Management Meet Update Institutional Equities Apar Industries Reuters: APAR.BO; Bloomberg: APR IN In Turnaround Mode; Retain Buy We had a meeting with the management of Apar Industries (Apar) recently to get the latest business update. The management is optimistic on healthy order inflow for conductors in domestic market and strong margin improvement in oil and cable segments. Following are the key takeaways: Conductor order placement activity on the rise: Apar, a market leader in India and third largest globally with a conductor manufacturing capacity of 144,000MT, is witnessing strong improvement in order placement activity in domestic market. The conductor industry suffered from lack of orders in FY14 and 9MFY15 in domestic market. However, over the past six months, order placement traction from Power Grid Corporation of India (PGCIL) was healthy at 100,000MT (total domestic industry s installed capacity is believed to be 600,000MT). The sudden rise in order placement activity resulted in aggressive pricing in the industry, but Apar was selective in orderbooking and has taken only a 12% market share in these orders (usual market share is 23%). Consequently, it reported a 26% YoY decline in its order book at Rs14.5bn as of FY15end (refer Exhibit 1). It expects further orders to the tune of 100,000MT from PGCIL in the next nine months of FY16, wherein margin is likely to be much higher because of moderation in competition (an aggressive competitor lost bank guarantee, while a few other players maximum offtake limit was reached in PGCIL contracts) as well as softening of aluminum prices. Further, the demand from state electricity board (SEB) projects, either directly or through private EPC players like KEC International and Kalpataru Power, remains healthy. Consequently, Apar is expected to witness a shift in its order book composition with improved order inflow from domestic market in FY16 (43% of revenue and 54% of order book in FY15 comprised exports). Higher demand to result in margin recovery: While the normal operating margin for Apar in conductors stands at Rs9,000Rs10,000 EBITDA/MT, it witnessed EBITDA/MT of Rs8,400 in FY15 and expects EBITDA/MT of only Rs6,000Rs6,500 in FY16 on account of lowmargin orders of the previous year. However, the revival in domestic demand is expected to result in recovery in margin to the normal level in FY17 (refer Exhibit 2). Further, the rising share of hightechnology conductors (HTC) which are manufactured by only two players in India and therefore a highmargin product will aid margins. Apar executed HTC orders worth more than Rs1bn and expects its demand to pick up (30% to 100% more powercarrying capacity, lesser ROW clearance required, reduced technical losses) after having already supplied them to PGCIL and SEBs of Gujarat, Orissa and Uttar Pradesh. Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Net revenue 46,507 46,316 51,219 55,150 61,452 EBITDA 3,113 2,974 2,520 2,768 4,071 Reported PAT 1,095 896 495 877 1,845 EPS (Rs) 28.5 23.3 12.9 22.8 48.0 EPS growth (%) 49.9 (18.1) (44.8) 77.1 110.4 EBITDA margin (%) 6.7 6.4 4.9 5.0 6.6 P/E (x) 13.4 16.3 29.5 16.7 7.9 P/BV (x) 2.3 2.1 2.0 1.8 1.6 EV/EBITDA (x) 4.4 6.8 7.3 6.5 4.3 Dividend yield (%) 1.4 1.4 0.9 1.3 2.6 RoCE (%) 18.3 17.4 16.1 19.2 28.2 RoE (%) 19.0 13.6 6.9 11.5 21.3 29 June 2015 BUY Sector: Capital Goods CMP: Rs380 Target Price: Rs480 Upside: 26% Chirag Muchhala chirag.muchhala@nirmalbang.com +91223926 8092 Key Data Current Shares O/S (mn) 38.5 Mkt Cap (Rsbn/US$mn) 14.7/230.7 52 Wk H / L (Rs) 468/229 Daily Vol. (3M NSE Avg.) 11,584 OneYear Indexed Stock Performance 240 200 160 120 80 Jun14 Aug14 Oct14 Dec14 Feb15 Apr15 Jun15 APAR INDUSTRIES NSE CNX NIFTY INDEX Price Performance (%) 1 M 6 M 1 Yr Apar Industries 16.7 (1.5) 55.2 Nifty Index 0.5 2.2 11.8 Source: Bloomberg Please refer to the disclaimer towards the end of the document.
