Apar Industries. Institutional Equities. Initiating Coverage

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2 Initiating Coverage Institutional Equities Apar Industries Reuters: APAR.BO; Bloomberg: APR IN A(bove) Par For The Course Apar Industries (Apar) is one of the key beneficiaries of likely revival in the power transmission and distribution (T&D) capex in India. With a market leader status in two of its key product lines - conductors and transformer oil - Apar has the firstmover advantage in many specialised and highly technology-oriented products (HTLS and HeC conductors, 76KV and 1,2KV transformer oil, E-beam cables) which have strong future scalability. Further, having done a capex of Rs2.bn over the past three years to develop such technologies and increase its manufacturing capacity, Apar is all set to reap the benefit of impending demand. We expect Apar to register a 31% earnings CAGR over FY14-FY16E driven by profitability revival following an improved product mix of high-technology products across its three business segments. We have assigned Buy rating to Apar with a target price of Rs21 based on a P/E of 11x September 216 earnings estimate. Conductor segment to post a healthy growth: Apar, the largest manufacturer and exporter of conductors in India with a 23% market share, is poised for a healthy growth driven by rising demand and increased contribution from high-technology and high-margin products. Having done a capex of Rs7mn over the past three years to augment manufacturing capacity and to develop high-efficiency conductors (manufactured by only two players in India and, hence, a high-margin product), Apar is well placed to benefit from strong order placement expected from Power Grid Corporation of India (PGCIL) in 2HFY1 amounting to 17,MT, in addition to likely revival in T&D capex. Oil segment to scale up: Being the fourth-largest manufacturer in the world with a 4% domestic market share, the transformer oil business of Apar (% of oil segment s revenue) is a quasi play on improved demand for transformers in the 12 th Five Year Plan period. Along with volume pick-up, profitability is likely to get a strong boost from rising contribution of 76KV transformer oil business (only two players in India including Apar have the capability to manufacture this) and rising penetration in automotive lubes segment, which enjoys the highest margin in the entire oil portfolio. Cable segment set for turnaround: The cable segment is on the verge of a turnaround after incurring operating losses over the past two years, with %/7% EBITDA margins likely in FY1E/FY16E, respectively, because of a change in the product mix. Apar is down-sizing its traditional HT/LT cable business, which suffers from an over-supply situation, while shifting its focus to three high-technology specialised cables - namely optic fibre cables, elastomeric cables and E-beam cables - which have limited competition and strong margins, after a Rs1.3bn capex over the past three years to set up its facility. Strong financial health to aid valuation: We expect Apar to register 9%/31% CAGR in revenue/earnings, respectively, over FY14-FY16E. Driven by improved profitability and completion of the capex programme, Apar is expected to generate healthy operating/free cash flow of Rs6bn/Rs2bn, respectively, over FY14-FY16E along with a healthy recovery in RoCE/RoE from 17.4%/13.6% in FY14 to 22.1%/18.4%, respectively, in FY16E, while also reducing its leverage from 1.6x in FY13 to.8x in FY16E. We have valued Apar at 11x September 216 earnings estimate with a target price of Rs21. Y/E March FY13 FY14 FY1E FY16E FY17E Net sales 46,7 46,329 49,2,3 6,4 EBITDA 3,113 2,974 2,963 3,768 4,88 Net profit 1, ,29 2,12 EPS (Rs) EPS growth (%) 49.9 (18.1) EBITDA margin (%) PER (x) P/BV (x) EV/EBITDA (x) Dividend yield (%) RoCE (%) RoE (%) September 214 BUY Sector: Capital Goods CMP: Rs39 Target Price: Rs21 Upside: 34% Chirag Muchhala chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) 38. Mkt Cap (Rsbn/US$mn) 1.2/ Wk H / L (Rs) 442/8 Daily Vol. (3M NSE Avg.) 267,2 Share holding (%) 3QFY14 4QFY14 1QFY1 Promoter FII DII Corporate General Public One Year Indexed Stock Performance Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 APAR INDUSTRIES NSE CNX NIFTY INDEX Price Performance (%) 1 M 6 M 1 Yr Apar Industries Nifty Index Source: Bloomberg Please refer to the disclaimer towards the end of the document.

