CRISIL assigns fair value of Rs 44/sh to Modison Metal

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CRISIL assigns fair value of Rs 44/sh to Modison Metal

CRISIL Research has initiated coverage on Modison Metal with a Valuation Grade of 4/5 in its September 01, 2010 research report.

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CRISIL Research has initiated coverage on Modison Metal with a Valuation Grade of 4/5 in its September 01, 2010 research report.

"Modison Metal (Modison) is a leading manufacturer of electrical contacts in India. Electrical contacts are used in switchgear to complete or interrupt electrical circuits and transfer electricity in virtually every electrical device. The demand for electrical contacts is dependent on the growth in the switchgear market. The industry is made up of low-, medium- and high-voltage electrical contacts. We assign Modison a fundamental grade of '3/5', indicating that its fundamentals are 'good' relative to other listed securities in India. We assign a valuation grade of '4/5', indicating that the market price has a potential 'upside'."

Low price-low quality Chinese products have a market, albeit a limited one

Modison is facing competition from Chinese players in the price-conscious, low-quality segment. While some of the low-voltage electrical contacts are being supplied at a price equivalent to Modison's raw material cost, relatively better quality of Modison's products gives it an edge. In the medium- and high-voltage segments, the unorganised Indian players are importing complete switchgear assemblies from China, killing the domestic demand for electric contacts. But due to the inferior lineament, quality-conscious customers refrain from using their products.

Growth backed by robust order book

Modison's prospects look promising due to the growing size of its order book. The company's order book is in the range of Rs 200 mn to Rs 250 mn as of July 2010 compared to Rs130 mn as of December 2009. Although the order book is executable in a couple of months, it is indicative of strong demand in the underlying switchgear market, improving international scenario and Modison's increased presence in the international arena.  We expect revenues to grow at a CAGR of 22% to Rs 1,432 mn in FY12 from Rs 967 mn in FY10. EBITDA margins are expected to decline to 21% in FY11 from 23% in FY10 due to an increase in raw material prices. Adjusted EPS is expected to increase to Rs 5.1 in FY12 from Rs 3.6 in FY10.

Valuations: Upside from current levels

We have used the discounted cash flow method to value Modison. We have projected cash flows from FY11 to FY15, assumed cost of equity of 15% and terminal growth rate of 3%. Based on this method, we arrive at a fair value of Rs 44 per share. We initiate coverage on Modison with a valuation grade of 4/5, indicating a potential 'upside' from the current levels of Rs 37 (August 31, 2010)," says CRISIL Research report

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

To read the full report click on the attachment