Summary
of Contents
Top Picks |
w Apollo
Tyres |
w
Ceat |
SHAREKHAN SECTOR
REPORT
The
tyre industry
Roll on good times Tyre stocks are
back in the reckoning and look very attractive considering the
stable rubber prices, better pricing power with the tyre
majors and a tight demand-supply scenario in the industry. In
view of the strong volumes in the original equipment
manufacturer (OEM) segment and a robust replacement demand
(triggered by brilliant OEM sales recorded in the past two
years), we believe the tyre industry is in for good times. We
expect the overall volumes of the industry to grow at a
compounded annual growth rate (CAGR) of 10% over the next two
years. Softening raw material prices along with price hikes
should improve the profitability of the tyre companies,
restoring their margins to 9-10% levels. Apollo Tyres
and Ceat are our top picks in the sector. Goodyear and
Balkrishna Inustries operate in niche segment and both would
benefit from the demand growth and lower raw material prices.
We are gathering detailed information on these and if found
attractive would be covered subsequently.
|
Sharekhan sector top picks
valuation |
Company
|
EPS |
PER |
EV/EBIDTA |
| CMP |
Target |
Upside |
FY2007E |
FY2008E |
FY2007E |
FY2008E |
FY2007E |
FY2008E |
(Rs) |
price |
(%) |
Apollo Tyres
|
20.1 |
31.3 |
17.1 |
11.0 |
7.4 |
5.0 |
344.0 |
425.0 |
23.5 |
Ceat |
6.1 |
15.6 |
20.0 |
7.8 |
6.7 |
4.1 |
122.0 |
190.0 |
55.7 |
|
STOCK
IDEA
Indo
Tech Transformers Cluster: Ugly
Duckling Recommendation: Buy Price target:
Rs280 Current market price: Rs199
Powered by power reforms
Key points
-
The fortunes of Indo Tech Transformers
are all set get transformed, thanks to India�s mission to
achieve power for all by 2012. As part of this programme the
government plans to almost double the country�s installed
power generation capacity from 115,000MW to 200,000MW by the
end of the 11th Five-Year Plan.
-
This initiative is expected result in an
additional demand of around 570,000MVA of transformer
capacity over FY2005-12 or of 80,000MVA per year. Another
15,000MVA of demand is expected from the replacement market
every year, leading to a total annual demand of 95,000MVA.
That is a huge opportunity for the transformer industry
whose annual capacity stands at a mere 75,000MVA.
-
Indo Tech already stands to gain from
this opportunity, as it has built a strong relationship with
the SEBs in the south over the years. Now to make the most
of this demand explosion, it is tripling its capacity from
2,450MVA to 7,450MVA.
-
Indo Tech has signed an MoU with DuPont
(USA) to set up a 100MVA plant to manufacture dry-type
transformers for industrial and corporate customers. These
transformers are higher in realisation and installed in the
basement of hotels, IT parks, malls etc. We believe this
will further boost the top line of the company.
-
As a result of these initiatives we
expect its revenues and net profit to grow at CAGR of 52%
and 49% respectively over FY2006-08E.
-
At the current market price of Rs199, the
stock is quoting at 8.6x its FY2008E EPS and 4.8x its
FY2008E EV/EBIDTA. Considering the future growth potential
of the company and the stock�s attractive valuations, we
recommend a Buy on the stock with a price target of Rs280.
| |