Friday, October 31, 2014


Outlook positive, maintain Buy with a revised price target of Rs3,600

Maruti Suzuki India (Maruti) posted an impressive volume growth of 16.8% in Q2FY2015. A favourable currency impact aided in a 68BPS sequential expansion in OPM to 12.4%. A fall in the tax rate to 20.2% as against 24% in the previous quarter resulted in a 28.7% Y-o-Y increase in the net profit to Rs863 crore as against our estimate of Rs784 crore.

Maruti’s management has maintained its guidance of a 10% volume growth for FY2015 and reiterated that the discount push was necessary to sustain the current trend which remains unstable. The urban volume growing at 10% is the key positive and a sign of better times ahead for the industry. Maruti meanwhile continues to consolidate its leadership position with its market share touching a four-year high of 45.2%. A spate of new launches coupled with refreshes to the current line-up is targeted at further consolidating the pole position.

We have tweaked our volume estimates for FY2016 and FY2017 given the deferment of the launch of XA-Alfa in FY2017 instead of FY2016 earlier. We have also reduced our tax rate estimate given the lower rates for the quarter and further benefit due to the expenditure on research and development. Consequently, earnings estimates for FY2015-16 are marginally higher, while FY2017 earnings estimates have been raised by 4.6% given the dual benefit of higher volume and lower tax rate. We continue to remain positive on the stock and reiterate a Buy recommendation with a revised price target of Rs3,600 (earlier Rs3,500) discounting FY2017E EBITDA 10x.



Stable quarter; Expansion plans to weigh on margins, Hold

Just Dial's 2QFY15 revenues grew 31% YoY to INR1.5bn, ~8% below our estimate. Increase in revenues was on the back of healthy growth in paid campaigns, which grew 6.5% sequentially to 296,100, and increased realisations per paid campaign. EBITDA came in at INR426m, in line with
our estimate. Margins declined 237bps YoY to 29% for the quarter, due to a one-off expense of INR32m towards employee stock options. Adjusting for this one-off, margins remained flat YoY. EBITDA margins were ~200bps higher than our estimate, led by lower-than-anticipated one-offs and higher estimated revenue base for the quarter. PAT came in at INR315m versus our estimate of INR366m, led by lower other income (INR85m). Listings increased 44% YoY to 14.5m. Search Plus currently offers 20 live services. However, most are on a trial basis and are yet to be monetised. We expect Search Plus to start contributing from FY16e and meaningfully from FY17e. Cash and investments stood at INR7.4bn as on 2QFY15 vs INR5.7bn as on 2QFY14. The board of directors recently approved a resolution to raise INR10bn to plough in inorganic expansion opportunities. The company has pushed its mass communication campaign for Search Plus Services to 4Q. The stock
trades at 55x FY16e earnings, which is rich in our view. We maintain our estimates for FY15e and FY16e and retain our Hold rating on the stock with a target price of INR1,650 per share.

Revenues grow 31%, margins better-than-estimated
2QFY15 revenues grew 31% YoY to INR1.5bn. However, the same was below our estimate as we factored in higher monetisation of the 2.3m business listings acquired last quarter. Growth in revenues was underpinned by: 1) Healthy uptick in paid campaigns, which grew 6.5% sequentially; and 2) Increased realisations per paid campaign. Margins were weighed down 237bps YoY to 29%, led by an INR32m one-off spend towards employee stock options. Adjusting for one-offs, EBITDA margins were flat YoY and better-than-expected as there was no one-off spend towards advertising on Search Plus Services as anticipated earlier. Margins are expected to remain subdued this fiscal on account of increased advertising spends and expansion-related investments.

Lower-than-expected paid campaigns
Paid campaigns for 2Q, though healthy, were lower than our estimate. It continues to comprise only ~2% of business listings vs 2.4% in 2QFY14. Listings remained soft and grew 3% sequentially to 14.5m during 2Q. Growth in business listings continues to outpace growth in paid campaigns, signalling conversions are increasingly hard to come by.

Fund raising on the anvil
The board of directors recently approved an enabling resolution to raise up to INR10bn. The management is presently looking at organic and inorganic expansions in international markets like the UK, US, Canada, and other emerging markets. These markets are highly competitive and regulated, thereby increasing uncertainty. Any meaningful inroads would entail significant investments and drag margins lower.

Valuations and outlook
The stock trades at 55x FY16e for 31% earnings CAGR over FY14-16e. We find valuations rich and maintain our earnings estimate for FY15e and FY16e. We retain our Hold rating on the stock, as the upside from current levels is limited, growth in paid campaigns tapering off, and increased capital/operating expenditure that would be required to enter new geographies.


