Buy Piramal Glass Q3FY11 Result Update; Both Fire & Ice; Target: Rs 160 :: Emkay

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Piramal Glass

Both Fire & Ice, Maintain BUY

BUY

CMP: Rs 109                                       Target Price: Rs 160

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n     Piramal Glass (PGL) Q3FY11 performance buoyed by product mix and operating leverage - revenue growth at 10.7% yoy to Rs3.2 bn and APAT doubles yoy to Rs231 mn

n     Tweaked near-term business strategy – future cashflow earmarked for debt repayment would be diverted to capacity expansion – investing Rs1.0 bn for 160 tpd furnace

n     Strong 9MFY11 performance- aligning FY11E estimates – FY11E earnings revised 7.7% to Rs9.9/Share and retained FY12E earnings of Rs18.8/Share

n     Risk from leveraged balance sheet remains, But valuations attractive – FY12E EV/Ebidta at 4.2X - Maintain BUY with target price of Rs160/Share

Q3FY11 performance surpasses expectation- driven by operational gains

and better product mix

Q3FY11 performance beats expectations, showcases gains from operating leverage

and richer product mix. Key highlights of Q3FY11 results (1) revenue growth 10.7% yoy

to Rs3.2 bn (2) Ebidta growth of 24.9% yoy to Rs0.78 bn and (3) APAT growth of

104.7% yoy to Rs231 mn. Ebidta margins gained 280 bps yoy to 24.6%, strongest

margins for last 25 quarter. Also, FY11E is gunning for exit margins of 23-25%, which is

extremely comforting for Ebidta margin assumption of 27% for FY12E.

C&P glass continues traction & Pharma continues to loose grip

Until 9MFY11, PGL has achieved said targets of (1) product mix and (2) business

structuring. Its focus on C&P glass has yielded desired results – C&P glass grew 27.0%

yoy to Rs3.5 whereas, Pharma glass was flat yoy to Rs2.5 bn in 9MFY11 period. C&P

glass generates 50% of total revenues, gain of 10% on yoy basis. These gains have

registered against decline in contribution from F&B glass and Pharma glass. PGL also

re-structured its manufacturing capacities, by closure of high-cost US furnaces and relocation

of manufacturing to Indian location.

Announces capex of Rs1.0 bn for 160 tpd brownfield furnace

PGL has tweaked its near-term business strategy to gain from buoyant business

environment and operational leverage in business. Erstwhile strategy articulated by

company contained ceiling on capacity expansion and repayment of debt for next 2

years. Instead, PGL will incur capex of Rs1.0 bn to add 160 tpd furnaces in India

dedicated for Mass C&P glass. The capex will be incurred in January-October 2011

period with 3 months production benefit for FY12E.

Upgrade FY11E earnings by 7.7%, but retain FY12E earnings

With strong operating performance in Q3FY11 and 9MFY11, we align our earnings

estimates to factor the positive surprises. Revision to FY11E estimates are as follows (1)

revenues upgraded by 0.5% to Rs12.2 bn (2) Ebidta margins revised by 110 bps and (3)

APAT upgraded by 7.7% to Rs793 mn. Our revised earnings are Rs9.9/Share versus

Rs9.1/Share earlier. We have retained our FY12E earnings at Rs18.8/Share.

Maintain ‘BUY’ rating with revised target price of Rs160/Share

PGL has successfully implemented said strategy - increasing share of C&P glass and

lowering share of Pharma glass in revenue mix. So far, progress is satisfactory excepting

one significant change – future cashflow earmarked for debt repayment will instead be

earmarked for capacity expansion. This would bring risk from leveraged balance sheet for

next 2 years to fore; also increase risk of equity dilution. But, current valuations are

extremely attractive – EV/Ebidta of 4.2X FY12E Ebidta- which is at discount to average

valuations of domestic and international players. We maintain BUY rating with target price

of Rs160/Share.