Srikalahasti Pipes Ltd.

September 5, 2016 Srikalahasti Pipes Ltd. Hitting a sweet spot in Water Infrastructure... CMP INR 294 Target INR 376 Result Update - BUY Key Share Data Face Value (INR) 10.0 Equity Capital (INR Mn) 397.6 Market Cap (INR Mn) 11,686.5 52 Week High/Low (INR) 356/185 6 months Avg. Daily Volume (BSE) 80,996 BSE Code 513605 NSE Code Reuters Code Bloomberg Code Shareholding Pattern (as on June 2016) Others, 45. Mutual Funds/FII 4.2% Key Financials (INR Million) SRIPIPES SRIK.BO Promoter, 50.8% Source: Company SRIK IN Particulars FY15 FY16 FY17E FY18E Net Sales 10,835.5 11,456.1 12,079.0 13,757.8 Growth (%) 9.5% 5.7% 5.4% 13.9% EBITDA 1,856.2 2,664.8 3,045.8 3,541.4 PAT 829.8 1,588.0 1,770.9 2,140.9 Growth (%) 114.4% 91.4% 11.5% 20.9% EPS (INR) 20.9 39.9 44.5 54.0 BVPS (INR) 73.8 107.7 148.7 198.5 Key Financials Ratios Particulars FY15 FY16 FY17E FY18E P/E (x) 8.5 6.7 6.0 4.9 P/BVPS (x) 2.4 2.5 1.8 1.3 Mcap/Sales (x) 0.6 0.9 0.9 0.8 EV/EBITDA (x) 5.9 5.4 4.7 4.0 ROCE (%) 28.3% 37.1% 29.9% 27.2% ROE (%) 28.3% 37.1% 29.9% 27.2% EBITDA Mar (%) 17.1% 23.3% 25.2% 25.7% PAT Mar (%) 7.7% 13.9% 14.7% 15.6% Debt - Equity (x) 1.3 0.9 0.7 0.5 Source: Company, SKP Research 1 Yr price performance SPL vis-à-vis BSE Small Cap 3-3 -6 3-Sep 3-Oct 3-Nov 3-Dec SPL 3-Jan 3-Feb 3-Mar 3-Apr 3-May 3-Jun BSE Small Cap 3-Jul 3-Aug 3-Sep Analysts: Nikhil Saboo Tel No: +91-33-40077019; Mobile: +91-9330186643 e-mail: nikhil.saboo@skpmoneywise.com Anik Das Tel No: +91-33-40077020; Mobile: +91-8017914822 e-mail: anik.das@skpmoneywise.com Company Background Srikalahasti Pipes Ltd (SPL), formerly known as Lanco Industries Ltd. (LIL), part of Electrosteel Group, India s leading manufacturer of Ductile Iron (DI) pipes, a valuable input in water infrastructure for movement of drinking water supply, sewerage and irrigation. Having a production capacity of 2,25,000 MTPA of DI pipes, it also manufactures pig iron (2,75,000 MTPA), cement (90000 TPA), low ash metallurgical coke (2,25,000 MTPA) and generates power (14.5 MW) for captive consumption from its facility located near Tirupathi, Andhra Pradesh. Unlike uncertainities surrounding group companies Electrosteel Castings and Electrosteel Steels due to the latters financial troubles, SPL is a pure play in DI pipes in domestic markets and has hit a sweet spot, enjoying marketing synergies with group companies. Investment Rationale Top-line to grow at a CAGR of ~9.6%over FY16-18E During Q1FY17, SPL reported net sales of Rs 2,792.2 mn, a growth of ~9.1% y-o-y, whereas sales grew by ~6% during FY16, backed by higher capacity utilization of its DI pipe segment. Going forward, we expect SPL sales to grow at a CAGR of 9.6% during FY16-18E on the back of healthy demand from key user industries, resulting in better capacity utilization and higher sales volume. We expect DI pipes sales to increase at a CAGR of ~11% in FY16-18E. Capacity addition to add volumes SPL is in the midst of a capacity expansion plan at an investment of ~Rs 1,000 million, funded through a mix of debt and internal accruals. DI pipes capacity will increase from 2,25,000 MTPA to ~2,75,000 MTPA and MBF capacity from 2,75,000 MTPA to 3,25,000 MTPA,expected to get commissioned by H1FY17. Over the next year, SPL will spend Rs 1000 million to put up 2 units