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Apar Industries

‘Power’ house play Apar Industries (Apar) is a leading manufacturer of conductors, transformer oils and cables for the domestic and overseas power T&D sector. Apar’s continuous in-house R&D efforts, strategic tie-ups and capacity expansion (Rs3bn invested over FY12-15), has imparted competitive edge for its newer products like EHV transformer oils, specialised industrial, high temperature conductors and elastomeric cables to address the growing needs of power and industrial sector. We believe that the successful implementation of UDAY scheme, acceleration of Rs1,800bn 12

th plan T&D capex spend

including Rs1,100bn by PGCIL, railway coaches electrification and thrust on developing solar and wind power can propel demand for Apar’s products. We expect stable commodity prices, rise in conductor segment margins and value-added products mix in specialty oils and cables business to propel 5%/51% CAGR in sales/net profit over FY15-18e. This will drive RoE/RoCE to 15%/24% in FY17e versus 7%/18% respectively in FY15. We initiate coverage on Apar with a Buy rating and target price of Rs595.

Conductors - rising volumes to aid margin improvement

Apar, with 23% market share in conductors, has witnessed a pickup in demand from PGCIL (10% market share), private transmission companies (+30% market share) and export demand in Middle East & Brazil, resulting in full capacity utilization (1,50,000 mtpa) for last four quarters. Expansion is underway to set up new capacity (36,000mtpa) by 3QFY17 at Jhasurguda (Odisha) in view of rising demand from domestic transmission companies. Demand for high temperature conductors (HTC- carry 30-100% more power, less prone to sagging) has picked up pace (average ticket size up from Rs50mn to Rs500mn) from state transmission companies for turnkey EPC re-conducting in Tier 1 cities, where ‘right of way’ is an issue. Current order book of Rs16bn (0.6x TTM revenue), comprising 46% exports, would see rapid execution due to shorter delivery schedules. Over FY15-18e, we expect 11%/10% CAGR in sales/EBITDA driven by 10% volume CAGR, led by a pickup in demand for both conventional and better-margin HTC conductors.

Transformer and specialty oils – superior product mix to aid margin expansion

Apar commands 45% of domestic market share and is a preferred supplier for 765kv and 800kv HVDC transformer oils for domestic and overseas transformer OEMs. A revival in domestic power segment and move towards higher MVA transformers in the 12

th Plan

would augment volumes for <220kv transformer oils, which currently comprise 30% of sales. UDAY scheme’s implementation is likely to be a key catalyst, which will increase demand for t-oil <220kv from participating state discoms. Auto lubes (despite sluggish rural demand) and industrial oils are the fastest-growing with expanded distribution and launch of high performance grade products. Given the pricing discipline, mix of high value-added products and cost control, we expect 125% EBITDA CAGR over FY15-18e led by 19% CAGR in volumes and increase in EBITDA/KL to average of Rs5,050 over FY16-18e versus Rs2,712 in FY15 and range of Rs3000-Rs7000 during FY08-FY14.

Focus on value-added cables to propel revenue and earnings growth

Apar’s value-added specialty cables introduced during FY13-15 – elastomeric (for solar, wind power), e-beam cables (for defence, railways) – and new approvals for optic fibre cables from BSNL, Reliance and export customers aided to counter the unremunerative margins (EBITDA margin 6.1% in FY15 versus 1.4% in FY13) and low demand from standard power cables. Hence, the share of value-added products in revenue rose from 29% in FY14 to 57% in 1HFY16. Going forward, we believe the ongoing demand for this along with an uptick in HT/LT power cables demand from state discoms on UDAY scheme’s implementation can drive 13%/22% CAGR in sales/EBITDA over FY15-18e.

Systematix

Institutional Equities

17 December, 2015

INITIATING COVERAGE

Sector: Capital Goods Rating: Buy

CMP: Rs482 Target Price: Rs595

Stock Info

Sensex/Nifty 25,494/7,751

Bloomberg APR IN

Equity shares (mn) 38.5

52-wk High/Low Rs530/320

Face value Rs10

M-Cap Rs18bn/$273

3-m Avg volume $0.3mn

Financial Snapshot (Rs mn)

YE Mar FY16e FY17e FY18e

Sales 50,735 54,483 59,123

EBITDA 3,390 3,977 4,545

PAT 1,120 1,433 1,710

EPS (Rs) 29.1 37.2 44.5

PE (x) 16.6 12.9 10.9

EV/EBITDA (x) 6.7 5.6 4.7

P/BV (x) 2.1 1.8 1.6

RoE (%) 13.8 15.0 15.7

RoCE (%) 20.9 23.5 24.8

Dividend yield (%) 0.8 0.9 1.0

Net gearing (x) 0.4 0.3 0.2

Shareholding pattern (%)

Sep ’15 Jun ’15 Mar ’15

Promoter 62.5 62.5 62.5

–Pledged - - -

FII 6.5 6.3 5.9

DII 8.8 9.2 9.2

Others 22.3 22.1 22.4

Stock Performance (1-year)

Divyata Dalal

[email protected] +91 22 6704 8059

Jaspreet Singh Arora [email protected] +91 22 6704 8062

17 December, 2015

2 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters Systematix Shares & Stocks (I) Ltd.