3 Financial overview Exhibit 1: Trend in consolidated revenue We expect Apar to post consolidated revenue CAGR of 9% over FY14-FY16E, primarily driven by 13.4% revenue CAGR in the conductor business, resulting in its share in total revenue to rise from 3% in FY14 to 38% in FY16E. Oil segment is likely to post 6.2% revenue CAGR over FY14-FY16E, accounting for 49% of FY16E revenue. Cable segment is expected to post 7.% revenue CAGR over FY14-FY16E, contributing 13% of FY16E top-line. We expect a healthy revival in profitability over FY14-FY16E, driven by recovery in margins of all three segments led by rising focus on high-technology products and a pick-up in volume because of rising T&D capex. EBITDA/PAT are likely to post 13%/31% CAGR, respectively, over FY14-FY16E with the cable segment showing highest margin improvement at 7% in FY16E compared to operating losses currently. Cable segment s contribution to consolidated operating profit is expected to rise to 13% in FY16E from nil in FY14. Exhibit 2: Trend in consolidated profitability (%) 7, , 3, 4, 3, 2, 1, (.4) FY13 FY14 FY1E FY16E FY17E Revenue % growth Exhibit 3: Segment-wise revenue mix 1% 9% 8% 7% 6% % 4% 3% 2% 1% % FY13 FY14 FY1E FY16E FY17E Conductor Oil Cable () (%), , , , 3, 2, , , , 1 FY13 FY14 FY1E FY16E FY17E EBITDA PAT EBITDA margin (%) PAT margin (%) Exhibit 4: Segment-wise EBITDA mix 1% 9% 8% 7% 6% % 4% 3% 2% 1% % FY13 FY14 FY1E FY16E FY17E Conductor Oil Cable 2 Apar Industries

4 Robust operating/free cash flow generation over FY14-FY16E After reporting negative operating cash flow in FY14 because of a rise in working capital requirement, Apar is likely to return back to posting strong operating cash flow from FY1 onwards driven by improved profitability, despite assuming an elevated working capital cycle. We expect Apar to register operating cash flow of Rs6.1bn over FY14-FY16E. Having completed its Rs2bn capex plan over the past two years, Apar will only need maintenance capex of Rs4mn over FY14-FY16E, leading to robust free cash flow. Compared to a negative cash flow of Rs7.1bn of FY14, we expect Apar to generate positive free cash flow of Rs2bn over FY14-FY16E. Through healthy cash flow generation, we expect Apar to repay Rsmn of debt each in FY1E and FY16E, thereby reducing its debt-equity ratio to.8x in FY16E from 1.6x/1.1x in FY13/FY14, respectively. Exhibit : Operating/free cash flow trend 8, 6, 4, 2, (2,) FY13 FY14 FY1E FY16E FY17E (4,) (6,) (8,) Operating cash flow Free cash flow Exhibit 6: Debt-equity profile 12, 1, 8, 6, 4, 2, FY13 FY14 FY1E FY16E FY17E Debt Networth Debt:equity ratio (RHS) (x) Healthy recovery in return ratios Pressure on profitability in the past two years, primarily because of operating losses in the cable segment, increased short-term borrowing and heightened capex of Rs2bn led to a sharp decline in return ratios over FY12-FY14. We expect the return ratios to gradually rise from here on, aided by recovery in operating margin across all three business segments, completion of capex programme (with only maintenance capex required henceforth) and repayment of short-term loans worth Rs1bn over FY14-FY16E. We expect RoCE to rise from 17.4% in FY14 to 22.1%/2.6% in FY16E/FY17E, respectively, while RoE is likely to increase from 13.6% in FY14 to 18.4%/21.6% in FY16E/FY17E, respectively. 3 Apar Industries

5 Apr- Aug- Jan-6 Jun-6 Nov-6 Apr-7 Sep-7 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Apr- Aug- Jan-6 Jun-6 Nov-6 Institutional Equities Apr-7 Sep-7 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Exhibit 7: Trend in return ratios (%) FY13 FY14 FY1E FY16E FY17E RoCE RoE Exhibit 8: One year forward P/E chart Outlook and valuation Apar stock trades at an average P/E of 8.7x one-year forward earnings over the past 1 years (see Exhibit 8). The company offers strong management pedigree, highly technology-oriented focus, market leader status in key products like conductors and transformer oils, and a first-mover advantage in many products which offer strong future scalability. Further, with a likely 31% earnings CAGR over FY14-FY16E along with strong operating/free cash flow generation, healthy revival in return ratios and declining leverage, Apar exhibits a sound financial position. Future value unlocking trigger also exists via demerger of business segments. We have valued the stock at a P/E of 11x September 216 earnings estimate (lower than +1 standard deviation of 12x one-year forward P/E) to arrive at a target price of Rs21. (x) 2 (Rs) P/E Average P/E Std Dev +1 Std Dev +2 Std Dev -1 Stock price 3x 7x 11x 1x 19x Source: BSE, Nirmal Bang Institutional Equities Research 4 Apar Industries

