BUY
Price : Rs 231 Target Price : Rs 380
Manugraph India Limited (MIL) is a strong growth and value play and has created a strong focused niche in the Offset Web Printing Machinery Equipment space finding applications mainly in newspaper printing segment. MIL's major competitive advantage is its excellent product line up and customized solutions approach, long standing relationships with large customers, excellent quality and technical credentials and adequate management bandwidth. With an expected CAGR of 23% in net profits over FY06-FY08E, we expect ROCE and ROE levels to remain healthy at 67% and 49% respectively as on FY07E.
Investment Rationale –
Market Leader providing complete printing solutions – MIL is the domestic market leader in the web offset presses segment and is an established Tier 1 supplier to large publishing houses like the Times of India Group, Indian Express Group, Dainik Jagran Prakashan Group, Hindustan Times, Anand Bazar Patrika and other regional newspapers and publications like Gujarat Samachar, Malayala Manorama, Hindu, Sandesh , Deccan Chronicle etc. Over the years, Manugraph has emerged as a thriving, nimble, printing machinery enterprise, due to its ability to transform itself rapidly in a highly competitive market and its commitment to become a supplier of choice by delighting customers with superior services and products at competitive prices. Constant modernisation and introduction of state-of-the-art technology at Manugraph has enabled it to stay ahead in the industry.
Exports offer MIL a strong outsourcing opportunity in future – In the Export arena, Manugraph has been exporting to customers in markets like Italy, Germany France, Sweden, UK, Russia, China, South Korea, Thailand, North America, Kenya, Nigeria, Brazil and Middle East.
Exports during FY06A totaled Rs1034.7mn accounting for 32% of total revenues. Exports in the last 3 years have grown at a CAGR of 35% from Rs 592mn in FY04A to Rs1034.7mn till date. What is more noteworthy to know is that having developed strong technical skill sets in its product domain, the price differential enjoyed by Manugraph is significantly high as compared to other global players like Heidelberg and Man-Roland, which have large business presence across the European and USA markets. Hence going ahead outsourcing opportunities can throw open a large business opportunity for Manugraph.
Large free cash generation ahead –Manugraph has moderate capex lined up over the next two years. Barring further reduction in residual debt in FY07E and further gains from tight working capital management, we expect it to generate free cash flow of Rs724.3mn over next two years. The build of cash in the balance sheet by Mar08 would result in a cash/Investments balance of Rs820.3mn,equal to (Rs.27per share - FV: Rs.2).
What is really noteworthy is that Manugraph has earned a healthy 79% ROCE and 61% ROE in FY06A largely due to a healthy volume growth, significant improvement in ATO levels and reducing the working capital cycle. This is amply reflected from the fact that Manugraph has expanded its EBIDTA margins from 10.9% in FY04A to 25.9% in FY06A.
During Q1FY07A Manugraph has reported a 19% increase in revenues totaling Rs1.03bn with EBIDTA growth being 12% YoY totaling Rs247.6mn with EBIDTA margins of 24% followed by a 15% rise in the net profit at Rs 172.9mn.
Risks & Concerns –
Any significant downturn in Manugraph's customers namely the domestic Newspaper segment could impact MIL's earnings negatively.
Valuation –
With an EPS CAGR growth of 23% estimated over FY06-08E, coming on the back of a 21% CAGR in the topline, and attractive ROE and ROCE levels of 67% & 49% on FY07E, and a EV/EBIDTA of 7x FY07E and 5x FY08E makes us believe that the present valuations of 10x FY07E and 8x FY08E look extremely attractive.
We recommend a BUY on the stock with a target price of Rs.380 based on the DCF approach. At our target price the stock will be valued at 14x P/E and 9x on EV/EBIDTA basis on FY08E.
"Research Reports" group
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