The Stocks Update
J K Cement
We prefer JK Cement as a midcap stock in the cement space, given its high growth potential due its presence in strong regions and attractive valuations. The company is expanding its cement capacity by 3.0 MT in North India. JK Cement has already installed the grey cum white cement plant with an installed capacity of 0.6 MTPA (white cement) and 1.02 MTPA (grey cement) in UAE, which will start flowing the full benefits from Q1FY15 onwards.
• Total 40% of its capacity is located in Karnataka (i.e. 3.0 MT). With the Andhra Pradesh issue now being resolved, we expect the southern region, including Karnataka, to witness an overall improvement in demand leading to better realisations, which will be beneficial for the company
• White cement segment has a strong market due to limited capacity in the industry. It contributes over 30% to the topline of JK Cement. With only two major players manufacturing white cement, other being UltraTech Cement, plants operate at very healthy utilisations and command higher EBITDA/tonne (white cement | 2739 vs. grey cement | 269 for FY14). Further, with doubling of white cement capacity, we expect blended margins to expand significantly from 13.0% in FY14 to 21.3% in FY16E.
• Given the upcoming new capacity from March 2014, we expect growth in profitability to remain healthy over the next two years. We expect expansion led revenue CAGR of 22.2% in FY14-16E. The stock is currently available at 5.4x FY16E EV/EBITDA and $67/tonne on FY16 capacity.
Cox & Kings
Cox & Kings (C&K) has done seven acquisitions in the past seven years
(including Holiday Break), which made C&K an integrated player globally with quality products and services. This series of acquisitions brought huge business volume on the book of C&K, on a consolidated basis. This, in turn, increased its bargaining power with vendors due to its large customer base and global presence. The overseas acquisition created value for C&K with healthy revenue growth (CAGR of 57% in FY07-14) and average operating margins (i.e. at ~39.3%) during the same period.
• C&K acquired a 100% stake in UK based HolidayBreak Plc (HBR) in FY12. We foresee HBR as a good long term strategic fit for C&K as it has provided synergistic opportunities in terms of geographic diversification, widening its product portfolio and offering cross-selling opportunities.
• The outlook for the domestic business is looking positive on an expected improved consumer sentiment and pick-up in corporate travel. Further, C&K should be a key beneficiary of any positive policy announcements (visa on arrival) given the new government’s thrust on tourism. Further a healthy order book for education division (+90%) of HBR provides strong growth visibility going ahead.
• The sale of the camping business for | 890 crore is likely to help C&K deleverage
its balance sheet significantly, going forward. On valuations, the stock is available at P/E of ~8x and 6x for FY15E and FY16E, respectively.
PVR Ltd
PVR is a behemoth in the movie exhibition space with an impressive ~25% market share of the total 1600 multiplex screens in the country having a tally of 421 screens (as on FY14). Cinemax acquisition and first mover advantage in most cities helped it command a 20-22% revenue share of Bollywood and 30-35% of Hollywood box office collection. PVR, thus, enjoys high bargaining power and is able to negotiate better terms with producers. We expect PVR to reach 109 & 119 properties and 481 & 537 screens by FY15E and FY16E, respectively
• Investment inflows in the movie production space would multiply with several movie studios namely Virgin Produced India, Fox Star Studio planning to step up investments in Bollywood. Higher investments & good content would prop up demand for movies and PVR would benefit from increased occupancies and hence rising average ticket prices (ATP). We expect ATPs to grow 7% to | 182 by FY16E. Moreover, as disposable income increases, F&B spends would rise to | 62 by FY16E from | 53 in FY14. Advertisement revenues are expected to grow at 14% CAGR in
FY14-16E to reach | 184 crore in FY16E, buoyed by increasing footfalls as PVR is able to provide undivided attention to advertisers
• Revenues & EBITDA are expected to grow at a CAGR of ~13.0% & 18.8%,
respectively, in FY14-16E. RoE & RoCE are expected to improve to 17.4% & 15.9% in FY16E from 14.0% & 12.4% in FY14, respectively.
