Sept 19, 2016 HPL ELECTRIC & POWER LIMITED. SMC Ranking (2/5) About the company. Issue Highlights. Competitive Strengths. Shareholding Pattern (%)

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1 HPL ELECTRIC & POWER LIMITED Sept 19, 2016 About the company SMC Ranking (2/5) Issue Highlights Industry Total Fresh Issue (Shares) Capital Goods 17,871,287 Net Offer to the Public 17,871,287 Issue Size (Rs. Cr.) Price Band (Rs.) Offer Date 22-Sep-16 Close Date 26-Sep-16 Face Value 10 Lot Size 70 Equity Share HPL Electric & Power Limited had the largest market share in the market for electricity energy meters in India in fiscal 2015, with one of the widest portfolios of meters in India and the fifth largest market share for LED lamps during the corresponding period. The company supplies its portfolio of products to developers of residential and commercial building projects, original equipment manufacturers ( OEMs ) and to industrial customers through a mix of direct sales and supply through its authorized dealer network. I ts sales and marketing activities are managed through over 90 branch offices and representative offices in India as on March 31, It has established two in-house research and development centres, one each at Kundli (Haryana) (the Kundli R&D Centre ) and Gurgaon (Haryana) (the Gurgaon R&D Centre, and together with Kundli R&D Centre, the R&D Centres ) Competitive Strengths Issue Composition In shares Total Issue (Shares) 17,871,287 QIB 8,935,644 NIB 2,680,693 Retail 6,254,950 Established brand in the electric equipment industry The company is an established manufacturer of electric equipment in India and the company manufactures and sells its products under the umbrella brand 'HPL'. The company enjoys significant brand recall and customer loyalty, particularly in the market for LV switchgear, allowing it to expand its presence across other ranges of domestic and industrial switchgear products. It supplies its products to a diverse range of industries in the public and private sectors, including power generation, transmission and distribution industry, airports, petrochemical, chemical and fertilizers industry, metals, textiles, cement manufacturing industry, hotels, software and electronics industry, sugar industry and the automobile industry, amongst others. Book Running Lead Manager ICICI Securities Limited IDFC Bank Limited SBI Capital Markets Limited Name of the registrar Karvy Computershare Pvt.Ltd. Shareholding Pattern (%) Particulars Pre-issue Post issue Promotors and promoters group 99.92% 72.15% QIB 0.00% 13.90% NIB 0.00% 4.17% Retail 0.08% 9.79% Total *calculated on the upper price band Objects of the Issue Repayment/ prepayment of certain indebtedness Funding working capital requirements General corporate purposes Large product portfolio Since its incorporation in 1992 as a B2B focused manufacturer of switchgears and allied electrical accessories, the company has significantly expanded its product portfolio. The product portfolio comprises industrial and commercial electric equipment as well as domestic electric equipment, catering to requirements of a diversified customer base. The company believes that its dedicated efforts towards expanding our product portfolio and its ability to identify its customers' requirements contribute significantly to its position in the electric equipment industry and has resulted in becoming a one-stop shop for low voltage electric equipment. Robust manufacturing facilities with a focus on technology up gradation: The Company manufactures all its products within dedicated manufacturing facilities for each product vertical, as well as several components used in its products, with product customization capabilities for its institutional and corporate customers. The company believes that it is able to achieve greater efficiency due to its in-house testing process, reducing the time taken for and the cost of manufacturing its products, from design to commercial production, resulting in higher profit margins. Pan-India sales and distribution network: The company sells its products to institutional, non-institutional and corporate customers, including to developers of residential, commercial and industrial building projects, panel builders and OEMs, primarily through a network of over 2,400 authorized dealers or distributors who further sell its products to over 15,000 retailers, as on March 31, 2016, present throughout India. Since the company invoices its products to its authorized dealers and recover the value of products sold directly from them prior to onward sales to the end-customer, the company believes that this makes its revenue recovery process more efficient and reduces its credit cycle. Established relationship with institutional customers and strong pre-qualification credentials The company believes that it has an established relationship with several 1

