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Brokerage Recommendations

Friday, December 21, 2012

Nirmal Bang calls a ‘Buy’ on Marico
CMP: Rs. 220  Target Rs. 260

We believe multiple positive levers will play out for Marico over the next three years like: 1) Benefit of correction in key raw material copra‟s price (down 35% YoY), 2) Improved profitability in international and Kaya businesses (31% of revenue), and 3) Re-investment of a part of gross margin expansion into spending on advertising to spur the launch of new products. Further, the company has managed to gain market share of 500bps-700bps since FY10 in domestic business (69% of revenue), helping it to grow faster than the market.  All this would lead to a 26% earnings CAGR over FY12- FY15E, in our view, the highest among its peers. We have assigned a Buy rating to Marico with a target price of Rs260, at 26x FY15E EPS. Strong market position in domestic business: Marico has gained market share (volume) by 500bps-700bps in Parachute hair oil, Saffola edible oil, and Value added hair oils since FY10. This has helped it to grow faster than the market in the current challenging economic environment and also aided in combating the 100% rise in copra prices over March 2010 to March 2011 without denting the profitability of its Parachute hair oil in absolute terms.

Valuation: We like Marico’s strategy of achieving growth through organic as well as inorganic routes. Further, it is heartening to see that the quality of earnings has been maintained through consistent volume despite price hikes by the company, indicating higher pricing power. We expect Marico to further increase its market share in Parachute (conversion from loose oil products), Saffola (gain market share from key competitor Sundrop and unbranded edible oils) and Value added hair oils (by offering more products in the sub-segment and higher brand investment). This is likely to result in 26% earnings CAGR over FY12-FY15E, the highest among its peers.

At the CMP, Marico trades at 27.6x and 22.1x P/E based on FY14E/FY15E earnings, respectively. We expect the current valuation to sustain given the company’s likely strong earnings CAGR of 26% over FY12-FY15E as against 16% earnings CAGR over FY09-FY12. We have assigned a Buy rating to the stock with a target price of Rs260, valuing it at 26x FY15E earnings, in line with its three-year average one-year forward rolling P/E multiple.

GEPL Capital calls a ‘Buy’ on Hindalco
CMP: Rs. 133  Target Rs. 160

Investment Rationale Better than expected results reported by Novelis in Q2FY13: Though Novelis reported a decline in volumes and realization in Q2FY13, the decline was much lower than expected. Shipments for the quarter declined marginally Y-o-Y to 0.754 mn tons and was in-fact marginally up around 1% q-o-q. Except Europe, there was recovery in volumes in all other geographies such as Asia and South America.  The major reason for increase in volumes was demand uptick in automotive sector and beverage cans. Novelis continued sequential (q-o-q) improvement in adjusted EBITDA/ton even in Q2FY13 by 6% to US$367 per ton.

Return ratios to improve: With the ongoing expansion plans, we estimate Hindalco to record EBITDA CAGR of around 16% over FY12-14E as the Utkal, Mahan and Aditya Aluminium projects get commissioned. However, we expect its balance sheet to continue to remain highly leveraged as we estimate its capex to remain at around Rs80 bn per year for the next 2 years. We expect RoCE at 11.8% in FY14E from 7.2% in FY12.

Outlook and Valuation: In last one year, Hindalco has significantly underperformed the benchmark indices for numerous reasons like project delays. After getting done with legal hurdles and putting projects back on track we believe that recovery would continue going ahead and better performance from Novelis will act as a catalyst for further improvement in FY14.  We recommend a BUY rating on the stock with target price of Rs160. At our target of Rs 160, the exit EV/EBITDA comes at 5.6x, which is lower than other international players where the average EV/EBITDA multiple stands at 6.5x.

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