Stabilisation of international subsidiaries’ performance, strong domestic consumer business and slow recovery in the domestic industrial and T&D segments should drive a strong earnings CAGR, in our view.
The company has a strong ROCE as over 60% of manufacturing is outsourced and overall cost structure is low. On valuations, the peer group trades on average valuations of 25x FY16e and 20x FY17e.
We believe that post-demerger, the consumer business should trade at over 20x P/E, given the high return ratios. As per the company filing, consumer business reported EPS of R3.8 in FY14, and even if we assume any royalty/one time charges, on a conservative view, the company should be able to deliver R5. This implies that base case valuation of the consumer business should be R100.
The implied value of the T&D business at current valuations is R45-65, which is c0.7-1.0 P/B (T&D book) versus T&D peer average P/B of 8.3.
Our analysis of Q3 performance for various end markets such as brown goods, lighting, fans, AC and cables/wires, etc., suggests that demand was weak in the festive season.
While appliance demand was weak, the lighting market was impacted by the transition from CFL to LEDs. The AC business and ceramics, though, remained strong. This segment in aggregate has seen growth falling to the 5-10% range vs over 15-20% in most years from CY05-12.
With macros stabilising, inflation moderating and stable pricing, we expect a recovery to emerge in 1-2 years, back to a 20-25% growth. Near term though, demand remains weak.