News Highlights. What s Inside. Result Update: Surya Roshni Limited & Vascon Engineers Ltd

Transcription

1 Morning Insight % Chg 18-Feb 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 35,498 (0.9) (2.4) 0.1 NIFTY Index 10,641 (0.8) (2.4) (0.4) NSEBANK Index 26,654 (0.5) (2.9) 1.6 NIFTY 500 Index 8,754 (0.8) (4.2) (2.7) CNXMcap Index 16,063 (0.9) (8.3) (8.3) BSESMCAP Index 13,119 (1.0) (9.6) (9.4) World Indices Dow Jones 25, Nasdaq 7, FTSE 7,219 (0.2) NIKKEI 21, (2.4) Hangseng 21, (2.4) Shanghai 28, Value traded (Rs cr) Cash BSE 18-Feb 3,454 % Chg Day 51.0 Cash NSE 29,300 (15.4) Derivatives 549,669 (25.6) Net inflows (Rs cr) 15-Feb MTD YTD FII (2,670) (103) (608) Mutual Fund 1,488 4,696 11,857 Nifty Gainers & Losers Price Chg Vol 18-Feb (Rs) (%) (mn) Gainers Bharti Infra Zee Entertainment ONGC Losers TCS 1,970 (2.9) 2.9 Yes Bank Ltd 214 (2.5) 90.0 Indiabulls H 624 (2.5) 5.0 Advances / Declines (BSE) 18-Feb A B T Total % total Advances Declines , Unchanged Commodity % Chg 18-Feb 1 Day 1 Mth 3 Mths Crude (US$/BBL) 66.1 (0.7) 5.3 (1.1) Gold (US$/OZ) 1, Silver (US$/OZ) Debt / forex market 18-Feb 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ Nifty 11,900 11,400 10,900 10,400 9,900 Feb-18 May-18 Aug-18 Nov-18 Feb-19 Source: Bloomberg News Highlights The RBI will pay Rs 280 bn as interim dividend to the government, which will help the Centre meet its revised budget estimates that include an allocation for the first-ever income transfer to farmers and burnish its fiscal credentials ahead of the general elections. (ET) Emami promoters sold 10 percent stake in Emami Ltd. for around Rs 16 bn to pare debt. After the divestment, the promoters stake in the maker of Boro Plus antiseptic cream will come down to percent from percent, according to its media statement. (BQ) Power Grid Corporation s board accorded investment approval for 'Northern Region System Strengthening - XL' at an estimated cost of Rs 5.73 bn with commissioning schedule of 22 months from the date of investment approval. (MC) Cyient launched its connected equipment offering for OEMs and equipment owners and operators. (MC) Gokaldas Exports entered into a Memorandum of Understanding with Government of Karnataka for setting up apparel manufacturing units over a period of next five years in Ballary district involving an investment of approximate up to Rs 800 mn. (MC) Interest due and payable on February 18 on IL&FS Transportation Networks s NCD was not paid to the debenture holders due to insufficient funds. (MC) Bodal Chemicals has restarted remaining of dye intermediate and dyestuff operations. (MC) Grasim Industries to acquire the chlor-alkali business of KPR Industries (India) by way of a slump sale, for a cash consideration of Rs 2.5 bn. KPR Industries would utilize Rs 2.53 bn towards a full and final settlement of the lenders' dues under a one-time settlement. (MC) Tata Steel s Subsidiary T S Global Minerals Holding Pte Ltd concluded the divestment of its entire stake in Black Ginger to IMR Asia Holding Pte Ltd. (MC) Cipla s arm said it will acquire 11.7% stake in Wellthy Therapeutics for Rs 105 mn. The deal is expected to be completed before March 10. The company also stated that its South Africa arm has been awarded a share of South African government s tender for four drugs whose contract will start from July for a period of three years. (BQ) Jet Airways would continue to work for its stake sale in Jet Privilege Pvt Ltd at an appropriate time, as part of its turnaround plan. (MC) 63 Moons filed damage suits of Rs 100 bn against P Chidambaram, KP Krishnan & Ramesh Abhishek, for taking mala fide actions against company by abusing their power. (MC) Rockfort Estate to buy 1 percent stake in Hotel Leela from Leela Lace via inter-se transfer. Rockfort Estate & Leela Lace are promoters of company. (MC) Wipro launched QuMiC to accelerate migration to Oracle Cloud. (MC) Mangalam Cement received in-principal approval for amalgamation of Mangalam Timber Products with company. (MC) Future Consumer entered into agreement with Middle East firm, T Choithrams, for supermarket chain. (MC) NBCC is planning to use a part of the 3,500 acre surplus land with jaypee Infratech to build a financial district on the lines of Mumbai s Bandra Kurla Complex (BKC) and Gurgaon Cyber City with facilities for back offices and IT companies near the proposed Jewar airport. (MC) What s Inside Result Update: Surya Roshni Limited & Vascon Engineers Ltd Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group.