6 Investment Arguments Conductor segment demand revival and high-technology products to drive margins Apar is the third largest conductor manufacturer globally with a fully vertically integrated business model and as a result, it is one of the world s low-cost producer. Starting in 198 as a basic conventional conductor manufacturer, Apar transformed itself into a technology-oriented high-efficiency conductor maker with a complete product range up to 1,2KV and is the first company to pass technical tender screening for high temperature low sag (HTLS) conductors and is among the only two vendors in the domestic market for HTLS technology. Apar has a 23% market share in the domestic conductor segment with a total installed capacity of 144,MT per annum, while it produced conductors worth 16,MT in FY14, thereby becoming the largest aluminum conductor maker in India surpassing Sterlite Technologies, which manufactured 96,MT in FY14. Apar is also the largest exporter of aluminum conductors from India, supplying to 2 global turnkey operators. Export revenue posted a 27% CAGR over FY11-14, while overseas markets account for more than % of the conductor order book currently. Exhibit 9: Conductor segment s volume growth Exhibit 1: Conductor segment s value growth (MT) , 2, 1, 1, 4 2 FY1 FY11 FY12 FY13 FY14 Rising opportunities in power T&D space, FY1 FY11 FY12 FY13 FY14 India has under-invested in its T&D network, resulting in high T&D losses and insufficient power evacuation infrastructure. To strengthen the T&D network, the country has lined up huge capex over the 12 th Five Year Plan period (FY12-FY17) at Rs2.4trn, which will be done by PGCIL (Rs1.2trn), state electricity boards or SEBs (Rs1trn) and the private sector (Rs2bn). Further, large investments are planned in high-capacity transmission lines of 4KV and 76KV, which will result in good demand for high-efficiency conductors, Apar s forte. Conductor demand is also likely to get a significant boost from upcoming PGCIL tenders in 3QFY1 amounting to 1,MT and in 4QFY1 amounting to 7,MT, after a tepid order placement activity last year. While PGCIL is the largest driver of T&D capex in India, Apar has gradually cut its dependence on PGCIL, with PGCIL accounting for only 17% of FY14 revenue versus 31% in FY1. Further, global electricity consumption is growing 2.4% and may touch 29,TWh by 23. India currently contributes only 1% to global exports of electrical equipment, leaving high scope for Apar to shore up its export business. Exhibit 11: Transmission line capacity addition (ckm) 4, 3, 3, 2, 2, 1, 1,, 76KV 4KV 22KV HVDC 11th Five-Year Plan addition 12th Five-Year Plan target Apar Industries

7 Exhibit 12: Break-up of 12 th Plan transmission capacity target Exhibit 13: Reducing dependence on PGCIL 22KV 33% HVDC 7% 4KV 3% 76KV 2% High-technology conductors to aid margins (%) 16, 4 14, , 1, 8, 6, 4, 2, FY1 FY11 FY12 FY13 FY14 PGCIL revenue Non PGCIL revenue PGCIL revenue as a % of total (RHS) Apar primarily operates in power conductors - deriving 9% of its revenue with better margins compared to distribution conductors which account for 1% of its revenue. Further, the focus of Apar has been on differentiated and technologically advanced products. It is a pioneer in alloy conductors (contains 1% aluminum) and HeC (High-efficiency Conductors) which are manufactured by only two players in India - Apar and Sterlite Technologies. Apar has done a capex of Rs7mn over the past three years in its conductor segment aimed at (a) Setting up a 36,MT Athola plant to augment capacity, and (b) Developing