Impressive order book with satisfactory numbers on top line and EBITDA, Beat on PAT on account of other higher income, TP revised upwards

CMP(Rs) 410

Target Price(Rs) 483

Upside % 17

Prev Target (Rs) 350

Share Holding (%)

Promoter 62.5Institutions 14.0Public 23.5

Avg Vol ( 6m) (000) 204.0

FV 10

Beta 1.2

Mcap (Rs Mn) 16,138.7

52 week H/L 451 / 110

Bloomberg/Reuters APR IN / APAR.BO

GroupB/S&P BSE Small

Cap

Sensex/Nifty 27,916 / 8,338

Pushkaraj Jamsandekar Email ID: pushkarajj@eisec.com (+91 22 22722364) 7th November, 2014

ABS% Sensex APAR

3 M 7.8 25.2

1 Yr 33.1 241.8

Apar Industries Ltd Q2FY15 Result Update Target: Rs 483

Previous Rating: ACCUMULATE Current Rating: ACCUMULATE

Key Highlights of Results:The income from operations grew by 9% YoY to Rs 12068mnModerate revenue at Rs 12,331mn (up 9%YoY) above our estimate of Rs 12,068mn led by the 32% YoYrevenue growth from conductor segment. The growth from Transformer and Specialty Oils segment wasflat on YoY (Rs 5654mn v/s Rs 5621mn). Despite sluggish domestic demand and even delay in orderexecution from PGCIL, the top line numbers were good due to change in revenue mix towards value addedproducts. Exports helped the growth in conductor as well as oils segments.

Margins declined 252 bps YoY to 6.2%EBITDA for Q2FY15 stood at Rs 773mn as compared to Rs 996mn in Q2FY14 was above our estimate of Rs739mn. The decline in margin of 252 bps on YoY was led by the both the segments conductor andtransformer & specialty oils. Margin in the conductor segment was under pressure due to lack of PGCILorders, fell 183 bps.

PAT down by 55.3% YoY Rs 159mn, lower than our estimate of Rs 268mnDepreciation grew by 15% and effective tax rate went up to 32% from 30% earlier. The sharp decline inother income from Rs 71mn to Rs 12mn ( -83.2% yoy) further hurt PAT.

Outlook and recommendationChange In product mix in the transformer & specialty oil business towards better margin 765kV transformeroil and auto lubricants and change in products mixed with high margin product would improve the marginfurther. The current order book of conductor has impressive growth of 60% (Rs 17770mn v/s Rs 11100mn)which offers strong revenue visibility for coming quarter. We maintain our ACCUMULATE rating on AparIndustries Ltd with the revised TP of Rs 483 per share.

Year Revenue (Rs mn) EBITDA Margin (%) PAT (Rs mn) EPS (Rs) P/E (x) P/BV (x) EV/EBITDA ROCE % ROE %

FY12 34,545 5.7 606 16.8 24.3 3.1 8.3 18.1 14.3

FY13 45,322 6.5 1,022 26.6 15.4 2.8 5.5 18.1 19.8

FY14 44,832 6.1 697 17.9 22.9 2.6 6.0 16.8 11.9

FY15E 50,534 6.0 761 19.8 20.7 2.3 5.4 17.9 11.8

FY16E 55,863 6.5 973 25.3 16.2 2.1 4.5 18.9 13.5

EISEC Research

Other Key highlights of the quarter:New product mix to drive profitability

• Auto lubes volume grew at 17% in H1FY15 due to aggressive marketing efforts and retail push.

• OFC and Elastomeric cables contributing 46% in H1FY15 up from 18% in H1FY14. Elastomeric and OFC cables up 238% & 101% YoY in H1FY15respectively.

Growing Demand for Advanced Technology Products

• Received orders for high efficiency conductors ACCC from West Bengal Transmission Company & Torrent Power. L-1 for Invar conductor orderfrom PGCIL .

• Growth in 765KV & 400KV transformer oil expected with 149,000MW 765KV & 45,000 MW 400KV substations planned in 12th 5yr plan .