of Ferro Alloys of 9 MVA capacity and will set up a Double walled corrugated (DWC) pipe plant to meet the growing demand of pipes required for sewerage and drainage system. On the back of healthy demand from key user industries, we expect DI sales volume to increase at a CAGR of ~9.6% in FY16-18E to 2,69,500 TPA. Margins to scale up with better operating efficiencies & capacity utilization EBITDA margins during Q1FY17, improved by 259 bps y-o-y & by 667 bps q- o-q to ~28.5%, on account of better operating efficiencies, higher capacity utilization. Raw material cost as a percentage of sales has fallen significantly to ~39.3% during the quarter vis-à-vis ~46.1% y-o-y. Over the last few years, SPL has undertaken several backward integration steps like installing sinter plant, coke-oven batteries and blast furnace, enhancing blowing capacity in MBF, improving logistics through extension of railway siding etc., resulting into cost savings. SPL is set to increase its effective capacity utilization to ~98% by FY18E from ~75.3% in FY15, on its expanded capacity. With better capacity utilization, operational efficiency and lower raw material prices, we expect SPL s EBITDA margins to stabilize at ~25% by FY18E. Deleveraging Balance Sheet Over the last few years, the company has reduced its net debt from Rs 4400 million in FY12 to Rs 3799 million in FY16, bringing down D/E ratio significantly to 0.9x in FY16 from 2.2x in FY12 on account of better operational performance and working capital management. Inspite of an expansion plan, we do not see any substantial increase in long term debt. Valuation With the thrust of government on improving water infrastructure through centre & state sponsored programmes, Swachh Bharat Abhiyan, Toilets for All and development of 100 smart cities giving a fillip to demand of DI pipes augurs well for SPL. We have valued the stock on the basis of EV/EBIDTA at 5.4x of FY18E EBIDTA - method of relative valuation and recommend BUY on the stock with a target price of Rs 376/- (~22% upside) in 18 months. SKP Securities Ltd www.skpmoneywise.com Page 1 of 7

Exhibit: Q1FY17 Result Review Figs. in INR M illion Particulars Q1FY17 Q1FY16 YoY (%) Q4FY16 QoQ (%) FY16 FY15 YoY (%) Net Sales 2,792.2 2,558.5 9.1% 3,150.5-11.4% 11,456.1 10,835.5 5.7% Total Income. 2,792.2 2,558.5 9.1% 3,150.5-11.4% 11,456.1 10,835.5 5.7% Expenditure. 1,995.1 1,894.5 5.3% 2,461.3-18.9% 8,791.3 8,979.3-2.1% Material Consumed 1,097.7 1,179.8-7. 1,120.9-2.1% 4,831.3 5,423.9-10.9% (as a % of Total Income) 39.3% 46.1% 35.6% 42.2% 50.1% Purchase of Traded goods 69.0-100. 204.9-100. 289.1 533.9-45.8% (as a % of Total Income) 0. 2.7% 6.5% 2.5% 4.9% Changes in Inventories & WIP (44.6) (53.4) -16.5% (as a % of Total Income) -1.6% -2.1% 0. 0. 0. Employees Cost 185.6 158.8 16.8% 256.6-27.7% 683.2 484.5 41. (as a % of Total Income) 6.6% 6.2% 8.1% 6. 4.5% Other Expenses 756.3 540.2 40. 878.9-13.9% 2,987.6 2,537.0 17.8% (as a % of Total Income) 27.1% 21.1% 27.9% 26.1% 23.4% EBITDA 797.1 664.1 20. 689.2 15.7% 2,664.8 1,856.2 43.6% EBITDA M argin (%) 28.5% 26. 