February 8, 2016 Srikalahasti Pipes Ltd. Hitting a sweet spot in Water Infrastructure... CMP INR 243 Target INR 353 Result Update - BUY Key Share Data Face Value (INR) 10.0 Equity Capital (INR Mn) 397.6 Market Cap (INR Mn) 9,646.6 52 Week High/Low (INR) 349/100 6 months Avg. Daily Volume (BSE) 80,996 BSE Code 513605 NSE Code Reuters Code Bloomberg Code Shareholding Pattern (as on 31st Dec 2015) Non Institution, 45. Source: Company Key Financials (INR Million) Institutios, 4.2% SRIPIPES Promoter, 50.8% SRIK.BO SRIK IN Particulars FY15 FY16E FY17E FY18E Net Sales 10,835.5 11,418.9 12,239.9 13,817.1 Growth (%) 9.5% 5.4% 7.2% 12.9% EBITDA 1,856.2 2,706.3 2,925.3 3,336.8 PAT 829.8 1,547.2 1,765.4 2,136.6 Growth (%) 114.4% 86.4% 14.1% 21. EPS (INR) 20.9 38.9 44.4 53.7 BVPS (INR) 73.8 109.2 148.9 197.9 Key Financials Ratios Particulars FY15 FY16E FY17E FY18E P/E (x) 8.5 6.8 6.0 4.9 P/BVPS (x) 2.4 2.4 1.8 1.3 Mcap/Sales (x) 0.6 0.9 0.9 0.8 EV/EBITDA (x) 5.9 5.1 4.4 3.6 ROCE (%) 23. 29.9% 29.2% 29.8% ROE (%) 28.3% 35.6% 29.8% 27.1% EBITDA Mar (%) 17.1% 23.7% 23.9% 24.2% PAT Mar (%) 7.7% 13.5% 14.4% 15.5% Debt - Equity (x) 1.3 0.9 0.5 0.3 Source: Company, SKP Research 1 Yr price performance SPL vis-à-vis BSE Small Cap 30 15-15 4-Feb 4-Mar 4-Apr 4-May SPL 4-Jun 4-Jul 4-Aug 4-Sep 4-Oct 4-Nov BSE Small Cap 4-Dec 4-Jan 4-Feb 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 ~8.4%over FY15-18E During Q3FY16, SPL reported net sales of Rs 2,800.1 mn, a decline of ~9.1% y-o-y, whereas sales grew by ~6% during 9MFY16, backed by higher capacity utilization of its DI pipe segment. Going forward, we expect SPL sales to grow at a CAGR of 8.4% during FY15-18E 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 14% in FY15-18E. 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 and FY16 respectively. SPL s current order book in DI pipes stands at ~2,00,000 MT (equivalent to about 8 months production). On the back of healthy demand from key user industries, we expect DI sales volume to increase at a CAGR of ~18% in FY15-18E to 2,65,250 TPA while softening commodity prices will restrict value growth to ~14%. Margins to scale up with better operating efficiencies & capacity utilization EBITDA margins during Q3FY16, improved by 836 bps y-o-y & 164 bps q-oq to 24.3%, on account of better operating efficiencies, higher capacity utilization and steep fall in raw materials (iron ore & coking coal) prices. Raw material cost as a percentage of sales has fallen significantly to 41.9% during the quarter vis-à-vis 46.2% 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 ~96% 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 improve to 24% by FY18E. Deleveraging Balance Sheet Over the last few years, the company has reduced its net debt from Rs 451 crores in FY12 to Rs 379 crores in FY15, bringing down D/E ratio significantly to 1.3x in FY15 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 4.8x of FY18E EBIDTA - method of relative valuation and recommend BUY on the stock with a target price of Rs 353/- (~46% upside) in 18 months. SKP Securities Ltd www.skpmoneywise.com Page 1 of 7
