Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs109
Ready with new power
Key points
- The management of the company sounded very upbeat on the growth prospects of the cable industry in general and that of Universal Cables Limited (UCL) in particular.
- The power, instrumentation and control cables industry is likely to see a huge continued growth in demand backed by the government's thrust on the power generation sector and capital expansion plans of India Inc.
- To take advantage of the same, UCL is implementing a capital expansion plan of Rs64 crore, wherein it will double its capacity of medium tension (MT) cables and put up a new capacity of extra high tension (EHT) cables (>220 KV).
- UCL will be the only player in India to produce EHT cables after Cable Corporation of India. UCL will slowly reduce its focus on the low-tension cable segment (<11>
- During FY2006, UCL merged one of its associate companies, Optic Fibre Goa Limited (OFGL) with itself. The implied consideration of the deal works out to Rs37 crore. UCL is confident about extracting a good return on the investment from this deal.
- We expect substantial improvement in UCL's operating profit margins and return ratios as it moves towards higher end products and OFGL turns profitable.
- At the current market price of Rs109, the stock is quoting at 8.3x its FY2008E earnings per share and 4.4x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs179. The reduction in the price target is on account of the equity dilution due to the amalgamation of OFGL where there is not much clarity on the returns on the investment made.
SECTOR UPDATE
Automobile
Revving up yet again
- Bajaj Auto delivered a powerful performance in September recording an overall growth of 37.5% year on year (yoy), mainly driven by strong motorcycle sales.
- TVS Motors reported another month of strong performance as the overall sales marked an increase of 33.9% to 162,200 vehicles during September.
- Maruti Udyog sold 59,420 vehicles in September 2006, marking a growth of 20.6%. The company sold 56,606 vehicles in the domestic market while the exports for the month stood at 2,814 vehicles.
- Tata Motors reported a 23.8% growth in its overall sales (including exports) to 49,157 vehicles for the month of September 2006.
- M&M's utility vehicle (UV) sales were up by 5.8%, and the sales of the new Scorpio stood at 3,368, rising by 6.4% yoy.