>Exide Industries Limited: 2QFY15 RESULTS REVIEW (ANTIQUE)

Margins set to recover from 3Q itself

Exide Industries' (EXID IN) 2QFY15 adjusted earnings rose 6% YoY but was down 32% QoQ to INR1.3bn, way below consensus estimates of INR1.5bn. Margins fell 340bps QoQ and 230bps YoY to 11.8%, due to weaker scale, larger fuel and freight costs, and higher technology upgradation-related expenses. On account of weak seasonality in industrials, revenue contraction was broadly in line with estimates, down 8% QoQ to INR17.6bn. An 80bps QoQ decline in gross margins and higher other expense, as a percentage to sales, of 170bps QoQ led to a negative surprise in terms of EBITDA margin at 11.8% as against expected levels of ~14%.

We leave unchanged our revenue and margin estimates for FY15e/FY16e, factoring a revenue CAGR of 19% over FY14-16e, on the back of low base in industrials in FY14 and a cyclical recovery in the original auto equipment manufacturer segment. We also retain our margin estimates at 14.4%/15.2%
for FY15e/FY16e, respectively. On the back of a cyclical recovery in the automotive segment, leading to better scale; price hikes in the inverter segment by ~5%; and incremental 10% correction in lead prices over 1Q levels to ~USD2,000 per tonne, we are confident of EXID achieving over 15%
margin levels by 4QFY15 itself. The management is guiding at a capex of INR5.5bn over FY15-16e to enhance automation, technology, and capacity in some segments. After incurring losses in FY14, due to currency volatility, the smelter subsidiaries are expected to improve profitability in FY15e, thus contributing to consolidated earnings. The company's insurance business had already turned profitable in FY14, with a PAT of INR0.5bn. It is expected to improve its performance further this fiscal.

We upgrade the stock to Buy but maintain our price target at INR179 per share, based on 17x FY16e battery business EPS of INR9.8 and value the insurance business at INR13 per share. With capital efficiency recovering to over 20%; strong earnings visibility of ~31% CAGR over FY14-16e, led by
demand recovery across segments and stable margins ~15%, we do not foresee any reason for EXIDE to trade at a significant discount to its long-term mean traded core earnings multiple of 18x.

Key takeaways from the management interaction:
􀂄 Price hike of 5%, effective November, in the inverter segment, presently contributing close to 30% of overall revenues, to drive partial margin recovery next quarter. A QoQ decline of ~10% in lead would get reflected in gross margin from 4Q onwards. Drop in crude prices is set to partially impact raw material prices, as other than lead, crude derivatives too form a chunk of raw material expenses for manufacturing battery casings.
􀂄 Drop in diesel prices will reduce freight expenses in addition to other fuel-related expenses at the plant level. The management is focusing on reducing charging-related expenses too going forward. Technology upgradation-related expenses will increase the element of automation. Productivity improvement has risen this quarter in the form of consultancy charges and is set to persist for a few additional quarters. The company is also trying to reduce its lead content per battery to improve margins down the line. It is targeting a
250bps structural improvement in gross margins over the next two-to-three years.
􀂄 The management is content with its present market share in the replacement market and looking forward towards margin improvement strategies like controlling dealer incentives. It does not foresee any major price war with its largest competitor, which is adding new capacity in the coming quarter. EXIDE broadly operates at 83% and 79% utilisation in the two- and four-wheeler segments, respectively.
􀂄 The company is confident of achieving 15-17% margin in FY16e, and would move towards that trajectory from next quarter itself. Despite 3Q being another weak quarter for industrials, the management is certain of a substantial improvement in margins. In the longer run, we do not see any hurdles towards a low double-digit sustainable growth in the auto battery replacement market.

We upgrade EXID to Buy from Hold, leaving our price target unchanged at INR179 per share, based on 17x FY16e core business earnings and value the insurance business at INR13 per share. With visibility of enough drivers for margins to recover from the seasonally weak level of 11.8% back towards 15%, we leave our margin estimate unchanged at 15.2% for FY16e, amid a cyclical recovery in overall volumes.


>Grauer and Weil (India) Ltd: Investment Rationale & SWOT Analysis (EAST SECURITIES INDIA LIMITED)

Grauer & Weil (India) Ltd (GWIL), incorporated in 1957, is a market leader in Rs 7000 mn electroplating chemical industry with 38% market share. GWIL is the only company in India and one of few in the world, which offers as wide an array of surface treatment products and solutions under one roof - Chemicals, Equipments, Paints & Lubricants. GWIL had a large tract of 10 acres Surplus land in Mumbai's western suburb Kandivali, which has been developed into a Mall - Growel’s 101, which is a highly valuable asset generating significant cash flows for the company. This will grow significantly over next couple of years as they utilize the balance development potential (only 60% of the development potential utilized till now). Over the years, the company has paid most of the debt that was taken to develop the mall and GWIL is all set to become a debt free company by FY16.
GWIL's sales & profits have grown, 13% CAGR and 17% CAGR during FY10-FY14 despite slowdown in the economy. Low gearing & no major capex required in next 2 to 3 years coupled with the recovering economic condition and good growth in auto and auto ancillary companies (main drivers of chemical business), GWIL is all set to generate healthy free cash flow in next couple of
years. Revenues from real estate business will also see a sharp jump as renewal of ~ 40% of lease, due next year, and is likely to happen at ~75% increment We initiate coverage on Grauer and Weil India Ltd (GWIL) with BUY rating and DCF valuation based price target of Rs 28 (11.2x to FY16 EPS).

