Buy Lux Industries Ltd For Target Rs.1,812 - HDFC Securities
Lux Industries, in volume terms is India’s largest branded innerwear company. Over the years, it has transformed itself from a commoditized inner-wear company to a house of brands with strong presence across economy, mid-market and premium segments. It has created a strong self-owned and sustainable portfolio of brands under “Lux” umbrella- Cozi, Venus, Inferno, Karishma, Touch etc which has presence across varied segments. Apart from these power brands, it has been constantly expanding and enriching its product portfolio in newer segments like mid-market/casual wear (“Genx”), premium inner-wear (“Onn”) and women’s legging segment (“Lyra”). Over the last decade, within the branded apparel space, Lux has been one of the leading consistent performers reporting stellar revenue & PAT growth of CAGR 14% & 39% over FY10-20. As on FY20, at group level (including JMHL & EBFL) its revenue and PAT stood at Rs. 1785Cr and Rs. 176Cr respectively. Going forward, post-merger of Lux Industries with JMHL (Genx) and EBFL (Lyra), we expect, the listed entity to not only strengthen its position in terms of growth but also to improve efficiency and further enhance its product mix. The merger of both these promoter owned entities with Lux Industries has been approved by the NCLAT and the merger is likely to fructify by the end of the current fiscal. The merger is structured in a way that there is no cash outflow from the listed company, Lux industries which will be issuing 48 lakh shares to its promoters against JMHL & EBFL 100% stake, thereby promoter stake will be increasing from current 69.5% to ~74.3% post-merger in the combined Lux Industries
Valuations and Recommendations:
We are positive on the future earnings growth trajectory of Lux Industries. It has laid out an ambitious target to reach revenue of Rs. 5000Cr by 2025 which translates in a 20%+ revenue CAGR growth of over next 5 years. However as a matter of prudence, we expect (“Lux group”- includes listed entity along EBFL and JMHL) Revenue and PAT to record a growth of 6.5% and 10.7% CAGR over FY20-23E. Its superior market positioning coupled with ability to consistently operate with high return ratios (ROE 25%+), constant debt reduction, FCF (free cashflow) generation along with guidance on higher dividend payout (25%) provides comfort. We are valuing the company post consolidating EBFL and JMHL (as per the Proforma Financials on Pg 14). The stock is currently trading at valuation of 23.50x FY22E earnings. We feel the base case fair value of the stock is Rs 1644 (24.5x FY22E) and bull case fair value is Rs 1812 (27.0x FY22E). Investors can buy the stock on dips in the price range of Rs 1490-1496 band (22.25xFY22E EPS) and add more on dips to Rs.1345-1349 band (20xFY22E EPS).
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