Recommendation: Buy
CMP = Rs 530
Price target: Rs 581
Result highlights:
- The Q2FY2008 results of ICI India are not comparable on a yoy basis due to divestment of several businesses in FY2007. The net sales for the quarter stood at Rs 239.1crore.
- The paints business revenue grew by 5.6% yoy to Rs 202.2 crore in Q2FY2008. The growth appears subdued due to high base effect as the festive sales on account of Diwali got deferred to Q3 as against most of it being registered in Q2 of FY2007. Thus we expect the paints division to record handsome growth in Q3FY2008.
- The continued chemical business grew by 21.9% yoy to Rs 36.8 crore. Thus the overall revenues of the continued businesses grew 7.8% to Rs 239 crore. The discontinued business (surfactant and advanced refinish) had contributed Rs 22.8 crore to the company's total revenues in Q2FY2007.
- The PBIT in the paint business declined by 3.8% yoy with a 90 basis-point contraction in the margin to 9%. The PBIT in the continued chemical business grew 41.9% yoy with the margin expanding by 234 basis-points to 16.6%. After the sale of the Uniqema business, the chemical business now contributes only 15.4% to the top line as against 21.7% in Q2FY2007.
- Overall, the operating margin stood at 12.5% against 13% in Q2FY2007. With a higher other income at Rs 6.5 crore for the quarter against Rs 3.9 crore in Q2FY2007 the adjusted net profit grew by 3.5% yoy to Rs 21.3 crore. Pursuant to the scheme of buy back, till the end of the quarter the company has bought back 15.87 lakh shares against a target of buying back ~36.7 lakh shares (worth Rs 211.06 crore).
- The outlook for the business remains positive with the company following a strategy of divesting non-paint businesses and focusing more on growing the paints business. Further a cash pile of ~Rs 700 crore leaves open inorganic growth opportunities for the company.
- At the current market price of Rs530, the stock trades at 18x its FY2008E adjusted EPS of Rs 29.4 and 16x its FY2009E adjusted EPS of Rs 33.1.
- I maintain Buy recommendation on the stock with a price target of Rs 581.
