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Recommendations India

Banco Products Initiating Coverage

July 2, 2014, Wednesday, 09:25 GMT | 04:25 EST | 12:55 IST | 15:25 SGT
Contributed by Angel Broking

Banco Products (India) (Banco) is among the leading manufacturers of radiators and gaskets in the country with five manufacturing units. In July 2010, the company acquired 51% stake in Lake Cement (a cement manufacturer), a diversification into unrelated business which led to sharp correction in the stock price. In May, 2014, the company exited the cement business at ~52% premium for US$17.7mn and is now expected to use the proceeds for acquisition in auto component related business in Europe which will further strengthen its foothold in global auto component market. Additionally, the commercial vehicle (CV) industry which contributes ~80% to the company’s domestic revenue is also witnessing revival, which poses a huge growth potential for the company.

Recovery in global economy & revival in domestic CV industry to aid growth The company is a leading exporter of aftermarket radiators to Europe, with a growing presence in the America, Middle East and African markets. The global economy which witnessed couple of difficult years is now showing recovery signs (U.N. forecasts global economic growth of 3% in 2014 and 3.3% in 2015). Also, the IHS Automotive predicts global auto sales to reach 85mn in 2014 and 100mn in 2018 from 82.8mn in 2013. Further, production in the domestic CV industry (contributes ~80% to domestic revenue) is to grow at a CAGR of 11% over FY2012-21E to 23.5lakh units. We expect these factors to aid the company’s revenue, which is expected to grow at a CAGR of 12.0% over FY2014-16E to Rs.1,457cr in FY2016E.

Exit from Lake Cement – No further unrelated acquisitions In order to focus on the core business, the company has divested its entire stake in Lake Cement for US$17.7mn, which is at an approximate premium of 52%. It is expected that the company will use the proceeds from the sale of Lake Cement (US$17.7mn) for acquisitions related to the core business. We believe this will help the company in strengthening its core business and enable it to make related acquisitions in Europe, which will enable it to fortify its presence in the global market.

Outlook and valuation: We expect Banco to register a revenue CAGR of 12.0% over FY2014-16E to Rs.1,457cr with an operating margin of 15.2% in FY2016E. The profit is expected to grow at a CAGR of 23.2% over the same period to Rs.136cr in FY2016E. At the CMP, the company is trading at a PE of 6.3x FY2016E earnings. On account of growth potential with revival in CV industry and potential acquisition plans, we initiate coverage on the company with a Buy recommendation with a target price of Rs.172 on a target PE of 9.0x FY2016E earnings.