Published on 15/07/2017 10:11:46 AM | Source: Emkay Global Financial Services Ltd
Buy Trident Ltd For Target Rs.110.00 - Emkay
* We initiate coverage on Trident Ltd (TRID IN) with a BUY rating and a target price of Rs110. We have arrived at the target price based on 6.5x FY19E EV/EBITDA. We believe that the valuation discount to peers should narrow as the company is moving up the value chain.
* With higher utilization of the new Bed Linen and Terry Towel capacity, the Textile segment is on the cusp of improvement in margin. With economies of scale playing out and change in revenue mix towards high-margin bed and bath businesses, Textile EBIT margin is likely to expand by 270bps from 9.0% in FY17 to 11.7% in FY19E.
* We believe that the healthy performance of its Paper business will continue with better realisations and increasing contribution of branded copier. We expect Paper EBIT margin to improve by 150bps from 27.5% in FY17 to 29% in FY19E.
* Trident is likely to generate free cash flows of ~Rs13bn over FY18-19E, translating into deleveraging of Rs7.7bn and improvement in RoCE (from 10.5% to 13.5% over FY17- 19E) and RoE (from 18.7% to 21.1% over FY17-19E).
Time to milk enhanced capacity in Home Textile
Post capex of Rs27bn over FY14-16 for expansion in Terry Towels & Bed Linen segments and for backward integration (Yarn and Weaving), TRID is poised to leverage its augmented capacities in Bed Linen and Terry Towels. We believe that the company is geared to ramp up its Bed Linen capacity of 43mn metres on existing terry towel clientele and focusing on untapped markets like Japan, Middle East, Australia & South Africa. Therefore, we expect Bed Linen to grow at a CAGR of 54% and Terry Towel at a CAGR of 12% over FY17-19E, but Yarn business will decline at a CAGR of 14% on higher captive consumption. Consequently, revenue mix is likely to shift from commoditized Yarn business (it is likely to decline from 33% in FY17 to 22% in FY19E) to high-margin Bed Linen. Margins in Bed Linen is in the range of 20-22% vs 15-18% in Yarn. We believe that the healthy performance in Paper business will continue with improvement in product mix (increasing contribution of Copier Paper), higher realisations (on lower supply in Uncoated Writing Paper & Printing Paper segments in domestic market), higher global pulp prices (benefits of backward integration) and stable costs due to agro-based pulp (wheat straw as raw material).
Initiate with a BUY rating and TP of Rs110
We expect TRID IN to deliver earnings CAGR of 23% over FY17-19E on account of margin expansion and lower finance cost (due to debt repayment). It is likely to generate free cash flows of ~Rs13bn over FY18-19E, led by high operating cash flows of ~Rs15bn, translating into deleveraging of Rs7.7bn over FY17-19E. Consequently, return ratios are likely to witness healthy improvement over FY17-19E (RoCE from 10.5% to 13.5% and RoE from 18.7% to 21.1%). We initiate coverage on Trident with a BUY rating and a target price of Rs110. We arrive at the target price based on 6.5x FY19E EV/EBITDA.
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