Saral Gyan Hidden Gem - June 2015

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS

EQUITY RESEARCH REPORT

VISAKA INDUSTRIES LTD.

BSE CODE: 509055 NSE CODE: VISAKAIND

Industry: Cement – Building Products CMP: Rs. 128.15 (05/07/2015)

Market Cap: 202.64 (INR in Crore) Target Price: Rs. 240 Date: July 05, 2015 Time Period: 12 – 24 months

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HIDDEN GEMS – JUNE 2015

- 2 - SARAL GYAN CAPITAL SERVICES

TABLE OF CONTENT

S.No Content Page No.

1. Company Background 03

2. Recent Developments 07

3. Financial Performance 08

4. Peer Group Comparison 10

5. Key Concerns / Risks 10

6. Saral Gyan Recommendation 11

7. Disclaimer 13



1. Company Background

Visaka Industries was established in 1981 to manufacture corrugated cement fiber sheets. With the initial production capacity of of 36,000 tons per year, the first factory in Patancheru, Andhra Pradesh commenced the commercial

production of the cement sheets in 1985. The company diversified into textile yarn manufacturing in 1992. Visaka ventured into Airjet spinning technology & successfully established the factory in Nagpur to produce about 2000 tons of man-made fibre yarns per annum. Headquartered in Hyderabad, Visaka Industries has 11 manufacturing facilities across India. These plants possess an aggregate production capacity (annual) of about 8,02,000 tonnes of corrugated cement asbestos sheets and 1,29,750 tonnes of fibre cement flat board products. The Company also comprises a spinning plant capable of producing 9,000 tonnes of yarn per annum. The Company’s manufacturing units are supported by nine pan-India marketing offices.

Segment Product Manufacturing Unit Installed Capacity

Capacity Utilisation

Building Products

Cement asbestos products

1. Patancheru (Telangana)

8,02,000 metric tonnes

96%

2. Vijayawada (Andhra Pradesh)

3. Paramathi (Tamil Nadu)

4. Tumkur (Karnataka)

5. Midnapore (West Bengal)

6. Rae Bareli (Uttar Pradesh)

7. Pune (Maharashtra)

8. Sambalpur (Odisha)

Fibre cement flat products

1. Miryalguda (Telangana) 2. Delwadi (Maharashtra)

1,29,750 metric tonnes

68%

Textiles Synthetic Yarns 1. Nagpur (Maharashtra) 31 MTS machines

96%

Visaka Industries is operating in two segments. 1. Building products - cement asbestos products and fibre cement flat products (V-

Boards and V-Panels) 2. Textiles - Synthetic yarns



1. Building Product Division The Company’s building products division comprises of i) Cement Asbestos, predominantly used in rural India and ii) Fibre Cement Boards (non-asbestos) used in urban and suburban centres, The Company possesses a strong distribution network comprising more than 6,000 retailers (rural and suburban markets). It derived 85% of its sales from these markets; the rest derived from institutional sales to governmental agencies, construction industry and poultry farms. The Company leveraged its superior marketplace knowledge by distributing directly to retailers as opposed to the conventional distributor-retailer model. Cement Asbestos Products

The Company was the seventh largest cement asbestos product manufacturer in India in 1996; it is the second largest today. The Company’s Visaka and Shakti brands enjoyed favourable recall across India’s organised cement asbestos market. The Company’s cement asbestos product manufacturing facilities are dispersed nationally - four in Southern, one in Northern, two in Eastern and one in Western India - thereby ensuring that captive and

emergent needs are adequately addressed, pan-India. The Company has reached a capacity of 8,02,000 tonnes per annum. The Company’s asbestos products offer superior load-bearing capacity, transcending recommended standards. The division engages in periodic dialogues with governmental agencies, architects, engineers and farmers to access feedback that translates into product customisation. The Company’s rich engineering competence is reflected through its ability of having designed and fabricated best-in-class cement asbestos machinery using verified pre-owned equipment at six of its eight plants, helping keep capital costs considerably lower than industry standards. Fibre Cement Sheets (non-asbestos) – V-boards and V-Panels The Company’s building products division also manufactures flat products like V-Boards and V-Panels. The Company possesses an installed capacity of 120,000 metric tonnes for V-Boards (fibre cement flat sheets) and 9,750 metric tonnes of V-Panels.



