Buy Balmer Lawrie; target Rs 560: Emkay Research

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Buy Balmer Lawrie; target Rs 560: Emkay Research

Emkay Research has recommended buy rating on Balmer Lawrie with target price of Rs 560. Research firm believes that the stock trades at 7.2x FY09 earnings, which is unwarranted.

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Emkay Research has recommended buy rating on Balmer Lawrie and Company with target price of Rs 560. Research firm believes that the stock trades at 7.2x FY09 earnings, which is unwarranted.

Emkay Research report on Balmer Lawrie:

Balmer Lawrie Limited (BLL), a public sector undertaking, is a diversified conglomerate with presence in logistics, industrial packaging, grease and lubricants and tours and travels. Logistics contributes 60% of PBIT of the company. The company has mutiple growth drivers in place as it plans to increase its CFS capacity at existing locations and expand its CFS/ICD network to other parts of the country as well. We expect the company to report an EPS of Rs 54.1 in FY08 and Rs 62.5 in FY09. The stock trades at 7.2x FY09 earnings and 4.3x FY09 EV/EBITDA. We believe, such steep discount to its logistics peers is unwarranted and initiate coverage with a BUY and a target price of Rs 560.

Containerisation to fuel growth

Buoyancy in exim trade, improvement in port infrastructure and increasing penetration of containers will drive container traffic at various ports in India. With proposed investment in the port handling capacity, container traffic is expected to grow three fold by 2014. We believe, BLL will be a key beneficiary of increased container traffic by virtue of its CFS presence at JNPT, Chennai and Kolkata.

Logistics - The profit driver

BLL's logistics segment has presence in Container Freight Stations (CFS) and freight forwarding services (FFS). Logistics segment contributes 60% of PBIT, with container freight station garnering the lion's share. The company is further mulling expansion at two of its CFS and is also in the look out for acquisitions. In the FFS, the company is a preferred service provider to PSUs with an 80% market share. With the rapid growth in container traffic, we expect BLL's logistics division to drive profitability of the company.

Capex and acquisition to drive growth

The management is contemplating acquisition in the logistics segment. The company has also appointed a consultant to advice it on the future growth strategies by outlining locations for its new CFS. Going forward, expansion at Chennai CFS and approval for expansion at JNPT will drive volumes.

Valuation- Initiate coverage with target price of Rs 562

We expect BLL to report EPS of Rs 54.1and Rs 62.5 in FY08 and FY09 respectively. The stock trades at 7.2x FY09 earnings and 4x EV/EBITDA. The stock trades at a sharp discount to its peers in the logistics sector. Given the strong return ratios and positive surprise from inorganic growth, we believe the discount is unwarranted. While the other logistics companies trade at a band of 12-16x FY09 earnings, BLL at 7.2x FY09 earnings is at a steep discount. We initiate a coverage with a BUY and a target price of Rs 560, discounting FY09 earnings by 9x.