Category: Equity Research

TTK Prestige is a leading kitchen appliances company with products across the entire kitchenware segment. The company has transformed its distribution model by launching exclusive retail outlets known as ‘Smart Kitchens’. The company is well placed to capitalise on the consumption boom led by the demographic shift towards nuclear families in India. ICICI has initiated coverage on the company with an OUTPERFORMER rating.

At the current price of Rs 107, the stock is trading at a P/E of 9.82x its FY07E EPS of Rs 10.9 and 7.19x its FY08E EPS of Rs 14.88. On an EV/EBIDTA basis, the stock is available at 6.87x FY07E earnings and 5.74x FY08E earnings. Given the company’s aggressive retail foray and product diversification, we believe the current valuations are extremely attractive. We rate the stock an OUTPERFORMER with a 12-month price target of Rs 164, at 11x FY08E earnings. 60% Upside from current levels.

Just a while ago, Merill Lynch has put a SELL recommendation on Retailing Stocks – Pantaloon Retail India Ltd and Shoppers Stop. Both the stocks have a potential downside of 20% from current levels. In the near term, Merill expects cost pressures to rise materially, which should slow EPS growth from 50% plus over the past three years to about 30% over the next two years.

SELL Pantaloon Retail India:
Merill expects Pantaloon’s EPS growth to slow to 36% in FY08 to Rs9.5 and 25% in FY09 to Rs11.9. There is downside risk due to cost pressures and imminent inventory write-off. Excluding the AMC value of Rs38/sh, Merill estimate the pure retail business is trading at P/E of 41x FY08E and 33x FY09E. Merill believes valuations are high given that Pantaloon has a low ROE of about 11%, does not generate cash from operations and is unlikely to do so in the near future.

SELL Shoppers Stop:
Shoppers Stop EPS growth wil also slow to 31% in FY08 to Rs13.7 and 29% in FY09 to Rs17.6. At P/Es of 44x FY08E and 34x FY09E, valuation is steep. Its option to buy a 51% stake in group company HyperCity is a good move, but is unlikely to be a re-rating trigger. It could, in fact, be marginally EPS dilutive in FY09.

Citigroup Research has recommended a BUY/Medium Risk on Gateway Distriparks with a price target of Rs 216, 33% upside from current levels.

GATE [through its subsidiary (GatewayRail)] and Concor are to form a 51-49 JV, which replaces the prior restrictive agreement between Concor and GATE that prohibited the latter from running its own trains until Oct/Nov08. Total outlay envisaged is Rs700m, albeit phase 1 capex will be around Rs210m (which GATE and Concor will fund through equity infusions). Also GATE’s current business at the Garhi ICD will be transferred to the JV. GATE will earn lease rentals (as yet undecided) for use of its ICD.

Citi expects margins at GATE’s JNPT facility to remain depressed over the next 6 months due to increased competition. This remains an area of concern. However, we are satisfied with the trajectory of the train operations, and believe that GATE is taking the right steps to develop an integrated logistics business model.

Citi expects an EPS of Rs11.32 and Rs 13.68 for FY08 and FY09, a 21% YoY growth.

Citigroup Research and ETrade owned IL&FS Investmart are bullish on the prospects of Godrej Consumer Products Ltd [GCPL].

GCPL’s 50:50 JV with SCA Hygiene Products, a Swedish consumer and paper goods company, will produce and market baby care and feminine hygiene products in India, Nepal and Bhutan. This development is particularly significant because, SCA group, which has a presence in 90 countries, is a market leader in the global absorbent incontinence products market and has 26% market share. This venture will give GCPL an entry into Rs 8 Billion Indian feminine hygiene market which is also growing at the rate of 12% YoY.

GCPL launched a new soap ‘Vigil,’ which has been priced competitively at Rs11 for a 75gm pack. Priced slightly above ‘Godrej No 1’ within GCPL’s stable, this brand would enable GCPL to participate in the high growth health soap market.

Godrej is expected to report an EPS of Rs 7.75 for FY08 and Rs 8.77 for FY09. Citi has a Low Risk BUY on Godrej Consumer Products Ltd with a Target Price of Rs 195, 31% upside from current levels.

