Fw: Investor's Eye: Update - Marico, Bajaj Holdings & Investment, Ratnamani Metals and Tubes

 

 

Investor's Eye [February 16, 2012]  Summary of Contents STOCK UPDATE Marico  Cluster: Apple Green Recommendation: Hold Price target: Rs186 Current market price: Rs162 Price target revised to Rs186 Key points Event: Marico will acquire Set Wet, Livon, Zatak and certain other personal care brands from Reckitt Benckiser (RB) for an undisclosed sum (media reports put the deal value in the range of Rs450-500 crore). These brands are the top three in the domestic hair gel, leave-on hair serum and male deodorant categories respectively, and are growing at around 25% per annum. The brands collectively are expected to achieve around Rs150 crore of revenues in FY2012 (around 4% of Marico's estimated consolidated revenues for FY2012). The gross profit margin (GPM) of these brands is much higher than Marico's GPM. Though this acquisition is positive from longer-term perspective, we don't expect the same to add to the bottom line of Marico in the near term. Details about the transaction: The transaction includes the transfer of all key assets including intellectual property rights, supply agreements and third party manufacturing agreements (Paras Pharmaceuticals' personal care business). The acquisition is likely to be completed in the middle of Q1FY2013. After the completion of the transaction, RB will provide distribution support to Marico for three months.  Rational behind the acquisition The acquisition provides Marico entry into low penetrated and strong growing categories such as deodorants and styling gels.  The brands will plug the gap in Marico's personal care portfolio.  Marico could leverage on the brand positioning to launch some of the products from its international portfolio (especially in the male grooming category) into the domestic market. The brands will also help Marico to participate in tailwind categories over time. Marico will also earn around 20% of the distribution reach of Paras Pharmaceuticals' personal care business. Funding of acquisition: Though the company has not disclosed the deal value, the media reports indicate that the deal value is in the range of Rs450-500 crore (3.0-3.3x sales of three brands). The funding of the acquisition would be done through a mix of (domestic) debt, equity and internal accruals.  Outlook and view: This acquisition of brands will help Marico to enter into strong growing categories (such as deodorant and male grooming products). Also, this acquisition will help Marico to reduce its dependence on commodity-linked products such as coconut oil and edible oil. Though there are synergetic benefits, which Marico can obtain in the long run, we don't expect these brands to add significantly to the consolidated bottom line in the near term. Having said that, more clarity would emerge once the company discloses the key financials of the deal.  We are introducing our FY2014 earnings estimate and revising the price target to Rs186 (22x its FY2014E earnings per share [EPS] of Rs8.4) in this note. At the current market price the stock trades at 22.8x its FY2013E EPS of Rs7.1 and 19.2x its FY2014E EPS of Rs8.4. We maintain our Hold recommendation on the stock.     Bajaj Holdings & Investment  Cluster: Apple Green Recommendation: Buy Price target: Rs1,051 Current market price: Rs804 Price target revised to Rs1,051 Q3FY2012 result highlights The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) declined by 76.4% year on year (YoY) to Rs62.4 crore against Rs265 crore reported in the corresponding period of the previous year. During each of the last four quarters the company had reported a lacklustre top line of under Rs100 crore. The subdued equity market had presented limited profit booking opportunities for the company in the last few quarters.  The company's income from associates grew 27.5% YoY. This moderated the profit after tax (PAT) decline to 28.8% YoY, lower than the top line growth. During Q3FY2012, the total market value of the company's investments declined by 2.3% sequentially while there was no major change in the cost of the investments.  The market value of the equity investments in the subsidiary company and the joint venture declined by 16% quarter on quarter (QoQ). One of the reasons for the same is the 6% fall in the share price of Maharasthra Scooters in which the company has a 24% stake.   Valuation Bajaj Auto is the key investment of BHIL and has been valued at 12.5x FY2013 earnings per share (EPS). The company reported good quarterly numbers, but there are concerns of sharp moderation in the domestic demand for its products. Our price target for Bajaj Finserv has been derived using the sum-of-the-parts (SOTP) valuation method.  Given the strategic nature of BHIL's investments, we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. Our price target of Rs1,051.4 implies a 31% upside for the stock. We maintain our Buy recommendation on the stock.   Ratnamani Metals and Tubes  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs132 Current market price: Rs110 Strong revenue performance Result highlights Revenues surge: Ratnamani Metals & Tubes (Ratnamani) reported another strong quarter in terms of revenue growth-in Q3FY2012 its revenues grew by 74.2% on a year-on-year (Y-o-Y) basis to Rs280.7 crore. The sales growth was backed by a 140% growth year on year (YoY) in the carbon steel tube and pipe (CS pipe) segment and a 57% Y-o-Y jump in the stainless steel tube and pipe (SS pipe) segment. The company is experiencing strong traction in the export business with exports contributing about 50% of the revenues.  OPM affected by forex loss: The gross profit margin (GPM) dipped by 180 basis points YoY to 36.7% despite an increase in the realisation mainly due to a higher raw material cost. The realisation for CS pipes increased by 29% YoY whereas that for SS pipes improved by 18.6%. The operating profit margin (OPM) was down by 560 basis points YoY to 14.9% despite a surge in the revenues. The fall was due to a foreign exchange (forex) loss of Rs12 crore on marked-to-market (MTM) forex denominated loans.  Net profit grows by 19.2%: On the back of a 70% fall in the other income and a 54.8% increase in the tax outgo (with the effective tax rate up by 520 basis points to 29.6%), the net profit growth was at 19.2% to Rs19.8 crore. Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.  Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company's revenues and profits to grow at a compounded annual growth rate (CAGR) of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a price/earnings (PE) multiple of 4.7x its FY2013E earnings. On an enterprise value (EV)/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions