Sell Abhishek Ind: Citigroup

Citigroup report on Abhishek Ind:

Retain Sell/Medium Risk

“We rate Abhishek as Sell/Medium Risk (3M) with a new target price of Rs23 based on 8.5x Sept'07E P/E. With muted earnings growth and no major earnings surprises forecasted, we believe all the potential upside is priced in.”

Pricing pressures dampen terry towel growth

“While outsourcing opportunities for terry towels remains strong, increasing price pressures dampen growth rates. We see healthy volume growth of 15% CAGR, but 4% CAGR decline in prices would lower Abhishek's towel revenue growth to 10% CAGR over FY06-09E.”

Large capex still on anvil

“While much of the textile expansion in terry towels and yarns is now complete, Abhishek still has significant capex of Rs10bn over FY06-09E on the anvil: 1) two 20MW captive power plants, 2) paper (Rs6.8bn) and 3) incremental expansion in terry towels and yarn (Rs2.1bn). “

We forecast earnings CAGR of 1% over FY06-09E

“Revenues will grow at 15% CAGR and EBITDA at 20% CAGR, but we forecast earnings CAGR of 1% over FY06-09 due to higher depreciation and interest costs post expansion with 9% equity dilution on equity warrants outstanding (conversion at Rs33 per share).”

Upsides priced in

“With the stock trading at 8.6x FY07E P/E, toward the mean of the two-year historical P/E band (7.5 -11x), we believe potential upside is priced in. Muted earnings growth and large-scale paper expansion will hinder price performance and re-rating, in our view.”