The stock trades at inexpensive valuations 4.9x FY16e EV/Ebitda (17% discount to its 5-year average) and target price multiple is 6x FY16 EV/Ebitda, marginally lower than 5-year average. We expect 17% Ebitda CAGR over the next 2 years, driven by an expected improvement in margin profile in forthcoming quarters underpinned by cost-saving initiatives and a gradual improvement in the product mix. With pellet plant/coke oven batteries just commissioned and utilisation of coke oven gas set for Q3FY15, we expect cost savings of over $200 million on an annual basis.
The stock trades at reasonable valuation despite last 12-month outperformance trades at 10.7x FY16e PE which is at 50% discount to pure global Off Highway Tyres company Titan International. The company has started tapping new markets in Canada, Mexico, Western US, Russia and CIS. We expect the strong performance to continue driven by uptick in demand in global OHT market leading to volume growth of 14% CAGR (FY14-16) and earnings growth of 18% CAGR (FY14-16). The management is looking at an Ebitda margin of 25% (against 24% in FY14) as share of radial tyres goes up from 30% to 35-40% once the Bhuj capacity is operational in FY16.
The stock trades at inexpensive valuations at P/BV 2.8x FY15e, 2.3x FY16e. It has re-rated sharply in last two years as RoEs have improved given strong performance in other businesses and investors have started giving valuation to its housing and general insurance subsidiaries which are accounting for substantial proportion of consolidated PAT, and its vehicle finance is the best quality business with lowest credit cost and funding cost among NBFCs. However, we think the full impact of turnaround in subsidiaries and economic pickup are priced-in. Its targets to cut non-housing loan portfolio to 25% from 33% is a positive as we feel that LAP market is overheated.
Head, India Equities, Espirito Santo Securities