the technology for manufacture of high temperature, high efficiency conductors at Silvasa plant. Apar expects the revenue contribution from HeC to grow from 4% in FY14 to 1% in three years, providing a healthy boost to margins. The demand for HeC has already been growing and is likely to continue to grow at a robust pace because of strong benefits of HeC conductor technology, which reduces T&D losses by 3%-4%, transmits 1.x to 2x power than conventional conductors and requires lower right of way clearance. HeC conductor is a good solution for high T&D losses faced by many SEBs. Gujarat SEB has been using HeC in most of its new lines as well as in replacement orders. Other SEBs are also expected to follow suit. Apar has the first-mover advantage in HeC and its technology has been approved by PGCIL. The trend of HeC and HTLS conductor usage among private players in India, namely Reliance Power, Tata Power Company and Torrent Power has also been on the rise, while international demand for HeC is also rising because of increased transmission and load-carrying capacity along with lower T&D losses. Rising export market penetration Apar has achieved good success in export markets and has achieved a revenue CAGR of 27% over FY11- FY14, which has helped it to counter the relatively subdued domestic market. Apar has become the largest exporter of aluminum conductors from India, supplying to 2 global turnkey operators. The key international geographies for Apar include Africa, Latin America, Middle East, South East Asia and CIS countries. The margins in export markets are stable and on par with the domestic market. While exports accounted for 28% of FY14 conductor revenue, they accounted for more than % of the conductor order book because of large contracts. Consequently, exports are likely to account for % of FY1E conductor revenue. However, on a steady-state basis, the export market:domestic market ratio is likely to remain at 2:7 because of a likely pick up in domestic demand from FY Apar Industries

8 Exhibit 14: Trend in conductor export revenue 7, 6,, 4, 3, 2, 1, FY11 FY12 FY13 FY14 Source: company, Nirmal Bang Institutional Equities Research Exhibit 1: Conductor business - peer comparison Particulars Apar Industries Sterlite Technologies Revenue 16,24 1,87 Volume 16,31MT 94,87MT Market share (%) 23% 21% Exports 4,49 4,3 Exporting countries 43 7 Order book 19,2 22, Four-year revenue CAGR (%) 13% 1% EBITDA/MT (Rs) 11,64 8,94 RoCE (%) 38% 16% (FY14 data) We expect 13.4%/11.1% revenue/ebitda CAGR, respectively, over FY14-FY16E Apar reported strong revenue of Rs22.3bn in FY13 because of bundling up of a couple of years PGCIL orders in the same year, leading to demand outpacing supply. This also led to a sharp rise in operating margin at 8.9% in FY13, the highest-ever in the past several years, as EBITDA/MT rose to Rs14,3 in FY13. However, FY14 witnessed tepid order placement activity by PGCIL, while private sector and SEB capex also remained weak. Consequently, EBITDA/MT fell to Rs11,64 in FY14 and is likely to decline further to Rs9, in FY1E (partly because of a rise in forward premium). However, strong order placement activity from PGCIL expected in 2HFY1 (amounting to 17,MT) and likely revival in T&D capex in addition to rising share of HeC conductors is expected to result in a 13.4% CAGR in the conductor segment s revenue along with improved profitability. We expect EBITDA/MT to rise to Rs1,/Rs11, in FY1E/FY16E, respectively, translating to operating margin of 6.8%/7.6%, respectively. Exhibit 16: Revenue trend in conductor segment (%) 2, , 4 1, , (27.) (1), (2) (3) (4) FY12 FY13 FY14 FY1E FY16E FY17E Revenue Revenue growth (%) Exhibit 17: Profitability trend in conductor segment 2, 2, 1, 1, FY12 FY13 FY14 FY1E FY16E FY17E EBITDA EBITDA margin (%) 7.6 (%) Apar Industries

