02 September 2014

Phoenix Lamps -Management Meet :: ICICI Sec

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India OEM dominance + profitable export
We recently met the management of Phoenix Lamps (PHL) to understand
PHL’s strategy on the path ahead for the company in the automotive
lighting business. PHL is India’s largest automotive halogen lighting
manufacturer with healthy market shares: 55% - passenger vehicles, 70-
80% all other segments like two-wheelers, commercial vehicles. The
company has 11 manufacturing lines with total capacity of 87 million
bulbs. PHL has a professional management as the largest investment
stake (~71%) is held by private equity player Actis. In terms of revenues,
the India business share is ~50% while balance is exports. The India
business has large OEM share of ~65% while balance is aftermarket &
white good sales. The company has overall capacity utilisation at ~70%.
Of this, 2-W is at ~90%, other domestic segments at ~60% with exports
at ~70% utilisation. PHL is working on increasing capacity intercompatibility
between H4, HS1 (4-W, 2W) capacity. On the financials
front, the management expects a consistent EBITDA performance of ~20-
25% coupled with RoCEs >40% with improving dividend payouts.
India OEM proxy with strong tie-ups!
Phoenix Lamps is the most dominant player in the domestic OEM
halogen lighting business. It has direct relationships with major OEMs like
Maruti Suzuki, Honda Motors, Hero MotoCorp, etc. with market shares
between 60% and 80% across various clients and categories. The second
major competitor remains Philips, which primarily imports bulbs for
supplying products to OEMs and, thus, remains ~30-40% more
expensive than PHL. This provides PHL with a significant pricing
advantage vis-à-vis its closest competitor & improves pricing negotiation
ability with OEMs. This aids PHL in maintaining similar margins in both
OEM and aftermarket sales in the domestic market on the EBITDA front.
Export business good cash cow
PHL’s exports markets comprise Europe, Central Asia and Latin America,
primarily in the aftermarket division. The company has two brands in
exports markets, namely Trifa and Luxlite. PHL has been gaining market
share in export markets in the last few years and continues to do so by
seeding newer geographies. The contribution margin remains at ~40-
43% in export markets while customers range from Hela, Valeo and
Magnetti Marelli to big retail store chains like Aldi.
Post demerger, financials look solid while valuations remain comfortable
PHL has undergone de-merger of its loss making division in FY14, leading
to the real automotive division’s strengths getting highlighted. On an
annualised basis, it has reported automotive financials of ~| 250 crore
sales coupled with 25% EBITDA margins, 47% RoCE for FY14 and is
available at a trailing EV/EBITDA multiple of ~6.2x with limited debt.



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Kostak, GPM for Sharda Cropchem IPO strategy; INVEST!!

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Sharda Cropchem

Price band:  145-156
Grey Market Premium (GMP) Rs 40-42

To maximize profit, Go for minimum size application of 90 shares  (1 lot) for Rs 14,040/-

Kostak Rs 650-700 for minimum application (1 lot)

Expected to be oversubscribe at least 30x


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Cement Sector Update :: ICICI Securities

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Monsoon effect seen in prices; decline MoM
Average cement prices decline in August
All-India cement prices declined on a month on month (MoM) basis.
Average prices were reported at | 312/bag during August from | 323/bag in
July. After defying monsoon pressure during the previous month, prices
finally declined during August due to lower demand on account of the
monsoon season.
Monsoon impact leads to decline in prices
Overall cement prices in India declined MoM. The lowest decline was seen
in central and southern regions. The decline in prices is on expected lines
due to monsoons. Average prices in the central region declined by | 4 /bag
on an MoM basis to | 301/bag during August with a major decline in
Ghaziabad and Indore where prices declined by | 6/bag and | 5/bag,
respectively. In the southern region, the average decline in prices was by
| 5/bag with a decline of | 10-12/bag in Bangalore, Chennai and Kochi while
Hyderabad saw a defiant trend with a price increase of | 11/bag. In the
western region, prices in Gujarat declined by almost ~| 30/bag while
Maharashtra also faced a price correction of | 6/bag to | 13/bag. With this,
the average decline in the western region remained at | 16/bag with a price
of | 325/bag. Northern and eastern regions registered a price decline of
| 15/bag each MoM. Average price in the northern region stayed at
| 284/bag post correction with highest decline in Jalandhar and Gurgaon. In
the eastern region, average prices remained at | 317/bag with price decline
in the range of | 9/bag to | 17/bag in various regions. Overall, August 2014
witnessed demand pressure after registering an improvement in demand
during Q1FY15 (with average YoY production growth of 9.67%) due to the
monsoon season. However, we expect demand to improve along with an
increase in prices once monsoon season ends.
Large caps trading at premium to current replacement costs
Large cap stocks like Ambuja, UltraTech and Shree Cement have now
reached their fair valuations after a sharp rally in the previous three months
due to favourable election outcome. However, the midcap space has still
potential for further upside from current levels. In the midcap space, we like
the business fundamentals of JK Cement (doubling white cement capacity),
JK Lakshmi Cement (strong presence in north) and Heidelberg (operating
leverage and cost efficiency measures). In small caps, we still like
Mangalam Cement after a sharp rally due to its attractive valuations.