Exhibit: Q3FY16 Result Review Figs. in INR M illion Particulars Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) FY16-9Months FY15-9Months YoY (%) Net Sales 2,800.1 3,080.2-9.1% 2,946.9-5. 8,305.6 7,821.2 6.2% Total Income.. 2,800.1 3,080.2-9.1% 2,946.9-5. 8,305.6 7,821.2 6.2% Expenditure 2,118.4 2,587.8-18.1% 2,277.9-7. 6,330.1 6,532.5-3.1% Material Consumed 1,172.8 1,423.2-17.6% 1,357.8-13.6% 3,710.4 3,761.3-1.4% (as a % of Total Income) 41.9% 46.2% 46.1% 44.7% 48.1% Purchase of Traded goods 157.4 397.5-60.4% 60.6 159.7% 287.0 411.1-30.2% (as a % of Total Income) 5.6% 12.9% 2.1% 3.5% 5.3% Changes in Inventories & WIP (107.9) (6.0) 1689.7% (41.4) 160.4% (202.8) 50.7-499.7% (as a % of Total Income) -3.9% -0.2% -1.4% -2.4% 0.6% Employees Cost 148.6 126.7 17.2% 150.0-1. 435.6 370.7 17.5% (as a % of Total Income) 5.3% 4.1% 5.1% 5.2% 4.7% Other Expenses 747.5 646.5 15.6% 751.0-0.5% 2,099.8 1,938.7 8.3% (as a % of Total Income) 26.7% 21. 25.5% 25.3% 24.8% EBITDA 681.7 492.3 38.5% 669.0 1.9% 1,975.5 1,288.7 53.3% EBITDA M argin (%) 24.3% 16. 836 Bps 22.7% 164 Bps 23.8% 16.5% 731 Bps Depreciation 68.3 67.1 1.8% 67.0 1.9% 203.0 200.2 1.4% EBIT 613.4 425.2 44.3% 602.0 1.9% 1,772.5 1,088.5 62.8% Other Income 54.1 18.4 193.5% 39.3 37.6% 119.5 44.7 167.4% Interest Expense 117.0 132.4-11.6% 105.4 11. 347.2 361.4-3.9% Profit Before Tax 550.4 311.2 76.9% 535.8 2.7% 1,544.9 771.8 100.2% Income Tax 136.4 97.5 39.9% 162.3-16. 418.1 246.3 69.7% Effective Tax Rate (%) 24.8% 31.3% - 30.3% - 27.1% 31.9% - Profit After Tax (PAT) 414.1 213.8 93.7% 373.5 10.9% 1,126.8 525.5 114.4% PAT M argins (%) 14.8% 6.9% 785 Bps 12.67% 211 Bps 13.57% 6.72% 685 Bps Diluted EPS 10.4 5.4 93.7% 9.4 10.9% 28.34 13.22 114.4% Source: Company Data, SKP Research SKP Securities Ltd www.skpmoneywise.com Page 2 of 7
Top-line expected to grow at a CAGR of 8.4% over FY15-18E Exhibit: Net Sales & Net Sales Growth 15000 CAGR growth of ~8.4% 2 Net Sales is expected to grow at a CAGR 8.4% percent to Rs 13817.1 million over FY15-18E 12000 9000 6000 3000 7870 8% 8639 9894 15% 10836 11419 5% 12240 7% 13817 15% 13% 5% 0 Net Sales (Rs Million) Growth (YoY%) EBITDA margins to improve by 702 bps over FY15 -FY18E Exhibit: EBITDA & EBITDA Margin (%) EBITDA is expected to grow at a CAGR 21.6% percent to Rs 3336.8 million over FY15-18E 4000 3500 3000 2500 2000 1500 1000 500 0 653 8.3% 513 5.9% 1170 11.8% 1856 Margins on an 30. increasing trend 23.7% 23.9% 24.2% 25. 17.1% 2706 2925 3337 20. 15. 10. 5. 0. EBITDA(Rs Million) EBITDA Margin (%) PAT margins to improve by 781 bps over FY15 -FY18E Exhibit: PAT & PAT Margin (%) 2500 20. PAT is expected to grow at a CAGR 37.1% percent to Rs 2136.6million over FY15-18E 2000 1500 1000 500 0-500 -0.5% -1.5% 3.9% 387-131 -40 13.5% 7.7% 1765 1547 830 14.4% 15.5% 2137 15. 10. 5. 0. -5. PAT(Rs Million) Growth (YoY%) SKP Securities Ltd www.skpmoneywise.com Page 3 of 7