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 Institutional Equities 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Sharp margin recovery likely in oil segment Apar is expected to post a sharp margin expansion in oil segment in FY16 (up from Rs2,700/KL in FY15 to Rs4,000Rs4,500/KL in FY16E, refer Exhibit 3) driven by favourable base oil prices and improved product mix (rising contribution from 400KV and 765KV transformer oil as well as auto lubes). The oil segment comprises transformer oil (50% share in revenue), white oil (26% share), auto lubes (14% share) and rubber processing oil as well as industrial oil. Apar is largest domestic manufacturer of transformer oil with a 45% market share and fourth largest globally. The transformer oil segment is likely to witness improvement in demand driven by higher capex spending planned in augmenting India s power transmission and distribution (T&D) network. Along with higher demand, rising share of 400KV and 765KV transformer oil (currently 30% of transformer oil revenue) is expected to be key margin driver for Apar because of limited competition (only three players). Apar was the first to introduce 765KV transformer oil in India while it is currently the sole supplier of 800KV HVDC transformer oil. In auto lubes, Apar offers two brands, namely ENI oil (in a tieup with ENI, Italy) and Poweroil. ENI oil is a leader in threewheeler segment, while it also has a presence in twowheelers and commercial vehicle segments. It competes with brands like Castrol, Shell, Total etc. Poweroil is positioned as a valueformoney proposition aimed at fleet operators and bulk buyers. It competes with brands like Veedol. The auto lube category is the most profitable in the oil segment portfolio because of B2C nature of the business. The current oil capacity of Apar stands at 442,000KL, while it is also setting up an oil processing facility at Sharjah in the UAE, which is expected to be operational towards endfy16. The Sharjah facility, being portbased, is likely to be margin accretive for oil segment as it will be closer to customers as well as fuel source (base oil). Strong turnaround in cable segment With the shift in focus towards highmargin elastomeric and ebeam cables as well as optical fibre cables (share in total revenue rose to 51% in FY15 from 29% in FY14) and scaledown in HT/LT cables division, the segment witnessed strong turnaround with an EBITDA margin of 6% in FY15 compared to 1% in FY14 and losses in FY13. Healthy margin traction is likely to continue as elastomeric and ebeam cables are witnessing strong demand from sectors like solar, wind, nuclear, railway and defence while optical fibre cables are witnessing healthy demand from telecom players and BBNL network rollout. Further, with rising spending in power T&D, the profitability of HT/LT cables is also improving, driven by orders from private EPC contractors. Outlook and valuation Post completion of Rs2.5bn capex programme over the past three years to augment manufacturing capacity for hightechnology, highmargin products, Apar is all set to reap the benefit of impending demand along with improved profitability. We expect Apar to register a 93% earnings CAGR over FY15FY17E (on a suppressed base) and a free cash flow generation of Rs1.1bn over the same