IndiaNivesh - Diwali Muharat Picks

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Diwali Picks
Ashiana Housing
Capital First
Meghmani Organics
Pennar Industries
Reliance Industries

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Ashiana Housing Ltd. (AHL)
CMP Rs.155 |P/E (FY15E) 19.9x | P/E (FY15E) 7.8x
Investment Rational Target Rs. 202
 Developer with Unique Business Model: Ashiana Housing Ltd. (AHL) is a unique asset light developer, with strong
focus on pursuing Real Estate business in Tier II and III cities. AHL has unique business model, (1) where land cost as %
of construction cost is lesser (vs. their listed peers), (2) does not build huge land banks, (3) does in-house construction
as well as sales, & (4) consistently explore the alternative of deploying lower capital across projects. This asset light
strategy and focus on cash flow generation has helped AHL remain debt free and experience above industry level
Internal Rate of Returns (IRRs) of >30% across most of the projects.
 Highest Return Ratios in the Industry: AHL is the only listed developer, which has consistently maintained >25% RoE as
well as RoCE for last few years (with exception of FY13 & FY14). Sudden drop in FY13-14 return ratios is owing to
company’s strategy to shift its accounting methodology. With most of the ongoing projects reaching completion, we
expect AHL to report FY16E RoE and RoCE of 35.0%, each.
 FY15-16E to see strong earnings growth: AHL is likely to report ~149% top-line CAGR during FY14-16E (to ~ Rs 6.9 bn),
on the back of 3 projects entirely getting completed (Tree House, Utsav and Anantara) and some phases of remaining 7
projects getting completed (Ashiana Town, Rangoli Gardens, Aangan, Gulmohar Gardens, Navrang, Vrinda Gardens,
Dwarka and Umang). We expect AHL to report ~192% PAT CAGR during FY14-16E (to ~Rs 1.8 bn; PAT margins would
expand from 19.8% in FY14 to 27.1% in FY16E).
Valuations
With substantial chunk of ~6.8 mn sq. ft. of ongoing projects reaching revenue recognition threshold, we expect revenue
visibility to sharply improve from here-on. With debt free balance sheet, at CMP of Rs 155, AHL is trading at FY15E and
FY16E, EV/ EBITDA multiple of 17.6x and 5.7x, respectively. We have valued AHL using Sum-of-the-parts (SoTP) basis to
arrive at FY16E based price target of Rs 202.

Capital First Ltd. (CFL)
Investment Rationale
 Capital First Ltd (CFL) is the leading Non Banking Financing Company (NBFC) providing finance to Retail (SME)
and Wholesale businesses. In Retail Financing it offers Consumer Durable Loans, Two-wheeler Loans, Loan
against Property, Mortgage, Gold Loans and Small Business Loans while in Wholesale business it provides loans
majorly to real estate developers. CFL has a total AUM of Rs 106 bn with strong distribution network of 161
branches and 1,090 employees spread across 40 cities.
 Asset Under Management (AUM) of CFL has grown at 79% CAGR over FY10-14 led by low base. As a strategy to
focus on retail segment (which includes Consumer Durable Loans, Two wheeler Loans, Loan against Property,
Mortgage, Gold Loans and Small Business Loans), AUM of CFL has gradually moved towards retail from 10% in
FY10 to 81% in FY14. We believe CFL is well poised to grow at 28% CAGR over FY14-16E with more focus on
retail segment. (AUM of CFL grew 32% y-o-y in Q1FY15 to Rs 106 bn).
 After the change in management in FY10, Credit rating of CFL has improved materially from A+ in FY11 to AA+
in FY13 which is indication of safety in terms of servicing and also one of the highest ratings in financial
services industry. As a result, Significant portion of CFL’s borrowings forms the term loans from banks which
are raised at close to base rate.
 Net Interest Margin (Calc) of CFL has remained stable at 4.5-4.7% in last 2 financial years. With stable
borrowing profile and company’s increasing presence in high yielding segments (i.e. two wheeler, gold,
consumer durable loans), margins are likely to improve slightly going forward. However, we remain
conservative and expect it to remain broadly stable around 5.0% over FY14-16E. (NIM of CFL was at 4.9% in
Q1FY15 ).
 CFL was successful in maintaining its asset quality with the lowest Gross and Net NPAs in the industry at 0.5%
and 0.1%, respectively as of Q1FY15. This is based on the fact that asset mix has shifted towards comparatively
safer segments like LAP, Mortgage, two wheelers and Consumer Durables than riskier segments of developer
loans. We don’t expect any significant deterioration in asset quality and expect it to remain broadly stable.


