S Kumars Nationwide - CMP: Rs.19; Target Price: Rs.44 - Karvy

Margin Call on Pledged Equity — Overhang on the Stock

There has been a rise in pledged shares over the last two quarters—the pledged shares have already reached 99.8% in Q1FY13 from 83.6% in Q4FY12 (see Risks & Concerns). We believe since there is no buffer left for more shares to be offered, there are possibilities for margin call going forward. Accordingly, a margin call could have an adverse impact on the stock.

However, the management clearly denied the possibility of a pledged share sale in the market as there was no margin price discussed; they feel that any possibility for margin calls does not exist. Moreover, management stated that they have been in talks with the banks to release the pledged equity. We prefer waiting for the release of the pledged equity even though the management has been reiterating its position with similar explanations.

We expect revenue to grow at a CAGR of 15.6% with stable operating margins. However, net income is likely to grow at a CAGR of 20.9% over FY12-FY14E due to lower interest costs and better working capital management. We expect SKNL to post an EPS of Rs. 14.9 and Rs. 19.4 in FY13E and FY14E, respectively.

We initiate coverage on the Company with "BUY" recommendation, valuing at 40% discount to 5 year average EV/EBITDA multiple of 4.9x, with a target price of Rs.44 per share, representing an upside potential of 132%.

Source : Equity Bulls

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