Stock Views on Bombay Rayon Fashion, United Breweries

Merrill Lynch on Bombay Rayon Fashion

Merrill Lynch has maintained `Buy’ rating on Bombay Rayon Fashion. However, it has reduced the price targer to Rs 225 from Rs 270 to reflect both earnings cut and higher risks. It cut FY10E EPS by 5% and FY11E by 14%, primarily to factor in lower sales of its brand Guru, as management has stalled its growth plans, following the global slowdown. The stock has corrected sharply in the last few months and valuations look attractive at 3x FY10E PE. It expects EPS growth of 32% in FY10 helped by new capacities coming onstream by March 2009. These capacities would enjoy several fiscal benefits making them globally cost competitive, which should help BRFL gain market share. Management had aggressive plans for expansion of the Guru operations which have now been put in the back burner. After the sharp cut in Guru’s estimates, it now accounts for less than 5% of BRFL’s consolidated EBIDTA versus 9% earlier. We estimate BRFL’s gearing to peak at 2.1x in FY09 and fall to 1.4x by FY11. After a 70% price correction in the last six months, the stock is trading at only 3x FY10E PE. The current stock price more than factors in the macro risks and the correction is clearly overdone.

Indiabulls Securities on United Breweries

Indiabulls Securities maintains `Sell’ rating on United Breweries (UBL) with a target price of Rs. 70. UBL’s net sales in Q309 grew substantially by 24% yo-y to Rs. 370 crore. The EBITDA margin advanced 200 bps y-o-y to 9.4% in the quarter, from 7.4% for the same period in FY08, on the back of a 243 bps y-o-y fall in advertisement and sales promotion costs (as a percentage of sales). Indiabulls sees significant downside in the stock due to high financial leverage and limited expected improvement in margin performance. Moreover, Indiabulls’ valuation gives a fair value of Rs 70, suggesting a ~10% downside from the current market price. UBL has a highly leveraged capital structure with a debt-to-EBITDA ratio of around 4x, largely attributed to its expansion activities and acquisitions in the recent times. The company has raised Rs. 425 crore through a rights issue; however, this money is to largely meet the CAPEX requirements for FY09 and FY10. Subsequently, UBL’s financial leverage is to remain at least 3x for FY09E. As a result, it will continue to bear a substantial interest burden, which will drag its net margins. We expect the EBITDA margin to improve by ~80 bps in FY10 to 11.3% as raw material prices have fallen recently. Moreover, the company should benefit from economies of scale and better realisations on the back of a strong brand equity.