It possesses the second largest fibre cement sheet capacity in the country. The V-Board division runs on the state-of-the-art HPSC technology, which complies with rigorous ISO 14862-2000 norms. Over the last few years, the use of flat products (V-Boards and V-Panels) revived on account of a superior price-value proposition. The product advantages were endorsed by architects and users. These products not only save time and money, but are safer and aesthetically better. The fibre cement board phenomenon is expected to radically change the way interiors and exteriors are perceived in India. A shift in application from plywood, particle board and MDF boards to cement fibre sheets could catalyse demand, leading to onward use in false roofing, wall paneling, partitioning and in mezzanine flooring, among others. V-Boards - The Company commissioned its V-Board business in May 2008, conveniently distant from its cement asbestos units. The Company’s V-Boards offer unmatched quality, style and durability, making it the ideal choice for internal and external applications like false ceiling, internal walls, mezzanine flooring, partitions and doors among others.

The offtake of cement boards grew, following enhanced product awareness, shift from timber products (due to advantages of fire, water and termite-resistance over plywood and particle boards), higher affordability, low maintenance costs, low installation costs, greater functionality, easy transportability (obviating the need for mixing on-site) and greater safety in seismic zones. These products are reinforced with top-ofthe-line HPSC technology conforming to ISO 14862-2000 norms.

V-Panels - This non-asbestos product is ideal for interiors (created using cement, fly ash and polystyrene beads), gaining preference over the years. This low maintenance and space-efficient product is positioned as a dry wall substitute, especially in earthquakeprone areas. V-Panels are preferred on account of their superior size-weight ratio (lighter than bricks) and also sufficiently match wall strength with axial loads. The product is labour-efficient, can be erected by a few individuals and reused across locations. Visaka possesses an installed capacity of 9,750 tonnes per annum. The Company’s customers for V-Panels comprise GMR Group, Punj Loyd, Shapoorji Pallonji, Soma Enterprises, TCS, Gujarat Ambuja port, Eenadu Group, Uranium Corporation of India and Larsen & Toubro India, among others.



2. Textile Division Visaka diversified into the manufacture of synthetic yarn in 1992. Its textile division manufactures yarns using state-of-the-art twin air jet spinning machines (Murata, Japan), 31 MTS machines (equivalent to 55,000 ring spindles). The quality manufactured is superior to conventional ring frame yarn.

The Company enjoys attractive scale; it possesses the single-largest twin airjet equipment installation in India and one of the biggest such installations in the world. The Company produced dyed yarns at a speed higher than the equipment manufacturer’s recommendation. The Company selected to specialise in the niche segment of a commodity

business (polyester spun yarns as well as products from 30s to 76s counts – double yarn). The Company ventured into the manufacture of value-added customised yarn varieties that are relatively insulated from price-based competition. The efficacy of this strategy was vindicated through enduring customer relationships. The Company’s domestic textile clients comprise industry heavyweights like Grasim Industries, Siyaram Silk, S. Kumar Nationwide, Shreekar Polyester, Puneet Syntex, Anand Silk Mills, G.M. Knitting Industries, D.C. Textiles, Kalpesh Synthetics and Raj Rajendra Industries, among others. Over 23% of the division’s production was exported to value-added fabric makers (used in sun umbrellas, venetian blinds, table linen and automotive fabrics). Visaka invested in the world’s largest double yarn manufacturing plant based on twin air jet spinning. The unit developed mélange yarns, grindle yarns, high twist yarns and specialty yarns with different blend styles. The unit is the largest global facility using Murata equipment, reporting one of the highest global efficiencies. Seamless procedural control translated into Visaka being given an ISO certification as early as in 1995 and ‘Star Export House’ status in 2008. Yarns are environment-friendly and certified as per demanding OEKO-TEX standards. The Company’s stringent adherence to quality processes resulted in its ISO certification. The Company’s air-jet yarns are marked by low pilling, no singeing and excellent dye pick-up, low picks per inch, low weaving cost, low value loss/fresher piece length, perspiration absorption, low shrinkage and smooth appearance value.