2 Result Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 460 / 185 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 127,304 Shares o/s (mn) : 54 Source: Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 49,312 59,196 64,876 Growth (%) EBITDA 3,459 3,758 4,248 EBITDA margin (%) PAT 1,080 1,178 1,556 EPS EPS Growth (%) BV (Rs/share) Dividend/share (Rs) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x) Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Dec-18 Jun-18 Mar-18 Promoters FII DII Others Source: Bloomberg, BSE Price Performance (%) (%) 1M 3M 6M Surya Roshni Ltd (16.5) (6.7) (37.6) Nifty (2.4) (0.4) (7.2) Source: Bloomberg Price chart (Rs) Feb-18 Jun-18 Oct-18 Feb-19 Source: Bloomberg Ruchir Khare ruchir.khare@kotak.com SURYA ROSHNI LIMITED (SURL) PRICE RS.202 TARGET RS.330 BUY SURL Q3FY19 result met our expectations; sales grew on back of improved demand in lighting and steel pipe division. EBITDA margin contracted y/y due to inventory write-down in the Steel pipe division. We note that 9MFY19 revenue trend signals sustainable recovery in company s financials across divisions, supporting our investment thesis. Key Highlights SURL revenue reported at Rs 16 Bn in Q3FY19 (+22.3% y/y) was driven by steel pipes and lighting & consumer appliances segments. EBITA margin contracted y/y to 6% in Q3FY19 vis-à-vis 7% in Q3FY18 due to inventory write-down in steel pipe division. Lighting and consumer appliances division reported significant growth with revenues reported at Rs 4.1 Bn in Q3FY19 vis-à-vis Rs 3.4 Bn in Q3FY18. Steel pipe division reported encouraging y/y revenue growth of c. 23% in Q3FY19. Valuation & outlook At current price of Rs 202, SURL stock is trading at attractive valuation- FY20 EV/EBITDA 5.0x. While we acknowledge that a conglomerate discount is warranted, we highlight that the implied upside remains attractive. We value SURL using SOTP valuation methodology- ascribe EV/EBITDA of 14x to the lighting business and 6x to the steel pipe business, arrive at a target price of Rs 330 (Rs 328 earlier). Standalone Result (Rs mn) Q3FY19 Q3FY18 YoY (%) Q3FY19 QoQ (%) Income from Operations Decrease/ (Increase) in stock 26 (109) 221 Material consumed Purchase of traded goods Employee expenses (0.7) Other expenses Total Expenses EBITDA Other income 8 10 (21.1) Depreciation EBIT Finance cost Exceptional Items PBT (1.4) Total tax (5.1) PAT Adjusted PAT (18.9) Adj. EPS (Rs) (18.9) EBITDA (%) Tax Rate (%) RM/Sales Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 Result Highlights Sales continues to report traction on robust demand across divisions SURL revenue reported at Rs 16 Bn in Q3FY19 (+22.3% y/y) was driven by steel pipes and lighting & consumer appliances segments. EBITDA margin contracted y/y to 6% in Q3FY19 vis-à-vis 7% in Q3FY18 due to inventory write-down in steel pipe division. Lighting and consumer appliances division reported significant growth with revenues reported at Rs 4.1 Bn in Q3FY19 vis-à-vis Rs 3.4 Bn in Q3FY18. Management sounded confident of maintaining the growth trend going ahead. Within lighting, SURL reported robust growth of 59% in LED which now constitutes to nearly 73% of total lighting sales. On contrary, the conventional lighting including CFL de-grew 23% y/y. We note that SURL has outperformed the industry growth in the lighting division. Lighting division performance was in line with Havells India (Havells reported lighting growth at 16% ex-eesl in Q3FY19) and higher than Crompton Greaves Consumers which reported 2% decline in lighting revenues. Our interaction with industry players suggests that Surya holds a strong brand positioning in the tier ii/iii areas. SURL is the second largest player in the Indian Lighting Industry with14% market share. For SURL c.82% of lighting sales is derived from the rural/tier ii areas. We tend to believe that Surya Roshni is favouably placed vis-à-vis other players, as meaningful growth is expected in tier ii/iii and rural parts of India. Steel pipe division reported encouraging y/y growth of c. 23% in Q3FY19 (c. 17% y/y growth in 9MFY19) driven by increased