Pitti Laminations (PITLAM) 68

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1 Company Update Rating matrix Rating : Buy Target : 78 Target Period : months Potential Upside : 15% What s changed? Target Changed form 84 to 78 EPS FY16E Changed from 5. to 3.9 EPS FY17E Changed from 7. to 5.6 Rating Unchanged Quarterly performance Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock data Stock Data Market Capitalization Crore Total Debt (FY15) Crore Cash & Investments (FY15) 15.3 Crore EV 34.7 Crore 52 week H/L 82/ 18 Equity capital 13.5 Crore Face value 5 MF Holding (%) 2.9 FII Holding (%) - Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia shashank.kanodia@icicisecurities.com Revise earnings, maintain BUY August 14, 215 Pitti Laminations (PITLAM) 68 Pitti Laminations (Pitti) reported a good set of Q1FY16 numbers with robust topline growth. However, margins were muted due to the absence of export incentives and a fall in scrap prices Topline in Q1FY16 was at 85.7 crore, up 19% YoY while EBITDA for the quarter was at 9.8 crore (EBITDA margin: 11.5%) Laminations sales volume in Q1FY16 was at 518 tonne, up 4.6% YoY while realisations improved 14.2% YoY on the back of a better product mix in favour of exports and higher stator frame volumes PAT in Q1FY16 was at 1.5 crore and was impacted by translational forex loss amounting to.8 crore Product profile; basic necessity of any process engineering! Pitti Laminations (Pitti) is a leading manufacturer of electrical steel laminations, motor cores, sub-assemblies, die-cast rotors and press tools. These products find application in basic capital goods products viz. motors and alternators, which are quintessential products used in process engineering. It manufactures laminations from 5 mm to 1,25 mm outer diameter. It is an end-to-end product and service provider in the electrical lamination segment and a market leader in the special purpose motors segment. It is one of the few suppliers with tooling, laminations, casting and machining all under one roof. The company is a pioneer in the manufacture of traction motor sub-assemblies in India and possesses an indigenously developed tool room with a portfolio of over 3,4 tools. Exports, domestic business to pick up simultaneously! Pitti manufactures electrical laminations/stampings, which constitutes a healthy ~83% of its gross sales (FY14) and has a strong clientele for this product both globally as well as domestically. With GE group companies awarding Pitti a three year contract (CY15-17) worth 6 crore, we expect export sales at Pitti to grow at a CAGR of 2.% in FY15-17E to 238 crore in FY17E ( 166 crore in FY15). Domestically, with a new government at the helm, renewed emphasis on capacity creation, we expect sales to match up to its customer s (Siemens, ABB, Crompton Greaves among others) growth rate. We expect domestic sales to grow at a CAGR of 8.% in FY15-17E to 2 crore in FY17E ( 171 crore in FY15). Re-organising capacity; to lead to enhanced business dynamics! Pitti has shifted ~38% (12 tonne) of its total installed capacity (32 tonne) to a new facility in Pune, Maharashtra. The shift in capacity was undertaken as majority (~65%) of its domestic customers are based out of the industrial belt near Pune while two of its main raw material suppliers (Posco & ThyssenKrupp) are also based out of the same region. This will lead to better business dynamics at Pitti, thereby helping them to reduce the lead time and savings in transportation & logistics costs. Operating margins take a knock, strong revenue visibility, maintain BUY! With the recovery of the domestic capex cycle and good export orders visibility, we expect sales, PAT to grow at a CAGR of 13.8%, 27.6%, respectively, in FY15-17E. We have, however, lowered our margin estimates by 15 bps for FY16E and FY17E on the back of absence of export incentives and a fall in scrap prices, which flow directly to EBITDA. Increase in working capital needs consequent to increase in exports may keep debt-equity at ~1.2x (FY15-17E). We have valued Pitti at 78 i.e. 14x P/E on FY17E EPS of 5.6/share against 12x P/E earlier on the back of strong revenue visibility. The key risks to our estimates remain swing in foreign exchange rate wherein Pitti is susceptible to forex losses if the domestic currency i.e. rupee depreciates beyond the hedged limits. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY16 Q1FY16E Q1FY15 YoY (%) Q4FY15 QoQ (%) Comments Sales Sales came in higher in Q1FY16 on the back of better-than-expected sales volume and change in sales mix in favour exports Other Operating Income Total Operating Income Total Raw Material Expenses Raw material as a percentage of sales in Q1FY16 came in at 63.% against our expectation of 65% Employee Cost Employee costs came in much ahead of estimates and stood at 11.3% of sales vs. our expectation of 9% (usual trend) Other operating expense Other expenses came on expected lines; stood at 14.2% of sales Total Expenditure EBITDA EBITDA Margin (%) bps bps EBITDA margins came in a tad lower-than-expected on the back of higher employee costs Depreciation Interest Reported interest in Q1FY16 came in higher on account of translational forex loss amounting to.8 crore. Adjusting for forex loss, the interest cost stood at 3.2 crore Exceptional item... NA. NA Other Income PBT Taxes Tax rate in Q1FY16 stood at 35.6% PAT PAT was boosted by higher-than-expected sales partly compensated by higher depreciation and forex loss Key Metrics Sales Volume (tonne) 5,18 4,824 4, , Sales volume of lamination sheets in Q1FY16 came in firm at 518 tonnes against our expectation of 4824 tonne Blended realisation ( /tonne) 166, , , , Blended realisations in Q1FY16 came in better-than-expected on account of greater export sales volume (3224 tonne) and higher stator frame sales, which fetch greater realisations Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Net Sales On the back of a robust performance in Q1FY16 we have revised upward our sales estimates for FY16E but largely maintained our FY17E estimates. We have maintained volume estimates but revised upward the realisations on the back of greater proportion of exports in the total product mix EBITDA EBITDA Margin (%) bps bps We have revised downward our EBITDA margin estimates for FY16E & FY17E on the back of correction of scrap prices (key contributor to EBITDA) and absence of export incentives for the company PAT EPS ( ) Assumptions Current FY14 FY15 FY16E FY17E FY16E FY17E Comments Domestic Sales Volume (tonne) 1,747 13,528 15,75 16,2 15,75 16,2 We have maintained our domestic sales volume estimates for FY16E & FY17E Domestic realisation ( /tonne) 18, , , ,32 123,32 12,219 We have revised upwards realisations for domestic sales on the back of robust realisations in Q1FY16 Export Sales Volume (tonne) 4,38 7,885 9,45 1,8 9,45 1,8 We have maintained our export sales volume estimates for FY16E & FY17E Export realisation ( /tonne) 192,572 21, ,399 22, ,399 22,784 We have largely maintained our export realisations estimates for FY16 & FY17 Total Sales Volume (tonne) Blended realisation ( /tonne) Revised upwards blended realisations on the back of robust increase in domestic realisations and better product mix ICICI Securities Ltd Retail Equity Research Page 2 Earlier

3 Company Analysis Pitti Laminations (Pitti) is a leading manufacturer of electrical steel lamination, motor cores, sub-assemblies, die-cast rotors and press tools domestically. These products find application in basic capital goods products, viz. motors and alternators, which itself are quintessentially used in any process engineering. The company was founded in 1983 by Sharad B Pitti. Pitti s main product i.e. laminations are sold both domestically as well as globally while motor housings are meant only for exports. The company is a pioneer in the manufacture of traction motor sub-assemblies in India and possesses an indigenously developed tool room with a portfolio of over 3,4 tools. Pitti also holds a 47% stake in Pitti Castings Pvt Ltd, which manufactures castings. Main Product: Electrical Steel Laminations Exhibit 1: Pictorial description of main product of Pitti Lamination Stator; around which electrical field is generated and copper coil Basic Motor wounded. It is the most critical component of a motor This stack is made of electrical steel and is of various forms ; It is the main product being manufactured by Pitti Laminations Single lamination Sheet This can either be sold in the form of single sheet or a stack of electrical sheets welded together Stack of lamination sheets Product being manufactures by Pitti Definition: Laminations are the steel portions of the stator and rotor consisting of thin lamination sheets stacked together. These laminations can be stacked "loose", welded, or bonded together depending upon application. ICICI Securities Ltd Retail Equity Research Page 3