• Strong initial demand for E-beam products. Operating at 30-40% load within 1st year of operations .

Geographical diversification

• Export orders contribute more than 51% of conductor order book. Conductor exports contributes 44% in H1FY15 .

• Total exports up 31% YoY from Rs 664cr in H1FY14 to Rs 869cr in H1FY15.

Outlook:All set to capture demand growth

• Well placed to capture demand growth with Rs 250cr capex in last 3yrs

• Heavy investment in T&D sector required to keep pace with 12th 5yr plan targets - only 20% of planned investment completed in first 2 yrs.

• Despite different business cycle, Conductors and oils are expected to grow in tandem for next 4-5 years

2

FY15E FY16E

Old New % change Old New % change

Sales 49,519 50,534 2% 54,768 55,863 2%

EBIDTA 2,971 3,032 2% 3,456 3,609 4%

PAT 732 761 4% 879 973 11%

EPS 19 20 4% 22.8 25.3 11%

EISEC Research 3

Segment performanceSpecialty Oils

• Revenue up 1% YoY from Rs 589cr in Q2FY14 to Rs 596cr in Q2FY15 driven by stable growth in Transformer, Industrial, Automotive and Processoils

• Profitability dropped due to sluggish market environment

• Total shipment up 2% YoY in Q2FY15 from 78,707KL to 80,304KL

Automotive Lubricants continues to grow

• Volume up 17% YoY in H1 FY15 driven by OEM sales and expansion of retail distribution.

• Motor cycle Oils volumes increased by 16% in H1FY15 over H1FY14 with the introduction of new range of 4T Oils with ‘Clutch lok’ technology.

Conductors

• Revenue up 32% YoY from Rs 412cr in Q2FY14 to Rs 545cr in Q2FY15 driven by strong exports contributing 41% of total sales

• EBFTDA up 8% from Rs 40cr in Q2FY14 to Rs 43cr in Q2FY15 due to improved product mix and strong export order book

• Order book up 60% from Rs 1,110cr as on Sep 30, 2013 to Rs 1,777cr as on Sep 30, 2014, driven by export order book of Rs 913cr.

Power & Telecom Cables

• Revenue of Power & Telecom cables down 25% YoY from Rs 173cr in Q2FY14 to Rs 130cr in Q2FY15 due to drop in revenue from Low margin HT-LT power cables, offsetting, strong growth in OFC and Elastomeric cables

• Revenue from Elastomeric and OFC cables up by 238% and 101% Y-o-Y, respectively

• Revenue from OFC cables to pick up with orders from BBNL

• Improving business scenario for OFC and elastomeric cables to enhance product mix and profitability

EISEC Research 4

Particulars (Rs mn) Q2FY15 Q1FY15 QoQ (%) Q2FY14 YoY (%) Revenue (In mn)Conductors 5448 4175 30.5% 4124 32.1%Transformer & Speciality Oils 5654 5615 0.7% 5539 2.1%Power / Telecom Cable 1297 1480 -12.3% 1726 -24.9%Others 62 59 4.8% 51 19.8%EBIT (In mn)Conductors 417 300 39.0% 391 6.7%Transformer & Speciality Oils 330 325 1.5% 590 -44.2%Power / Telecom Cable -2 54 - 59 -Others 6 7 -13.4% 3 75.8%% EBITConductors 7.6% 7.2% - 9.5% -Transformer & Speciality Oils 5.8% 5.8% - 10.7% -Power / Telecom Cable -0.1% 3.7% - 3.4% -Others 9.4% 11.4% - 6.4% -

Y/E March 31st (In mn) 2QFY15 1QFY15 QoQ (%) 2QFY14 YoY (%) Net Sales 12068 11214 7.60% 11745 2.80%EBITDA 739 634 16.70% 569 29.90%% Margin 6.10% 5.60% - 4.80% -Profit After Tax 268 201 32.80% 192 39.30%% Margin 2.20% 1.80% - 1.60% -

5448 5654

1297

4124

5539

1726

0

1500

3000

4500

6000

Conductors Transformer & Speciality Oils

Power / Telecom Cable

Q2FY15 Q2FY14

417330

-2

391

590

59

-300

0

300

600

900

Conductors Transformer & Speciality Oils

Power / Telecom Cable

Q2FY15 Q2FY14

Segment Revenue YoY, Rs mn Segment EBIT YoY, Rs mn

EISEC Research 5

• Income from operations for Q2FY15 grewby 9% YoY to Rs.12331mn , higher than ourestimate of Rs 12,068mn, owing to 2% YoYgrowth in oil business and 32% YoY growthin conductor business revenues.