Gokaldas Exports Ltd (GEL), India’s largest garment exporter, has drawn up an extensive roadmap for growth. It is expanding capacity by setting up three new factories and diversifying its client and product mix. Big global retailers are consolidating their vendor base and the company will be optimally positioned to capitalize on the opportunity with its expanded capacities.

ICICI predicts Gokaldas Exporst to report FY08E EPS of Rs 24.99 and FY09E EPS of Rs 31.46 . ICICI values the stock at 10x its FY09E EPS of Rs 31.46, setting a 12-15 month price target of Rs 315, upside of 33% from current levels. Gokaldas Research Report is available here.

FAG Bearings India is a 51.33% subsidiary of German major FAG Kulgelfishcer Georg Schafer AG. Net sales revenue jumped 29% to Rs 147.53 crore in the quarter ended December 2006. Operating profit margin (OPM) increased 30 basis points (bps) to 23.1%. Thus, operating profit (OP) was up 30% to Rs 34.03 crore. Profit after tax (PAT) before prior-period adjustments (PPA) rose 33% to Rs 20.54 crore.

Net sales surged 33% to Rs 550.73 crore in the year ended December 2006. OPM moved up 290 bps to 23%. Thus, OP soared 53% to Rs 126.83 crore. PAT before PPA zoomed 50% to Rs 74.85 crore.

FAG Bearings India has been growing consistently at an attractive rate. Over the last three years (FY 2003 to FY 2006), sales have grown at a CAGR of 27% and net profit at a CAGR of 48%. OPM improved every year, from 17.2% to 23% in this period. The return on capital employed (ROCE) at 42.5% (in FY 2005) is one of the highest in the manufacturing sector.

FAG Bearings India, manufacturer of ball bearings, cylindrical roller bearings and spherical roller bearings, is a leading supplier to the automotive industry, mechanical and electrical engineering industry, besides the Railways.

The customer list consists of leaders in their respective industries. In the automobile industry, FAG Bearings India’s clients are Maruti Udyog, Ashok Leyland, Bajaj Auto, Eicher Tractors, Ford India, General Motors, Hero India, Hyundai India, M&M, New Holland, Tata Motors, and TVS Motors. In the engineering industry, the buyers are ABB, Bhel, Bharat Bijlee, Crompton Greaves, and Siemens. In the machinery sector, the company supplies to LMW, HMT, and Textools. Elecon Engineering and Neyveli Lignite in the material-handling sector and Bhel and NTPC in the thermal power sector are also its clients. Besides, FAG Bearings has many customers in the electric fan, transmission product, steel, paper, construction machinery, pump and rolling mill sectors. It also caters to the Indian Railways.

FAG Bearings had planned a Rs 80-crore capex in calendar year (CY) 2006. It is understood that it has carried our capex as per plans. Full benefit of this capacity expansion will help it to sustain its healthy sales growth in FY 2007.

The recent launch of the diesel version of Swift will give significant additional volume to FAG Bearings India — the sole supplier of bearings to Maruti’s Swift. The company also has good export business (around 18% of sales). Exports had come to its rescue even when domestic growth had slowed down in the past.

The automotive industry, the main user of bearings, remains in high gear with most categories of vehicles registering robust year-on- year growth. With road and other infrastructure poised for accelerated development as well as penetration of personalised transport set to increase with rising disposable income, the potential of continued healthy growth for the automobile industry is considered good.

The increasing exports of automotive products from India and the sourcing policy of global majors have resulted in India developing into a manufacturing hub for auto component manufacturers. As a cost effective and quality supply source, FAG Bearings India is well positioned to benefit from this indirect exports also.

The demand from the Railways, another important market segment, and other user industries such as thermal power plants, transmission products, steel, paper, construction machinery, pumps, material handling is also expected to be buoyant.

In FY 0712, we expect FAG Bearings India to register sales and net profit of Rs 688.41 crore and Rs 96.01 crore, respectively. EPS works out to 57.8. At the current share price of Rs 587, PE stands at just 10.1.