period. We expect a healthy rise in return ratios, with RoE likely to grow from 7% in FY15 to 21% in FY17 along with a reduction in leverage from 1.6x in FY13 to 0.4x in FY17. The business offers high scalability potential owing to strong transmission capex outlay likely over the next five years in India, which will benefit Apar across its product line with its market leadership position in conductors, transformer oil and cables. Apar stock trades at an attractive valuation of 8x FY17E earnings. We have retained Buy rating on Apar with a target price of Rs480 based on past 10 years average P/E of 10x FY17E EPS. Exhibit 1: Conductor segment s order book position (Rsbn) 25 20 15 10 5 0 2 Apar Industries
Exhibit 2: Conductor segment execution and profitability trend (MT) 200,000 (EBITDA/MT) 15,000 160,000 12,000 120,000 9,000 80,000 6,000 40,000 3,000 FY13 FY14 FY15 FY16E FY17E Execution (LHS) Operating profit (RHS) Exhibit 3: Transformer & specialty oil segment execution and profitability trend (KL) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 (EBITDA/KL) 6,000 5,000 4,000 3,000 2,000 1,000 FY13 FY14 FY15 FY16E FY17E Execution (LHS) Operating profit (RHS) Exhibit 4: Cable segment revenue and profitability trend (Rsmn) (%) 9,000 9.0 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY13 FY14 FY15 FY16E FY17E Revenue (LHS) Operating margin (RHS) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 3 Apar Industries
Apr05 Dec05 Aug06 Apr07 Dec07 Aug08 Apr09 Jan10 Sep10 May11 Jan12 Sep12 May13 Jan14 Oct14 Jun15 Apr05 Dec05 Aug06 Apr07 Institutional Equities Dec07 Aug08 Apr09 Jan10 Sep10 May11 Jan12 Sep12 May13 Jan14 Oct14 Jun15 Exhibit 5: Segmentwise revenue mix FY17E FY16E FY15 FY14 FY13 FY12 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Conductor Transformer & speciality oil Cable Exhibit 6: Segmentwise operating margin profile (%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 (1.0) FY12 FY13 FY14 FY15 FY16E FY17E Conductor Transformer & speciality oil Cable Exhibit 7: P/E charts (Rs) 600 500 400 300 200 100 0 (x) 30 25 20 15 10 5 0 Stock price 3x 7x 11x 15x 19x Source: BSE, Nirmal Bang Institutional Equities Research P/E Average P/E Std Dev +1 Std Dev +2 Std Dev 1 Source: BSE, Nirmal Bang Institutional Equities Research 4 Apar Industries
Financial statement (consolidated) Exhibit 8: Income statement Exhibit 3: Exhibit 9: Cash flow Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Net sales 46,507 46,316 51,219 55,150 61,452 EBIT 2,872 2,704 2,208 2,393 3,669 % growth 29.3 (0.4) 10.6 7.7 11.4 (Inc.)/dec. in working capital 3,138 (7,209) 1,604 (60) (768) Raw material costs 36,555 36,755 40,851 43,679 47,626 Cash flow from operations 6,011 (4,505) 3,812 2,332 2,900 Staff costs 573 668 794 899 1,014 Other income 23 45 18 19 21 Other overheads 6,267 5,920 7,054 7,805 8,742 Depreciation 240 270 312 375 402 Total expenditure 43,394 43,342 48,698 52,383 57,382 Interest paid () (1,346) (1,455) (1,499) (1,141) (1,016) EBITDA 3,113 2,974 2,520 2,768 4,071 Tax paid () (430) (265) (181) (394) (829) % growth 44.6 (4.4) (15.3) 9.8 47.1 Dividends paid () (236) (236) (158) (225) (450) EBITDA margin (%) 6.7 6.4 4.9 5.0 6.6 Minority interest () (7) (3) 1 Other income 23 45 18 19 21 Net cash from operations 4,255 (6,149) 2,305 966 1,028 Interest costs 1,346 1,455 1,499 1,141 1,016 Capital expenditure () (1,054) (952) (582) (450) (450) Depreciation 240 270 312 375 402 Net cash after capex 3,201 (7,101) 1,724 516 578 Profit before tax 1,549 1,294 727 1,271 2,674 Inc./(dec.) in shortterm borrowing (86) (2,323) (3,213) (500) (500) Tax 402 386 231 394 829 Inc./(dec.) in longterm borrowing (17) 372 247 PAT 1,148 908 497 877 1,845 Inc./(dec.) in total borrowings (104) (1,951) (2,967) (500) (500) Minority interest 7 3 (1) (Inc.)