Management Meet Update Institutional Equities Swiss Glascoat Equipments 28 December 17 Reuters: SWGE.BO; Bloomberg: SWGE IN We had a meeting with the management of Swiss Glascoat Equipments (SGEL) recently to understand its business model and growth prospects. SGEL is based in Anand (Gujarat) and specialises in the design and manufacture of carbon steel glass lined equipment viz. reactors, receivers/storage tanks, dryers, filters, columns, agitators, valves, pipes and fittings. SGEL caters to the requirement of leading pharmaceutical/api, specialty chemicals, dyes/colours, agrochemicals, food processing and allied industries. The business prospects remain attached to growth in manufacturing capacity in chemical/agrochemical and API space. Key takeways from the meeting are as follows: 1. The client base of the company is entirely domestic and it is not targeting exports. All leading companies in the target industry are clients of SGEL. The glass line reactor space is dominated by a few players which include GMM Pfaudler and De Dietrich Process Sytems which are multinationals. De Dietrich made inroads into the Indian market through the acquisition of glasslined equipment and pressure vessel division of Nile for Rs8mn in 11. 2. SGEL can manufacture the full range of API reactors of all sizes and it has all major names in the space in its client list. The company is in a position of strength as it has significant market share in the glasslined reactor segment. SGEL is the secondlargest player after GMM Pfaudler in the glasslined reactor space. 3. In the past few years, the agrochemical sector has been the primary contributor to the company s sales volume, while demand from the pharmaceutical industry has been subdued. However, of late the company is witnessing greenfield expansion in API segment, leading to rising orders for API reactors. According to the company, there are two trends that will drive the demand for its products which are: a. Shift from stainless steel reactors to glasslined reactors as glasslined reactors are believed to be safer from the perspective of potential chance of contamination. Besides, even from an economic perspective, the prices of stainless steel reactors are almost at par with glasslined reactors. Other benefits of glasslined reactors are that they are noncorrosive and offer flexibility as they can be used under the widest variety of operating conditions. b. Overall increase in greenfield expansion projects in the manufacture of APIs. The replacement demand for these reactors is not significant as these reactors function normally for 23 years. 