Arvind Ltd
Arvind Ltd (Arvind), the flagship company of the Lalbhai group, is in the process of transformation from a textile company to a brands and retail company. Arvind is the preferred supplier to brands like Polo, Armani Exchange, Diesel and GAP among others. It is also present in the value retail segment through its Megamart stores. Its brand portfolio comprises Flying Machine, Arrow, Tommy Hilfiger, Lee, Wrangler, US Polo, Izod, Gant, New Port, Excalibur, Calvin Klein, Hanes, etc.
• Arvind’s revenues have grown at a CAGR of 18% during FY07-14. It envisages growing at 25% in FY15E. From being a pure-play textiles company, Arvind has gradually got transformed into a brands company and has over 28 brands in its kitty (both licensed and owned). As the share of brands and high-end denim wear has been on the rise, the company’s operating margin has improved from 10.9% (FY09) to 13.3% (FY14).
• The company is also making an effort to restructure the retail business and is gradually changing from a discount model to a value format. It has also changed the product profile and store size to optimise revenues. We expect this segment to contribute positively towards profitability
• Arvind’s return ratios have also improved over the years. Its RoE has improved from single digits to the 11-15% range during FY11-14. Improvement in the company’s profitability profile, return ratios and the transformation from a textile to a brands company warrant a re-rating.
Gail (India) Ltd
Gail (India) Ltd is India’s leading integrated natural gas company with a presence in transmission (75% share of volumes), gas trading, gas processing, LPG production & transmission, petrochemicals and oil & gas exploration & production (E&P)
• The core strength of Gail lies in its strong pipeline network, which will enable the company to tap the growing demand for natural gas in India. An increase in domestic gas supply from ONGC marginal fields, GSPC, KG basin, etc. and LNG capacity additions over the next three to four years will add 65-80 mmscmd of gas supply in India, auguring well for the gas transmission business. We expect gas transmission volumes of Gail to increase from 96.4 mmscmd in FY14 to 106.2 mmscmd for FY16E.
• Doubling of petrochemical capacity and reduction in subsidy burden borne by Gail’s LPG business would be the growth drivers for Gail. With the increase in capacity, we expect the share of the petchem business in Gail’s EBIT to increase from current levels of 22.7%. Also, Gail is likely to be excluded from the subsidy sharing mechanism, as per the recommendations of the Kirit Parikh Committee, when the expected gas price hike is implemented by the new government.
• Gail is currently trading at 11.1x FY16E EPS, a discount to its historical P/E ratio of 12.5x in the last five years. We believe Gail’s defensive business model of gas transmission, growing petro chemical business and reduction in subsidy burden would create value for investors.
DCB Bank
DCB earned its highest yearly profits of | 150 crore in FY14. It is in a turnaround phase. It had made significant losses of | 88 crore in FY09 & |79 crore in FY10 due to large unsecured exposure (29%, | 1176 crore) as on FY08. Post FY10, the credit monitoring is lot more stringent. Resultantly, its GNPA has declined from | 306 crore (GNPA ratio - 9.3%) in FY09 to | 138 crore (GNPA ratio - 1.7%) in FY14.
• The bank was in a consolidation phase during FY08-11 with credit book flat at ~| 4200 crore in FY08-11. Post FY11, it has almost doubled its book from | 4271 crore in FY11 to | 8140 crore in FY14. DCB has steadily shed its risky unsecured book, which now comprises <4% (| 300 crore) of loan book & is fully provided. In the past two years, 55% (| 1578.3 crore) of loan growth is contributed by mortgage (comprises 38.4%). As on FY14, Agri constituted 14.2%, SME– 16.6%, corporate- 25.7% & retail– 43.5%.
• Ahead, the bank is embarking on a branch expansion, which is estimated to rise to 185 by FY16E (from 130 now). The management has guided to double the bank’s balance sheet in three years. We estimate a credit book of | 12523 crore (| 8140 crore now) by FY16E implying 24% CAGR. NIM is expected to be maintained at 3.5%.
• DCB is well-placed in terms of capital adequacy (Tier I at 12.9%) & asset
quality compred to peers . Return ratios are decent with 1.3% RoA & 15% RoE. Being a private bank, it has the potential to command higher multiple in growth phase.