2. Recent Development

No. of Initiatives taken to strengthen growth and operating margins Company expanded its capacity in a cost-effective manner. Company increased the cement asbestos capacity at its Rae Bareli plant by 20% to cater to the growing asbestos demand coming out of Northern and Eastern India. Company also added two MTS machines to its spinning units, increasing its capacity by 6%. This expansion was achieved at a marginal capital investment through the prudent procurement of preowned machines. Company ensured that its Miryalguda manufacturing unit became self-sufficient in terms of power. It commissioned a 2.5-megawatt solar power plant, which addressed over 70% of its captive requirement, helping this unit counter power outages and curtail power costs. Company also improved productivity and optimised costs wherever possible, company successfully de-bottlenecked production lines at its asbestos units, reporting an average capacity utilisation of 96% in FY 2014-15 against 80% in 2013-14 Better future outlook with rise in demand from rural & semi urban markets Company is planning to increase its Midnapore cement asbestos plant capacity by 20% to cater to the growing demand from Eastern India. Company believes in pursuing incremental expansion rather than creating entire new units as the former calls for significantly lower capital costs and quicker time-to-market. With fibre prices forecast to remain stable for 2015-16, enhanced capacity utilisation will allow company to break even quicker. The loss-making board segment of the company is expected to turn profitable and the spinning segment’s supplementary capacity will enhance profitability. With adequate capacity in place to cater to the expected rise in demand, utilisation levels are expected to improve, leading to higher volumes and turnover. Besides, cement and fly ash prices are expected to remain flat while freight costs are expected to remain steady as diesel prices have declined. The increase in energy costs due to the power crisis in Telengana has been largely counter balanced by company’s newly commissioned solar power plant.



3. Financial Performance Visaka Industries standalone net profit rises 34.89% in the March 2015 quarter Net profit of Visaka Industries rose 34.89% to Rs 6.07 crore in the quarter ended March 2015 as against Rs 4.50 crore during the previous quarter ended March 2014. Sales rose 18.81% to Rs 281.72 crore in the quarter ended March 2015 as against Rs 237.11 crore during the previous quarter ended March 2014. For the full year, net profit rose 77.44% to Rs 21.24 crore in the year ended March 2015 as against Rs 11.97 crore during the previous year ended March 2014. Sales rose 14.74% to Rs 1013.10 crore in the year ended March 2015 as against Rs 882.92 crore during the previous year ended March 2014 Visaka Industries reports net profit of Rs 0.27 crore in the Dec 2014 quarter Net profit of Visaka Industries reported to Rs 0.27 crore in the quarter ended December 2014 as against net loss of Rs 4.69 crore during the previous quarter ended December 2013. Sales rose 13.79% to Rs 212.60 crore in the quarter ended December 2014 as against Rs 186.83 crore during the previous quarter ended December 2013

1 2 3 4 5 6

Net Sales 186.83 237.11 310.48 208.29 212.6 281.72

Net Profit -4.69 4.5 11.2 3.69 0.27 6.07

186.83

237.11

310.48

208.29 212.6

281.72

-4.69

4.5 11.2 3.69 0.27 6.07

-50

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50

100

150

200

250

300

350

Rs i

n C

rore

s

Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15

Last 6 Quarters Net Sales & Profit



Current & Expected Earnings Quarterly Ended Profit & Loss Account

The company has entered into growth path once again with the improved market conditions. Revenue from operations increased by 14% to 1021 Crores from 892 Crores, PBDIT increased to Rs. 98.33 Crores in FY14-15 from Rs 62.65 crores in FY13-14. The capital expenditure for 2014-15 was Rs. 41 Crores, which was principally on account of setup of 2.5 MW Solar Power Plant at V-Boards & V-Panels Division, Miryalaguda and modernization cum expansion at Raebareli unit. Promoter’s shareholding is low at 37.54%. However, we believe management is prudent and making sincere efforts to register 15-20% revenue growth in 2015-16, which, when coupled with tighter cost control, will enhance profitability and add value for shareholders.