Meghmani Organics Ltd. (MOL)
CMP Rs.17 | EV/EBITDA (FY15E) 5.4x | (FY16E) 4.8x
Target Rs.34 (5.9x FY16E P/E)
Investment Rationale
 Absence of incremental growth capex from here on could lead to higher free cash flow generation, repayment
of debt (paid Rs.500 mn in Oct-2014) and better net profit margin.
 Investments in pollution control equipment and permissions in place from state level pollution control board.
This could result in higher plant utilization and margin expansion.
 Given that all safety and environment certifications are in place, MOL could attract new order wins and also
remain eligible for contract manufacturing order from MNCs .
 All newly commenced facilities both in Pigments & Agrochemical segments are stabilized and ready to deliver
higher revenue growth going ahead.
Valuations
At CMP of Rs.17, the stock is trading at EV/EBITDA multiple of 5.4x FY15E and 4.8x FY16E estimates. In our view,
the current valuations are significantly below 7.5x global peer average. On back of various triggers like: (1) debt
reduction, (2) margin expansion, and (3) higher plant utilization the stock is poised for re-rating. We have assigned
5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of
Rs. 34/share with BUY rating.

Pennar Industries Ltd. (Pennar)
Investment Rationale
 Moving from commodity to value added products: Pennar Industries is moving from pure commodity player to value
added player with its range of engineering products. This transition is helping the company improve its consolidated
margin as company has added many high margin segments in its portfolio.
 Direct Play on overall macro-economic recovery: As company caters to the large part of economy’s sectors like
Automobile, Infrastructure, Railway etc, it is well placed to take the advantage of any economic uptick through its
diversified business portfolio.
 High Operating leverage and Low Financial leverage provides high upside and limited downside potential: Muted
economic environment has reduced capacity utilization for Pennar Industries in last couple of years. With likely economic
cycle revival, increase in capacity utilization will act as major margin booster for the company. On the other hand delay in
revival should not be major concern as company has low financial leverage and large part of its debt is working capital
debt.
 Subsidiary PEBS is Key Growth Driver: Other major growth driver for the company will be PEBS, which is amongst top 5
players in India. As the concept of pre-engineered building products (PEBS) is catching up fast in India; anyone setting up
an industry now would look for early commissioning of plants, PEBS is poised for abnormally strong growth. A corporate
action by the company on getting this subsidiary (PEBS) separately listed on exchanges could be the additional trigger for
the stock.
Valuations
At CMP of Rs.52, Pennar Industries is trading at P/E multiple of 9.7x FY15E and 6.5x FY16E earnings estimate, which is well
below 14.3x – three year historical average. Average ROE for the company is past 3 year has been 12.9%. In FY15E and FY16E,
the ROE of the company is likely to improve to 16.4% and 20.3% respectively on back of increased capacity utilization and
margin expansion. We value this company at conservative PE multiple of 10x to FY16E EPS (Rs.8.1), which gives the target
price of Rs 81.

Reliance Industries Ltd. (RIL) CMP Rs.934| Target Rs.1,111 (13x FY16E P/E)
P/E (FY15E) 11.5x | P/E (FY16E) 10.9x Investment Rationale
 RIL is the largest private player in the refining, petrochemical and E&P sectors in India. RIL’s refining complex in
Jamnagar is the largest in the world and among the most complex. The company’s US$4bn pet coke gasification project
remains on schedule for implementation by FY16 end, which is likely to help in expansion on operating margin of
refining business.
 Although RIL is not entitled to receive any benefit from the gas price hike as of now , If RIL is able to prove that the
production cut was indeed due to geological reasons (as it claims), the 'company will be able to claim the amount
parked in the escrow account. We believe gas price hike for RIL’s KGD-6 is inevitable in medium to long term.
 We believe successful discovery in MJ1 well and exploration in R-Series gas field in KG D6 block would help to ramp up
the production of natural gas in next 2-3 years.
 The company plans to invest Rs. 1.5t in the next 3 years in pet coke gasification, polyester expansion & off-gases crack,
E&P activities, telecom and retail businesses. This should drive RIL’s earnings growth over the medium to long term.
 Shale Gas and Retail business also showing remarkable growth and likely to be key revenue and profitability driver
going ahead


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