Salzer Electronics Ltd. Rating: Buy. Electrical Equipment SEL STOCK IDEA

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1 Salzer Electronics Ltd. Electrical Equipment STOCK IDEA Rating: Buy Date June 16, 216 CMP (Rs.) 215 Target (Rs.) 263 Potential Upside 22% BSE Sensex 26,525 NSE Nifty 8,141 Scrip Code Bloomberg SZE IN Reuters SALZ.BO BSE Group B BSE Code NSE Symbol SALZERELEC Market Data Market Cap.(Rs. Cr) 295 Equity Sh. Cap. (Rs Cr) Wk High/Low 364/16 Avg. Quarterly Volume 83,5 Face Value (Rs.) 1 Shareholding Pattern (As on 31 st Mar 216) FII.58 DII Promoters Public & Others Total 1. Comparative Price Chart Jun-15 Sep-15 Dec-15 Mar-16 Salzer Sensex Ravikant Sangepag Research Analyst ravikants@systematixshares.com Arun Gopalan VP- Research arungopalan@systematixshares.com Salzer Electronics Limited (SEL) is a leading player offering total and customized electrical solutions in switchgears, wires and cables and energy management business. It is the largest manufacturer of CAM operated rotary switches with a market share of 25%. SEL caters to a wide range of products with five in-house manufacturing facilities, located in Tamil Nadu and Himachal Pradesh. SEL was established in 1985 as an electrical installation product manufacturer having more than 15 different products with 1,2 employees and five manufacturing plants. The company caters to almost all aspects of indoor and outdoor electrical requirements of the industry, and the building and construction, and automobile component industries. With strong research base and technological tie-ups, SEL is a preferred supplier to various leading companies like GE, Schneider, Nuclear Power Corporation, American Power Corporation and Indian Railways. The company, in a technical collaboration with Trafomodern (a leading manufacturer of dry type transformers in Europe) has lined up three new products in industrial switchgear segment. With addition of these new products, we expect revenue from switchgear segment to grow at a CAGR of 27% from FY16 to FY18. With improved utilization, increasing contribution of high margin switchgear segment and introduction of new high margin products, we expect EBITDAM of SEL to reach 13.1% (11.9% in FY16). Well positioned to ride on recovery in domestic Capital Expenditure cycle: SEL, starting as single product company, today has emerged as global player operating in 4 countries with more than 1 SKU s in the segment. SEL commands ~2% market share in industrial switchgear segment in India. The company spends ~4-5% of its revenues on R&D to develop new products. It owns one patent for rotary switches and 5 more product patents are in process of approval. In addition, it has Joint venture with C3Controls for contactors and relays. SEL s products are internationally certified and have universal acceptance. With strong research base and technological tie-ups, SEL is a preferred supplier to various leading companies like GE, Schneider, Nuclear Power Corporation, American Power Corporation and Indian Railways. We believe that SEL is best placed to ride on revival of domestic capital expenditure cycle. New product addition in Industrial switchgear segment to drive revenues: Switchgear segment contributing 47% has grown 14% in FY16. To expand its product portfolio, the company raised Rs 62 Cr from QIP in July 215. Rs 3 Cr of that is already spent on capability to manufacture 3 phase dry type transformer in technical collaboration from Trafomodern, a leading manufacturer of dry type transformers in Europe. The plant with capacity to generate Rs 1 Cr (at 1% utilization level) revenue is expected to be operational in 2H FY217. SEL is flooded with inquiries for the product and management expect 3% utilization in FY17 itself. SEL is also in talks with leading global players for technological tie-up to design and manufacture latching relays and special type of capacitors. Management expects to spend remaining Rs 32 Cr in FY17. With leveraging client base and cross selling to new clients, management expects revenue of Rs 25 Cr from these new businesses by FY19. With addition of these new products, we expect revenue from switchgear segment to grow at a CAGR of 27% from FY16 to FY18. Increasing contribution of switchgears and operating leverage to lift margins: Switchgear segment reaped EBITDAM of ~15.5% in FY16 compared to 7.5%, 7.5%, and 18% in copper, building and energy segment respectively. The segment currently operates at 6-65% capacity. We believe improved utilization going ahead will push margins further. With faster growth compared to other segments, we expect contribution of switchgear segment to total revenue to reach 55% in FY18 (~47% in FY16). The new products are specialized and technology intensive hence potential EBITDAM significantly higher than current basket. With improved utilization, increasing contribution of high margin switchgear segment and introduction of new high margin products, we expect EBITDAM of SEL to reach 13.1% in FY18 (11.9% in FY16). Valuation & Outlook: At CMP of Rs 215 the stock is trading at 17.2x of FY16 EPS of Rs We value the company at 12x its FY18E EPS of Rs 21.9 and recommend buy with a target of Rs. 263, an upside of 22% in 12 months. EBITDA EBITDAM PAT PATM EPS BVPS P/E P/BV EV/EBITDA (Rs. Cr) (%) (Rs. Cr) (%) (Rs.) (Rs.) (x) (x) (x) Particulars Sales (Rs. Cr) FY FY FY17E FY18E

