current market price the stock is trading at 6.8x and 6.2x its FY2012E and FY2013E earnings. Hence we maintain our Buy rating on the stock with a price target of Rs330.
VIEWPOINT HSIL Challenging environment ahead Key points -
HSIL operates in two key business segments, namely sanitary ware and container glass division. Each business segment contributes 50% revenue. The company sells sanitary ware under the Hindware brand and manufactures glass under the AGI brand. While it is the number one player in the sanitary ware market with a 40% market share, it is the second largest player in the container glass space with a 17% market share (70% market share in southern India, the biggest market for container glass). -
The organised segment is growing at over 12% per annum and we expect the growth to sustain driven by the increased demand for new houses and the burgeoning young earners with a rising disposable income. Being the largest domestic player in the sanitary ware business HSIL is likely to benefit the most from this incremental demand. However, the slowdown in the property market in recent times has affected the overall volume growth of this industry. -
Key risk includes longer than expected slowdown in the real estate market will affect the demand for building products while sharp volatility in prices of soda ash can affect the margins in the container glass division. Moreover, in order to fund the huge capex of Rs650 crore it could see an increase in its debt-to-equity ratio, which presently stands at 0.6x. This will increase the interest burden on the earnings of the company. The return on equity (RoE), which stands at 15%, could fall to around 10% in the coming two years. Outlook and valuation: The company has a strong financial track record in terms of earnings. It is also operationally efficient. With the new capacities coming on stream in the next two years the company is well placed to capture the incremental demand in both the sanitary ware and container glass markets. The company's management is confident of achieving a 25% growth in its revenue in the coming years. However, a longer than expected slowdown in the real estate market (which is the key consumer of its sanitary ware) and an increase in the price of soda ash could adversely affect the performance of the company. At the current market price the stock is trading at price-to-earnings ratio of 10.7x, discounting its FY2011 earnings per share. On a comparative basis, the stock's valuation is in line with that of its peers despite its lower return ratios. | | "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." | | | |
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