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To benefit from revival in investment cycle
↓ Continuous investment in fleet expansion and a likely pick up in the
investment cycle on account of peaking out of interest rates may augur
well for SGM’s business momentum. We estimate the company to
report revenue and PAT CAGR of 9% and 7%, respectively, over FY12f‐
FY14f. This implied growth is based on a cut of up to 20% in earnings
and factors in flat yields and lower capex of INR3bn over FY12f‐FY14f.
We arrive at a Dec12 fair value range of INR118‐INR130 based on a
one‐year forward P/E range of 5.0x‐5.5x, which is at a discount to the
average P/E of 7.4x since Jan09. The potential upside stands at 48%.
Potential upside of 48% over the next 12‐month period
Our Dec12 fair value range has a potential upside of 48%. Our fair value range
assumes a one‐year forward P/E range of 5.0x‐5.5x, which is lower than the
average P/E of 7.4x since Jan09. If the P/E reverts to its three‐year mean, led by
a revival in the investment cycle, then the potential upside can be c100%.
Weak macro environment led to underperformance
A weak macro environment and rising competition in the domestic market
have raised concerns on growth prospects over the medium term. Also, weak
2QFY12 numbers due to certain one‐offs had a bearing on stock performance.
In the worst case, yields and capex may taper off from current levels
The potential upside is likely to reduce to 24%, assuming the macro
environment remains challenging for an extended period and is likely to lead to
cancellation of fleet expansion plans. Yields are also likely to witness slight
moderation, given the competition and rising asset base in FY12f. Monthly
yields are assumed to be at a five‐year low at 2.2%. The improvement in free
cash flow (c45% of sales) over FY13f‐FY14f ‐ on account of reduced capex ‐ is
likely to be utilized for paying off debt. This is likely to lead to de‐leveraging,
which may restrict the downside from current levels.
Pick up in investment cycle to trigger improvement in valuations
SGM has reported an improvement in its business momentum during the past
three quarters, but sustenance of the same is contingent upon a revival in the
macro environment. The likely reversal in the interest rate cycle may lead to a
pick up in investment activity. SGM is likely to invest INR2bn in FY12f, in
addition to the INR6.4bn during FY09‐FY11, towards fleet expansion. An
improvement in economic activity is likely to benefit SGM in terms of better
capacity utilization and yields.
Assign fair value range of INR118‐INR130
We reduce our FY12f‐FY14f EPS by up to 20%, factoring in lower fleet
expansion plans and flat yields. Our capex estimate has been reduced from
INR4.2bn to INR3.0bn and yields are assumed to be flat over FY12f‐FY14f. We
roll over our TP to Dec12 and assign a fair value range of INR118‐INR130
(INR137‐INR151 earlier), based on a one‐year forward P/E range of 5.0x‐5.5x.
The implied revenue and PAT CAGR works out to be 9% and 7%, respectively,
over FY12f‐FY14f, against 14% and 15% earlier. Prolonged weak investment
cycle and increase in competition are the key risk factors.
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