public spending in infrastructure, primarily oil & gas transportation and city gas distribution. Recovery in the global economy has also supported the demand in the last few years. Company has been observing reasonable traction in its newly set-up 3LPE Coated Pipe Manufacturing Unit at Anjar-Kutchh (Gujarat) by higher capacity utilization of its existing ERW and Spiral API Pipe facilities. Additionally, the South Indian market has also shown strength. The company has contemplated to enhance the installed capacity of ER W Steel Pipe & Strips Unit at Hindupur, A.P. by 12,000 M.T per annum-from 1,50,000 MTPA to 1,62,000 MTPA. Segment reporting (Standalone) Q3FY19 Q3FY18 YoY (%) Q3FY19 QoQ (%) Segment Revenue (Rs mn) Steel Pipe & Strips Lighting & Consumer Durables Segment EBIT Steel Pipe & Strips (6.0) Lighting & Consumer Durables Segment Margins (%) Steel Pipe & Strips Lighting & Consumer Durables Margins, however contracted in steel pipe division to 3.2% in Q3FY19 due to inventory write down (c. Rs 80 mn hit in the quarter). Management believes that the company shall restore margins in the succeeding quarters. We highlight that the company sources inventory on order to order basis, thus mitigating inventory risk to a large extent. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 Finance cost increased 16% y/y to Rs 298 mn (in line with our estimates) due to working capital requirement in the pipes business. However, we expect borrowings/financial charges to peak out at current level of Rs 12 Bn. We estimate interest expense at Rs 11.5 bn and Rs 11bn in FY19 and FY20 respectively. Note that our debt forecast does not include the advantages that can flow from channel financing. We also project moderate reduction in working capital form 84 days in FY18 to 79 days in FY20 with inventory/debtors at c.61/53 days in FY18 to 61/51 days in FY20. Conglomerate discount should get narrowed with the demerger of consumers and steel pipes business Typically, consumer durables companies trade at a much premium valuations vis-à-vis steel pipe companies due to the higher capital efficiency, better return ratios and lower capital requirements. SURL management has recognized the need of having two separate entitieshaving a precise focus and dedicated bandwidth for both the lighting/consumer durable and pipes business. We believe that the corporate action would likely provide an enhanced focus on both the businesses and finally lead to the rerating of company s stock. Attractive valuation on relative basis; maintain BUY rating and a SOTP based target price of Rs 330 At current price of Rs 202, SURL stock is trading at attractive valuation- FY20 EV/EBITDA 5.0x. While we acknowledge that a conglomerate discount is warranted, we highlight that the implied upside remains attractive. We value SURL using SOTP valuation methodology- ascribe EV/EBITDA of 14x to the lighting business and 6x to the steel pipe business. Valuation Rs mn FY20E B2C EBITDA (Lighting/CD) 1757 Target EV/EBITDA (Lighting/CD) 14 Target EV (B2C) (a) EBITDA (Steel Pipes) 2625 Target EV/EBITDA (Steel Pipes) 6.0 Target EV (B2B)(b) Target EV (SURL) (a+b) Less Debt Add Cash 247 Market Capitalization Conlomerate Target Market Capitalization Target price per share (SURL) 330 Source: Kotak-PCG Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

5 About the company SURL (estd. 1973), founded by Mr J.P Agarwal, is a manufacturing company with business interest aligned broadly divided into two areas- Lighting and Steel pipes. Under Lighting, the Company offers a wide range of lighting productsfrom GLS, CFL, Luminaries to LEDs and luminaries. Company also operates its fans and appliances business where it offers several models of fans and kitchen appliances. The Company s lighting manufacturing units are located in Uttarakhand and Madhya Pradesh. While company manufactures an array of pipes, it has been the largest manufacturer of ERW-GI pipes in India. The company s pipe manufacturing units are located in Haryana, Gujarat, Andhra Pradesh and Madhya Pradesh. SURL has a wide presence across the length and breadth of India along with considerable overseas presence spread across 50 countries. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 Financials: Consolidated Profit and Loss Statement (Rs mn) (Year-end Mar) FY18 FY19E FY20E FY21E Revenues 49,312 59,196 64,876 69,614 % change yoy EBITDA 3,459 3,758 4,248 4,762 % change yoy Depreciation EBIT 2,586 2,875 3,327 3,789 % change yoy Net Interest 1,052 1,198 1, Earnings Before Tax 1,561 1,708 2,255 2,829 % change yoy Tax as % of EBT XO Items Recurring PAT 1,080 1,178 1,556 1,952 % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS Balance sheet (Rs mn) (Year-end Mar) FY18 FY19E FY20E FY21E Cash and cash equivalents ,015 Accounts receivable 7,126 8,596 8,887 9,536 Inventories Other current assets 8,286 10,055 10,665 11,443 Current Assets 17,210 20,759 21,862 23,268 Net fixed assets 10,710 10,428 10,107 10,105 Investments Other non-current assets Total Assets 28,547 32,188 33,289 34,768 Debt 10,714 12,100 11,100 10,200 Equity & reserves 10,473 11,511 12,928 14,735 Other liabilities (deferred tax) 1,450 1,450 1,450 1,450 Current Liabilities 5,919 7,136 7,821 8,392 Total Liabilities 28,556 32,196 33,298 34,777 BVPS (Rs) Cash flow Statement (Rs mn) (Year-end Mar) FY18 FY19E FY20E FY21E PBT 1,561 1,708 2,255 2,829 Depreciation Current liabilities incl provisions 794 1, Increase in inventory (1,736) (1,769) (609) (779) Increase in sundry Debtors (808) (1,470) (292) (649) Increase in advances Tax Paid (481) (529) (699) (877) Other Adjustments 1, ,012 Net cash from operations 1, ,160 3,080 (Inc)/Dec in F.A+CWIP (472) (600) (600) (970) Net investments Net cash from investing (472) (600) (600) (970) Change in Borrowings 401 1,386 (1,000) (900) Dividend Paid (132) (132) (132) (139) Net Cash from financing (754) 48 (2,241) (2,035) Net Cash Flow Cash at the end of year ,015 Ratio Analysis (Year-end Mar) FY18 FY19E FY20E FY21E EBITDA margin (%) EBIT margin (%) Net profit margin (%) Receivables (days) Inventory (days) Sales / Net Fixed Assets (x) Interest coverage (x) Debt/ equity ratio ROE (%) ROCE (%) EV/ Sales EV/EBITDA Price to earnings (P/E) Price to book value (P/B) Price to cash earnings Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 Result Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 42 / 13 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 252,210 Shares o/s (mn) : 178 Source: Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 5,298 5,271 5,817 Growth (%) EBITDA (26) EBITDA margin (%) (0.5) PAT EPS EPS Growth (%) (52.5) Book value (Rs/share) Dividend per share (Rs) ROE (%) Adj ROCE (%) (1.8) (0.8) 1.3 P/E (x) EV/EBITDA (x) (175.5) P/BV (x) Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Dec-18 Jun-18 Mar-18 Promoters FII DII Others Source: Bloomberg, BSE Price Performance (%) (%) 1M 3M 6M Vascon Engineers (18.5) (25.8) (47.8) Nifty (2.4) (0.4) (7.2) Source: Bloomberg Price chart (Rs) Feb-18 Jun-18 Oct-18 Feb-19 Source: Bloomberg Pankaj Kumar pankajr.kumar@kotak.com VASCON ENGINEERS LTD (VEL) PRICE RS.14 TARGET RS.13 SELL VEL Q3FY19 results were mixed with revenue in the quarter was lower than estimates due to decline in real estate on account impact of Ind AS115 while margins were higher than our estimates driven by project mix. Key Highlights Net revenue for the quarter declined by 12% yoy to Rs 821 mn driven by 60% yoy decline in real estate segment due to adoption of new accounting standard. The real estate business got impacted particularly in the affordable housing segment due to challenges faced by NBFCs delaying lending towards the segment. In addition, sales in its premium segment Windermere project remained weak. The company is positive on improvement in real estate sales in both affordable as well as premium project in FY20E. In EPC segment, the company has not received any order in the quarter with 9MFY19 order inflows remained unchanged at Rs 2.26 bn on qoq with external order book stood at Rs 7.2 bn. The company has maintained order intake guidance of Rs 5 bn in FY19E as it has pipeline of projects where it is L1. The company has faced challenges in extension of BG limits, but