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Bajaj Electricals :: ICICI Securities

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Major order inflow in E&P segment…
Bajaj Electricals’ engineering & project (E&P) division has bagged four
orders of | 602 crore under the TLT and special projects categories. New
order inflows consist of | 66 crore from transmission lines in Tamil Nadu
& West Bengal from Power Grid Corporation of India (PGCIL) and West
Bengal State Electricity Transmission Company. Also, | 535 crore is from
special projects includes rural electrification (under RGGVY XIIth Plan)
works at Bihar from north and south Bihar power distribution company.
The current order book size stands at | 2800 crore. The E&P segment
witnessed 13% YoY revenue growth during Q1FY15 as the company has
largely focused on maintaining the margin. The EBIT loss narrowed down
substantially QoQ from | 26 crore to ~| 6 crore in Q1FY15. The EBIT also
includes incremental depreciation charges of | 2 crore due to a change in
the depreciation policy.
Consumption story to remain intact
The core business of BEL (CD, lighting contributes ~70% to topline)
recorded a subdued FY14 performance. Given the GDP growth in FY14
slowed down to 4.7%, urban and rural income levels were negatively
impacted. This, in turn, resulted in dismal segment revenue growth of
~5%, ~8% YoY, respectively, with muted offtake of kitchen appliances,
fans and luminaries. However, under the appliances category, BEL’s
premium brand Morphy Richards (MR) recorded sales growth of 11%
YoY to | 190 crore in FY14. BEL plans to revamp its MR product portfolio
with new models in the premium segment in steam irons, mixers, food
processors, induction cookers, instant water heaters and dry irons.
However, BEL is facing stiff competition from LED lighting manufacturers
as CFL is losing ground to LED products. Still, segment revenue would be
driven by the luminaries segment. We expect the CD & lighting segment
revenue to witness CAGR of 17%, 10%, respectively, in 2014-16E.
Execution of higher margin projects to drive overall margin
BEL’s E&P segment remained a laggard over last two years at the EBIT
level, despite sales CAGR of ~18% during FY12-14, largely due to sharp
cost overruns on legacy projects. During FY14, the company completed
40 legacy sites, which were loss making and recorded a loss of | 103
crore. However, the company turned cautious and focused on bidding
only on higher margin projects to improve profitability. We believe new
orders would flow in the P&L from FY16 onwards. With a completion
period of 24 months, the major part of revenue would flow in FY17E.
However, continuous order inflow improved the visibility of revenue
booking from the E&P segment. We believe BEL will benefit from the
government’s thrust to improve power infrastructure in India. We expect
E&P segment to record ~22% sales CAGR in FY14-16E with positive EBIT
of | 54 crore and | 86 crore in FY15E and FY16E, respectively.
Consumer business to drive rating
With an expected turnaround in the E&P business from FY15E onwards
and continued dominance in the lighting & CD business, we expect BEL to
generate EBITDA of | 315 crore in FY15E and | 430 crore in FY16E. We
believe the stock is trading at attractive multiples considering the
turnaround in the E&P segment. We have valued the CD, lighting and E&P
business at 12x, 6x and 6x FY16E EBITDA, respectively, to arrive at a
target price of | 416/share with a BUY recommendation.