• EBITDA fell by 22% YoY to Rs 773 mn andoverall EBIDTA margins contracted by 252bps YoY, The decline in margin was led bythe both the segments conductor andtransformer & specialty oils.

• Effective tax rate went up to 32% from 30%earlier. The sharp decrees in other incomefrom Rs 71mn to Rs 12mn (YoY -83.2%)further hampered the PAT.

• Conductor revenue up 32% YoY from Rs412cr in Q2FY14 to Rs 545cr in Q2FY15driven by strong exports contributing 41% oftotal sales

• Oils segment revenue up 1% YoY from Rs589cr in Q2FY14 to Rs 596cr in Q2FY15driven by stable growth in Transformer,Industrial, Automotive and Process oils . Butthe profitability dropped due to sluggishmarket environment. Total shipment up 2%YoY in Q2FY’15 from 78,707KL to 80,304KLRevenue of Power & Telecom cables down25% YoY from Rs 173cr in Q2FY14 to Rs130cr in Q2FY15 due to drop in revenuefrom Low margin HT-LT power cables,offsetting, strong growth in OFC andElastomeric cables

Table No.1 Quarterly Performance at a glance - Consolidated

Source: Company, Eisec Research

Particulars (Rs mn) Q2FY15 Q1FY15 QoQ (%) Q2FY14 YoY (%) Net Sales 12331 11214 10.0% 11298 9.1%Other operating income 105 92 15.0% 104 1.5%Net Sales & Other Operating Income 12436 11306 10.0% 11402 9.1%Change In Stocks -498 -355 40.4% -247 101.7%Purchase of Finished Goods 131 161 -18.4% 201 -34.6%Cost of Services & Raw Materials 9986 9018 10.7% 8792 13.6%Operating & Manufacturing Expenses 1870 1682 11.2% 1517 23.3%Employee Cost 175 167 4.6% 160 8.9%Miscellaneous Expenses 0 0 - -16 -Total Expenditure 11663 10672 9.3% 10406 12.1%EBITDA 773 634 22.0% 996 -22.4%% Margin 6.2% 5.6% 10.9% 8.7% -28.8%Depreciation 76 70 9.5% 66 15.1%EBIT 697 564 23.6% 930 -25.0%Interest 171 170 0.3% 0Other Income 12 69 -82.8% 71 -83.2%PBT before Exceptional Items 538 463 16.2% 1001 -46.2%Exceptional Items 0 0 - -7 -Loss on Foreign Exchange 302 196 54.2% 538 -43.8%Profit Before Tax 236 267 -11.6% 456 -48.2%Tax 77 66 16.6% 137 -44.0%Profit After Tax 159 201 -20.8% 319 -50.0%% Margin 1.3% 1.8% -28.0% 2.8% -54.1%

EISEC Research 6

Financials (Standalone)

