Recommendation: Hold
CMP = Rs 643
Price target: Rs 622
Key points:
- The board of directors of ICI India has approved divestment of its adhesives business for a total consideration of Rs 260 crore to an Indian affiliate of Henkel group, subject to adjustments for actual working capital and cash balances. This is in line with AKZO Nobel's (which has acquired 100% stake in ICI Plc, the parent company of ICI India) decision to divest ICI's global adhesives and electronic materials business to Henkel AG.
- While ICI's global business is transferred to Henkel AG at a valuation of 2.1X its sales, the Indian adhesive business has fetched 2.3X its expected sales for FY2008. The deal will include transfer of portion of Thane manufacturing facility and about 120 employees currently working with the business and the company's shareholding in its subsidiary Polyinks to Henkel.
- I remain positive on ICI India primarily on account of good prospects for paint industry going forward, synergies that would arise on concerted efforts of Akzo Nobel in growing ICI India's business and a huge pile of cash that opens up opportunities for organic and inorganic growth.
- Valuing the core business at 20X FY2009E EPS of Rs 17.8 (excluding other income) and adding the cash per share of Rs 266, I arrive at a fair value of Rs 622 for the stock.
- At the current market price of Rs 643, the stock trades at 21X its FY2009E EPS of Rs 30.9. I recommend a Hold call on this stock.
