Buy Radha Madhav Corp, target of Rs 70: Brics PCG

Broking house, Brics PCG is bullish on Radha Madhav Corporation , RMCL. It has recommended a 'buy rating' on the company with a target price of Rs 70.

The Brics PCG report on Radha Madhav Corporation:

"Radha Madhav Corporation is a medium-sized company engaged in diversified packaging and printing activities, and catering to varied clientele including PSUs, government organisations, institutions, large scale industries, cooperative unions, federations and other small scale industries. The manufacturing activities of the company are in the areas of primary as well as secondary packaging. RMCL's top ten clients include major manufacturers in the areas of milk and milk products, coatings, and FMCG and textile industries, who contribute approximately 40% of the total sales."

Investment rationales

Organic growth will fuel sales turnover

"The company has planned a capital expenditure of Rs 500.6 million for setting up manufacturing facilities for new products and to add capacities for existing products."

Unique business model

"At the beginning of each month, RMCL submits a re-estimated contract to customers, quoting an average polymer price. This pricing method greatly reduces the impact of volatility in prices of raw material like polymer resins."

Strong customer base

"The company has a client base of over 800 customers, both in India and abroad."

Foray in international markets

"RMCL has also recently signed a deal for technological collaboration with an Italian company Tce Srl. The major focus will be on catering to West European countries such as France. The company will export POF films and other high-quality packaging products to Europe."

Significant risk factors

Export obligations

"To avail the concessions provided for the import of machinery, the company has an obligation to export 8 times the total customs duties saved, that is products valued at approximately Rs 385.4 million in the next eight years."

Forex currency risk

"RMCL imports a substantial portion of the total raw material required, along with other plant and machinery, thus leaving it vulnerable to adverse fluctuations in the forex rate."

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Expansion Projects 

Unit-IV (Daman)

"The company has planned capital expenditure of Rs 500.6 million for setting up manufacturing facilities for new products and to enhance its capacity for existing products."

"The expansion is being carried out at the existing three units, that is Unit I, II and III. Also, a new unit (Unit IV) is being set up in Daman to allow for horizontal integration. This unit will cater to the demand for existing and new products in both the primary as well as secondary packaging segments."

"The total cost of the project is at Rs 500.6 million, which includes the cost of land and building, and plant and machinery (both indigenous and imported), as well as margin money for working capital and other contingencies. The project is expected to begin commercial trial runs in the month of March 2006, while commercial production is expected from the following month."

Unit-V (Uttaranchal)

"RMCL is planning a further capital expenditure of Rs 700 million to set up a manufacturing facility for new products in the state of Uttaranchal."

"The new plant is expected to house a polyester film line with a capacity of 2500 MT per month, a metallizer, a dye guaranteed, DG coating machine and a micro slitter (all with a monthly capacity of 1000 MT). The new unit will also be equipped with an acrylic coating machine of 100 MT capacity per month and another 200 MT of polyester will be used for captive consumption."

Valuation

"We have estimated the fair value for RMCL using a comparative valuation based on the PER, P/BV, EV/EBIDTA and EV/sales multiples, taking their industry averages as 14.0x, 1.8x, 8.1x and 1.2x respectively."

"RMCL has planned expansion and new product strategies, proving that it is a dynamic company, focusing on future demand. We believe that it will perform well in view of its future outlook, and the overall positive economic environment. The company offers an attractive profile with robust growth and newer technological characteristics. Using an average of the methods for calculating the total enterprise value, we estimate the fair value to be Rs 70 per share, an upside of 87% from the current market price of Rs 37 per share. Buy."

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