is hopeful of increased limits based on discussion with banks. The company is refinancing its high cost debt in Windermere with the issuance of NCD of Rs 1.1bn. The refinancing will reduce the cost of debt by 1.6%. Valuation & outlook We believe that the slowdown in sales in its affordable housing project, large unsold inventory in premium project, challenges related to extension of BG limits by banks (crucial for growing EPC order book) and expected decline in revenue of subsidiary GMP would negatively impact VEL s growth in medium term. Based on this, we have cut our estimates for FY19E and FY20E. We discontinue our coverage on the stock with Sell rating (Vs Buy earlier) and revised SOTP based target price of Rs 13 (Vs Rs 30 earlier), as we see increased risk on growth in business. Quarterly performance table (standalone) Year to March (INR Mn.) Q3FY19 Q3FY18 % Chg Q2FY19 % Chg Net Revenues (12.2) Raw Materials Cost (18.9) 554 (1.7) Gross Profit Employee Expenses (20.9) 130 (21.0) Other Expenses Operating Expenses (16.0) 766 (4.5) EBITDA (69) NA EBITDA margin 10.9% 6.9% -10.0% Depreciation Other income (35.4) Net finance expense Profit before tax (21) (475.5) Provision for taxes (0) - (10) (97.0) Reported net profit (11) (807.1) Net profit Margins% (1.6) Source: Company Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 Revenue declined by 12% yoy The standalone net revenue for the quarter declined by 12% yoy to Rs 821 mn (Vs estimates of Rs 849 mn) driven by 60% yoy decline in real estate revenue. The decline in real estate segment is due to no major contribution from completed project like Windermere as the company has sold 1-2 units in the quarter due to weak demand for the premium project. The EPC (external) segment witnessed 26% yoy growth in revenue in the quarter but was below our estimates as some of its large size private developer project moved at slower pace in terms of revenue contribution. The company is positive on pick up in execution in coming quarters. It targets for 20-25% yoy growth in EPC revenue in FY20E based on its order book. Its subsidiary, GMP is expected to report decline in revenue in FY19E as its large size order related to construction of steel doors is moving slow and is expected to contribute Rs 1 bn in FY20E. Earlier, the company targeted Rs 300 mn from Tata steel doors order in FY19E and had guided for total Rs bn of revenue from GMP. But now the subsidiary is expected to contribute Rs 1.7 bn in FY19E consolidated revenue. Margins in the quarter was driven by contribution from associate companies EBITDA margin of 10.9% was ahead of our estimates as the company reported profits in the real estate segment, where it has been incurring losses in the past two quarters. In addition, EPC segment also reported higher EBIT margins of 24%. The higher margins in the quarter was driven by contribution from associate company Ajanta Enterprises and Phoenix Ventures where the company is doing real estate project in JV and only share of profit has been accounted in the quarter. Based on this, PAT for the quarter grew by 225% yoy on low base of last year to Rs 80 mn. Segmental Breakup Year to March (INR Mn.) Q3FY19 Q3FY18 % Chg Q2FY19 % Chg Revenue EPC % % Real Estate % % EBIT EPC % % Real Estate % % Source: Company No major Order inflows in Q3FY19, has pipeline of new orders VEL has external order backlog of Rs 7.2 bn and internal order book of Rs 1.6 bn at the end of Q3FY19 which takes total order backlog at ~Rs 8.8 bn. VEL has not added any new order in Q3FY19. Earlier, it added Rs 1.9 bn and Rs 360 mn of new orders in Q1FY19 and Q2FY19, respectively. However, the company has maintained guidance of adding Rs 5 bn of new projects in FY19E as it is L1 in three projects of value Rs 3 bn. Based on current gross block, VEL can execute Rs 10 bn of EPC work in a year. But, due to constraints related to BG limit, the company is eligible to bid for Rs 4-5bn of projects. The company is positive on increase in BG limits. But, in the current macro environment, we believe that any significant increase in BG limit may take time. Hence, the order inflows in FY20E is expected to remain flattish. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 Update real estate projects The company has achieved new sales bookings of Rs 1.9 bn in 9MFY19 (Vs Rs 1.36 bn in H1FY19) as it achieved sales of Rs 580 mn (new sales of ~ sq ft) in Q3FY19. This is on account of sale of inventory in new launch Xotech, contribution from Forest County and few inventory sold in Windermere. However, its affordable housing business remained subdued after cancellation of bookings in Katvi project where it had sold Rs 1.02 bn of inventory on launch. The sale was based on scheme where it tied up with NBFCs for financing. But several loan proposals were not processed due to challenges faced by NBFCs. The company is reworking on its strategy for affordable housing project before future launches in the segment. It is tying up with several banks including SBI and is also targeting investors as well. The company would be relaunching the project in FY20E. It is also planning to launch 300,000 sqft of inventory in Coimbatore of value Rs 2 bn in the next 3-6 months post approval. In its premium project Windermere in Pune, it could sell only 1-2 units in Q3FY19 and expects traction in sales as it received OC in Tower-2. The company is also refinancing of high cost debt of Rs 900 mn related to the projects through issuance of NCD which is at final stage. The refinancing will reduce the cost of debt by ~1.6%. Other highlights The company aims to reduce its consolidated debt which stood at Rs 2.3 bn and includes high cost debt. The company has sold Rs 500 mn of non-core assets in the quarter which includes sale of amenity plot along with school building for total consideration of Rs 365 mn and sale of land parcel at Balewadi, Baner for Rs 131 mn as its share. The company has reported new sales booking of mn sqft for a total sales value of Rs 1.94 bn in 9MFY19. Outlook and valuation The company targets to meet its real estate sales and order inflows guidance for EPC segment despite slower 9MFY19 and current macroeconomic challenges in the real estate sector. We had initiated cover on VEL based on expectation of turnaround in its business across segment. But in the current challenging business environment, the company may take longer time in substantial improvement in its operations particularly in Real Estate business. We believe that the challenges related to slowdown in sales in its affordable housing project, large unsold inventory in premium project Windermere, challenges related to extension in BG limits by banks (crucial for growing EPC order book), and expected decline in revenue of subsidiary GMP (in FY19E) would negatively impact VEL s growth in medium term. Based on this, we have cut our estimates for FY19E and FY20E. The stock is trading at FY20E PE of 12.3x based on revised EPS of Rs 1.1 (Vs Rs 2.1 earlier). We have reduced valuation multiple for all EPC and GMP (EPC at 5x Vs 7x EV/EBITDA and GMP at 5x Vs 7x EV/EBITDA) factoring in challenges related to respective businesses. We discontinue our coverage on the stock with Sell rating (Vs Buy earlier) and revised SOTP based target price of Rs 13 (Vs Rs 30 earlier), as we see increased risk on growth in the business. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 Valuation Table Segment Multiple (x) Per Share (Rs) EPC Business 5 9 Real Estate GMP 5 5 Less: Net Debt 10 Total Value 13 Source: Kotak Securities - Private Client Research Revision in consolidated earnings estimates Previous Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Revenue (11.1) (19.2) EBITDA margin (%) (207) (211) APAT (81.6) (46.8) AEPS (81.6) (46.8) Source: Kotak Securities - Private Client Research Company Background Vascon Engineers Ltd (VEL) has presence in construction and development of residential and commercial real estate projects with a history of over 25 years. VEL through its EPC and real estate verticals is active in multiple sectors including residential, industrial, IT parks, malls, multiplexes, hospitality and community. The company has presence in more than 10 states and has