9 Exhibit 18: Oil segment s volume growth (' KL) 3 Transformer and specialty oils - 76KV transformers and automotive lubes to drive margins Apar has a strong portfolio of over 4 types of various oils across categories like transformer oil (% of oil segment s revenue) and other specialty oils like white oil, industrial oil, auto lube and rubber processing oil. It is a pioneer in the manufacture of transformer oil since 1969 and is a preferred supplier for over 8% of the customer base with ABB, Crompton Greaves, Bharat Heavy Electricals and Alstom being its key customers. It is the fourth-largest transformer oil manufacturer in the world and has a 4% domestic market share. Collectively, the transformer and speciality oils segment has total manufacturing capacity of 4,42, KL as all oils are fungible in manufacturing. Apar has also successfully expanded to the automotive lube segment, through a licensing agreement with ENI, Italy, and made foray in the huge Rs18bn retail automotive lubricants market. As much as 36% of transformer and specialty oil revenue in FY14 came from exports, thereby posting a 27% CAGR over FY11-FY14. Exhibit 19: Oil segment s value growth 3, 3 2, 2 2, 2 1 1, 1 1, FY1 FY11 FY12 FY13 FY14 FY1 FY11 FY12 FY13 FY14 Exhibit 2: Trend in oil segment s export revenue 1, 9, 8, 7, 6,, 4, 3, 2, 1, Transformer oil A quasi play on transformer demand FY1 FY11 FY12 FY13 FY14 Transformer oil is required to provide insulation and cooling properties to a transformer and accounts for a % to 7% of the total costs of a transformer. While transformer oil lasts for 1 years, every year oil top-up of % is required for maintenance of the transformer. New transformers account for 8% of total transformer oil sales while top-up oil for maintenance contributes the balance 1%, a relatively lower quantum compared to developed countries as spending on regular maintenance of transformers is insufficient in India. A higher quantum of Apar s revenue comes from power transformers (6%) compared to distribution transformers (4%), as a distribution transformer requires low grade oil (less than 22KV) which makes it a relatively lowmargin business compared to power transformer oil, even though a power transformer needs.3 KL to.4 KL oil per MVA compared to. KL to.6 KL per MVA required by a distribution transformer. Besides Apar (4% market share), the key players in the transformer oil segment include Savita Oil Technologies (3% market share), Raj Petro and Columbia Petro. 8 Apar Industries

10 Exhibit 21: Sub-station capacity addition Exhibit 22: Break-up of 12 th Plan sub-station addition target (ckm) 16, 14, 12, 22KV 28% 1, 8, 6, 4, 2, 76KV 4KV 22KV 11th FYP addition 12th FYP target Higher grade oil to drive profitability 4KV 17% 76KV % With rising high output capacity power plants in India at a single location, the demand for 76KV transformers is growing exponentially. As much as % of the sub-stations under the 12 th Five Year Plan will be of 76KV, up from 16% in the 11 th Five Year Plan period. Also, 76KV and 4KV collectively will constitute more than 72% of new sub-stations under the 12 th Plan. Apar is the first Indian company to introduce 76KV transformer oil in India, having received approval from PGCIL for its Rabale and Silvassa manufacturing plants. The margins in 76KV transformer oil is also much better, as only two companies have the capability to manufacture it - Apar and Savita Oil Technologies (which received approval in March two years after Apar). Further, Apar is the only player in India which is currently undergoing testing for 1,2KV transformer oil. (1,2KV transformers are under testing by PGCIL and its commercial order placement is yet to begin). Exhibit 23: Oil portfolio of Apar Type of oil Share in FY14 revenue End-user industry Transformer oil % Transformer - for insulation and cooling White oil 22% FMCG and Pharmaceuticals Auto lube 11% Automobiles Industrial oil 1% Various manufacturing industries Rubber processing oil 7% Tyres and polymer Diversification in automotive lubricants a significant opportunity Apar has diversified into automotive lubricants business via a technology and manufacturing licensing agreement with ENI Spa, an Italian industrial giant, the world s eighth largest automotive lubricant manufacturer. As automotive lube needs the same base oil that is required for transformer oil, it gives Apar a better control over raw materials and hence