2 institutional customers and it supplies its products to various Governmental Agencies. It also supplies its products to various Governmental Agencies, based on a pre-qualification process and grant of approval by these Governmental Agencies. It believes that its prequalified status with Power Utilities and such Governmental Agencies strengthens its position in the market. Business strategies Expand its product range with focus on value added products The Company has consistently focused on expanding its product range and introduces modern electric equipment, offering a wide range of features. The company seeks to utilize its research and development capabilities to develop new products, particularly lighting equipment, has the highest profitability margin amongst the products that the company manufacture and supply. The company also intends to focus on manufacturing value added products across its product verticals such as specialty wiring and smart meters and penetrate all segments of the market, ensuring its presence in each rung of the value chain. Additionally, the company seeks to further penetrate and strengthen its market position in each segment of the market across all its product verticals. Reduce its working capital cycle and focus on rationalizing its indebtedness The company seeks to implement measures to reduce its working capital cycles and improve its inventory management, including through enhancing its brand image to facilitate faster movement of its inventory. The company also seeks to increase its visibility in the market and focus on further strengthening and promoting its brand, which the company believe, will support its efforts in obtaining large channel partners. The company proposes to repay/prepay its long term borrowings and a portion of its working capital borrowings, towards which, the company intend to use a portion of the Net Proceeds to reduce its overall indebtedness, finance costs and debt to equity ratio for future leverage. Expand its business and capture growth opportunities The Government of India has implemented several initiatives such as private participation in the transmission segment and development of the National Power Grid to boost growth in the T&D industry. The company believes that these initiatives of the Government will drive the demand for domestic and industrial electric equipment, including for electric equipment that the company manufactures. Additionally, the company believes that pursuant to the UDAY Scheme of the Government of India there would be added emphasis on improvements in operational efficiency including through mandatory of smart metering solutions, up gradation of transformers and meters, implementing energy efficiency measures like efficient LED bulbs, agricultural pumps, fans and air conditioners, amongst others. Increase its geographical reach and expansion of addressable market The company continually seeks to enhance its addressable market through its network of over 2,400 authorized dealers or distributors, as on March 31, 2016, including by carrying out promotional activities to create awareness for its products. The company plans to create a niche customer base for its products by increasing its focus on increasing its visibility with such institutional customers including panel builders and developers of such residential and commercial projects. Further, the company seeks to utilize its present network of authorized dealers to increase sale of its products across a larger customer base and cover more customer segments. In addition, the company seeks to expand its global reach, through increased customer acceptance of its products in international markets. The company currently exports its products from India solely on receipt of confirmed orders. The company seeks to enter new international markets, primarily in the Middle East, Africa and the south-east Asian region. Strengthen customer base with focus on increasing customer spend on its products The company intends to increase the volume of sale through authorized dealers through 2

3 various promotional activities, including product launches, electrician meets, exhibitions aimed at creating awareness for its products amongst its authorized dealers and through advertisements in the print and electronic media to increase acceptance of its products amongst its end-consumers. Further, the company plans to introduce products at different price points to increase the attractiveness of its products to end-consumers across market segments. The company also proposes to launch different variants for its domestic electric equipment offerings, differentiated on the basis of design and quality, amongst other factors, to enhance the appeal and acceptance for its products amongst end-consumers. Continue to enhance its brand through innovative and focused marketing initiatives The company seeks to continue to enhance brand awareness and customer loyalty through its promotion and marketing efforts. Its marketing strategy involves increasing its visibility through increased advertising in print and social media, television campaigns and increasing its one-to-one interactions with its authorized dealers and end consumers. The company also proposes to increase its marketing efforts for its value added products to garner demand for such products, such as conducting product launches to create awareness for its new products. The company believes that its pan-india presence and scale of operations allows it to increasingly focus on branding and promotional activities and enhance its visibility in the electric equipment industry Risk factors Operations are significantly dependent on its ability to successfully identify customer requirements and preferences: The operations of the company are significantly dependent on its ability to successfully identify customer requirements and preferences and gain customer acceptance for its products. If the company fails to successfully identify customer requirements and preferences and gain customer acceptance for its products, its business may suffer. Competition: The Company may face competition in relation to its offerings, including from competitors that may have greater financial and marketing resources. Failure to compete effectively may have an adverse impact on its business, financial condition, results of operations and prospects. The company has long working capital cycles and significant working capital requirements: The Company has long working capital cycles and significant working capital requirements. If the company fails to effectively manage its working capital cycles or generate sufficient cash flow to satisfy any increased working capital requirements and make required payments for its business, its results of operations may be negatively impacted. Disruption in its relationships with third party authorized dealers: The Company relies upon its network of third party authorized dealers or distributors for a significant portion of its sales and distribution operations within India. Any disruption in its relationships with third party authorized dealers, changes in their business practices, their failure to meet payment schedules and provide timely and accurate information could adversely affect its business, operating cash flows and financial condition. Exposure to foreign currency fluctuation risks: The Company is exposed to foreign currency fluctuation risks, particularly in relation to import of raw materials, which may harm its results of operations. 3

