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Wednesday, August 22, 2012

Nomura calls a ‘Buy’ on HDIL
CMP: Rs. 83  Target Rs. 235

Company earnings for 1QFY13 disappointed on the top and bottom lines, as PAT at INR 1.05 bn was 40% and 30% lower than our and the Street’s estimates, respectively. With the Street currently focused on the company’s cash flow generation rather than P&L, there was disappointment with operating cash flow generation, due to lower FSI sales and lower sales across ongoing residential projects. The management, though, seemed hopeful for improvement in cash flow visibility, noting significant improvement in the on-ground situation in Mumbai’s real estate market. In our view, monetisation of its commercial asset in Andheri (W) along with FSI sales in Virar-Vasai region remains key to the de-leveraging of the balance sheet and the performance of the stock. We are reviewing our target price.

Key takeaways from conference call: Management sounded positive on the analysts’ conference call, seeing improvement in the on-ground situation in Mumbai.

They noted that after a gap of more than one year, the situation around project approvals has improved and that consequently new launches are likely to gain momentum. Moreover, there are visible signs of easing liquidity, reflected in the higher activity in land market, as well as FSI demand from the developers.

After having recognised almost 90% of revenues on FSI sales in Andheri & Goregaon by 4QFY12 and with TDR inventory of only 0.1- 0.15mn sq ft left for sale, the company’s revenue in upcoming quarters should be largely driven by 1) targeted FSI sales in Virar & Vasai region, and 2) completion of its four under-construction projects – namely, Premiere, Virar Residency, Virar Industrial Park & Galaxy.

As per the management, with improvement in the on-ground situation in the real estate market in Mumbai, it 1) is targeting FSI sales of 1- 1.5mn sq ft per quarter from Virar and Vasai region and 2) has plans for new residential project launches in Pantnagar in (Ghatkopar), Shahad, and 40mn sq ft township in Virar, on the outskirts of Mumbai.

Valuation Methodology: We value HDIL using our net asset value estimate of its current saleable area at INR 235 per share, without any discount/premium to NAV, and with cost of equity at 15%.

LKP calls a ‘Buy’ on DFM Foods
CMP: Rs. 255  Target Rs. 360

DFM Foods is a packaged snack food company which derives more than 85% of its Rs 170cr revenues from a single snack product-CRAX, a non fried brand of corn rings made out of corn grits. A 13.5% EBIDTA business with a very strong brand equity in North India operating out of its Ghaziabad facility made strong inroads into Western India last fiscal as capacity constriants got addressed with the commissioning of its second unit at Noida in November 2011.

The story ahead…: The 10,000 MT snack food facility at Noida put up at a cost of Rs70crs virtually triples capacity and we expect revenues to grow at 35% this fiscal and the next as the company makes its foray into Eastern India in Q2 this fiscal buoyed by the encouraging response received for the product in Western India. Despite increase in RMC, power costs, wage cost and finance costs, we believe DFM can sustain a 13% EBIDTA on our projected revenues of Rs 230crs and net profit of Rs 14crs this fiscal. The Crax brand basically operates in two price points of Rs 5 and Rs 10 per pack while the Natkhat brand of wheat puffs operate even at lower price points. DFM has over a dozen products in the Namkeen category which retail at a higher price point. The rationale for the low price point in Crax is the fact that the brand is primarily targeted at kids below the age of 10 which is reflected in the marketing strategies like free gifts inside the packs and brand promotion in cartoon channels of media. Our channel checks with trade and distributors suggest significant traction for the product in Western India too which clearly reflects on the potential of this regional brand towards becoming a Pan-India brand.

Q1 is prima facie a weak quarter and revenues pick up from Q2 onwards as kids get back to school after the vacation. DFM is now gaining distribution strength and is now present in close to 1.5lac retail outlets in India. We forecast DFM to grow its revenues and net profits at 35% during FY’13-14 and the stock trading at 12xFY’13-14E earnings of Rs 19 can be accumulated by investors having the appetite for taking risks as DFM is an SME with a single product operating in snack foods and competing with large players with multiple products and deep pockets. We recommend BUY on DFM Foods with a one year price target of Rs 360. Liquidity in the stock could be an issue as promoters own 69% of its equity which is listed only on the BSE

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