makes a commercial sense to enter this business. Further, it opens up almost 6% of total 2mn tones lube business with a better margin profile. Apar sells automotive lubes under its premium brand ENI, focusing on the retail market, while its own brand PowerOil is a value-formoney proposition targeted towards the wholesale market and fleet operators. The domestic automotive lube market is a Rs18bn opportunity where Apar can grow exponentially from its current market share of 1%. It has expanded its sales network to 4 distributors and 1, stockists across India. The market penetration focus remains on Tier 2 and Tier 3 cities, while the southern region accounts for over half of this segment s revenue. Apar has tied up with1 OEMs (original equipment manufacturers), the prominent ones being ITL, Escorts and Greaves. Automotive lube has the highest margin among the entire specialty oil product portfolio. 9 Apar Industries

11 Exhibit 24: Trend in automotive lube revenue 3, 2, 2, 1, 1, Exhibit 26: Revenue trend in oil segment 4.1 FY9 FY1 FY11 FY12 FY13 FY14 Exhibit 2: Transformer and specialty oil business - peer comparison Particulars Apar Industries Savita Oil Technologies Revenue 24,29 2,48 Volume 327,393 KL 272,8 KL Market share (in transformer oil) (%) 4% 3% Exports 8,66 NA Exporting countries 1 7 Manufacturing started in (year) Three-year revenue CAGR 16% 1% EBIT margin (%) 8% 7% RoCE (%) 48% 28% (FY14 data) We expect 6.2%/11.4% revenue/ebitda CAGR, respectively, over FY14-FY16E The oil segment reported a.% volume CAGR over the past five years. While FY1E is likely to continue registering a modest % rise in volume, we expect it to pick up from FY16 onwards led by revival in power T&D capex which could lead to improved demand from SEBs as well as from the replacement market. We have factored in a 8% volume growth in FY16E, translating to a 6.2% revenue CAGR over FY14-FY16E. Profitability in FY1E is likely to remain flat with EBITDA/KL of Rs4,, translating into a 6.3% margin. However, we expect a gradual improvement from FY16 onwards, driven by rising contribution of high-margin 76KV transformer oil, improved traction in automotive lubes and better volume growth. We have estimated EBITDA/KL of Rs4,9 in FY16E, leading to an operating margin of 6.8%, a bps YoY rise. (%) 3, , 2, 2, 1, 1,, Exhibit 27: Profitability trend in oil segment 2, 2, 1, 1, (%) FY12 FY13 FY14 FY1E FY16E FY17E Revenue Revenue growth (%) FY12 FY13 FY14 FY1E FY16E FY17E EBITDA EBITDA margin (%). 1 Apar Industries

12 Exhibit 28: Cable segment s revenue profile 7, 6,, 4, 3, 2, 1, Cables segment in turnaround mode Apar entered the cable business through the acquisition of Uniflex Cables in 28 as a means of forward integration. While Apar has managed to report healthy revenue CAGR of 44% - from Rs1.3bn in FY9 to Rs6bn in FY14 - the subsequent industrial slowdown post Uniflex acquisition hit profitability as the cable industry suffered from an over-supply situation. The management has taken various steps over the past three years to turn around the cable segment, including foray into high-technology specialised cables like optic fibre cables (OFC), elastomeric cables and E-beam technology cables apart from venturing into the export markets where the margins are better for conventional HT/LT cables. Exports accounted for 4% of FY14 revenue. FY9 FY1 FY11 FY12 FY13 FY14 Foray into OFC and elastomeric cables Exhibit 29: Cable segment s exports (%) 3, , 3 2, , 1, FY1 FY11 FY12 FY13 FY14 Exports Exports as a % of total revenue (RHS) Apar has a presence in cables up to 33KV, which has turned into a highly competitive market over past few years because of an over-supply situation in the industry with more than 3 players in the traditional HT/LT cables category leading to most of the players, including Apar, to incur losses. HT/LT cable segment posted revenue of Rs4.3bn in FY14 out of the total cable segment top-line of Rs6bn, thereby accounting for 72% of total revenue. Consequently, Apar decided to diversify its offerings and enter into high-technology specialty cables instead of EHV cables of 22KV/4KV, which