Union Budget 2015-2016
28/03/2015 Others
The Union Budget for 2015-16 has set the ground for a brighter medium term outlook. The government has taken a conscious decision to revive the investment cycle by mobilising resources towards infrastructure and thereby facilitate growth across sectors. With this objective and given the narrow fiscal space that the government will have given higher devolution of centres revenue to the states after the 14th Finance Commission comes into effect from April 1, 2015, the government has chosen to target fiscal deficit of 3.9% in FY2016, a tad higher than expectation of 3.6% and committed to diverting larger funds towards investment revival. Further, the Budget has carried forward the governments thrust on simplifying the tax regime, infusing efficiency in the systems and promoting transparency and fairness in governance. Overall, we believe that the Budget FY2016 is responsible and credible in setting the governments medium term reform agenda forward apart from creating optimism for continued policy push.
   Goodyear India Ltd
27/02/2015 Result Updates
For 4QCY2014, Goodyear India (GIL) reported a disappointing set of numbers. Its top-line for the quarter declined by 11.2% yoy to Rs360cr, below our expectation of Rs424cr. The raw material cost as a percentage of sales declined by 314bp yoy to 66.5% but employee and other expenses (both as a percentage of sales) increased by 210bp yoy and 231bp yoy to 8.5% and 16.6% respectively, negating the benefits of lower raw material cost. As a result, the EBITDA margin declined by 127bp yoy to 8.4%, below of our expectation of 9.9%. Owing to lower topline and subdued operating performance, the net profit declined by 31.2% yoy to Rs19cr. Tractor tyre demand to continue to drive growth: GIL is a market leader in the tractor tyre industry. Tractor tyres accounted for ~60% of the company’s tonnage off-take in CY2012. Tractor sales have been subdued in CY2014 on account of unexpected rains in some parts of the country (in February and March) which destroyed the rabi crop, along with below average rainfall for the year. Although tractor sales for the year have been subdued, the long term outlook remains positive. As per industry reports, tractor sales are likely to post a CAGR of 6-7% over the next five years. We expect GIL to register a 7.4% CAGR in revenue over CY2013-16E. Strong balance sheet with high RoIC: GIL is a debt free-cash rich company with a RoIC of 92.1%. We expect the company’s RoIC to improve to 101.3% in CY2016. The company’s cash and equivalents are expected to be at Rs560cr by CY2016-end, which are ~41% of the current market cap. Outlook and valuation: On the back of projected growth in the tractor tyre market and decline in rubber prices, earnings are expected to grow at a CAGR of ~11.9% over CY2013-16E to Rs127cr in CY2016E. At the current market price, the stock is trading at a PE of 10.9x its CY2016E earnings. On a TTM basis, GIL is one of the cheapest MNCs available as it trades at a PE of 13.7x while other MNCs (market cap of Rs1,000-Rs5,000cr) trade above the 20.0x mark (median of 35.7x). We have revised our rating on the stock to Accumulate and assign a target price of `659 based on a target PE of 12x for CY2016E.
   Railway Budget 2015-16
26/02/2015 Others
The Railway Budget for 2015-16 laid the foundation for a five year vision to transform the Indian Railways as a prime engine for propelling the Indian economy. It laid thrust on customer satisfaction, investment towards capacity building and modernisaion of infrastructure. The Railway Budget for the next fiscal emphasized on augmenting capacity through network expansion, expansion of freight handling capacity, setting up of Transport Logistics Corporation of India towards provision of end-to-end logistics solution, revision of poicy for private freight terminals, harnessing PPP, and awarding 750 km of civil contracts and 1300km of system contracts on dedicated freight corridor. Railways intends to raise long term debt from domestic and international sources, monetising of assets and digitalisation of land records towards achieving the same.
   Vesuvius India
26/02/2015 Others
Vesuvius India has given good returns in the past year, appreciating by ~75%. After assuming top-line CAGR of 7.5% and bottom-line CAGR of 11.2% for CY2014-CY2016E, the valuation in our view is expensive at 20.2x PE for CY2016E. In comparison, its peer Orient Refractories Ltd trades at 13.5x PE for FY2017E. We had initiated coverage on the stock on August 9, 2011 at the price of `365, delivering 100% return. Going forward, we do not expect any notable upside in the stock and hence drop our coverage on the same (from February 25, 2015).
   Styrolution ABS (India) Ltd
24/02/2015 Result Updates
Styrolution ABS (Styrolution) reported a disappointing set of numbers for 4QCY2014. Its top-line declined by 12.2% yoy to Rs303cr (lower by 12% as compared to our estimate of Rs344cr) as volume declined to 20.8kt against 22.4kt a year ago. The EBITDA declined by 23.4% yoy and came in at Rs16cr, while margins contracted by 76bp yoy to 5.2% owing to higher employee cost as a percentage of sales. The net profit de-grew by 54% yoy to Rs6cr, which was lower than our expectation of Rs10cr, mainly on account of higher interest cost and lower other income. Stability in crude oil prices and capacity expansion to drive growth: During CY2014, the performance of the company was impacted by i) import of rubber due to rubber plant shutdown for expansion, ii) falling crude oil price resulting in inventory loss and iii) sluggish demand as end-user market consumer expected ABS (acrylonitrile butadiene styrene) price to decline. However, with expectation of crude oil price to stabilize above $60/barrel and meaningful contribution from the enhanced capacity (SAN & rubber) coupled with introduction of premium products, we expect the company’s performance to improve from here on. Outlook and Valuation: With the Automobile and Household industry expected to report healthy growth, which will drive the demand for Styrolution products, we expect the company to post a revenue CAGR of 12.8% (adjusted for FY2015E) over FY2015E-17E to Rs1,508cr in FY2017E. The EBITDA is expected to grow at a CAGR of 49.2% over FY2015E-17E to Rs143cr while margins are expected to rebound to higher single digit levels of 9.5% in FY2017E. The net profit is expected to register a CAGR of 71.1% over the same period to Rs78cr in FY2017E. We recommend an Accumulate rating on the stock, with a target price of Rs758, assigning a P/E multiple of 17x to its FY2017E EPS of Rs44.6.
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