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India Equity Research Reports, IPO and Stock News
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We have derived a fundamental EV/EBIT calculation to arrive at fair
equity value of T&D stocks under coverage. We call it the ‘M’ approach
(from the fictional character M in the James Bond series!). In our view,
the approach offers a fresh perspective to DCF, which is our preferred
valuation methodology.
Conclusions first. Fair price implied by using fundamental EV/EBIT
(calculated) implies downside to CMP for CG and ABB, and
equivalence for Siemens India. This outcome is in-line with our T&D
pecking order for investment. In our view the implied downside in CG
represents margin uncertainty (management downgraded guidance post
Jun-q by ~300bps), and weak growth in DM where CG has 30%
exposure. The implied downside in ABB lends further credence to our
view that inflated earnings multiples (52x fiscalized FY12 EPS) are a
function of historical premium enjoyed by the MNC, support from
buyback price (Rs900/share) and limited free float. Implied price
equivalence to market in the case of Siemens is in line with our view
that the company is likely to enjoy superior growth as compared to T&D
peers; order inflow growth has been strong.
Outlining the ‘M’ (=EV/EBIT) approach. We revisit basic textbook
equations for deriving M: (a) Gordon Growth formula: EV = FCF/
(WACC - g); (b) Definition of FCF = EBIT*(1-tax rate) + Depreciation -
Capex – ΔNWC; (c) another definition of FCF = EBIT* (1-reinvestment
rate)* (1-tax rate). Using these equations we have derived M. Details on
assumptions and definitions of variable have been provided inside the
report.
For the mathematically inclined. M equates to [(1-tax rate)*{1-
(ρ/EBIT*(1-tax rate))}]/(WACC - g). The derivation has been shown in
the report.
Investment view. We recommend a pair trade “buy Siemens, sell CG”
over the next three to six months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We have derived a fundamental EV/EBIT calculation to arrive at fair
equity value of T&D stocks under coverage. We call it the ‘M’ approach
(from the fictional character M in the James Bond series!). In our view,
the approach offers a fresh perspective to DCF, which is our preferred
valuation methodology.
Conclusions first. Fair price implied by using fundamental EV/EBIT
(calculated) implies downside to CMP for CG and ABB, and
equivalence for Siemens India. This outcome is in-line with our T&D
pecking order for investment. In our view the implied downside in CG
represents margin uncertainty (management downgraded guidance post
Jun-q by ~300bps), and weak growth in DM where CG has 30%
exposure. The implied downside in ABB lends further credence to our
view that inflated earnings multiples (52x fiscalized FY12 EPS) are a
function of historical premium enjoyed by the MNC, support from
buyback price (Rs900/share) and limited free float. Implied price
equivalence to market in the case of Siemens is in line with our view
that the company is likely to enjoy superior growth as compared to T&D
peers; order inflow growth has been strong.
Outlining the ‘M’ (=EV/EBIT) approach. We revisit basic textbook
equations for deriving M: (a) Gordon Growth formula: EV = FCF/
(WACC - g); (b) Definition of FCF = EBIT*(1-tax rate) + Depreciation -
Capex – ΔNWC; (c) another definition of FCF = EBIT* (1-reinvestment
rate)* (1-tax rate). Using these equations we have derived M. Details on
assumptions and definitions of variable have been provided inside the
report.
For the mathematically inclined. M equates to [(1-tax rate)*{1-
(ρ/EBIT*(1-tax rate))}]/(WACC - g). The derivation has been shown in
the report.
Investment view. We recommend a pair trade “buy Siemens, sell CG”
over the next three to six months.
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