many players in the industry were entering. The management identified three key specialised cables viz. OFC, elastomeric and E-beam which are technologyintensive future growth drivers, where competition would remain limited. Consequently, it went for a capex of Rs1.3bn over the past three years, half of the company s total capex, to set up Khatalwad cable plant to double OFC cable capacity, shift elastomeric cable manufacturing facility from Umbergaon and set up two E- beam accelerators. With the completion of capex, Apar can meet the rising demand for all three specialised cables. OFC is a telecommunications cable used for setting up of the national optic fibre network (NOFN) and the Bharat Broadband project. Apar has already received a Rs1bn order for the same, which will be booked over FY1 and FY16. Apart from the above two government projects, the key private customers for OFC are Reliance Communications, Reliance Jio, Hathway and Sify. Currently, there are five-six players in India having OFC manufacturing capability, including Aksh Optifibre and Sterlite Technologies. Strong growth in OFC is expected because of the e-governance initiative of the government to connect all villages through the internet. Apar also forayed into elastomeric cables, which are power cables made of rubber, thereby offering a flexible physical property. Its application is primarily in sectors such as railways, defence, and wind mill/solar energy generation. Being technology-intensive, the manufacturers are limited, thereby resulting in high profitability. E-beam technology can be a game changer Apar has set up a state-of-the-art E-beam irradiation facility at Khatalwad with two accelerators (of 1. MeV and 3 MeV capacity) to cater to a wide range of elastomeric cables and various other products. E-beam crosslinking protects cables from short circuit and high temperature, prevents fire and improves their physical properties like tensile strength, stress resistance and abrasion/thermal resistance. These cables are mainly used in railways, marine sector, defence sector, ship-building and solar energy generation. E-beam cables are 1.7x times costlier than elastomeric cables. Apar is the fourth company in India to introduce E-beam cables and has the highest voltage capability of 3 MeV, compared to the second-highest prevailing capability of 2 MeV. Apar is expected to witness huge demand for its E-beam cables and irradiation services, currently being met by imports. While there are more than 1,8 accelerators all over the world, with 6 in the US and Apar Industries

13 Exhibit 3: Revenue trend in cable segment 9, 8, 7, 6,, 4, 3, 2, 1, in China, India has only including the two facilities of Apar. Apar has already executed its first major commercial E-beam cable order worth Rsmn from the Nuclear Power Corporation of India. Apar is also a level-one supplier to Indian Railways for E-beam cables where it can bid for 1% of total tenders and is on course to become a level-2 supplier. Other applications of irradiation service are in making polymer materials, automotive components, diamond processing and medical sterilisation. Better product mix to aid profitability turnaround While the margin in conventional HT/LT cables (72% of cable segment revenue in FY14) remains flat-tonegative, the margins in other three specialised cable remains robust. Apar aims to reduce the order intake of HT/LT cables because the orders for three specialised cables are rising. With a change in the product mix, operating margin is likely to rebound from FY1 itself as HT/LT cables revenue is poised to fall to Rs3.3bn, a 24% YoY drop, while the three specialised cables revenue is likely to collectively rise 71% YoY at Rs3bn. We expect a 7.