Happy Investing
J K Cement
We prefer JK Cement as a midcap stock in the cement space, given its high growth potential due its presence in strong regions and attractive valuations. The company is expanding its cement capacity by 3.0 MT in North India. JK Cement has already installed the grey cum white cement plant with an installed capacity of 0.6 MTPA (white cement) and 1.02 MTPA (grey cement) in UAE, which will start flowing the full benefits from Q1FY15 onwards.
• Total 40% of its capacity is located in Karnataka (i.e. 3.0 MT). With the Andhra Pradesh issue now being resolved, we expect the southern region, including Karnataka, to witness an overall improvement in demand leading to better realisations, which will be beneficial for the company
• White cement segment has a strong market due to limited capacity in the industry. It contributes over 30% to the topline of JK Cement. With only two major players manufacturing white cement, other being UltraTech Cement, plants operate at very healthy utilisations and command higher EBITDA/tonne (white cement | 2739 vs. grey cement | 269 for FY14). Further, with doubling of white cement capacity, we expect blended margins to expand significantly from 13.0% in FY14 to 21.3% in FY16E.
• Given the upcoming new capacity from March 2014, we expect growth in profitability to remain healthy over the next two years. We expect expansion led revenue CAGR of 22.2% in FY14-16E. The stock is currently available at 5.4x FY16E EV/EBITDA and $67/tonne on FY16 capacity.
Cox & Kings
Cox & Kings (C&K) has done seven acquisitions in the past seven years
(including Holiday Break), which made C&K an integrated player globally with quality products and services. This series of acquisitions brought huge business volume on the book of C&K, on a consolidated basis. This, in turn, increased its bargaining power with vendors due to its large customer base and global presence. The overseas acquisition created value for C&K with healthy revenue growth (CAGR of 57% in FY07-14) and average operating margins (i.e. at ~39.3%) during the same period.
• C&K acquired a 100% stake in UK based HolidayBreak Plc (HBR) in FY12. We foresee HBR as a good long term strategic fit for C&K as it has provided synergistic opportunities in terms of geographic diversification, widening its product portfolio and offering cross-selling opportunities.
• The outlook for the domestic business is looking positive on an expected improved consumer sentiment and pick-up in corporate travel. Further, C&K should be a key beneficiary of any positive policy announcements (visa on arrival) given the new government’s thrust on tourism. Further a healthy order book for education division (+90%) of HBR provides strong growth visibility going ahead.
• The sale of the camping business for | 890 crore is likely to help C&K deleverage
its balance sheet significantly, going forward. On valuations, the stock is available at P/E of ~8x and 6x for FY15E and FY16E, respectively.
PVR Ltd
PVR is a behemoth in the movie exhibition space with an impressive ~25% market share of the total 1600 multiplex screens in the country having a tally of 421 screens (as on FY14). Cinemax acquisition and first mover advantage in most cities helped it command a 20-22% revenue share of Bollywood and 30-35% of Hollywood box office collection. PVR, thus, enjoys high bargaining power and is able to negotiate better terms with producers. We expect PVR to reach 109 & 119 properties and 481 & 537 screens by FY15E and FY16E, respectively
• Investment inflows in the movie production space would multiply with several movie studios namely Virgin Produced India, Fox Star Studio planning to step up investments in Bollywood. Higher investments & good content would prop up demand for movies and PVR would benefit from increased occupancies and hence rising average ticket prices (ATP). We expect ATPs to grow 7% to | 182 by FY16E. Moreover, as disposable income increases, F&B spends would rise to | 62 by FY16E from | 53 in FY14. Advertisement revenues are expected to grow at 14% CAGR in
FY14-16E to reach | 184 crore in FY16E, buoyed by increasing footfalls as PVR is able to provide undivided attention to advertisers
• Revenues & EBITDA are expected to grow at a CAGR of ~13.0% & 18.8%,
respectively, in FY14-16E. RoE & RoCE are expected to improve to 17.4% & 15.9% in FY16E from 14.0% & 12.4% in FY14, respectively.