259 Bps 21.9% 667 Bps 23.3% 17.1% 613 Bps Depreciation 143.7 125.8 14.2% 67.9 111.6% 270.9 311.7-13.1% EBIT 653.4 538.2 21.4% 621.3 5.2% 2,394.0 1,544.5 55. Other Income 54.8 26.2 109.5% 53.8 1.9% 173.3 86.6 100.1% Interest Expense 120.0 96.5 24.3% 73.3 63.7% 420.5 436.9-3.8% Profit Before Tax 588.3 467.9 25.7% 601.8-2.2% 2,146.8 1,194.2 79.8% Income Tax 159.2 122.6 29.8% 140.7 13.1% 558.8 364.4 53.4% Effective Tax Rate (%) 27.1% 26.2% - 23.4% - 26. 30.5% - Profit After Tax (PAT) 429.1 345.3 24.3% 461.1-6.9% 1,588.0 829.8 91.4% PAT M argins (%) 15.4% 13.5% 187 Bps 14.64% 73 Bps 13.86% 7.66% 620 Bps Diluted EPS 10.8 8.7 24.3% 11.6-6.9% 39.94 20.87 91.4% Source: Company Data, SKP Research SKP Securities Ltd www.skpmoneywise.com Page 2 of 7

Top-line expected to grow at a CAGR of 9.6% over FY16-18E Exhibit: Net Sales & Net Sales Growth 15000 2 Net Sales is expected to grow at a CAGR 9.6% percent to Rs 13758 million over FY16-18E 12000 9000 6000 3000 7870 8% 8639 9894 10836 11456 12079 6% 5% 13758 14% 5% 0 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Net Sales (Rs Million) Growth (YoY%) EBITDA margins to stabilize at ~25%+ over FY16 -FY18E Exhibit: EBITDA & EBITDA Margin (%) EBITDA is expected to grow at a CAGR 15.3% percent to Rs 3541 million over FY16-18E 4000 3500 3000 2500 2000 1500 1000 500 0 653 8.3% 513 5.9% 11.8% 1856 1170 17.1% 30. 25.7% 23.3% 25.2% 25. 20. 3046 2665 3541 FY12 FY13 FY14 FY15 FY16E FY17E FY18E EBITDA(Rs Million) EBITDA Margin (%) 15. 10. 5. 0. PAT margins to improve by 170 bps over FY16 -FY18E Exhibit: PAT & PAT Margin (%) 2500 2 PAT is expected to grow at a CAGR 16.1% percent to Rs 2140 million over FY16-18E 2000 1500 1000 500 0-500 -40-131 387 4% 830 8% 16% 2141 1771-1% -2% FY12 FY13 FY14 FY15 FY16E FY17E 5% -5% PAT (Rs Million) PAT Margin (%) SKP Securities Ltd www.skpmoneywise.com Page 3 of 7

D/E ratio improves to 0.5x in FY18E from a high of 1.3x in FY15 Exhibit: Debt/Equity & Interest Coverage Ratio (x) 2.5 2.0 1.5 1.0 0.5 0.0 7.2 2.2 2.2 1.8 5.7 6.0 1.3 3.5 0.9 0.7 1.6 0.5 0.8 0.5 FY12 FY13 FY14 FY15 FY16 FY17E FY18E D/E Ratio (x) ICR(X) 8.0 6.0 4.0 2.0 0.0 ROE to improve from 17% in FY14 to 26% by FY18E Exhibit: ROE & ROCE Ratio (x) 4 3 2-37% 28% 3 27% 17% 29% 27% 27% 23% -2% -7% 14% FY12 FY13 FY14 FY15 FY16 FY17E FY18E 7% 5% ROE ROCE 35% 3 25% 2 5% Key Concerns Rise in raw material price: Over the last few quarters, EBITDA margins of SPL witnessed healthy growth on account of steep fall in major raw material prices viz. iron ore and coking coal. Going forward, any steep rise in raw material prices will have an adverse impact on margins. Slowdown in order intake: Over the last couple of years, SPL reported healthy top-line growth on the back of a demand pick-up from key user industry segments resulting in higher order intake. However, going forward, any slowdown in demand from key user industries may adversely impact the order book intake and sales volumes for the company. Related Party Transactions- Electrosteel Group makes its three group entities enjoy marketing synergies based on geographical considerations, mainly to reduce logistical costs and improve margins. At times, one entity may buy/sell products from the other for this purpose. As such ~ of SPL s sales are to related parties. However, we understand that this is done on an arms length basis SKP Securities Ltd www.skpmoneywise.com Page 4 of 7

