GIL reported a disappointing set of numbers for 3QFY2016. Its top-line witnessed
a 5.0% yoy decline to Rs382cr. The raw material cost declined by 495bp yoy to
63.4% of sales, while employee and other expense increased by 193bp yoy and
100bp yoy to 7.7% and 16.9% of sales respectively. The EBITDA margin
expanded by 202bp yoy to 11.9%. On the back of lower raw material cost, the
net profit for the quarter increased by 15.2% yoy to Rs29cr.
Expansion drive to lead to recovery in top-line: GIL has laid out plans to
significantly grow its presence in the passenger car segment in India, over the
next five years. The company aspires to be one of the top players in the mid to
premium, and SUV segments, for passenger cars. It is also evaluating entry into
newer segments; in order to reach its goal, the company is weighing organic as
well as in-organic growth options, to expand in India.
Strong balance sheet with high RoIC: GIL is a debt free-cash rich company with
RoIC estimated at 75.8% for FY2017. The company’s cash and equivalents are
expected to be at Rs524cr by FY2017-end, which would amount to ~40% of the
current market cap. More importantly, GIL is one of the cheapest MNCs available
to invest in, in the similar market cap range.
Outlook and valuation: We expect the company’s top-line to be at Rs1,888cr and
Rs1,680cr in FY2016E and FY2017E respectively. Raw material cost is expected to
remain stable over FY2016E-17E resulting in EBITDA margin of 12.1% in
FY2016E and 11.9% in FY2017E. Consequently, we estimate the net profit to be
at Rs130cr in FY2017E. At the current market price, the stock is trading at a PE of
10.1x its FY2017E earnings. On a TTM basis, GIL is one of the cheapest MNCs
available as it trades at a PE of 14.0x while other MNCs (having market cap of
Rs1,000cr-Rs5,000cr) trade above the 20.0x mark (median of 33.1x). We maintain
our Accumulate rating on the stock and assign a target price of Rs622 based on a
target PE of 11x for FY2017E.

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