4 Electrical steel laminations business: main revenue driver!! Pitti s sales can be broadly classified under four business heads viz. sale of electrical stampings, sale of scrap (bi-product of stamping), sale of tools & Job work charges. Exhibit 2: Revenue bifurcation Sales Bifurcation Units FY11 FY12 FY13 FY14 Sale of Stampings crore Sale of Scrap crore Sale of tools crore Job Work Charges crore Total Gross Sales crore Total Net Sales crore As of FY14, electrical laminations/stampings constitute a healthy ~83% of its total gross sales followed by scrap (~12%), job work (~3%) and tools (~2%). Stamping business: Volume led growth to prevail!! Pitti has an installed capacity of 32 tonne/annum (TPA) of electrical stampings/laminations and 3 motor housing/stator frames. It is currently undergoing de-bottlenecking, which will increase its electrical laminations capacity to 36 TPA in the near term. Exhibit 3: Stampings volume & realisation In FY15, Pitti recorded sales of tonne of laminations while the blended realisations stood at /tonne. Export sales during FY15 stood at 7885 tonne with corresponding realisations at 21146/tonne. Domestic sales during FY15 stood at tonne with corresponding realisations at /tonne Going forward, total sales volumes are expected to grow at a CAGR of 12.3% in FY15-17E. Domestic sales volume are expected to grow at a CAGR of 9.4% in FY15-17E to 162 tonne while export sales volume are expected to grow at a CAGR of 17.% in FY15-17E to 18 tonne in FY17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Total Volume Blended Realization /tonne Domestic vs. export sales volume & realisation Exhibit 4: Domestic sales volume to 9.4% CAGR in FY15-17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Domestic Volume 8 4 Domestic Realization /tonne Exhibit 5: Export sales volume to 17.% CAGR in FY15-17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Export Volume Export Realization /tonne ICICI Securities Ltd Retail Equity Research Page 4

5 Strong clientele both domestically, globally! Pitti by virtue of supplying specialised custom made quality product has a very strong clientele with most of client s sticking with Pitti for fairly long period of time. Domestically, in the laminations segment Pitti s client include ABB, Alstom and Ritz Hydro, Bhel, Crompton Greaves, Cummins, L&T, ReGen Powertech, Siemens and Voith, among others. On the global front, GE group entities, mainly GE Transportation Systems (GETS) and GE Consumer and Industrial (GECI) constitute the major chunk of its exports. Pitti s customers utilise their products in power generation, transportation, mining, industrial motors, locomotives, aerospace, automobile, oil & gas, earth moving and mining. Stretched working capital: here to stay! By virtue of importing raw material for orders from GE group companies and shipping the final product to GE entities through sea, the company has elongated working capital needs with net working capital days (NWCD) at 146 days as of FY14. The company is shifting some of its manufacturing capacity from Hyderabad to Pune, which should help in cutting down the lead time. However, conservatively we have built in NWCD at 13 days in FY16E and FY17E, going forward. Exhibit 6: Net working capital days (NWCD) days FY11 FY12 FY13 FY14 FY15E FY16E FY17E Net WC days Debt to remain at elevated levels, working capital loans to prevail!! By virtue of having an elongated working capital cycle, Pitti has considerable amount of debt on its books (FY15 total debt at 136 crore, debt-equity: 1.2x). However, majority of the debt is in the form of shortterm borrowing, thereby catering to the working capital needs. Going forward, on the back of a pick-up in exports, debt at Pitti is expected to be at elevated levels with debt to equity at ~1.2x in both FY16E and FY17E. Exhibit 7: Equity, debt, debt-equity trend crore 1 8 x FY11 FY12 FY13 FY14 FY15 FY16E FY17E Equity (LHS) Debt (LHS) Debt:Equity (RHS) ICICI Securities Ltd Retail Equity Research Page 5

