Surya Roshni commands strong market positioning in tier ii/iii cities and rural India driven by its extensive reach across length & breadth of India.
Surya Roshni shares rallied 4 percent to close at Rs 250.95 on Monday after Kotak Securities initiated coverage on the stock with buy rating and a target price of Rs 328, implying 36 percent upside from Friday's closing levels.
The research house believes that Surya valuations can get rerated on back of 1) potential demerger of company’s consumer electrical and steel pipes business, and 2) strong growth in company’s estimated consolidated profits through FY18-20E.
Consolidated profits would be driven by a) meaningful growth in fans & consumer appliance segments supported by improved penetration on the current lower base, b) stability in LED prices, c) recovery in the pipes business driven by improved public spending in infrastructure, Kotak said.
It expects 18.7 percent CAGR between FY18-20 in consolidated profits from Rs 108 crore in FY18 to Rs 150 crore in FY20, and expects improved return ratios and balance sheet strengthening-building a case for stock re-rating.
At current price of Rs 242, Surya stock is trading attractive at 5x EV/EBITDA and 8.6x P/E on FY20E earnings, it feels.
The company commands strong market positioning in tier ii/iii cities and rural India driven by its extensive reach across length & breadth of India.
"We tend to believe that Surya Roshni would likely outpace the industry growth, as tier ii/iii and rural parts of India are expected to remain buyout in the near to medium term. Various welfare schemes, introduced by the Indian government and rural electrification drive could potentially benefit company’s operations going ahead," Kotak said.
The company has a strong distribution reach spread across India. Distribution franchise includes a wide network of over 2,500 distributors and 2.5 lakh country wide retailers. "This facilitates the company in rapidly scaling-up of new product into the market," Kotak said.
Kotak highlighted some key concerns which are 1) fluctuation in input price can likely have a diminishing effect on company’s margins (mainly in pipes business), 2) company has been trying to revamp its brand image in the urban areas to target the youth population in the premium segment. A weaker branding initiative can potentially disrupt company’s growth plans.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
