“BUY” This Small Cap CDGS Stock For 20% Upside In 6 Months: HDFC Securities

The brokerage firm HDFC Securities has initiated a buy call on the shares of Alicon Castalloy Ltd. The brokerage has set a target price for the stock of Rs. 995, which it forecasts to hit in six months from its market price of Rs. 823, which would result in a 20% jump. The stock was trading at Rs. 823.55 per share at the time of the brokerages buy call, but it is currently trading at Rs. 828.30 per share on the NSE. HDFC Securities has said in its research report ACL reported robust numbers for Q2FY22 on partial recovery in demand as many customers had ramped up their production by the end of Q1. Net revenue increased by 30.9% YoY to Rs 268cr, driven by a recovery in automobile sales and increased pricing due to higher raw material costs. Exports accounted for ~25% of revenues and the Auto Division contribute 94%. EBITDA however declined by 7% YoY to Rs 24cr due to lower gross margins as raw material inflation gets passed on with a lag. EBITDA margin declined 370bps YoY but improved 100bps sequentially to 9.1%, on account of better operating leverage. The company reported PAT of Rs 3cr vs loss of Rs 4cr in Q1FY22.According to the brokerage Net debt stood at Rs 235cr with a net debt-equity ratio of 0.55x. The company has reduced its CAPEX to Rs 60cr for FY22 from Rs 90cr expected earlier as a further wave of pandemic and semiconductor shortage has led to disruption in the supply chain. Capacity utilization was 60- 65% which is expected to increase to 70-75% in H2FY22. The management guided for EBITDA margin to be in the range of 13-15% for FY22 as shortage of semiconductor eases and there is a ramp-up in production in the coming quarters.Advertisement In its research report, the brokerage has said that Alicon Castalloy Ltd. (ACL) operates one of the largest aluminum foundries in India supplying frugal engineering solutions mainly to the automobile space. It is a leading manufacturer of aluminum castings supplying its products to the Indian and European markets. The company has won significant orders in the last 4-6 quarters and has an outstanding order book of ~Rs 3150cr from new products implying an annual revenue of ~Rs 625cr from these. New orders are expected to support faster recovery over the medium term. With the share of EV gaining strength gradually, we believe an increasing share of revenue would be contributed by EV parts. ACL has increased its revenue target from EV to 36% by FY26 from its earlier target of 25%.HDFC Securities has claimed that Various initiatives taken by the Government is likely to drive higher demand for EVs thereby increasing the need for aluminium parts to reduce the weight of vehicles. Successful completion of fund raising exercise by QIP issue and preferential issue to Promoters and foreign collaborators (in June and Aug 2021 @ Rs 540 and Rs 563 respectively raising a total of Rs 110cr) has enabled ACL to reduce financial cost and improve leverage. It also has strong financial and technological support from Enkei, Japan (leading 2W/PV wheel manufacturer with 7 decades of experience). On May 24, 2021, we had initiated coverage on the stock with a recommendation to Buy at LTP and add on dips to Rs 445-450 band for base case fair value of Rs 584 and bull case fair value of Rs 629. The stock had achieved our base case target on May 24 and bull case target on July 1, 2021. The brokerage has highlighted in its research report that We expect ACLs business to turn around in FY22E supported by strong order wins over the last 4-6 quarters and build on the momentum over the next two years. Revenue/EBITDA of the company is expected to grow at a CAGR of 22/31% over FY21 to FY24E and PAT as the company ramps up the production of recent order wins. We believe investors can buy the stock in the band of Rs 825-840 and add on dips to Rs 735-750 band (14.5x Dec-23E EPS) for a base case fair value of Rs 920 (18x Dec-23E EPS) and bull case fair value is Rs 995 (19.5x Dec23E EPS) in the next two quarters. The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.