2 Story in charts Trend in revenue from Industrial Switchgear segment Revenue from Industrial Switchgear segment is expected to grow with a CAGR of 27% from FY16 to FY Revenue (Rs Cr) Contribution (%) Trend in total revenue Total revenue is expected to grow with a CAGR of 17.4% from FY16 to FY Revenue (Rs Cr) Growth (%) Trend in EBITDA EBITDAM is expected to reach 13.1% in FY18 compared to 11.9% in FY EBITDA (Rs Cr) EBITDAM (%) Trend in PAT PAT margin to reach 6% in FY18 compared to 4.7% in FY PAT (Rs Cr) PATM (%) Trend in ROE Growth with minimal CAPEX requirement to lift ROE to 13.3% in FY18 compared to 11.2% in FY

3 Industry Overview The Indian Electrical Industry is one of the prominent industries in India, directly connected with the growth story of the infrastructure development in the country. The industry witnessed some volatility in the recent past due to a poor show of the infra sector. In spite of an absence of significant spurt in the sector in , the electrical industry has gone ahead and witnessed a 13% growth in Q4 of FY The overall growth of the industry is 1% in the fiscal under report. Although higher imports still plague the industry, policy changes and various initiatives undertaken by the industry and government are eventually showing signs of revival of the sector. The major drivers in this growth are cables & conductors and LV and HV switchgear, while power transformers and LT motors continue to show declining trends. Rotating machines continue to witness negative growth on the back of huge rise of imports of about Rs 2, Cr and even capacitors have shown a decline in demand. Demand from power generation, sub-station and growth of the infrastructure and realty sectors coupled with increasing exports is helping the industry remain competitive. In FY15, many industry customers took a more cautious approach to large capital expenditures in light of the ongoing macroeconomic uncertainties. However, operational spending to maintain and improve the performance of existing assets remained generally stable. Company Background Salzer Electronics Limited (SEL) is a leading player offering total and customized electrical solutions in switchgears, wires and cables and energy management business. It is the largest manufacturer of CAM operated rotary switches with a market share of 25%. SEL caters to a wide range of products with five in-house manufacturing facilities, located in Tamil Nadu and Himachal Pradesh. The Company has a wide distribution network locally and globally, exporting to more than 5 countries. In India, SEL markets its products through its own distributors and more than 35 local distributors of L&T. The Company has its own state-of-the-art R&D facilities, recognized by the Department of Science and Technology, Government of India and a strong R&D team that focuses on developing and commercializing product technologies and as a result, can offer total customized electrical solutions to customers. The Company s product portfolio comprises rotary switches, load break switches, cable ducts, terminal connectors, toroidal transformers, relays and contactors, limit / foot switches, modular switches, energy saver products, AMR, custom-built products, motor control products, flexible bus bars, wire harness assemblies, cable assemblies and wires and cables. These products are core to customer solutions and efficiency. List of clients Key Management Personnel : Key Management personnel Mr. Rangachary Mr. R. Doraiswamy Mr. D. Rajeshkumar Mr. P. Ramachandran Designation Chairman Managing Director Joint MD and CFO Whole Time Director

4 Key Risks: Slower than expected growth in underlying industry may dampen revenue growth. The company is standing at cusp of investment and transformation of product portfolio. Delay in execution of ongoing expansion plans and/or delay in securing orders for new products could dent performance. The company operates in highly competitive environment where unorganized players play crucial role. Adverse shift in market forces could lead in loss of market share. Comparison with peers CMP M-Cap Revenue EBITDA PAT EBITDAM PATM P/E P/B ROE FY 16 (Rs) (Rs Cr) (Rs Cr) (Rs Cr) (Rs Cr) (%) (%) (x) (x) (%) SEL HBL Power , Techno Electric 54 3,83 1, Havells 36 22,486 7,

5 FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr) Particulars FY14 FY15 FY16 FY17E FY18E Particulars FY14 FY15 FY16 FY17E FY18E Revenue Cash from operating act (11) 4 31 Raw material cost Cash from investing act Employee cost Cash from financing act. (1) 11 7 (5) (8) Other operating expenses Net Change in Cash (8) EBITDA Depreciation RATIO ANALYSIS Other Income Particulars FY14 FY15 FY16 FY17E FY18E EBIT General Interest Expenses EPS Profit Before Tax BVPS Tax ROE 9.% 11.7% 11.2% 1.% 13.3% PAT WC as % of Sales 36.3% 35.5% 34.% 33.5% 29.% Growth BALANCE SHEET (Rs Cr) Revenue 6.9% 15.9% 27.5% 11.5% 23.6% Particulars FY14 FY15 FY16 FY17E FY18E EBITDA 6.2% 17.3% 21.% 17.4% 29.3% Share Capital PAT 19.7% 41.9% 42.3% 19.5% 46.7% Reserves & Surplus Profitability Total Shareholder funds EBITDA Margin 12.4% 12.5% 11.9% 12.5% 13.1% Non Current Liabilities EBIT Margin 9.7% 1.3% 1.3% 1.5% 11.4% Longterm Borrowings PAT Margin 3.5% 4.2% 4.7% 5.1% 6.% Deferred Tax Liabilities Stability Other LT Liabilities Debt/Equity Current Liabilities Current Ratio Trade Payables Interest Coverage Other Current Liabilities ST Borrowings ST Provisions TOTAL LIABILITIES Non Current Assets Net Block CWIP NC Investments Current Assets Inventories Sundry Debtors Cash and Bank ST Loans and Advances TOTAL ASSETS SEL

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