Parekh Aluminex Ltd

Broking House - ABN Amro
Recommendation - Buy
Low Cost producer in India and an attractive valuation
In its Report Dated 18th December,2006 ABN Amro (ABN) has recommend a Buy on Parekh Aluminex Ltd with CMP Rs 110 and a Target price of Rs 161 .

ABN Amro (ABN) throws light that Parekh Aluminex Ltd (PAL) is the largest aluminum foil container manufacturer in India, with over 70% market share in the domestic market. Almost half of its revenues come from sales to Airlines, Railways and Flight Kitchens. PAL supplies 70-90% of the foil container requirement of Indian Railways, Indian Airlines, Air India and Jet Airways. PAL has also gained entry into international airlines like Emirates, Thai and Singapore Airlines through an acquisition. ABN Quotes that with the rapid pace of rising air travel expected to continue, demand outlook for PAL''s products remains strong. Emergence of modern retailing and growth of processed food sector would also drive demand for new varieties of foil packaging and containers.

ABN states that PAL has expanded capacity by 2.6x over the last two years. It has acquired new moulds and machinery that would enable it to produce 1250 million containers, 470 million lids and 15 million foil rolls pa. A large part of the expansion has come on-stream in H1 FY07 and the full impact of the expanded capacities will be witnessed in H2 FY07 and FY08 earnings. ABN expects PAL to record a 47% revenue CAGR and a 50% net profit CAGR during the next two years.

ABN mentions that PAL has traditionally commanded low valuations due to the perception of being a metal (aluminum) company. However, unlike commodity companies which face volatility in earnings in line with commodity fluctuations, PAL has demonstrated stability in margins. ABN highlights that PAL has consistently improved EBIDTA margins in the last three years, even though aluminum prices have risen sharply during the period. PAL''s policy of contracting raw material supplies as soon as contracts are finalized enables it to protect margins from raw material price fluctuations. Its rerating as a niche packaging player, rather than a commodity play, as the company gains size and scale, could provide further upside to the target, says ABN.

Finally, ABN Makes us aware that PAL trades at undemanding valuations of 6.3x FY07E and 4.1x FY08E. Given the strong earnings growth visibility, ABN value''s PAL at 6x FY08E earnings of Rs26.9, which gives ABN a target price of Rs161, a 52% upside from current levels.

Thanks HK