Investment Rationale
One-stop-shop for various surface protection solutions with extensive dealer network
• GWIL manufactures more than 600 chemicals which includes pre treatment chemicals, general plating, conversion coating, speciality chemicals and basic chemicals. GWIL offer wide array of chemical products which make them unique in electroplating industry.
• The Company has well organized dealer network and strong distribution system in multiple locations in India which covers the major states such as Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Haryana, Rajasthan and west Bengal. Together these states contribute 85% of business.
• The wide array of surface treatment products with well organized dealer networks and strong distribution system in multiple locations, GWIL enjoys advantageous geographical and customer mix which reduce the risk of high dependency on limited buyers and improve the pricing power of organization.
• All these help the company not only grow its business but also do the business in a profitable manner.

Very strong revenue visibility
• Stable economic condition and good growth in auto and auto ancillary companies which are the main drivers of chemical business, are expected to boost the segment revenue at a CAGR of 19% over a period of FY14-FY16.
• The order book at the Engineering Division is reasonably encouraging stood at Rs 420 mn, out of which 95% would be executed during this fiscal. Also, the enquiries under discussion hold lot of promises.
• The renewal of old lease agreement would propel rental income from Growel's 101 Mall at a CAGR of 24% over the period FY14-FY16.
• On the consolidated basis, we expect top-line and bottom-line numbers to grow at a CAGR of 15% and 23% respectively, over the same period.

Growel's 101 - high asset valuations with potential to propel the Margins
• Under the real estate segment company owns and manages the 10 acres of land with 0.47 mn Sqft of Mall (Usable area ~ 0.28 mn Sqft) & a development potential to construct additional 0.25 mn usable area. At present the leasable area is 0.25mn Sqft of which 85% is occupied.
• The renewal of its 9 year old lease agreement with Big Bazaar & Cinemax, due next year, should happen at ~75% increment.
• Recovery in economy & consumer sentiment should improve the occupancy ratio which would further improve the margins.

Relocation of paint manufacturing plant would help improve the margins
• The existing paint manufacturing plant is in Mumbai, has heavy octroi duty which increases the cost of materials. Plus, the labor charges at Mumbai plant are also higher which adversely impact the margins.
• Shifting of paint manufacturing plant from Mumbai to J&K would improve the margins on account of absence of octrai duty and low labor charges.
• The company will get some more benefits like tax exemption, low cost of power, free water availability etc in new location.
• All this would help the company increase its profitability in the long run.

New technical collaboration should improve the export further
• The company enjoys several foreign technical collaborations.
• Foreign collaborations not only help the company to gain more technical know-hows but also help increase its footprints in the overseas markets.
• We believe that several strong collaborations would continue to help the company grow its business in domestic as well as overseas markets.

All set to become zero debt company
• GWIL had taken debt to fund their Mall expansion projects few years back which will be fully repaid within next 2-3 years.
• The management has strong focus on repayment of debt which would continue to improve the PAT margin.
• Repayment of debt and strong cash positions in the coming years would lessen the financial risk in the business.

Outlook & Valuation
Recovery in the economy and early good signs from auto industry definitely bode well for GWIL. Its market leadership position in the surface protection business puts the company on the strong footing to capitalize on the improving business scenario. The mall business is doing well and going to be stronger in the future. Hence, we find the company's growth prospect very sound in the coming years.
We initiate coverage on GWIL with BUY rating, having DCF valuation based price target of Rs.28 per share (11.2x to FY16 EPS) over a period of 15 to 18 months, representing the potential upside 101%.

Risk & Concern
• Low cost products from Chinese market are the major concern in chemical business. This may hurt the margin profile of the company.
• Online shopping and heavy discount on products while doing e-shopping may hurt the growth prospect of the mall business.

SWOT Analysis

• Well diversified in chemical, engineering and real estate segment
• Market leader in Rs 7000 mn electroplating chemical industry with 38% market share
• Manufacturing more than 600 chemicals under one roof
• Well organised dealer networks & strong distribution system in multiple locations across India
• By FY16, net of cash, the company would be almost debt free
• Strong R&D with innovation and addition in product

• Small size of mall with single location
• Slow down in economy will adversely impact chemical as well as mall business

• Has potential to construct additional 0.25 mn usable area in Growel’s 101 mall
• New technical collaboration should improve the export further

• Online shopping and heavy discount on products via e-shopping may change the dynamics of mall business unfavorably.
• Low cost products from Chinese market are the major concern in chemical business.