completed over 200 contracts of approx 50 mn sqft. In EPC, VEL has expertise across various types of buildings and has capability to execute 8 mn sqft of projects (or Rs 10 bn in value) per annum. In real estate, its land current portfolio includes 30.9 mn sqft of saleable area with VEL s share of 16.2 mn sqft. Its 85% subsidiary, GMP Technicals Solutions is one of the leading players in clean room partitioning systems and turnkey solution provider in India having manufacturing facilities in Baddi, Himachal Pradesh and in Bhiwandi, Thane that is engaged in making fibre doors, aluminum doors & windows, clean room partition & windows, aluminum sections, etc. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

11 Financials: Consolidated Profit and Loss Statement (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E Revenues 4,812 5,298 5,271 5,817 % change yoy (18.1) 10.1 (0.5) 10.4 EBITDA (158) (26) % change yoy (143.0) (83.5) (490.4) Depreciation EBIT (315) (169) (72) 115 Other Income Interest Profit Before Tax (62) (43) (97) 123 % change yoy (178.0) (31.1) (227.5) Tax as % of EBT (24.2) (8.2) PAT % change yoy (85.8) (52.5) Shares outstanding (mn) AEPS (Rs) DPS (Rs) CEPS (Rs) BVPS (Rs) Balance sheet (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E Paid - Up Equity Capital 1,677 1,741 1,741 1,741 Reserves 4,808 4,939 4,961 5,144 Net worth 6,485 6,681 6,703 6,886 Borrowings 2,744 2,700 2,300 2,100 Minority Interest Total Liabilities 9,348 9,490 9,112 9,095 Net block 1,235 1,199 1,125 1,044 Investments 1, Inventories 4,512 4,715 4,332 4,462 Sundry debtors 2,241 2,056 2,138 2,359 Cash and equivalents Loans and advances & Others 1,780 2,173 2,282 2,304 Total current assets 9,197 9,502 9,194 9,688 Sundry creditors and others 3,543 4,007 3,987 4,400 Provisions Total CL & provisions 3,691 4,171 4,167 4,598 Net current assets 5,505 5,331 5,027 5,091 Net Other assets 1,474 2,032 2,032 2,032 Net Deferred tax Total Assets 9,348 9,490 9,112 9,095 Cash flow Statement (Rs mn) (Year-end Mar) FY17 FY18 FY19E FY20E Pre-Tax Profit (62) (43) (97) 123 Depreciation Change in WC (871) Other operating activities 533 (456) Operating Cash Flow (243) (288) Capex (230) (107) (100) (100) Free Cash Flow (473) (395) Change in Investments Investment cash flow (56) 87 (100) (100) Equity Raised Debt Raised 50 (44) (400) (200) Dividend & others CF from Financing (400) (200) Change in Cash (38) (97) (116) 120 Opening Cash Closing Cash Ratio Analysis (Year-end Mar) FY17 FY18 FY19E FY20E Profitability Ratios EBITDA margin (%) (3.3) (0.5) EBIT margin (%) (6.5) (3.2) (1.4) 2.0 Net profit margin (%) Adjusted EPS growth (%) (85.8) (52.5) Balance Sheet Ratios: Receivables (days) Inventory (days) Loans & Advances Payable (days) Cash Conversion Cycle (days) Asset Turnover (x) Net Debt/ Equity (x) Return Ratios: RoCE (%) (3.4) (1.8) (0.8) 1.3 RoE (%) Valuation Ratios: P/E (x) P/BV (x) EV/EBITDA (x) (27.9) (175.5) EV/Sales (x) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 15% returns over the next 12 months ADD We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE We expect the stock to deliver -5% - +5% returns over the next 12 months SELL We expect the stock to deliver < -5% returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE We advise investor to subscribe to the IPO. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com deval.shah@kotak.com Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala, CFA Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com ledo.padinjarathala@kotak.com Teena Virmani Sumit Pokharna Pankaj Kumar Krishna Nain K. Kathirvelu Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap M&A, Corporate actions Support Executive teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com krishna.nain@kotak.com k.kathirvelu@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale Faisal Shaikh, CFTe Siddhesh Jain shrikant.chouhan@kotak.com amol.athawale@kotak.com Research Associate Research Associate faisalf.shaikh@kotak.com siddhesh.jain@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

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