Particulars (Rs in Crores)

Jun 2014

Sep 2014

Dec 2014

Mar 2015

Jun 2015 E

Sep 2015 E

Audited / UnAudited UA UA UA UA UA UA

Net Sales 310.48 208.29 212.6 281.72 345.86 252.01

Other Operating Income 1.9 1.29 1.52 3.32 1.41 1.47

Total Income - Operations 312.39 209.58 214.12 285.04 347.27 253.48

Raw Materials Consumed 165.23 154.07 146.11 139.48 192.34 190.31

Purchase of Traded Goods 0.39 0.31 0.24 0.14 0.29 0.41

Increase/Decrease in Stocks 27.79 -51.4 -32.63 27.77 29.21 -52.23

Employees Cost 17.11 13.46 13.49 15.28 18.88 14.71

Depreciation 13.62 10.15 9.82 9.5 12.41 9.43

Provisions And Contingencies -- -- -- -- -- --

Other Expenses 67.68 73.72 71.48 75.49 69.17 77.21

P/L Before Other Income 20.56 9.27 5.62 17.37 24.97 13.64

Other Income 0.83 0.67 0.71 0.21 0.87 0.73

P/L Before Int., E. Items & Tax 21.39 9.93 6.33 17.58 25.84 14.37

Interest 4.91 4.03 5.92 7.17 7.03 6.45

P/L Before E. Items & Tax 16.49 5.91 0.41 10.41 18.81 7.92

Exceptional Items -- -- -- -- -- --

P/L Before Tax 16.49 5.91 0.41 10.41 18.81 7.92

Tax 5.28 2.21 0.14 4.34 6.25 2.56

Net Profit/(Loss) 11.2 3.69 0.27 6.07 12.56 5.36

Equity Share Capital 15.88 15.88 15.88 15.88 15.88 15.88

Calculated EPS 7.05 2.33 0.17 3.82 7.91 3.38

Calculated EPS (Annualised) 28.2 9.32 0.68 15.28 31.64 13.54

No Of Public Shares Holding 0.99 0.99 0.99 0.99 NA NA

Public Share Holding (%) 62.44 62.46 62.46 62.46 NA NA



4. Peer Group Comparison

PEER GROUP VISAKA

INDUSTRIES EVEREST

INDUSTRIES RAMCO

INDUSTRIES HYDERABAD INDUSTRIES

CMP 128.15 332.15 86.55 655.05

52 W H/L 144.00/85.00 366.90/214.05 103.40/54.55 738.80/423.70

Market Cap 202.64 506.68 748.34 485.81

Results (in Crores) Mar-15 Mar-15 Mar-15 Mar-15

Sales 281.72 314.54 184.44 273.39

PAT 6.07 10.07 2.78 12.84

Equity 15.88 15.29 8.67 7.49

EPS 13.37 22.31 2.42 89.59

P/E 9.54 14.81 35.68 7.27

The leading players in the industry are Hyderabad Industries, Visaka Industries, Everest Industries and Ramco Industries. These companies account for 70-75% of industry capacity. Visaka Industries is trading at cheap valuations compared to its peers which are trading at relatively high valuations

5. Key Concerns / Risks Asbestos cement sheet sales are highly dependent on rural prosperity as the use of

these sheets is highest in rural and semi-urban areas. In urban areas most houses are already pucca and the need for asbestos cement sheet is low. In rural areas, thatched roofs and tiled roofs are replaced by Asbestos cement sheet when affordable, as it has several advantages. Rural prosperity is highly dependent on agricultural productivity, which in turn in dependant on the monsoon. A poor monsoon impacts the demand for roofing in rural India.

Chrysotile (Asbestos fibre), a key raw material in the manufacturing of Asbestos

cement sheet, is entirely imported by all players. Exports are limited and imports are significant, exposing companies to a forex risk, which amplifies in times of depreciating domestic currency.

Possible oversupply caused by the several capacities being added by most of the

companies could lead to a price war. Rapid capacity expansions could lead to an oversupply situation, which could affect prices.



6. Saral Gyan Recommendation

Cement asbestos products represent a convenient intermediate roofing product in rural and suburban India. Rural India accounts for ~70% of total population and ~ 50% of Rural India living in Kuccha & Semi Pucca homes provides a vast opportunity for Pucca houses. Thatched roofs need regular replacement and tiled roofs need continued maintenance. Therefore, once the economic conditions improve the first choice of the rural poor is to replace thatched or tiled roofs with affordable asbestos cement alternatives

The proposed National Gramin Awas Mission, under the aegis of the Rural Development Ministry, could become the blueprint for constructing houses in rural areas. The Central Government aims to build six crore houses - two crore in urban areas and the remainder in rural areas. The Union Budget 2015-16 has allocated Rs. 14,000 crore towards the programme to realise the dream of housing for all. With a revival in demand for cement asbestos becoming evident, the Company is concurrently planning to increase its Midnapore plant capacity by 20%.