4 Industry overview India is the world's fourth largest economy, with a population of 1.2 billion people. As per the CIA World Factbook, economic liberalization measures, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, which began in the early 1990s served to accelerate the country's growth. The Indian Power sector has witnessed a considerable change and evolution in the last two decades owing to several policy and regulatory measures. Further, continuous growth in population and increasing urbanization and industrialization have constantly added to the electricity demand in India, with 300 million of existing population yet to receive electricity connections and the remaining one billion population having intermittent access to electricity. India's energy demand is expected to grow by 132% by 2035 and is likely to surpass China in the energy demand growth and double the aggregate demand of non- OECD countries. Peer Comparison Co_Name Total Operating Income PAT EPS P/E P/BV BV FV Price Mcap Havells India HPL Electric & Power Limited Valuation Considering the P/E valuation on the upper end of the price band of Rs. 202, the stock is priced at pre issue P/E of 25.61x on its FY16 EPS of Rs Post issue, the stock is priced at a P/E of x on its EPS of Rs Looking at the P/B ratio at Rs. 202 the stock is priced at P/B ratio of 2.65x on the pre issue book value of Rs and on the post issue book value of Rs the P/B ratio of 2.65x on the pre issue book value of Rs and on the post issue book value of Rs the P/B comes out to 1.82x. On the lower end of the price band of Rs.175 the stock is priced at pre issue P/E of 22.19x on its FY16 EPS of Rs Post issue, the stock is priced at a P/E of 30.73x on its EPS of Rs Looking at the P/B ratio at Rs. 175, the stock is priced at P/B ratio of 2.29x on the pre issue book value of Rs and on the post issue book value of Rs , the P/B comes out to 1.57x. Outlook The company is an established manufacturer of electric equipment in India and the company manufactures and sells its products under the umbrella brand 'HPL'. Since its incorporation in 1992 as a B2B focused manufacturer of switchgears and allied electrical accessories, the company has significantly expanded its product portfolio. However, the operations of the company are significantly dependent on its ability to successfully identify customer requirements and preferences and gain customer acceptance for its products. A long term investor may opt the issue. 4

5 Annexure Profit & Loss Rs. in Cr. Particulars 30-Mar Mar-15 Total Operating Income 1, , Total expenditure Operating Profit OPM% Other Income PBDIT Depreciation PBIT Interest PBT Tax PAT CHECK NEXT PAGE FOR BALANCE SHEET 8

6 Annexure Balance Sheet Particulars 30-Jun Mar-16 Non-current assets Fixed Assets Tangible Assets Intangible Assets Capital Work in Progress Non Current Investments Long-term loans and advances Total Non- Current Assets Current assets Inventories Trade receivable Cash & Cash Equivalents Short Term Loan and Advances Other Current Assets Total current assets Total Assets Non-current liabilities Long-term provisions Deferred Tax Liabilities (Net) Other Long Term Liabilities Long Term Provisions Total Current liabilities Short-term borrowings Trade payables Other current liabilities Short-term provisions Total current liabilities Total NET Worth Net worth represented by: Share capital Reserves and surplus Net Worth

7 RANKING METHODOLOGY WEAK NEUTRAL FAIR GOOD EXCELLENT SMC Research Desk SMC Research also available on Reuters Corporate Office: 11/6B, Shanti Chamber, Pusa Road, New Delhi Tel: Mumbai Office: Dheeraj Sagar, 1st Floor, Opp. Goregaon sports club, link road Malad (West), Mumbai Tel: , Fax: Kolkata Office: 18, Rabindra Sarani, "Poddar Court", Gate No. 4, 4th Floor, Kolkata Tel: , Fax: SMC Global Securities Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH SMC Global Securities Limited or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. SMC or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. SMC or its associates and relatives does not have any material conflict of interest. SMC or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. The subject company has not been a client of SMC during the past twelve months. SMC or its associates has not received any compensation or other benefits from the company covered by analyst or third party in connection with the research report. The Analyst has not served as an officer, director or employee of company covered by Analyst and SMC has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly available/internal data/ other reliable sources believed to be true. SMC does not represent/ provide any warranty express or implied to the accuracy, contents or views expressed herein and investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. SMC Global Securities Limited is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a further public offering of its equity shares and has filed the Draft Red Herring Prospectus with the Securities and Exchange Board of India ( SEBI ) and the Stock Exchanges. The Draft Red Herring Prospectus is available on the website of SEBI at and on the websites of the Book Running Lead Manager i.e., ICICI Securities Limited at and the Co- Book Running Lead Manager i.e., Elara Capital (India) Private Limited at Investors should note that investment in equity shares involves a high degree of risk and for details relating to the same, please see the section titled Risk Factors of the aforementioned offer document. DISCLAMIER: This report is for the personal information of the authorized recipient and doesn't construe to be any investment, legal or taxation advice to you. It is only for private circulation and use.the report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No action is solicited on the basis of the contents of the report. The report should not be reproduced or redistributed to any other person(s)in any form without prior written permission of the SMC. The contents of this material are general and are neither comprehensive nor inclusive. Neither SMC nor any of its affiliates, associates, representatives, directors or employees shall be responsible for any loss or damage that may arise to any person due to any action taken on the basis of this report. It does not constitute personal recommendations or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/s. All investments involve risk and past performance doesn't guarantee future results. The value of, and income from investments may vary because of the changes in the macro and micro factors given at a certain period of time. The person should use his/her own judgment while taking investment decisions. Please note that we and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance if this material;(a) from time to time, may have long or short positions in, and buy or sell the commodities thereof, mentioned here in or (b) be engaged in any other transaction involving such commodities and earn brokerage or other compensation or act as a market maker in the commodities discussed herein (c) may have any other potential conflict of interest with respect to any recommendation and related information and opinions. All disputes shall be subject to the exclusive jurisdiction of Delhi High court.