CMP = Rs 534 (at the time of this recommendation)
Price target: Rs 622
Key points:
- ICI India's FY2008 results are not comparable with FY2007 results, as the company sold off its Advanced 2K refinished paint business in March 2007. The net sales stood at Rs 992.6 crore during FY2008, as against Rs 1,015.2 crore in FY2007. On a comparable basis, the net sales increased by 13.7% to Rs 951.2 crore on the back of a strong performance by the chemical business.
- The return on equity (RoE) and the return on capital employed (RoCE) stood at 8.8% and 13.2% respectively in FY2008, which are lower compared to the RoE of 12.4% and the RoCE of 15.6% in FY2007. The decline in the return ratios was primarily due to a lower other income, as there were lower returns on the average investments.
- ICI India's cash from operating activities stood at Rs 82.90 crore in FY2008 on account of a better working management. In terms of outlook, the management is positive. However, it cites that its paint business would be impacted by a clear slowdown in the user industries like auto and real estate.
- The margins are likely to be under pressure due to the surging crude oil prices coupled with the hike in the key input prices. However, the company has a huge pile of cash of Rs 700 crore, which it can use to generate organic or inorganic growth going forward.
- At the current market price, the stock is trading at 18.1x (net of cash on books) its FY2010E core earnings per share of Rs 17.4.
- I maintain a strong Buy recommendation with a price target of Rs 622.