Building products divisions contributed 82% to the Company’s overall topline. This

segment reported 18% revenue growth to Rs. 834 crore, production grew by 28% for the cement asbestos segment with a capacity utilisation of 96% (80% in 2013-14). Sales grew by 12.5% for the cement asbestos segment. Moreover, company achieved robust growth from V-boards, sales volumes for V-boards grew by 57% and exports grew by 109% in FY14-15. The Company expects the V-Boards unit will continue to post robust performance on account of growing product acceptance and increasing exports. Capacity utilization was at 67% in FY14-15, increase in capacity utilization will lead to higher revenue growth and operating margins going forward.

Asbestos fibre, the key raw material for asbestos cement products is 100% imported

and accounts for 60% of raw material cost of building products segment. Sharp fall in rupee in last 2 years led to increase in landed cost which impacted the segment margins. However, with rupee stabilizing, the prices are expected to remain flat going ahead. Besides asbestos fibre, cement and fly ash prices are also expected to remain flat. The increase in power costs due to power crisis in Andhra Pradesh and Tamilnadu would be offset by the company’s newly commissioned 2.5MW solar power plant which will further lead to improvement in EBIDTA margins.

Textile division contributed 18% to the company’s total revenue in FY14-15.

Optimistic of the prospects of the synthetic yarn segment, the Company intends to add two machines, which will spike its capacity by 6%. The per capita man-made fibre consumption in India was 1.7 kilogram per annum in FY2012-13 against the global average of 10 kilograms per annum. The per capita man-made fibre consumption is expected to reach a level of 2.1 kilograms per annum by the end of



2015-16. It is also estimated that the domestic consumption of man-made fibre could grow at a CAGR of 5.2% during the period FY12-16 (Source: CARE Ratings).

Company’s EBITDA and PAT margins are expected to improve as company is

currently operating at lower utilization levels. Going ahead, if the demand improves, existing capacities will cater through higher utilization.

Key Financial Parameters Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015

Return on Equity (%) 17.96 13.36 17.36 4.58 7.53

ROCE (%) 12.45 10.58 12.14 5.01 6.56

Operating Profit Margin (%) 13.47 10.87 12.04 6.92 9.93

Net Profit Margin (%) 6.83 4.88 5.81 1.69 2.45

Debt to Equity (%) 0.66 0.55 0.85 0.79 0.92

Working Capital Days 130 116 123 141 125

Management has rewarded shareholders by paying regular dividends. Company has declared dividend of Rs. 5 per share for FY 14-15 and dividend yield at current share price is at 3.9 which increases margin of safety with limited downside risk.

YEAR Mar'11 Mar'12 Mar'13 Mar'14 Mar'15

EPS 28.35 21.60 31.88 7.53 13.35

Dividend / Share (In Rs) 2.00 5.00 6.00 2.50 5.00

As per our estimates, Visaka Industries Ltd can deliver bottom line of 28 crores for full financial year 2016, annualized EPS of Rs. 17.6 with forward P/E ratio of 7.3X for FY16, valuation looks attractive considering margin expansion and increase in revenue with rise in demand of company’s products from domestic semi-urban and rural markets and exports.

On equity of Rs. 15.88 crore, the estimated annualized EPS for FY 15-16 works out to Rs. 17.6 and the Book Value per share is Rs. 223. At current market price of Rs. 128.15, stock price to book value is 0.57.

Considering start of good monsoon season this year and expected revival in rural demand aided by government’s focus on low cost housing, Saral Gyan team recommends “Buy” on Visaka Industries Ltd at current market price of Rs. 128.15 for target of Rs. 240 over a period of 12 to 24 months. Buying Strategy:

70% at current market price of 128.15 30% at price range of 100-110 (in case of correction in stock price in near term)

Portfolio Allocation: 3% of your equity portfolio.



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Economy & Finance

Saral Gyan Hidden Gem - June 2015