Shirpur Gold Refinery Ltd.

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1 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 MANAGEMENT COMPANY VISIT REPORT NOTE Nifty: 8,095; Sensex: 26,403 June 27, 2016 Shirpur Gold Refinery Ltd. Long term vision = Backward integration + Value added products Summary NOT RATED CMP Rs97 Target Price - Reco NOT RATED Key Stock Data Sector Metals Non-Ferrous Bloomberg ATRI IN / SHGR.BO Shares o/s (mn) 29 Market cap. 2,803 Market cap. (US$ mn) 41 3-m daily average vol. 92,009 Price Performance 52-week high/low Rs100/49-1m -3m -12m Absolute (%) Rel to Sensex (%) Shareholding Pattern (%) Promoters 72.7 MFs/Banks/FIs 2.5 Public & Others 24.8 Relative to Sensex ATRI Source: Capitaline Sensex We recently met the management of Shirpur Gold Refinery Ltd. (SGRL) (Director Mr. V. K. Agarawal and CFO - Ms. Archita Kothari) to understand the business insights and future strategy. Incorporated in 1984, SGRL, a part of Essel Group Company, is engaged in the business of refining, manufacturing and marketing of precious metals. It has a technical capability of achieving fineness of upto parts per thousand for gold and silver and casting the refined bullion into bars of various denominations. It also exports gold jewellery & Zee Gold coins to various countries in APAC region. Recently, the Company has been certified as ISO 9001:2015 standard Refinery. The backward integration, increasing footprints in different countries, contribution of Dubai subsidiary from current year (100% tax benefit) along with refinancing of existing debt at lower interest rate would accelerate the earning pace, thus, making a case of rerating. The stock is currently trading at a P/E and EV/EBITDA of 20.4x/12.0x and 5.7x/4.9x its FY16/FY17E earnings. We do not have coverage on the stock. Key management meet highlights SGRL, earlier known as Agee Gold Refiners Ltd, has been acquired by Essel group in December 2008 from ARCIL. After passing through tough time, the company is geared up smartly and now looking to explore opportunities in different geographies. Gold deposit scheme - The scheme (to mobilize a portion of the tonnes of gold) can offer an opportunity of domestic supplies of scrap for refining and SGRL (being Asia s largest refiner) stands to gain maximum benefit from this scheme in the coming years. The company has already tied-up with 4 large private banks in India. Zee Gold DMCC, Dubai (100% subsidiary) has just started trading from current fiscal (targeting 4-5 tonne per month; tax free till 2052) and also started offering gold to High Net worth Individuals (HNIs) in Dubai under the scheme of Zee Gold Saver A/c and tapping an opportunity in African, Latin America and Australia. The company appointed Mr. Jeff Rhodes (CEO) on board a well known and respected person in the Global Bullion industry. Zee Gold DMCC is broker member of Dubai Gold & Commodities Exchange (DGCX) and providing liquidity to Spot Gold contract introduced by DGCX first of its kind in Dubai. Backward integration a key through PMRL (Australia) by joining hands with local government and dore suppliers would ensure easy availability of RM at cheaper rate for India. It already got export license (December 2015) and environment clearance from MDA. The company has incurred capex of USD1mn and targeting 100kg dore every month. EBITDA margins is likely to improve gradually (backward integration) while lower interest outgo (lower borrowing rate) along with tax benefit in Dubai subsidiary (100% exempted) would improve consolidated earnings. Consequently, Return ratios to see upward journey. The management is focusing on (1) Backward integration/strategic tie-up for RM (2) Expansion in other countries (3) new value added products in the coming years. Tale: Financial snapshot (Standalone) Year Revenue EBITDA EBITDA(%) Adj.PAT EPS (Rs) PE(x) EV/EBITDA (x) ROE (%) ROCE (%) FY15 32, FY16 38, FY17E 44, FY18E 49,137 1, Source: Company; IDBI Capital Research