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ITC Limited :: ICICI Securities

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Ready to ‘milk’ opportunity in dairy…
ITC is set to foray into the dairy segment with value-added products like
ghee and milk powder being be the preliminary offerings. The launch of
ghee would be pan-India but powdered milk would be initially used inhouse
by the company for its other FMCG products. The company plans
to set up six plants across the country for its dairy business namely in
Bihar (first plant to be commissioned in Munger), Uttar Pradesh, Punjab
(in Kapurthala), Maharashtra, Andhra Pradesh and Telangana. ITC’s
constant extension into new FMCG segments over the years has been led
by the company’s intention to reduce its dependence on cigarettes
(facing extensive tax and government regulations hampering volume
growth in cigarettes). ITC’s revenues from the FMCG segment have
grown at 21.9% CAGR in FY09-14 with losses declining from | 483.5 crore
in FY09 to meagre profits of | 21.8 crore in FY14. We believe that though
profitability from the FMCG segment would be gradual, the company’s
strong distribution and sourcing network would aid in building a strong
presence across the segments in which it enters.
Dairy opportunity in India
India is the largest milk producing country in the world producing ~132
million tonnes (MT) of milk (FY13) with only ~20% being organised and
~80% coming under the unorganised sector. Of the 20% organised,
~14% milk is processed and sold in liquid form while only ~6% is
processed into value-added products. Within the unorganised segment,
~40% is consumed and sold in rural India itself with ~17% sold in urban
areas while ~23% is processed into traditional value-added forms.
However, a visible shift is taking place towards the organised segment,
although gradually, where companies like Amul, Nestlé, Britannia and
Danone are increasingly growing their presence to tap the huge
opportunity. Hence, we believe there lies a huge opportunity for ITC by
capitalising on its strong backward integration network with farmers
(through e-choupal initiative) and an extensively established distribution
network of cigarettes to tap this opportunity.
Innovation, new launches across businesses
ITC has also developed a new packaging solution for consumer goods
involving the package itself to turn into a retail shelf, thereby reducing the
retailer’s investment on shelves. The package is known as ‘shelf-ready
packing’. This packaging trend is already widely prevalent in developed
markets and is soon expected to be rolled out in India by ITC through its
packaging business (ITC’s paperboard and packaging business revenue
was | 5166 crore in FY14). Further, within the hotels business (revenues
of | 1132.9 crore in FY14) ITC is expected to launch its first five-star
leisure retreat ‘ITC Grand Bharat’ on October 1, 2014 at Manesar,
Gurgaon. Hence, ITC has been taking steps to expand revenues across all
its businesses to gradually reduce its dependency on cigarettes (~57% of
revenues ~84% contribution to EBIT in FY14).
Strengthening presence across businesses, earnings need to catch up!
We believe that though ITC is actively increasing its presence and
innovating across segments other than cigarettes, contribution to
profitability from these segments still needs to strengthen. With ~84% of
earnings still from cigarette segment, which is facing increased
challenges from the government to reduce consumption in the country,
we remain cautious on the earnings visibility from cigarettes. Hence, we
maintain our target price of | 387 on the stock and assign a HOLD rating.


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Astra Microwave Products :: ICICI Securities

