ICICI Direct : Buy Manugraph Industries

(BSE: 505324 | NSE: MANUGRAPH | ISIN: INE867A01022)

Company Background Manugraph India Ltd. is India’s largest manufacturer of newspaper web offset printing presses and is a world leader in the 4- page web-offset printing segment. The company’s manufacturing base is at Kolhapur, an industrial city about 250 miles south of Mumbai. It operates two ultra-modern manufacturing plants, and employees about 1,200 people. In November 2006, the company acquired Dauphin Graphic Machines (DGM), a leading manufacturer of web offset printing machines based in Pennsylvania, US, for US$19.2 million. DGM has an annual turnover of around US$ 70 million. The combined entity now continues to maintain the manufacturing and assembling operations at three facilities two in India and one in the US. Manugraph’s clocked an annual turnover of Rs 525 crores in FY07. We expect the figure to rise to Rs 750 crore in FY08 as a result of the acquisition

Investment rationale Good growth in newsprint Industry Newsprint demand is expected to increase at a CAGR of 8% over the next five years with increasing circulation of newspapers. Many newsprint companies are enhancing capacities, which will result in added demand of the printing presses. With the increase in literacy rates, higher spend on advertisement, and the governments’ continued effort to spread education in the country, demand for newspapers and magazines is expected to grow in long run, which will result in demand for printing presses.

Manugraph is ranked No. 1 among manufacturing and supplying of web offset presses, thereby satisfying end to end requirements of presses and stands to gain the most from the coming influx of demand. With a whopping 70 % market share, its presses are present in nearly all-major publication houses. The company supplies presses having speeds ranging from 35,000 55,000 copies per hour, and can meet all production needs efficiently.

Strong business relationship The company is the domestic leader in web offset printing presses with around 70% market share. Its presses are currently present in all leading publication houses like Times of India Group, Hindustan Times, Indian Express Group, Dainik Jagran Prakashan Group, Anand Bazar Patrika and other regional dailies.

Manugraph has has emerged as a thriving, nimble, printing machinery enterprise, due to its ability to transform itself rapidly to meet the challenges of a highly competitive global economy through constant modernisation and introduction of state-of-the art technology. This has enabled it to stay ahead in the industry and successfully surpass all expectations.

Global presence Manugraph has also made its presence in the international market. Leading publishers from South America, Europe, Middle East, Asia and the CIS countries have all invested in their presses. During FY07, export income comprised 32.4% of its revenue. Going forward, once the DGM facility gets accounted for the entire year, we expect the export portion to grow to almost 45% of the top line and thereby increase revenue figures by around 62% over FY07.

Although Manugraph could face competitive pressures from china and Germany, its end-to-end product line in the printing space would give it the edge. We expect the company to expand its client base in Europe, Middle East, South East Asia, Africa, South America and Australia.

Key Concerns The company could feel pressures from imports coming from China and Germany. However looking at the long standing corporate relationship it has established with domestic players, any major business shifting out from their portfolio seems unlikely.

Financials Manugraph posted an increase of 11.5% in top line from Rs 184 crore in H1FY07 to Rs 206 crore in H1FY08. Bottom line grew by 8.5% from Rs 29.9 crore to Rs 32.45 crore during the same period. For the quarter ended Sept 30, 2007, the company reported a 34.8% jump in top line to Rs 110.29 crore, while bottom line grew by 55.9% to 19.66 crore.

Valuations The stock is trading at a P/E of 9.07x its FY07 EPS of Rs 15.43. Post the DGM acquisition, we expect the company to achieve an EPS in the range of Rs 25 to Rs 27. At the current price, the stock discounts its FY08E EPS by 5.45x. We believe that the stock is trading at an attractive level and we rate it an OUTPERFORMER with a price target of Rs 168 for an investment horizon of 3-6 months.

Technicals The stock was hammered from the Rs 275 levels to around Rs 105. But during the last few weeks, it has consolidated with good volumes. A long-legged doji candle at the bottom suggests that the worst is over, and we could witness a good upward movement from the current levels. On the weekly charts, the stock has formed a long Engulfing Bull candle, with average volumes that are 3x more than the previous week. We believe the stock can further rise to around Rs 140. On the upper side, it could face a strong resistance at around Rs 156. If it manages to cross these levels, it could further rise to Rs 167-174 levels soon. On the downside, the stock has a strong support at around Rs 108.

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Every week ICICIdirect research team will select a stock based on fundamental and/or technical parameter, which is likely to return 20% over a 3-6 month perspective.

Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.