2 Investment Rationale Largest gold refiner in India; Sufficient capacity in place SGRL is India s no.1 and one of the Asian largest gold refiners with the 217 MT capacity in India. It manufactures gold bars, Silver coins and gold jewellery as well. It has technical capability of achieving fineness of upto parts per thousand for gold and silver and casting the refined bullion into bars of various denominations. Its refining facility in Shirpur, Dhulia (Maharashtra) spread across 50 acres land through which it caters to major jewelers and top-notch bullions across India. Major revenue contribution (80% above) comes from top five bullion dealers. It is looking for backward integration (for dore through strategic tie-ups) in FY17 and targeting to offer value addition products and entry into B2C in FY18. After a twe years of muted performance, it is expecting to see strong revenue traction in the next 2-3 years (including contribution from Dubai subsidiary). Backward integration through PMRL; RM availability at cheaper rate a long term strategy Through its step down subsidiary in PNG, Australia, the company is looking to for backward integration by the joint effort of local government (currently educating gold miners about the melting process and manufacturing of bars). It is looking to enter into strategic tie-ups/ agreement to procure the key raw material (Dore) for its Indian refinery. It already got export license in December 2015 and environment clearance from Mineral Development Authority (MDA). The company has incurred capex of USD1mn and targeting 100kg dore every month with an EBITDA margin of 4%. India - domestic opportunities abundant The gold refining industry is looking forward to a modified gold deposit scheme from the RBI to mobilize a portion of the tonnes of gold held by the general public. The scheme can offer an opportunity of domestic supplies of scrap for refining and SGRL (being Asia s largest refiner) stands to gain maximum benefit from this scheme. Launching of initiatives of the gold deposit scheme and India coin shows the government efforts to regularize gold. Additional procedural reforms and the ease of imports of the raw material would eventually add to efficiency of the company. The company is planning to tie-up with 6-7 large private banks and expecting better margins, however, the gold monetization scheme is yet to start getting traction, which would take 6 months from hereon. Zee Gold DMCC, Dubai (100% subsidiary) started contribution in FY17 A feather on the cap After two years of formation (Formed in 2013 with the object of doing trading business in precious metals), the company is now aggressively looking to build profession team (currently 11) and started supplying bullions to Standard Bank of London (acquired by ICBC, China last year) and tied-up with DGCX, Dubai to supply gold for its spot contracts from current year. Moreover, it has recently started offering gold to High Net worth Individuals (HNIs) in Dubai under the scheme of Zee Gold Saver A/c and tapping an opportunity in African, Latin America and Australia. For Dubai subsidiary, they have appointed Mr. Jeff Rhodes (CEO) on board a well known and respected person in the Global gold Industry. He represented the SGRL in Latin American gold conference recently and also in Dubai as well. This alliance with DGCX will help create a paradigm shift for the UAE bullion industry and the gold souk participants by providing them access to Loco Dubai gold prices on a federally regulated trading platform. This subsidiary has already started trading of 4-5 tonnes gold per month, which would reflect in FY17 financials. Most importantly, this entity will enjoy 100% tax exemption for the next 50 years under SEZ norms. This would not only spur the EBITDA margins but also help in availing a key RM at a competitive price from international market. Consequently, this strategy would bring operating efficiency and expand the margins at a decent rate. Currently, there are three players operating majorly (including PMRL) in PNG, Australia and the annual gold production of the country stands at 70 MT. It is also working to form JV with local government to ensure smoother supply of dore. 2

3 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 6,390 9,685 8,011 7,962 11,129 7,924 9,749 40,467 17,405 32,212 38,953 10,183 Strong international presence; Customer centric focus to bode well The Company has taken various initiatives to improve global footprint gradually by analyzing the customer s requirement. The company has also created a strong customer base in the international market by having strong and solid channel partners in main hubs of UAE and Hongkong, the company stands to gain in the process of penetration of extended markets like Africa, Europe and USA. EBITDA margin to improve; Uptick in return ratios With the availability of RM at competitive rate and better operating leverage (higher consumer spending would reflect in volumes), the EBITDA margin is expected to improve gradually while entry in end consumer market and value added products along with the reduction in interest outgo (due to refinancing of debt at lower rate) would improve overall financials. The benefit of 100% tax benefit on its subsidiary would enhance consolidated accelerate earning pace and return ratios. Valuation and Outlook SGRL s focus on (1) Backward integration (2) Strategic tie-ups/ off take deals and (3) Value addition products is likely to help company to improve operational performance, going forward. In addition, the contribution from its Dubai subsidiary from current fiscal along with the lower interest outgo (Average cost of debt reduced on working capital) would help in improving earnings growth. The stock currently trades at a P/E and EV/EBITDA of 20.4x/12.0x and 5.7x/4.9x to its FY16/FY17E estimates. Figure: Revenue & EBITDA margin trend (Standalone) 12,000 10,000 8,000 6, % Quarterly 2.3% 2.1% 2.0% 2.0% 2.2% 1.6% 1.5% 3.0% 2.5% 2.0% 1.5% 50,000 40,000 30,000 Yearly 3.1% 2.4% 2.0% 3.5% 3.0% 2.5% 2.0% 4,000 2, % 0.5% 0.0% 20,000 10, % 1.5% 1.0% 0.5% 0.0% FY13 FY14 FY15 FY16 Revenue EBITDA (%) Revenue EBITDA (%) Source: Company Table: Quarterly performance (Standalone) Year-end: March Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Revenues EBITDA EBITDA margin (%) 2.4% 1.6% 1.5% 2.3% 2.1% 2.0% 2.0% 2.2% PAT PAT margin (%) 0.8% 0.5% 0.8% -0.2% 0.4% -0.2% 0.5% 0.6% EPS (Rs) Source: Company; IDBI Capital Research 3