Balance Sheet, Rs mn FY12 FY13 FY14 FY15E FY16EShare Capital 360 385 385 385 385Share suspense A/c 25 0 0 0 0Reserves & Surplus 4,325 5,217 5,682 6,444 7,193Total Neworth 4,710 5,602 6,067 6,828 7,578Total Debt - short and long term 9,882 9,733 7,781 9,584 10,404Deferred tax liabilities 135 110 225 110 110Long term provisions 24 26 29 26 26Other long term liabilities 411 138 67 271 298Current Liabilities & Prov 12,553 16,452 15,080 19,106 21,121Total Liabilities 27,713 32,060 29,248 35,925 39,536Net Fixed Assets 1,817 2,423 3,558 3,191 3,034Intangible assets 4 3 0 3 3CWIP 213 451 0 0 0Non- current Investments 60 285 285 285 285Long term loans & advances 463 457 446 500 553Current Investments 0 796 15 15 15Inventories 6,663 7,409 10,104 9,691 10,714Trade Receivables 8,321 7,936 10,442 11,353 12,550Cash & Cash equivalents 8,246 10,321 2,272 8,679 9,942Short Term Loans and Advances 1,384 1,315 1,642 1,466 1,620Other Current Assets 545 665 484 742 820Total Assets 27,713 32,060 29,249 35,925 39,536

Ratio analysis (%) FY12 FY13 FY14 FY15E FY16EEBIDTA margin 5.7 6.5 6.1 6.0 6.5Net profit margin 1.8 2.3 1.6 1.5 1.7Return on equity 14.3 19.8 11.9 11.8 13.5ROCE 18.1 18.1 16.8 17.9 18.9Asset Turnover Ratio 1.5 1.5 1.5 1.6 1.5Inventory (days) 70.4 59.7 72.7 70.0 70.0Payable (days) 90.4 106.9 110.0 110.0 110.0Receivables (days) 87.9 63.9 79.9 82.0 82.0Gross Debt to equity (%) 2.1 1.7 1.3 1.4 1.4Dividend Yield (%) 2.5 4.8 3.8 3.8 3.8

Valuation parameters FY12 FY13 FY14 FY15E FY16EDil. No. of Shares (mn) 36 38 38 38 38 Diluted EPS (Rs) 16.8 26.6 17.9 19.8 25.3 P/E (x) 24.3 15.4 22.9 20.7 16.2 P/BV (x) 3.1 2.8 2.6 2.3 2.1 EV/ EBIDTA (x) 8.3 5.5 6.0 5.4 4.5 EV/Sales(x) 0.5 0.4 0.4 0.3 0.3

Income statement, Rs mn FY12 FY13 FY14 FY15E FY16E

Total revenues 34,545 45,322 44,832 50,534 55,863

% growth 31.2 (1.1) 12.7 10.5

Operating expenses 32,569 42,368 42,113 47,502 52,255

EBITDA 1,977 2,954 2,719 3,032 3,609

% growth 49.4 (7.9) 11.5 19.0

Depreciation 213 239 269 327 357

EBIT 1,764 2,715 2,450 2,705 3,252

Interest 1,621 2,167 1,458 1,669 1,851

Other Income 485 901 45 100 50

PBT 628 1,449 1,037 1,136 1,451

exceptional item 20 46 0 0 0

PBT after exceptional item 609 1,403 1,037 1,136 1,451

Tax 3 381 340 375 479

PAT 606 1,022 697 761 973

% growth 68.6 (31.8) 9.3 27.8

EPS 16.8 26.6 17.9 19.8 25.3

Cash flow, Rs mn FY12 FY13 FY14 FY15E FY16E

PBT 609 1,403 1,028 1,136 1,451

Depreciation 213 239 269 327 357

Other adjustments 780 (47) 0 0 0

Tax paid (190) (287) (197) (375) (479)

Change working capital (1,211) 2,842 (7,108) (613) (437)

Operating cash flow 199 4,150 (6,124) 475 892

Capital expenditure (436) (1,054) (749) (200) (200)

Investments 4 (1,029) (1,098) 0 0

Other investing activities 2 61 39 (82) (53)

Investing cash flows (430) (2,021) (1,058) (282) (253)

Change in borrowings 4,084 28 402 (1,275) 820

Change in Equity 776 0 0 0 0

Dividend paid (147) (178) (202) (223) (223)

Other financing activities (164) 95 92 42 27

Financing cash flow 4,549 (55) (8,049) (1,457) 623

Net change in cash 4,318 2,074 10,321 (1,264) 1,262

Closing cash balance 8,259 10,321 2,272 8,679 9,942

EISEC Research 7

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