D/E ratio improves to 0.3x in FY18E from a high of 1.3x in FY15 Exhibit: Debt/Equity & Interest Coverage Ratio (x) Total debt to decline by Rs 153 crores by FY18E, thereby bringing down its D/E to 0.3x. 2.5 2.0 1.5 1.0 0.5 0.0 12.0 2.2 2.2 1.8 1.3 7.6 5.5 3.5 0.9 0.5 1.6 0.3 0.8 0.5 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 D/E Ratio (x) ICR(X) ROE to improve from 17% in FY14 to 27% by FY18E Exhibit: ROE & ROCE Ratio (x) 4 3 2-36% 28% 3 27% 3 29% 3 17% 23% -2% -7% 14% 7% 5% ROE ROCE 35% 3 25% 2 15% 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 FY16E FY17E FY18E Particulars FY15 FY16E FY17E FY18E Total Income 10,835.5 11,418.9 12,239.9 13,817.1 Share Capital 397.6 397.6 397.6 397.6 Growth (%) 9.5% 5.4% 7.2% 12.9% Reserve & Surplus 2,535.3 3,942.9 5,522.2 7,472.7 Expenditure 8,979.3 8,712.6 9,314.5 10,480.3 Shareholders Funds 2,932.9 4,340.6 5,919.8 7,870.4 Material Cost 5,423.9 5,081.4 5,385.5 6,045.0 Total Debt 3,786.3 3,704.6 2,975.7 2,170.8 Traded goods 533.9 137.0 171.4 207.3 Deferred Tax (Net) - - - - Employee Cost 484.5 605.2 673.2 759.9 Total Liabilities 6,719.2 8,045.2 8,895.5 10,041.2 Admin & Other Exp. 2,537.0 2,889.0 3,084.4 3,468.1 EBITDA 1,856.2 2,706.3 2,925.3 3,336.8 Net Block inc. Capital WIP 4961.9 5663.7 5539.8 5399.9 Depreciation 311.7 298.1 323.9 339.9 Deferred Tax (Net) (654.7) (654.7) (654.7) (654.7) EBIT 1,544.5 2,408.1 2,601.4 2,996.9 Non-Current Assets 4,750.0 5,676.4 6,750.0 8,054.0 Other Income 86.6 148.4 159.1 179.6 Inventories 1,345.9 1,622.0 1,993.5 2,493.8 Interest Expense 436.9 437.1 342.2 249.6 Sundry Debtors 1,860.5 2,154.5 2,604.2 3,070.5 Profit Before Tax (PBT) 1,194.2 2,119.4 2,418.3 2,926.9 Cash & Bank Balance 592.5 586.7 769.1 845.5 Income Tax 364.4 572.2 652.9 790.3 Other Current Assets 502.9 456.8 489.6 552.7 Profit After Tax (PAT) 829.8 1,547.2 1,765.4 2,136.6 Loans & Advances 448.3 856.4 893.5 1,091.6 Growth (%) 114.4% 86.4% 14.1% 21. Current Liabilities & Prov 2,337.9 2,640.2 2,739.6 2,758.0 Diluted EPS 20.9 38.9 44.4 53.7 Total Assets 6,719.2 8,045.2 8,895.5 10,041.2 Exhibit: Cash Flow Statement Figures in INR Million Exhibit: Ratio Analysis Particulars FY14 FY15 FY16E FY17E Particulars FY15 FY16E FY17E FY18E Profit Before Tax (PBT) 1,194.2 2,119.4 2,418.3 2,926.9 Earning Ratios (%) Depreciation 311.7 298.1 323.9 339.9 EBITDA Margin (%) 17.1% 23.7% 23.9% 24.2% Interest Provided 436.9 437.1 342.2 249.6 PAT Margins (%) 7.7% 13.5% 14.4% 15.5% Chg. in Working Capital 1,344.4 2,224.9 2,292.6 2,307.2 ROCE (%) 23. 29.9% 29.2% 29.8% Direct Taxes Paid 231.9 572.2 652.9 790.3 ROE (%) 28.3% 35.6% 29.8% 27.1% Other Charges - Per Share Data (INR) Operating Cash Flows 1,576.2 1,652.6 1,639.7 1,517.0 Diluted EPS 20.9 38.9 44.4 53.7 Capital Expenditure (748.3) (1,000.0) (200.0) (200.0) Cash EPS (CEPS) 13.0 31.4 36.3 45.2 Investments 15.5 (353.6) (342.5) (342.5) BVPS 73.8 109.2 148.9 197.9 Others - Valuation Ratios (x) Investing Cash Flows (728.1) (1,657.0) (963.9) (946.2) P/E 8.5 6.8 6.0 4.9 Changes in Equity - - - - Price/BVPS 2.4 2.4 1.8 1.3 Inc / (Dec) in Debt (315.7) 176.5 (307.2) (309.4) EV/Sales 1.0 1.2 1.0 0.9 Dividend Paid (inc tax) (59.6) (119.3) (159.1) (159.1) EV/EBITDA 5.9 5.1 4.4 3.6 Tax on Dividend (10.1) (20.3) (27.0) (27.0) Dividend Yield (%) 0.8% 2. 2.6% 3.4% Financing Cash Flows (821.4) 37.0 (493.3) (494.5) Balance Sheet Ratios Chg. in Cash & Cash Eqv 26.7 32.6 182.4 76.3 Debt - Equity 1.3 0.9 0.5 0.3 Opening Cash Balance 527.4 554.1 586.7 769.1 Current Ratio 2.0 2.1 2.5 2.9 Closing Cash Balance 554.1 586.7 769.1 845.5 Asset Turn. Ratios 1.6 1.4 1.4 1.4 Source: Company Data, SKP Research SKP Securities Ltd www.skpmoneywise.com Page 5 of 7
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