% revenue CAGR with a sharp improvement in margins over FY14-FY16E The focus of the management is on downsizing the traditional HT/LT cable business and scaling up of the three specialised cable business. Consequently, the revenue growth in the cable segment is likely to remain soft at %/1% in FY1E/FY16E, respectively. However, a change in the product mix, with the three specialised cables having strong margins replacing the flat-to-negative business of HT/LT cables is expected to propel the operating margin to touch %/7% in FY1E/FY16E, respectively, compared to losses at the operating level reported over the past two years FY12 FY13 FY14 FY1E FY16E FY17E Revenue Revenue growth (%) Key risks Exhibit 32: Key management personnel (%) Exhibit 31: Profitability trend in cable segment 7 (1) Lack of revival in power T&D capex can affect revenue traction (.2).1 FY12 FY13 FY14 FY1E FY16E FY17E. 7. EBITDA EBITDA margin (%) Any unforeseen rise in competitive intensity, especially in high-technology products, can hurt margins. Any sharp rise in commodity prices - if cannot be passed on to end-customers - will hurt margins. High volatility in foreign exchange rates and base oil rates - if cannot be passed on to end-customers - can affect margins. 8. (%) (1) Source: Company 12 Apar Industries

14 Financials (consolidated) Exhibit 33: Income statement Y/E March FY13 FY14 FY1E FY16E FY17E Net sales 46,7 46,329 49,2,3 6,4 % growth 29.3 (.4) Raw material costs 36, 36,7 39,121 43,22 47,1 Staff costs Other overheads 6,267,933 6,64 7,168 7,71 Total expenditure 43,394 43,3 46,8 1,267,868 EBITDA 3,113 2,974 2,963 3,768 4,88 % growth 44.6 (4.4) (.4) EBITDA margin (%) Other income Interest costs 1,346 1,4 1,28 1,19 1,11 Depreciation Profit before tax 1,49 1,294 1,412 2,282 3,16 Tax ,44 PAT 1, ,29 2,12 Minority interest Exceptional items (46) (9) Net profit 1, ,29 2,12 % growth 49.9 (18.1) Net profit margin (%) EPS (Rs) % growth 49.9 (18.1) Exhibit 3: Balance sheet Y/E March FY13 FY14 FY1E FY16E FY17E Share capital Reserves,882 6,78 7,276 8,3 1,34 Net worth 6,266 6,962 7,661 8,919 1,72 Minority interest Short-term loans 9,43 7,8 6,8 6,8,8 Long-term loans Total loans 9,733 7,781 7,281 6,781 6,281 Deferred tax liability (net) Liabilities 16,12 14,986 1,18 1,943 17,249 Gross block 4,38,412,713 6,38 6,388 Depreciation 1,932 2,32 2,338 2,661 3,2 Net block 2,426 3,38 3,37 3,377 3,38 Capital work-in-progress Goodwill Investments Inventories 7,1 1,17 1,4 11,172 12,24 Debtors 8,138 11,36 11,817 12,64 13,66 Cash 1,49 2,36 3,3 3,319 3,992 Loans and advances 1,83 2,22 2,492 2,718 3,3 Other current assets Total current assets 28,72 26,197 28,424 3,441 33,317 Creditors 14,841 13,673 1,71 16,126 17,43 Other current liabilities & provisions 1,624 1,321 1,864 2,69 2,322 Total current liabilities 16,46 14,994 16,93 18,196 19,77 Net current assets 12,238 11,24 11,488 12,24 13,42 Total assets 16,12 14,986 1,18 1,943 17,249 Exhibit 34: Cash flow Y/E March FY13 FY14 FY1E FY16E FY17E EBIT 2,872 2,74 2,67 3,44 4,246 (Inc.)/dec. in working capital 3,138 (7,29) 44 (473) (624) Cash flow from operations 6,11 (4,) 3,11 2,972 3,622 Other income Depreciation Interest paid (-) (1,346) (1,4) (1,28) (1,19) (1,11) Tax paid (-) (43) (26) (466) (73) (1,44) Dividends paid (-) (236) (236) (248) (27) (31) Minority interest (-) (7) (3) Net cash from operations 4,2 (6,149) 1,449 1,19 1,23 Capital expenditure (-) (1,4) (92) (22) (32) (3) Net cash after capex 3,21 (7,11) 1, ,173 Inc./(dec.) in short-term borrowing (86) (2,323) () () () Inc./(dec.) in long-term borrowing (17) Inc./(dec.) in total borrowings (14) (1,91) () () () (Inc.)/dec. in investments (796) Minority interest Equity issue/(buyback) Cash from financial activities (868) (1,17) () () () Others (13) Opening cash 8,319 1,49 2,36 3,3 3,319 Closing cash 1,49 2,36 3,3 3,319 3,992 Change in cash 2,23 (8,243) Exhibit 36: Key ratios Y/E March FY13 FY14 FY1E FY16E FY17E Per share (Rs) EPS Book value Valuation (x) P/E P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE RoIC Profitability ratios (%) EBITDA margin EBIT margin PAT margin Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditors days Solvency ratios (x) Debt-equity Interest coverage Apar Industries

15 Disclaimer Stock Ratings Absolute Returns BUY > 1% ACCUMULATE -% to1% SELL < -% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /811, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /813, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-413. Board No. : /1 Fax. : Apar Industries