Arvind Ltd
Arvind Ltd (Arvind), the flagship company of the Lalbhai group, is in the process of transformation from a textile company to a brands and retail company. Arvind is the preferred supplier to brands like Polo, Armani Exchange, Diesel and GAP among others. It is also present in the value retail segment through its Megamart stores. Its brand portfolio comprises Flying Machine, Arrow, Tommy Hilfiger, Lee, Wrangler, US Polo, Izod, Gant, New Port, Excalibur, Calvin Klein, Hanes, etc.
• Arvind’s revenues have grown at a CAGR of 18% during FY07-14. It envisages growing at 25% in FY15E. From being a pure-play textiles company, Arvind has gradually got transformed into a brands company and has over 28 brands in its kitty (both licensed and owned). As the share of brands and high-end denim wear has been on the rise, the company’s operating margin has improved from 10.9% (FY09) to 13.3% (FY14).
• The company is also making an effort to restructure the retail business and is gradually changing from a discount model to a value format. It has also changed the product profile and store size to optimise revenues. We expect this segment to contribute positively towards profitability
• Arvind’s return ratios have also improved over the years. Its RoE has improved from single digits to the 11-15% range during FY11-14. Improvement in the company’s profitability profile, return ratios and the transformation from a textile to a brands company warrant a re-rating.
Gail (India) Ltd
Gail (India) Ltd is India’s leading integrated natural gas company with a presence in transmission (75% share of volumes), gas trading, gas processing, LPG production & transmission, petrochemicals and oil & gas exploration & production (E&P)
• The core strength of Gail lies in its strong pipeline network, which will enable the company to tap the growing demand for natural gas in India. An increase in domestic gas supply from ONGC marginal fields, GSPC, KG basin, etc. and LNG capacity additions over the next three to four years will add 65-80 mmscmd of gas supply in India, auguring well for the gas transmission business. We expect gas transmission volumes of Gail to increase from 96.4 mmscmd in FY14 to 106.2 mmscmd for FY16E.
• Doubling of petrochemical capacity and reduction in subsidy burden borne by Gail’s LPG business would be the growth drivers for Gail. With the increase in capacity, we expect the share of the petchem business in Gail’s EBIT to increase from current levels of 22.7%. Also, Gail is likely to be excluded from the subsidy sharing mechanism, as per the recommendations of the Kirit Parikh Committee, when the expected gas price hike is implemented by the new government.
• Gail is currently trading at 11.1x FY16E EPS, a discount to its historical P/E ratio of 12.5x in the last five years. We believe Gail’s defensive business model of gas transmission, growing petro chemical business and reduction in subsidy burden would create value for investors.
DCB Bank
DCB earned its highest yearly profits of | 150 crore in FY14. It is in a turnaround phase. It had made significant losses of | 88 crore in FY09 & |79 crore in FY10 due to large unsecured exposure (29%, | 1176 crore) as on FY08. Post FY10, the credit monitoring is lot more stringent. Resultantly, its GNPA has declined from | 306 crore (GNPA ratio - 9.3%) in FY09 to | 138 crore (GNPA ratio - 1.7%) in FY14.
• The bank was in a consolidation phase during FY08-11 with credit book flat at ~| 4200 crore in FY08-11. Post FY11, it has almost doubled its book from | 4271 crore in FY11 to | 8140 crore in FY14. DCB has steadily shed its risky unsecured book, which now comprises <4% (| 300 crore) of loan book & is fully provided. In the past two years, 55% (| 1578.3 crore) of loan growth is contributed by mortgage (comprises 38.4%). As on FY14, Agri constituted 14.2%, SME– 16.6%, corporate- 25.7% & retail– 43.5%.
• Ahead, the bank is embarking on a branch expansion, which is estimated to rise to 185 by FY16E (from 130 now). The management has guided to double the bank’s balance sheet in three years. We estimate a credit book of | 12523 crore (| 8140 crore now) by FY16E implying 24% CAGR. NIM is expected to be maintained at 3.5%.
• DCB is well-placed in terms of capital adequacy (Tier I at 12.9%) & asset
quality compred to peers . Return ratios are decent with 1.3% RoA & 15% RoE. Being a private bank, it has the potential to command higher multiple in growth phase.
Happy Investing
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