4 Business profile Shirpur Gold Refinery Ltd. (SGRL), a part of Essel Group Company, is engaged in the business of refining, manufacturing and marketing of precious metals. The Company has an installed capacity to refine 217 metric tons (MT) of gold and silver in Shirpur, Maharashtra. The company has production lines for gold and silver bars, minting of gold and silver coins and gold jewelry. It has technical capability of achieving fineness of upto parts per thousand for gold and silver and casting the refined bullion into bars of various denominations. SGRL laboratory is a NABL Accredited Lab (National Accreditation Board for Testing & Calibration Laboratories), Government of India for ISO/IEC 17025;2005 in the discipline of chemical analysis and the scope covers testing of Gold & Silver by Fire Assay & Bullion Assay. It exports gold jewellery & Zee Gold coins to various countries in APAC region. It has major presence in Western market of India. Recently, the Company has been certified as ISO 9001:2015 standard Refinery. Product range Manufacturing (1) Gold bars of 100g (2) 1 kg. Gold and (3) Silver coins or different denominations of different purities as per market demand and marketing throughout the country by its network of dealers. Gold Bar Gold Coin Gold Jewellery Presence in Jewellery The Company is also manufacturing gold jewellery for domestic as well as international markets and having two wholly owned subsidiaries in Dubai and Singapore. Figure: Standalone revenue mix (FY16) Region wise Product-wise Export mix, 5% Gold jewellery, 20% Gold bars, 80% Domestic mix, 95% Source: Company; IDBI Capital Research 4

5 Table: Subsidiaries Name of Subsidiaries Stake Country Particulars Zee Gold DMCC 100% Dubai Shirpur Gold Mining Company Private Limited 100% Singapore Precious Metals Mining and Refining Limited 100% Australia Source: Company For trading in precious metal. The company specializes in mine financing of precious metals Investing in the equity of international mining companies for getting dore supply Objects of carrying out activities of Mining and Refining of Precious Metals and to avail dore for internal purpose Zee Gold DMCC, a wholly owned subsidiary of SGRL, was formed with limited liability on 2nd January 2013 by the Registrar of Companies of the Dubai Multi Commodities Centre Authority in Dubai. Step down - Precious Metals Mining and Refining Ltd. (PMRL)- It is incorporated with the main objects of carrying out activities of Mining and Refining of Precious Metals. Shirpur Gold Mining Company Private Ltd., a wholly owned subsidiary of SGRL was incorporated under the Companies Act (Cap 50), on 27th February 2013 in Singapore. The company specializes in financing of mines production, secured transportation, insurance and all other related services from raw material to finished products. Further the company purchases all the production of mines. Table: Peer comparison Particulars Revenues EBITDA (%) P/E (x) P/S (x) D/E (x) ROCE (%) FY16 FY17E FY16 FY17E FY16 FY17E FY16 FY17E FY16 FY17E FY16 FY17E Shirpur Gold Refinery Ltd % 2.1% Rajesh Exports* % 1.0% *Incl. Acquisition Source: Bloomberg; Company; IDBI Capital Research 5

6 Financial summary (Standalone) Profit & Loss Account Cash Flow Statement Net sales 32,212 38,953 44,045 49,137 Growth (%) Operating expenses (31,426) (38,175) (43,128) (47,933) EBITDA ,204 Growth (%) Depreciation (87) (67) (88) (103) EBIT ,101 Interest paid (492) (547) (507) (541) Other income Pre-tax profit Tax (62) (67) (121) (202) Effective tax rate (%) Net profit Adjusted net profit Growth (%) (10.9) Shares o/s (mn nos) Pre-tax profit Depreciation Tax paid - (67) (121) (202) Chg in working capital 210 (2,234) (342) (418) Other operating activities CF from operations (a) 779 (1,530) (20) 77 Capital expenditure (8) (40) (44) (49) Chg in investments (3) Other investing activities (3) CF from investing (b) (14) (40) (44) (49) Equity raised/(repaid) (1,073) Debt raised/(repaid) Dividend (incl. tax) Chg in minorities Other financing activities (492) CF from financing (c) (980) Net chg in cash (a+b+c) (216) (1,060) Balance Sheet Financial Ratios Net fixed assets 1,742 1,710 1,666 1,612 Investments Other non-curr assets Current assets 7,573 7,656 8,570 9,453 Inventories 742 1,417 1,654 1,839 Sundry Debtors 4,521 2,805 3,017 3,231 Cash and Bank 1, Loans and advances 569 2,755 3,083 3,440 Total assets 10,195 10,303 11,174 12,003 Shareholders' funds 2,561 3,251 3,485 3,878 Share capital Reserves & surplus 2,269 2,960 3,194 3,586 Total Debt 1,822 2,331 2,531 2,631 Secured loans Unsecured loans 876 1,839 2,039 2,139 Other liabilities Curr Liab & prov 5,778 4,686 5,122 5,458 Current liabilities 5,735 4,636 5,051 5,351 Provisions Total liabilities 7,634 7,052 7,689 8,125 Total equity & liabilities 10,195 10,303 11,174 12,003 Book Value (Rs) Source: Company; IDBI Capital Research Adj EPS (Rs) Adj EPS growth (%) (10.9) EBITDA margin (%) Pre-tax margin (%) RoE (%) RoCE (%) Turnover & Leverage ratios (x) Asset turnover Leverage factor Net margin (%) Net Debt/Equity Working Capital & Liquidity ratios Inventory days Receivable days Payable days Valuations PER (x) Price/Book value (x) PCE (x) EV/Net sales (x) EV/EBITDA (x) Dividend Yield (%)

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