Note: This is not the stock idea of Monday. The stock idea of Monday would be posted on Monday only 🙂 .
Liberty Shoes had been consolidating for some time now, but now its looking strong, having closed above 315rs. People who want to play it safe, or people with larger portfolios i.e. people looking to invest few tens of lakhs of rupees in a stock may consider buying into liberty at these levels. The stock is good for largish portfolios as it has large enough market cap (as compared to other stocks recommended here) and very good liquidity.
The stock has lot of potential and may “easily atleast double” from these levels in next 12-15 months. The estimate is based on the collaboration of what the management has guided in their interview given to CNBC after first quarter results and the news of restructuring that CNBC gave 28th Aug. For next FY, assuming they make 700cr in revenue (I know it would most likely be more, but lets take the pessimistic case), their royalty charges that they have to pay comes out to be roughly 2.5% of 700cr = 17.5 cr, which after restructuring, directly gets added to EBITA (as they no longer need to pay any royalty). Then as mentioned in that news item they would save 10% on cost of productions, that roughly comes out to be 26cr, that again adds up to the EBITA. Adding these two gives 43.5cr and assuming 30% tax gives around 30.5cr which translates into an EPS accretion of around 18rs. As on last FY, they worked on 2.7% PAT and assuming the same margin we get an EPS of around 11rs (assuming there was no re-structuring). Therefore for next year the EPS could be around 18+11 = 29rs. Given a nominal PE of around 30 one gets a price target of 29*30 = 870rs. This is very much possible, because
- I have taken a pessimistic approach. I believe the PAT margins would not be just 2.7%, it would improve, given the past trends (FY 13 it was 2.12% and almost same before that).
- For savings on cost of operations, I have assumed just 26cr. It could be much more than that. Basically I have arrived at 26cr by taking 10% of employee benefit expenses and other expenses (this is nothing but manufacturing expenses, Total administration and selling expenses). If its more than 26cr,then the EPS accretion could be way more.
- This is just phase 1 of restructuring, there are two more phases of re-structuring and once the market knows the bottomline is going to improve so much, the markets normally rewards the the stock with higher PE multiple.
- Dividends:This year the dividend distribution was 20% of net profits. Considering next year the net profits could be around 49 cr (EPS*no. of shares = 29*1.7cr). Considering again a 20% payout, they would distribute around 9.8cr in dividends and this translates into 5.5rs dividend per share. Liberty has normally been generous in the dividend payout (before it got into trouble, i.e. till 2006) paying around 25% of NP, but as usual I am taking the pessimistic approach, just to have margin of safety.
- There would be some cash consideration while merging the entities but that’s not thing to be big and its just one time.
Given all this, I guess this is a good level to enter liberty.
Original recommendation is here