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Retail Research | India

Date: 12th April 2010 MF Global Sector

Top Picks

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JBF INDUSTRIES CMP Rs 140 Target price Rs 214

• JBF was earlier mainly into production of POY & textile grade polyester chips, but due to

increasing competition from other companies, It has increased its POY capacity and acquired a

specialty yarn manufacturer in Gujarat and increased its yarn capacity, which has reduced its

dependency on polyester chips. Today only 45% of its revenues are coming from domestic textile

business.

• In 2007 it ventured into the middle east, the company is now increasing its production capacity of

PET grade Chips which are mainly used in packaging industry for bottle grade packing in FMCG

industry from 216000tpa to 400000tpa at RAK. It also plans to set up a 1.2mta plant of PTA which

is a major raw material for PET a backward integration.

• JBF has 90% mkt share in UAE and 60% in GCC, Govt. is not permitting other companies to set

PET plant in UAE. Global demand for PET chips is growing at 7.7% CAGR. Today the PET grade

chips business is contributing 50% revenues to consolidated business.

• We expect EPS of Rs 35.4 in FY11E and Rs 38.5, JBF has historically traded at 5-6x. Packaging

companies comparatively trade at 8-10x. We expect a price target of Rs214 discounting one year

forward average earning of Rs35.6 by 6x.

Source: MF Global PCG Research, Industry, Company

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SUNIL HITECH CMP Rs 247 Target price Rs 300

• The company has over 20 years of experience in fabrication, erection, testing and commissioning of

thermal power plants up to 660 mw and steel projects.

• Its client base consists of BHEL, NTPC, RELIANCE ENERDY, JINDAL STEEL & POWER, TATA AND

MSEB, CHATTISGARH SEB, and MPEB and TNSEB. The company is expected to benefit from the

ongoing investments in the power and the industrial sector.

• The anticipation of 32600 mw of thermal power capacity addition in the 11th 5 year plan will provide

good opportunities to Sunil Hi-tech in EPC and BoP Space. The company ahs executed EPC job for

integrated a sugar complex bagged in July 2007. Based on the success of this EPC job the company is now in a position to execute industrial and process EPC projects.

• The company has a healthy order book of Rs 20.6bn, 2.8X FY10E revenue of Rs 7,413 mn. This would

help the top line to grow by 24.4% CAGR in FY 10-12E. The company has gone for backward integration and set up SHEM Industries in Nov 2006 to manufacture pressure parts used by Power plants.

• Based on the strong order book and opportunity size the net sales is expected to grow by 24.4% CAGR and net profit by 31.5% CAGR over FY10-12E. We expect the EPS to grow by 36.1% in FY 11E and by

27.1% in FY12E. It has attractive on 4.4x and 3.8x EV/EBIDTA basis also. Based on Rs 37.5 avg EPS of FY11-12E we expect stock price of Rs 300, the stock can provide an upside of 22% from the current

levels.

Source: MF Global PCG Research, Industry, Company

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TILAKNAGAR INDUSTRIES CMP Rs 170 Target price Rs 227

• The company has been present in the alcoholic industry since more than 3 decades. Over the past

couple of years the company has changed its track and is now focusing on its growth strategy. The

industry is looking positive and TIL is looking to grow faster than the industry giving good returns to the

investors.

• TIL have products in all IMFL segments with almost 32 brands in the portfolio. Even though the

company started with semi premium brands, over the years it has shifted to premium brands which

constitute about 80% of its revenues.

• The growing population and increasing income is creating the demand for IMFL among the youngsters.

This is a key to TIL as it produces IMFL and also the industry is growing at 9-10% CAGR. Over 100mn

customers are expected to be added over the next 5 years.

• TIL also has the grain based facility to manufacture ENA (Extra Neutral Alcohol) commissioned in Dec

2009 which has a subsidy of Rs 250mn from the Maharashtra Government. The company has reduced

the dependence on outsourced bottling capacity from 70 % to 45%. It also has plans to expand the

bottling capacity in its subsidiary Prag.

• Based on 10x avg FY11-12E EPS of Rs22.7 we expect stock price of Rs 227, the stock can provide an

upside of 35% from the current levels.

Source: MF Global PCG Research, Industry, Company

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PARENTAL DRUGS CMP Rs 218 Target price Rs 328

– The company was established in 1983 engaged in the manufacturing of intravenous fluids. Today

its products include intravenous transfusions, tablets, capsules, liquid syrups and injections.