4. SGEL has enough capacity in place to handle higher business volume. Glasslining function is core specialty of the company and it can undertake much more volume from what it is currently handling. The glasslining process is labourintensive and also requires skilled labour. Typically it takes the company around five to six months to execute an order for a glasslined vessel. To ensure the quality of the end product, the company does the fabrication of the vessels inhouse.. Recently the company witnessed a change in management as HLE Engineering (a Gujaratbased company) acquired the stake of Mr. Sudarshan Amin the erstwhile promoter of SGEL. Mr. Amin went for a strategic sale of the business because of succession issues. However the new promoter, HLE Engineering, brings in synergy as it also caters to the same set of customers. With the acquisition of SGEL, HLE Engineering has a larger bouquet of product offerings, at par with its closest competitor GMM Pfaudler. HLE Engineering is a leading supplier of drying and filtration equipment to the chemical industry. A wider product basket and larger scale will help the group achieve cost synergy in sourcing and revenue synergy by tapping into the customer base of both companies. 6. For the current financial year, the order book size of SGEL is close to Rs4mn. NOT RATED Sector: Pharmaceutical CMP: Rs186 Vishal Manchanda Research analyst vishal.manchanda@nirmalbang.com +91 97374 37148 Key Data Current Shares O/S (mn) 6. Mkt Cap (Rsbn/US$mn) 1.2/18.9 2 Wk H / L (Rs) 227/131 Daily Vol. (3M NSE Avg.) 6,234 One Year Indexed Stock Performance 17 16 1 14 13 1 1 9 8 7 6 Dec16 Feb17 Apr17 Jun17 Aug17 Oct17 Dec17 SWISS GLASCOAT Nifty Price Performance (%) 1 M 6 M 1 Yr Swiss Glascoat Equipment 9.7 11.3 34.7 Nifty Index.9.3 3.6 Source: Bloomberg
Exhibit 1: Key financials Y/E March (Rsmn) Net sales 76 768 884 924 81 EBITDA 1 1 9 114 94 Net profit 36 38 46 42 31 EPS (Rs).6.9 7. 6.4 4.7 EPS growth (%) 28..4 19.7 (8.8) (26.3) EBITDA margin (%) 13.3 13.2 12.3 12.3 11.6 PER (x) 33. 31.8 26. 29.1 39. P/BV (x) 6..3.1 4.6 2.6 EV/EBITDA (x) 13.9 13.2 12.7 12.1 12.7 RoCE (%) 21.8 21.4 21.8 21.1 13.7 RoE (%) 18.9 17.7 19.7 16.6 8. Exhibit 2: Revenue trend 1, 924 884 9 81 76 768 1 8 1.2 7 6 7.4 4. 4 1.6 3 () () (11.8) (1) Net Sales Growth Exhibit 3: Gross profit trend 464 472 441 4 394 378 17.7 1 4 3 3 2 4.2 1 1.9 1.8 (6.) () () Gross Profit Growth Exhibit 4: EBITDA trend 1 1 114 9 1 16.6 94 1 8 7.6 6 4.1.8 4 () () (17.) (1) () EBITDA Growth (RHS) Exhibit : Net profit trend 46 4 4 36 42 38 3 4 28. 3 31 3 19.7 2.4 1 () (8.8) (26.3) () (3) Net Profit Growth (RHS) 2 Swiss Glascoat Equipments
Exhibit 6: Margins (%) 6. 1.3 2.4 1.1 4.2 4 3 13.3 13.2 12.3 12.3 11.6 4.8..1 4. 3.8 Gross Profit EBITDA PAT Exhibit 7: Return ratios (%) 2 21.8 21.4 21.8 21.1 19.7 18.9 1 17.7 16.6 13.7 8. RoCE RoE Exhibit 8: Peer Comparison/Valuation Particulars CMP (Rs) Market Cap (Rsmn) P/Sales (x) EV/EBITDA (x) P/E (x) CAGR* (%) FY1 FY16 FY17 FY1 FY16 FY17 FY1 FY16 FY17 Sales EBITDA EPS Swiss Glascoat 186.1 1,9.3 1.4 1.3 1. 12.7 12.1 12.7 26. 29.1 39. 2. (2.4) (7.) GMM Pfaudler 861. 12,93. 4.1 4.3 3.6 33.7 34. 2.7 29.7 27.9 16.9 8.2 12.8.4 *CAGR has been calculated over the 3 year period from FY14 to FY17. Exhibit 9: Peer Comparison Financial Snapshot Particulars (Rsmn) Swiss Glascoat GMM Pfaudler FY1 FY16 FY17 FY1 FY16 FY17 Sales 884 924 81 3,76 2,921 3,3 Gross Profit 464 472 441 1,737 1,714 2,37 Margin (%) 2.4 1.1 4.2 6. 8.7 7.7 EBITDA 9 114 94 39 349 477 Margin (%) 12.3 12.3 11.6 11.7 12. 13. PAT 46 42 31 189 1 332 Margin (%).1 4. 3.8 6.1 6.9 9.4 EPS (Rs) 7. 6.4 4.7 29. 3.9 1.1 Gross Block 342 389 394 93 1,39 1,189 3 Swiss Glascoat Equipments