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Niche player in sunrise sector…
We recently met the CFO of Astra Microwave Products (AMP), Mr S
Gurunatha Reddy, to understand the business model of the company.
AMP is a leading player in designing, developing & manufacturing of subsystems
for radio frequency (RF) & microwave systems used in defence,
space, meteorology & telecommunication. The company was founded in
1991 by three Defence Research & Development Organisation (DRDO)
scientists - B Malla Reddy, PA Chitrakar and C Prameelamma. They still
continue to manage AMP. In the defence segment, the company’s
products include subsystems for radars, command guidance unit and
radio proximity fuse for missiles & other electronic counter measure
warfare products. The company’s products find applications in other
segments like space (microwave & ground based systems for satellites),
telecom (repeaters, jammers, antennas) & meteorology (automatic rain
gauge systems, automatic weather systems). Revenues for FY14 stood at
| 531.2 crore, with major concentration in the defence segment, which
forms ~90% of total revenues (export-63% domestic-26%). AMP’s major
customers in the domestic segment are Bharat Electronics, Bharat
Dynamics, DRDO and ISRO. With the increase in FDI cap in defence from
26% to 49%, opportunity for more export orders under offset policy and
expected step up in spending on defence capex by the new government,
the company is poised for an exciting growth journey ahead.
High entry barrier business
The business model of AMP is characterised by high gestation periods
and lumpy orders. A company involved in this business has to pass
through a stringent & long approval process before starting commercial
production for defence PSUs like Bharat Electronics & Bharat Dynamics.
Given the experience & technological expertise accumulated over the past
two decades, AMP is way ahead of its competitors, which are smaller in
size and currently going though their R&D phase of the approval process.
Beneficiary of improved industry environment
In recent years, AMP has been one of the major beneficiaries of the
defence offset provision, under which for all defence equipment imports
of value above | 300 crore, the foreign company has to source at least
30% inputs from Indian suppliers. This offset provision led to export
orders forming ~47% of the company’s outstanding order book, which
currently stands at | 850 crore. On the domestic front, AMP will benefit
from India’s missile programme, where the Akash missile (5000 missiles
to be produced over a five to eight year period) is in the commercial
production phase while Astra is in the design phase.

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BUY Page Ind :: ICICI Securities

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Consistent performance calls for upgrade!
• Page Industries’ (Page) Q1FY15 revenues were marginally lower than
our estimate. A superior operational performance led to in-line PAT
• Revenues increased 24.4% YoY to | 378.3 crore (I-direct estimate:
| 393.3 crore) led by 9.0% volume growth (30.5 million pieces) and
14.2% realisation growth (| 124/piece). Strong growth in the
brassiere and leisure segment aided this performance
• Owing to lower-than-expected selling and advertising expenses and
also relatively lower raw material costs, the operating margin at
20.0% (up 100 bps YoY) was higher than our estimate of 17.9%
• Consequently, PAT at | 54.3 crore (up 26.0% YoY) was in line with
our estimate of | 53.8 crore
Healthy volume growth continues
During FY10-14, volumes have grown at a CAGR of 19.8%. Page has
achieved this on the back of aggressive capacity addition, which has
increased from 2.2 crore pieces in FY07 to 16.3 crore pieces in FY14. We
expect the company to continue the volume growth trajectory at a CAGR
of ~16% led by capacity addition. We expect the total capacity to touch
28 crore pieces by FY17E. We believe that with the launch of newer SKUs,
volume growth should not be a concern for Page.
Rising costs to be passed on
Page is cushioned from rising input costs as it takes price hikes to the
tune of 5-10% per annum, which enables it to maintain operating
margins. The company is confident of maintaining its operating margin
around 20%. Though the operating margin has increased to 21.4% in
FY14 (owing to removal of excise duty), we expect it to stabilise at 21.0%
by FY17E.
Favourable demographics, low penetration to boost growth
The Indian innerwear segment valued at $4 billion is expected to grow at
12% CAGR over the next decade. Page has consistently grown well
above the industry average. We expect the same to continue as India’s
per capita spend on innerwear is ~90% lower than that of Thailand and
China. The market has been growing faster than the overall clothing
market, driven by premiumisation. With discretionary consumer spend in
India continuing to grow, these trends should persist, aided by rising
urbanisation and growth in consumer incomes.
Marginal increase in estimates owing to better operational performance
We have upgraded our FY15E, FY16E operating margin estimates by 38
bps, 48 bps, respectively, led by a better-than-expected operational
performance in Q1FY15. While no price hikes have been taken in Q1FY15,
the company is likely to take price hikes in H2FY15E. This should also aid
in cushioning margins. Consequently, our earnings estimates for FY15E,
FY16E have been revised upwards by 0.7, 1.4%, respectively. We
introduce our FY17E EPS of | 288.7.
Consistent growth with healthy fundamentals; upgrade to BUY
Many consumer oriented companies that have delivered consistent
growth are trading at premium multiples. Similarly, we believe Page
should also command a premium considering its strong fundamentals
and consistent dividend payouts. Page has been able to grow consistently
while many of its peers are struggling to grow. We, thereby, upgrade
Page Industries to BUY with a revised target price of | 8660 (based on 30x
FY17E EPS of | 288.7).



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