Everest Industries : Buy -Growing on Rural Theme::: Anand rathi

Everest Industries : Buy

CMP Rs. 245                                                 Reco: Buy                                                     expected value Rs. 344                                                     Nifty level 6003           

Growing on Rural Theme

Rural Indian markets offer huge opportunities for the company. Govt. thrust on rural India, different schemes, offers disposable income in a hand of villagers.  The liquidity in rural market, the bottom pyramid where the wealth is increasing offers sustainable growth of their building solutions segment which is contributing almost 75% in their total revenue.

In last 5 years EIL had done Capex of Rs. 150 Cr. which actually helped EIL to grow the revenue three-fold; from Rs.285.13 Cr. in FY 08 to Rs. 881.54 Cr. in FY 12, a CAGR of 33%.

Valuation

Growth is the function of two factors: how much one is reinvesting and at what rate?

We have used DCF approach to value EIL. EIL’s average reinvestment rate is around 61.92% and with 3 years average ROE of 20% combining both give us sustainable growth rate in net income of around 12%.

We expect EIL will maintain equity reinvestment rate (ERR) of around 61.2% for next 5 years with average ROE of 20%. We used cost of equity at 15% (Rf = 6.5% + Beta 1.2 * Risk Premium of 7%) for discounting purpose.

After 5 years we expect Cost of Equity will come down to 14.5% and growth will be around 8% (equivalent to 10 year G sec rate) which give us ERR will be 55% and combining both We derived an intrinsic value of Rs. 344 per share.

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