Financials Exhibit : Income statement Y/E March (Rsmn) Net sales 76 768 884 924 81 Growth (%) 7.4 1.6 1.2 4. (11.8) Raw material costs 378 394 464 472 441 Employee expenses 46 2 3 6 Other expenses 232 24 31 33 287 Total expenditure 66 667 77 811 7 EBITDA 1 1 9 114 94 Growth (%) 16.6.8 7.6 4.1 (17.) EBITDA margin (%) 13.3 13.2 12.3 12.3 11.6 Other income 4 4 Interest costs 33 28 33 34 26 Depreciation 19 24 23 2 Exceptional items PBT 3 8 7 63 46 Tax 17 19 11 21 16 Effective tax rate (%) 32.4 33.9.1 33.7 34. PAT 36 38 46 42 31 Growth (%) (22.3).4 19.7 (8.8) (26.3) EPS (Rs).6.9 7. 6.4 4.7 EPS growth (%) 28..4 19.7 (8.8) (26.3) Exhibit 12: Balance sheet Y/E March (Rsmn) Equity 6 Reserves 13 176 186 21 394 Net worth 3 226 236 26 49 Shortterm loans 181 124 142 76 Longterm loans 19 11 42 71 3 Total loans 13 184 176 6 Deferred tax liabilities 37 37 29 32 3 Other noncurrent liabilities 4 18 11 Total liabilities 444 419 467 484 6 Fixed assets including CWIP 2 217 224 232 212 Intangible assets 2 3 3 3 6 Longterm loans & advances 2 4 2 1 1 Other noncurrent assets 18 21 23 29 Inventories 381 411 7 47 439 Debtors 43 4 44 38 49 Cash and cash equivalents 9 6 8 116 Other current assets 13 14 2 32 3 Total current assets 44 484 86 36 639 Creditors 124 162 173 169 14 Other current liabilities/provisions 1 148 196 142 147 Total current liabilities 244 3 369 312 286 Net current assets 1 17 217 224 32 Total assets 444 419 467 484 6 Exhibit 11: Cash flow Y/E March (Rsmn) PBT 3 8 7 63 46 (Inc.)/dec. in working capital (1) 39 (36) (7) 21 Cash flow from operations 3 96 21 6 68 Other income (1) 2 (4) (2) (2) Other expenses 33 28 33 34 26 Depreciation 19 24 23 2 Tax paid (13) (27) (23) (29) (17) Net cash from operations 4 119 1 82 Capital expenditure (19) (16) (1) (3) (63) Net cash after capex 21 3 () 2 37 Other investment activities 3 (2) 2 2 2 Cash from financial activities (26) (4) 3 () 69 Opening cash balance 9 6 8 Closing cash balance 9 6 8 116 Change in cash balance (1) (3) 4 (2) 8 Exhibit 13: Key ratios Y/E March Per share (Rs) EPS.6.9 7. 6.4 4.7 Book value 31.2 34.8 36.4 4.7 7.6 Valuation (x) P/E 33. 31.8 26. 29.1 39. P/sales 1.6 1.6 1.4 1.3 1. P/BV 6..3.1 4.6 2.6 EV/EBITDA 13.9 13.2 12.7 12.1 12.7 EV/sales 1.9 1.7 1.6 1. 1. Return ratios (%) RoCE 21.8 21.4 21.8 21.1 13.7 RoE 18.9 17.7 19.7 16.6 8. Margins (%) Gross margin. 1.3 2.4 1.1 4.2 EBITDA margin 13.3 13.2 12.3 12.3 11.6 EBIT margin.8.7 9.6 9.8 8.4 PBT margin 7.1 7. 6.4 6.8.7 PAT margin 4.8..1 4. 3.8 Turnover ratio Asset turnover ratio (x) 1.1 1.1 1.1 1.1.9 Avg. inventory days 372.4 386. 398.4 389.2 438.1 Avg. collection period (days) 18.7 22.9.1 16.1 19. Avg. payment period (days) 12.7 139.4 14.3 138.1 1.9 Solvency ratios (x) Debtequity 1..6.8.7.2 Growth (%) Sales 7.4 1.6 1.2 4. (11.8) EBITDA 16.6.8 7.6 4.1 (17.) PAT 28..4 19.7 (8.8) (26.3) 4 Swiss Glascoat Equipments
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