Exhibit: Income Statement Figures in INR Million Exhibit: Balance Sheet Figures in INR Million Particulars FY15 FY16 FY17E FY18E Particulars FY15 FY16 FY17E FY18E Total Income 10,835.5 11,456.1 12,079.0 13,757.8 Share Capital 397.6 397.6 397.6 397.6 Growth (%) 9.5% 5.7% 5.4% 13.9% Reserve & Surplus 2,535.3 3,884.0 5,515.4 7,470.8 Expenditure 8,979.3 8,791.3 9,033.2 10,216.4 Shareholders Funds 2,932.9 4,281.7 5,913.0 7,868.4 Material Cost 5,423.9 4,831.3 5,194.0 5,847.1 Total Debt 3,786.3 4,015.3 3,900.0 3,631.1 Traded goods 533.9 289.1 300.0 338.3 Deferred Tax (Net) - - - - Employee Cost 484.5 683.2 724.7 825.5 Total Liabilities 6,719.2 8,297.0 9,813.0 11,499.5 Admin & Other Exp. 2,537.0 2,987.6 2,814.4 3,205.6 EBITDA 1,856.2 2,664.8 3,045.8 3,541.4 Net Block inc. Capital WIP 4961.9 5081.7 5273.3 5431.9 Depreciation 311.7 270.9 361.3 391.4 Deferred Tax (Net) (654.7) (691.2) (691.2) (691.2) EBIT 1,544.5 2,394.0 2,684.6 3,150.1 Non-Current Assets 4,750.0 5,479.0 5,797.0 6,176.2 Other Income 86.6 173.3 157.0 178.9 Inventories 1,345.9 1,188.9 1,295.8 1,468.4 Interest Expense 436.9 420.5 448.5 435.7 Sundry Debtors 1,860.5 2,075.5 2,137.9 2,413.7 Profit Before Tax (PBT) 1,194.2 2,146.8 2,393.1 2,893.2 Cash & Bank Balance 592.5 215.4 260.8 139.9 Income Tax 364.4 558.8 622.2 752.2 Other Current Assets 502.9 504.3 555.6 502.9 Profit After Tax (PAT) 829.8 1,588.0 1,770.9 2,140.9 Loans & Advances 448.3 1,494.9 1,546.9 1,651.4 Growth (%) 114.4% 91.4% 11.5% 20.9% Current Liabilities & Prov 2,337.9 1,572.6 2,055.0 2,267.5 Diluted EPS 20.9 39.9 44.5 54.0 Total Assets 6,719.2 8,297.0 9,813.0 11,499.5 Exhibit: Cash Flow Statement Figures in INR Million Exhibit: Ratio Analysis Particulars FY15 FY16 FY17E FY18E Particulars FY15 FY16 FY17E FY18E Profit Before Tax (PBT) 1,194.2 2,146.8 2,393.1 2,893.2 Earning Ratios (%) Depreciation 311.7 270.9 361.3 391.4 EBITDA Margin (%) 17.1% 23.3% 25.2% 25.7% Interest Provided 436.9 420.5 448.5 435.7 PAT Margins (%) 7.7% 13.9% 14.7% 15.6% Chg. in Working Capital 1,344.4 2,426.9 3,279.9 3,499.4 ROCE (%) 23. 28.9% 27.4% 27.4% Direct Taxes Paid 231.9 558.8 622.2 752.2 ROE (%) 28.3% 37.1% 29.9% 27.2% Other Charges - Per Share Data (INR) Operating Cash Flows 1,576.2 1,868.1 2,657.7 2,747.2 Diluted EPS 20.9 39.9 44.5 54.0 Capital Expenditure (748.3) (410.3) (555.2) (550.0) Cash EPS (CEPS) 28.7 46.7 53.6 63.9 Investments 15.5 (353.6) - - BVPS 73.8 107.7 148.7 198.5 Others - (1,026.5) (1,546.9) (1,651.4) Valuation Ratios (x) Investing Cash Flows (728.1) (1,782.7) (2,102.1) (2,201.4) P/E 8.5 6.7 6.0 4.9 Changes in Equity - Price/BVPS 2.4 2.5 1.8 1.3 Inc / (Dec) in Debt (315.7) 229.0 79.1 (45.4) EV/Sales 1.0 1.3 1.2 1.0 Dividend Paid (inc tax) (59.6) (198.8) (119.3) (158.6) EV/EBITDA 5.9 5.4 4.7 4.0 Tax on Dividend (10.1) (33.8) (20.3) (27.0) Dividend Yield (%) 0.8% 1.6% 2. 3.7% Financing Cash Flows (821.4) (424.1) (509.0) (666.7) Balance Sheet Ratios Chg. in Cash & Cash Eqv 26.7 (338.7) 46.6 (120.9) Debt - Equity 1.3 0.9 0.7 0.5 Opening Cash Balance 527.4 554.1 214.2 260.8 Current Ratio 2.0 3.0 2.8 2.7 Closing Cash Balance 554.1 214.2 260.8 139.9 Asset Turn. Ratios 1.6 1.4 1.2 1.2 Source: Company Data, SKP Research * Cash & Bank Balance (FY15)-Includes Margin Money of Rs 38.21 Crores and Deposit with bank with 3 12 months maturity of Rs 0.33 crores. SKP Securities Ltd www.skpmoneywise.com Page 5 of 7

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