/dec. in investments (796) 781 (38) Exceptional items (46) (9) (3) Minority interest 6 0.4 (6) Reported net profit 1,095 896 495 877 1,845 Equity issue/(buyback) 0.3 % growth 49.9 (18.1) (44.8) 77.1 110.4 Cash from financial activities (893) (1,170) (3,010) (500) (500) Net profit margin (%) 2.4 1.9 1.0 1.6 3.0 Others (78) 27 (15) EPS (Rs) 28.5 23.3 12.9 22.8 48.0 Opening cash balance 8,319 10,549 2,306 1,005 1,021 % growth 49.9 (18.1) (44.8) 77.1 110.4 Closing cash balance 10,549 2,306 1,005 1,021 1,099 Change in cash balance 2,230 (8,243) (1,301) 16 78 Exhibit 10: Balance sheet Y/E March (Rsmn) FY13 FY14 FY15 FY16E FY17E Share capital 385 385 385 385 385 Reserves 5,882 6,578 6,913 7,565 8,959 Net worth 6,266 6,962 7,298 7,950 9,344 Minority interest 18 18 12 12 12 Shortterm loans 9,403 7,080 3,867 3,367 2,867 Longterm loans 329 701 948 948 948 Total loans 9,733 7,781 4,815 4,315 3,815 Deferred tax liability (net) 103 225 274 274 274 Liabilities 16,120 14,986 12,399 12,551 13,445 Gross block 4,358 5,412 6,025 6,475 6,925 Depreciation 1,932 2,032 2,344 2,719 3,121 Net block 2,426 3,380 3,681 3,756 3,804 Capital workinprogress 454 181 150 150 150 Goodwill 207 207 217 217 217 Investments 796 15 53 53 53 Inventories 7,515 10,170 9,443 10,577 12,122 Debtors 8,138 11,036 12,670 13,296 14,479 Cash 10,549 2,306 1,005 1,021 1,099 Loans and advances 1,835 2,202 1,955 2,096 2,274 Other current assets 665 484 386 469 553 Total current assets 28,702 26,197 25,459 27,459 30,527 Creditors 14,841 13,673 15,730 16,993 18,920 Other current liabilities & provisions 1,624 1,321 1,430 2,091 2,386 Total current liabilities 16,465 14,994 17,160 19,083 21,305 Net current assets 12,238 11,204 8,299 8,375 9,222 Total assets 16,120 14,986 12,399 12,551 13,445 Exhibit 11: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS 28.5 23.3 12.9 22.8 48.0 Book value 162.9 181.0 189.7 206.6 242.9 Valuation (x) P/E 13.4 16.3 29.5 16.7 7.9 P/BV 2.3 2.1 2.0 1.8 1.6 EV/EBITDA 4.4 6.8 7.3 6.5 4.3 EV/sales 0.3 0.4 0.4 0.3 0.3 Return ratios (%) RoCE 18.3 17.4 16.1 19.2 28.2 RoE 19.0 13.6 6.9 11.5 21.3 RoIC 49.2 31.0 18.4 21.0 30.9 Profitability ratios (%) EBITDA margin 6.7 6.4 4.9 5.0 6.6 EBIT margin 6.2 5.8 4.3 4.3 6.0 PAT margin 2.4 1.9 1.0 1.6 3.0 Turnover ratios Total asset turnover ratio (x) 3.0 3.0 3.7 4.4 4.7 Debtor days 64 87 90 88 86 Inventory days 59 80 67 70 72 Creditors days 148 136 141 142 145 Solvency ratios (x) Debtequity 1.6 1.1 0.7 0.5 0.4 Interest coverage 2.1 1.9 1.5 2.1 3.6 5 Apar Industries
Rating track Date Rating Market price (Rs) Target price (Rs) 17 September 2014 Buy 390 521 9 October 2014 Buy 406 521 7 November 2014 Buy 421 521 9 January 2015 Buy 393 521 10 February 2015 Buy 334 511 15 April 2015 Buy 377 511 21 May 2015 Buy 334 480 6 Apar Industries
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