Model portfolio-Dec 2016

Company name

Investment rationale

Recommendation and target

CCL Products

• CCL Products produces several varieties and blends of coffee including spray dried coffee powder, spray dried agglomerated / granulated coffee, freeze dried coffee and freeze concentrated liquid coffee. It is also certified to supply organic coffee, rainforest alliance coffee, UTZ certified coffee and fair trade coffee, in any combination. In India it has a capacity of 20000 mt pa.
• CCLP is now embarked on hiking the freeze dried capacity by 5000 mt with an outlay of $40m ($25m debt; balance internal accruals) in Chittoor District of Andhra Pradesh - to be operational by December 2017. Additional investment is the need of the hour as it was at the end of FY15 when total capacity utilization in India zoomed past 100%.
• CCLP's domestic business has gained traction in last few quarters for it has inexorably boosted its presence across the supply chain - institutional sales; supermarkets; kirana stores. After initially launching its wares in Andhra

Pradesh, Telangana and Tamil Nadu, it forayed in Goa,

Buy at cmp(Rs.277.50) and further add on declines towards Rs.260 levels for a target of Rs.320.Holding period 1-2 quarters.

Kerala, Allahabad and Lucknow last year.

• Management has maintained its volume growth guidance of 12-15% for FY17, while it has reduced its profitability growth guidance to 15-20% from earlier 20-25% on

account of disruption in production during the quarter. This is excluding the export incentive of INR25mn.

CEAT

• CEAT is expanding its 2/3 wheeler and PCR (incl UV) capacity by 120 MT/day each at an investment of INR 4.2 bn and INR 6.5 bn respectively.
• The management expects ~35% capacity utilisation for both PCR and 2 Wheeler plant by the end of FY17 as (a) For PCR capacity, the thrust is mostly towards UV tyres, where the company has a strategy in place to increase its market share from current 15%-16%. (b) For 2/3 wheeler capacity, the company is facing stock outs for its current outsourced capacity and CEAT is on board with various OEMs for some of the new models like Hero Maestro Edge, Duet, Royal Enfield Himalayan and Honda Navi models.
• It is also investing another INR 3.3 bn in 40 MT/day specialty tyre plant where CEAT will manufacture only farm radial tyres for export markets (mainly US and Europe). The facility will start from Q4FY17.
• Currently CEAT derives 38% of its revenue from the T&B segment. The T&B segment (~75%- Bias Capacity) is de- growing for the company due to increasing radialisation and influx of Chinese TBR tyres. Following segments would be driving growth for the company going forward
  1. 2 wheelers (b) PC including UVs and (c) specialty tyres (d) emerging markets (for exports). 2 wheelers and PC segment cumulatively are expected to account for more than 50% of revenue over the next 5 years.
• The consolidated net debt currently stands at INR 7 bn with net debt to equity ratio of ~0.40. The capex of INR 14 bn will be financed by debt & internal accruals and is likely to increase the leverage of CEAT and increase its

net debt: equity ratio to ~0.80- 1.0.

Buy at cmp(Rs.1266.85) and further add on declines to around Rs.1200 levels for sequential targets of Rs.1350 and Rs.1410,holding period 1 quarter.

• SSML is the largest manufacturer of blended high fashion suitings, shirtings and apparels in the country. A portfolio of strong and value-for-money brands like Siyaram’s, J Hampstead and Mistair in the fabric segment, place SSML in a sweet spot.
• The company operates four plants – one at Tarapur near Mumbai for weaving and yarn dyeing, two at Daman for garments and one at Silvassa for weaving.
• It has launched two new premium cotton brands – Zenesis and Moretti, and has penetrated further into new growth areas like cotton shirting, linen fabrics etc. SSML has been able to differentiate itself from unorganized and

Siyaram Silk Mills

organized competitors in a highly fragmented market.

• SSML has built a strong brand presence in the country through continuous advertisement and brand-building efforts. Its emphasis on latest fabrics, innovative and latest designs, and affordable pricing points give it an edge over competition.
• SSML has one of the largest distribution networks in the country with over 1,600 dealers and 500 agents supplying to more than 40,000 outlets across India. This enables the company to launch new products with a high success ratio and low marketing cost, giving it an edge over competition. In order to expand its retail footprint, the company continues to add stores through the franchise model. The company plans to increase the number of stores through franchisees to 500 by FY2017.
• The company has ventured into the salwar kameez and ethnic women’s wear segment with its brand - Siya. The Siya brand comprises of semi-stitched cotton, polyester and embroidered designer fabrics, with prices ranging from Rs.700 to Rs.7,000.

Buy at cmp(Rs.1242) and further add on declines towards Rs.1200 levels for a target of Rs.1350 and Rs.1425.Holding period 1-2 quarter.

Eicher Motors

• RE has plans to produce 9 lacs motorcycles by the end of 2018, from its 2 existing manufacturing facilities and 3rd upcoming facility in Tamil Nadu. RE which has a market share of over 95% in 250 cc and above motorcycles, is currently operating at 60,000 units per month and is expected to remain stable in near term until 3rd plant is commissioned by Q2FY18.
• To become global leader in mid-sized motorcycle industry, RE is building couple of new technology centers in India and UK. During past few months, RE expanded its footprints in Paris, Madrid, Bogota, Medellin, Dubai, London and Jakarta. RE is planning to launch multiple products in coming years on new engine platforms and those would be in range of 250-750cc, Himalayan bike was the 1st launch in this series, which is currently clocking >1000 units per month.
• In view of the growing demand, EML is planning to enhance its bus production capacity at Baggad plant (near Indore, MP). Currently the plant is operating at 100% capacity of 5,500 units per month and EML is planning to take it to 7,000 units by adding new assembly line, which would be operational by the end of FY17.
• EML is operating at TTM EBITDA and net margin of 18.0% and 11.1% respectively. Profitability has substantially improved during past 12 months due to lower commodity prices, increased scale of operations

and healthy product mix. EML is a debt free company and has moderate liquidity, which further provides sufficient

Buy at cmp(Rs.22480) and further add on declines to Rs.21530 levels for a target of Rs.25000.Holding period 1 quarter.

financial cushion and flexibility.

Hind Zinc

• HZL is the leading miner & manufacturer of zinc and lead in India. Zinc metal is primarily used in galvanising steel, which is further used in the automobile & consumer goods industry while lead is primarily used in manufacturing automobile batteries. The company has a huge reserve base, which provides strong earnings visibility.
• HZL’s smelting assets are in the lowest quartile on the global cost curve. The low cost advantage is attributable to its fully integrated nature of operations involving mines, smelter and captive power plants. Furthermore, HZL’s smelters are logistically well placed in Rajasthan, near its mines, which results in low transportation and shifting costs.
• Mine production stood at 319kt in 1HFY17, indicating 36% of FY16 production and slightly higher than the guidance of 33%. Mine production is expected to increase 39% YoY to 580kt in 2HFY17, which is higher than the refinery capacity.
• HZ states that it remains on track to achieve 1.2mtpa MIC capacity in the next three years. The transition to UG mining is progressing satisfactorily with ~40% of total mined metal production in FY16 coming from UG versus 28% a year ago; this is expected to further increase to

~60% in FY17 while COP excluding royalty is likely to remain stable.

Buy at cmp(Rs.276.50) and further add on declines to Rs.260 levels for a target of Rs.310.Holding period 1 quarter.