– It commenced with the polypropylene bottles (instead of glass bottles) for the first time in India. And commands 50% domestic market share on the institutional front in IV fluids. The company has a capacity of producing 1.2mn bottles/day. It has also received approval from the DCGI to manufacture IV fluids with Paracetamol and has diversified its operations to focus on formulations and oncology.

– The company got registered with United Nations Offices for Project Services (UNOPS) that provides aids to developing and poorer nations of the world. The company maintains a strong order pipeline of Rs 300mn for FY11E and Rs 700-800mn for FY12E from UNOPS which offer better margins also.

– It has set up joint ventures in Mauritius, Nairobi and Kazakhstan for the manufacture of IV fluids. PDCL ha tied up with Jawaharlal Nehru University for R& D of DNA based anti-rabies vaccine and will be launched in 6-8 months. We expect these efforts to enable a 25-30% growth to the company over next couple of years.

– The margins are expected to grow from 14.8% in FY09 to 17% in FY 12E. At CMP of Rs 213 the stock is trading at FY11E and FY12E earnings of 7.8x and 5.3x respectively. With expected EPS of Rs41 we expect a price target of Rs 328, indicating a 54 % increase is expected from the current price levels.

Source: MF Global PCG Research, Industry, Company

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CEAT CMP Rs 160 Target price Rs 216

• CEAT, a part of the RPG group is one of India’s leading tyre manufacturers. The company manufactures 7.2mn tyres overall. It has a strong brand equity and is well entrenched in both domestic and international markets. The company has global footprint and exports to over 110 countries. Its products have a global acceptance.

• Over the past 3-4 years there has been a high capacity utilization of about 90%. It implies either very strong demand or constraints on the supply side both of which should push the product prices upwards. Price revision has been made by most of the companies; this will help in reducing the threat of RM pricing pressure in future.

• The company has expanded capacity by 130 TPD at green field CV’s radial tyre facility at Halol and brown field expansion of 30TPD at Nasik is expected to be commissioned by Q2FY11. It ahs recently procured a 50 acre land at Ambarnath, Thane, Maharashtra and would shift its existing facility from Bhandup to this location.

• The company’s existing plant at Bhandup is 40years old and inefficient which results in almost 300bps lower margins as compared to the industry. This plant also has Octroi duty which negatively impacts its profitability by another 100-150bps as compared to its peers. The switch to new plant will increase its efficiency and margins bringing it in line with its peers.

• At present CEAT is available at attractive price of Rs 163 trading at 4.3x of avg. of FY11E-12E earnings and FY12E EV/EBITA of 3.7x. We expect an earning of Rs for38 FY11-FY12, at median PER of 6x we expect price target of Rs 216 giving an upside of 33% from the current levels.

Source: MF Global PCG Research, Company

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PRATIBHA INDUSTRIES CMP Rs 405 Target price Rs 484

• PIL is one of the industry leaders in water infrastructure and management. The company desires to diversify itself and

play a major role in full fledged infrastructure development with presence across water management, urban

infrastructure, tunneling, and oil & gas etc. segments.

• The central govt. has launched the JNNURM (Jawaharlal Nehru National Urban Renewal Mission) which contributes 40-

45% of the total order book. In this scheme public private participation for urban infrastructure development has been

encouraged. Its allocation has increased by 25.2% in budget 2008 and by 87.7% in 2009.

• Due to strong replacement demand of the century old urban water system, water supply and sanitation business is

expected to grow to over Rs 1400bn. from. Also new sanitation systems are to be provided in the rural areas. PIL is the

only company with backward integration of saw pipe division which gives higher margins.

• The company has partnered with other companies which has expertise in their respective fields to gain technological

knowledge and operating efficiencies in order to overcome its weakness and to compete in consciously ventured new

segments i.e. building & modernization of airports, tunneling, construction of high rises, shopping malls, development of

urban infra.

• PIL is pursuing two major airport project Amritsar and Ahmadabad airport, two tunnel projects for Mumbai Municipal

Corporation and has taken initiatives in tunneling, Car Park, Oil and Gas EPC.

• Due to this PIL has created a strong order book of Rs 35,372mn, 3.4X FY10E revenue of Rs 10,279 mn and has

submitted bids worth Rs 30 bn. Its net sales of PIL are expected to grow by CAGR of 53.3% over FY10-12E and PAT

will increase by 43.2% on consolidated basis. Historically the stock has traded at 10-15x but presently it is trading at

5.9x and 5x. Based on 10x avg. EPS of FY11-12E we maintain buy with the price target of Rs 484 i.e. 29% increase

from the current levels.

Source: MF Global PCG Research, Company

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