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Monday, December 04, 2017

Angel Broking call a 'Buy' on Century Plyboards India
CMP: 311            Target: 400

Century Plyboards India Ltd (CPIL) is a plywood manufacturer dealing in plywood, laminates, MDF (Medium Density Fibreboard) and others with presence across India and overseas. CPIL is also engaged in logistics business through management of a container freight station.

Shift in trend towards organized plywood sector to propel growth: Indian plywood industry is estimated at `18,000cr and is largely unorganised (~75% share of revenues). However, with the implementation of GST, the share of organized players is expected to improve, which would be beneficial for branded players like CPIL. Hence, we believe that CPIL is best placed to gain market share on the back of better product quality, strong brands and wide distribution network. Currently, the company has ~25% market share in the organized plywood industry.

Capacity addition across segments to drive growth: CPIL has recently added new MDF plant (1,98,000 cubic metre, to generate ~`450-500cr revenue), laminates (4.8 million sheets by scaling ~50%, to generate ~`250-300cr revenue), particle boards (`100cr of revenue). Capacity addition across segments would boost company’s revenue and profitability going ahead.

Pradhan Mantri Awas Yojana - trigger for Plywood & MDF segment: The government’s aim to build ~1.2cr houses by 2022 under Pradhan Mantri Awas Yojana (PMAY) would increase demand for plywood industry (for making doors & furniture). Hence, demand for Plywood & MDF would witness an uptick.

Strong brand visibility with wide distribution network: CPIL has been continuously focusing on strong brand visibility, by spending 3-4% (% of sales) on ad spends to increase brand visibility. CPIL’s products are available across the country through 31 marketing offices covering over 630 cities and towns addressing 1,800 dealers and ~16,500 retailers.

Outlook & Valuation: We expect CPIL to report net revenue CAGR of ~17% to ~`2,896cr over FY2017-20E owing to healthy growth in plywood and lamination business, foray into MDF and particle boards coupled with strong brand and distribution network. On the bottom-line front, we expect CAGR of ~16% to `306cr over the same period on the back of strong revenue and better margin in MDF business. At the current market price of `317, the stock trades at a P/E of 23.3x its FY2020E EPS of `13.7. We initiate coverage on the stock with a Buy recommendation and Target Price of `400 based on 29x FY20E EPS, indicating an upside of ~26% from the current levels.

Emkay Research call a 'Buy' on Ashok Leyland
CMP: 120             Target: 156

Investment argument: Ashok Leyland has gained a significant market share in domestic MHCVs, increasing it from 26% in FY14 to 34% in FY17, driven by new launches (to plug product gaps) and doubling of sales touch points (from ~600 in FY14 to ~1,200 in FY17). We expect further escalation in market share to 36% in FY20E, implying a CAGR of 8%, propelled by the growing acceptance of EGR (exhaust gas recirculation) Trucks vs SCR Trucks (selective catalytic reduction) of competitors.

With an objective to insulate itself from the cyclicality of domestic MHCV business, the company has increased focus on LCVs, Defence, Spares and Exports. Domestic LCV sales are expected to grow at 12% CAGR over FY17-20E, supported by new launches and ease of finance availability. Over the next 12 months, 6-7 new LCVs are expected to be launched.

Ashok Leyland has become the second largest CV exporter, with a presence in over 30 countries. After a 9% fall in exports in FY17, we expect a growth of 18% CAGR over FY17-20E, owing to a low base and healthy order book in Africa.

We have built in revenue/earnings CAGR of 17%/14% over FY17-20E with ROE of ~25% and average free cash flow of ~Rs21bn.

We maintain BUY with TP of Rs156 based on 12x FY20E EV/EBITDA and value of investment in Hinduja Leyland Finance Ltd (HLF) at Rs2/share. In a recent stake acquisition, HLF has been valued at Rs48bn, which implies a value of Rs10/share for Ashok Leyland’s stake.

Risks: Weak macro-economic environment, delay in execution of infrastructure projects, heightened competition, adverse commodity/currency rates etc.

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