6 Revenues to grow at 13.8% CAGR in FY15-17E We expect Pitti to clock robust revenue growth of 13.8% CAGR in FY15-17E primarily on the back of a pick-up in volumes and increase in realisations. Laminations sales volume is expected to grow at a CAGR of 12.3% in FY15-17E to 27 tonne in FY17 (21413 tonne in FY15) while blended realisations are expected to improve at a CAGR of 1.6% in FY15-17E to /tonne ( /tonne in FY15). Exhibit 8: Revenue trend Exhibit 9: Revenue bifurcation- Domestic vs. Exports crore crore FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E Domestic Exports Domestic sales turnover is expected to grow at a CAGR of 8.% in FY15-17E to 2 crore while the exports turnover is expected to grow at a CAGR of 2.% in FY15-17E to 238 crore. EBITDA, PAT to grow at 14.7%, 27.6% CAGR, respectively, in FY15-17E We expect EBITDA to grow at a CAGR of 14.7% in FY15-17E to 53.2 crore in FY17E ( 4.5 crore in FY15) primarily on the back of increase in sales (13.8% CAGR) and flat margin profile (~12%). PAT is expected to grow at a CAGR of 27.6% CAGR in FY15-17E to 15.1 crore in FY17E ( 9.3 crore in FY15) Exhibit 1: EBITDA & EBITDA margins trend Exhibit 11: PAT trend crore % crore FY13 FY14 FY15 FY16E FY17E 11 - FY13 FY14 FY15 FY16E FY17E EBITDA EBITDA Margin ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation Exhibit 12: Two year forward P/E (Pitti currently trading at two year forward P/E of 12.2x) With a recovery in the domestic capex cycle and good export order visibility, we expect sales and PAT to grow at a CAGR of 13.8% and 27.6%, respectively, in FY15-17E. We have, however, lowered our margin estimates by 15 bps for FY16E and FY17E on the back of the absence of export incentives and fall in scrap prices, which flow directly to EBITDA. Increase in working capital needs consequent to increase in exports may keep debt-equity at ~1.2x (FY15-17E). We have valued Pitti at 78 i.e. 14x P/E on FY17E EPS of 5.6/share vs. 12x P/E earlier on the back of strong revenue visibility. The key risks to our estimates remain a swing in foreign exchange rate wherein Pitti is susceptible to forex losses if the domestic currency i.e. rupee depreciates beyond the hedged limits. The company is a net exporter but also has account receivables outstanding against its exports for a period of ~18 days, thereby making itself susceptible to losses on account of domestic currency (rupee) depreciation. In the recent company presentation, the company also expressed its long term vision wherein it plans to reach a topline of ~ 1 crore by FY18E, which will involve some amount of corporate restructuring (merger of group entity; Pitti Castings) and inorganic expansion (acquisition of some motor company; forward integration). Pitti intends to realise ~57% of the targeted revenues in FY18E from the current laminations business, ~18% from Pitti Castings and ~25% from the motors business. Since the plan is on the drawing board, we await clarity on this matter and have not factored this in our target price calculation. ( ) Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Price 18x 15x 13x 1x 7x 5x 2x Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot 1 Target Price: Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date/Year Event 28 Records capacity utilisation of 68% on its new expanded capacity of 25 tonne (production volume at 1785 tonne) 29 Promoters pledge 25.9% of their stake in the company 211 Appoints G Vijay Kumar as Chief Financial Officer (CFO) 212 Expands its capacity from 25 tonne to 32 tonne (production in FY12; 2522 tonne, capacity utilisation 78%) 212 Buys assets of Andhra foundry unit 214 Gets awarded a firm three year contract from GE group companies for supplying laminations worth 6 crore over CY15-17E 215 Board of directors of company approve stock split of company's shares in the ratio of 1:2 215 Sets April 17, 215 as the record date of stock split Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Position Change (m) 1 Pitti Electrical Equipment Pvt. Ltd. 3-Jun Pitti (Sharad B) 3-Jun Pitti (Akshay S) 3-Jun Pitti (Madhuri S) 3-Jun Lalita Steel Industries Pvt. Ltd. 3-Jun Barclays Wealth 3-Jun Shah (Dhiren Shevantilal) 3-Jun Shah (Sharad Kanayalal) 3-Jun Nuwal (Rahesh) 31-Mar Pitti (Shanti B) 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoter FII..... DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Nuwal (Rahesh).32m.35m Lalita Steel Industries Pvt. Ltd. -.14m -.14m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material Expenses Employee Expenses Other Operating Expense Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item.... Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Share Cap Interest Paid CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others.... Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Others Assets.... Application of Funds Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

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