Ruchi Agrawal Moneycontrol Research
The recent stock market volatility has led to a correction in many scripts, some of which are quality plays. Current prices offer a great opportunity to accumulate these fundamentally sound stocks, where the business growth story remains intact.
Despite business dynamics not seeing much of an impact from macro challenges, Godrej Agrovet has fallen over 19 percent while Indian Hotels has risen 5.8 percent in the past six months. Both stocks have underperformed the Nifty, which has risen over 8 percent in this period.
Godrej Agrovet Godrej Agrovet (GAVL) is a diversified farm-to-fork company with interests in animal feed, oil palm plantations, agri-inputs (crop protection), poultry, dairy and frozen foods segments. Majority of its business accrues from underpenetrated and high growth segments.
The company launched its initial public offering in October last year and the stock has been a decent performer since then. It has generated consistent returns and achieved high growth through both organic and inorganic routes over the years.
Why GAVL? Animal feed stabilising: The company has been able to curb de-growth in the animal feed (majorly broiler and cattle feed) segment, which constitutes almost 50 percent of the business and had seen some hiccups in past quarters.
New launches in crop protection: With growing exports and improved domestic performance owing to new products launches, we expect the company to deliver decent growth in the crop protection segment. Though some impact of the rising raw material prices due to Chinese supply constraints is expected, the same might be countered with higher margin product launches.
Policy support in palm oil: The palm oil segment has been a strong performer for the company. We expect the segment to be a growth driver with favourable policy support. Higher import duty on oil is helping improve domestic prices of palm oil, leading to improved realisation and margin.
Value added products in dairy: The dairy segment faced challenges on account of adverse milk and low butter prices during the quarter gone by. The company has now launched products in the value added product portfolio which would usher better margins in upcoming quarters. The expansion in the frozen foods segment, with new product launches, also stands to aid margins.
Healthy balance sheet: The company’s balance sheet remains healthy with low debt, adequate cash and room for inorganic expansion.
Attractive valuation: Post-correction, the stock is now trading at FY19e enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of 20 times and a price-to-earnings of 30 times which looks attractive.
Indian Hotels Company Indian Hotels Company (IHCL) is the hospitality arm of the Tata group and the owner of the luxury Taj group of hotels.
Why IHCL? Completed restructuring, clean balance sheet: The company has undertaken substantial restructuring in the last one year and is now positioned for growth with a leaner balance sheet. At a debt-equity ratio of 0.47 times, the company has scope to undertake capex and inorganic expansion.
Demand supply scenario favourable: After a period of surplus supply, the industry dynamics are now changing with slowing supply growth and progressive demand uptick, which is offering pricing power to companies.
Growing rates and occupancies: With favourable dynamics, room rates have improved. A parallel increase in occupancies is enabling revenue per available room (RevPAR) growth for IHCL, which will help grow revenues rapidly in H2 FY19.
Moving to an asset light model: The management now plans to move towards an asset light model and monetise its strong brand image. IHCL also has moved its focus towards the domestic business, where it remains a strong market leader.
Economy segment growing fast: IHCL is expanding its presence in the fast growing economy segment through the Ginger brand. This will help it capture market share.
Attractive valuation: Post-correction, IHCL is now trading at a FY19e EV per room of 1.05 times and EV/EBITDA of 19.5 times, which is an attractive entry point.
Outlook With the growth story for both GAVL and IHCL intact, we find the current price level attractive and would recommend progressive accumulation.
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