Apar Industries

FINANCIALS (CONSOLIDATED)

Profit & Loss Statement

YE: Mar (Rs mn) FY14 FY15 FY16e FY17e FY18e

Net revenues 46,316 51,219 50,735 54,483 59,123

Revenue growth (%) (0.4) 10.6 (0.9) 7.4 8.5

- Op. expenses 43,342 48,698 47,345 50,506 54,578

EBIDTA 2,974 2,520 3,390 3,977 4,545

EBITDA margins (%) 6.4 4.9 6.7 7.3 7.7

- Interest expenses 2,150 1,590 1,435 1,474 1,550

- Depreciation 270 312 434 464 539

+ Other income 740 109 152 102 97

- Exceptional item 9 3 3 3 3

PBT 1,285 725 1,671 2,138 2,551

- Tax 385 231 551 705 842

Effective tax rate (%) 33.0 33.0 33.0 33.0 33.0

Reported PAT 900 494 1,119 1,432 1,709

+/- Minority interest (3) 1 1 1 1

Adjusted PAT 897 495 1,120 1,433 1,710

Adj. FDEPS (Rs/share) 23.3 12.9 29.1 37.2 44.4

Adj. FDEPS growth (%) (18.0) (44.9) 126.4 27.9 19.3

Source: Company, Systematix Institutional Research

Balance Sheet


Share capital 385 385 385 385 385

Reserves & Surplus 6,578 6,913 8,557 9,784 11,268

Networth 6,962 7,298 8,942 10,169 11,653

Minority interest 18 12 13 14 15

Total Debt 7,983 5,020 5,200 4,800 4,500

Def. tax liab. (net) 225 274 274 274 274

Capital employed 15,188 12,605 14,429 15,257 16,443

Net Fixed assets 3,768 4,048 4,264 4,600 4,211

Investments 15 53 25 25 25

- of which liquid 15 53 25 25 25

Net Working capital 9,099 7,499 8,479 8,807 9,719

Cash and bank balance 2,306 1,005 1,661 1,825 2,488

Capital deployed 15,188 12,605 14,429 15,257 16,443

Net debt 5,677 4,015 3,539 2,975 2,012

WC (days) 72 53 61 59 60

Book value (Rs/sh) 181 190 232 264 303


Cash Flow Statement


PAT 897 495 1,120 1,433 1,710

+ Non cash items 392 362 434 464 539

Cash profit 1,289 857 1,555 1,897 2,249

- Incr/(Decr) in WC 7,184 (1,600) 980 328 912

Operating cash flow (5,895) 2,457 575 1,569 1,337

- Capex 952 582 650 800 150

Free cash flow (6,846) 1,875 (75) 769 1,187

- Dividend 236 149 154 173 193

+ Equity raised - - - - -

+ Debt raised (1,977) (2,963) 180 (400) (300)

- Investments 38 (28) - - -

- Misc. items (35) 21 (677) 33 33

Net cash flow (8,243) (1,301) 656 164 662

+ Opening cash 10,549 2,306 1,005 1,661 1,825

Closing cash 2,306 1,005 1,661 1,825 2,488


Ratios

YE: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 20.7 37.5 16.6 12.9 10.9

P/B (x) 2.7 2.5 2.1 1.8 1.6

EV/EBITDA (x) 6.0 9.6 6.7 5.6 4.7

RoE (%) 13.6 6.9 13.8 15.0 15.7

RoCE (%) 18.1 17.9 20.9 23.5 24.8

Net Gearing (x) 0.8 0.6 0.4 0.3 0.2

Fixed Asset turnover (x) 9.5 9.0 8.0 7.7 7.8

Dividend yield (%) 1.1 0.7 0.8 0.9 1.0

Dividend payout (%) 20.4 19.7 18.5 22.5 27.2

Interest exp./Sales 4.6 3.1 2.8 2.7 2.6

Debtors (days) 87 90 92 90 90

Revenue growth (%) (0.4) 10.6 (0.9) 7.4 8.5

PAT growth (%) (18.0) (44.9) 126.4 27.9 19.3

EBITDA growth (%) (4.4) (15.3) 34.5 17.3 14.3

EPS growth (%) (18.0) (44.9) 126.4 27.9 19.3


17 December, 2015


Apar Industries

Charting the story Chart 1: Rising revenue in conductor and cables business Chart 2: Product-wise revenue breakup as on 30

th Sept’15

Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research

Chart 3: FY15 revenue: export and domestic Chart 4: Robust profitability growth led by value-added products


Chart 5: …Resulting in sharp uptrend in return ratios Chart 6: Lower working capital, lean capex to improve cash flows


17 December, 2015


Apar Industries

Conductors - rising volumes to aid margin improvement

Apar in 1958, with technical knowhow from Alcan (Canada) and Properzi (Italy), pioneered in the manufacturing of aluminum alloy rods and conductors that are used in overhead power transmission and distribution. Apar has surpassed its close competitor Sterlite Technologies (earlier 26% and now 20% market share) and holds 23% market share (earlier 20%) in the domestic market. Being among the top five global producers, Apar manufactures the entire range of ASCR, AAAC conductors up to 1,200kv through vertical integration of operations at its three manufacturing facilities (total capacity 150,000mtpa), also making it the low cost producer. The company has received approvals from several global utilities and is a key supplier to top 25 global turnkey operators and EPC contractors in the US, Africa, Middle East and Brazil. Given the strategic location of its facilities near ports, competitiveness of exports has increased, resulting in 53% CAGR in export revenue over FY12-15 (430% of sales as of FY15).

To move up the value chain, Apar pioneered to develop high temperature conductors in collaboration with CTC Global, USA. The ACCC conductors are technologically superior which makes them more efficient in terms of current carrying capacity (transmits 30-100% more power versus conventional conductor), less prone to sagging and has potential to reduce line losses by 30-40%. Being among the two players (Sterlite Technologies being the other) for the high temperature low sag (HTLS) conductors, average size of turnkey EPC orders for Apar has increased from Rs50mn to Rs500mn led by increased awareness and larger acceptability of products. The demand at present is from SEBs for re-conducting in metros and Tier 1 cities, where obtaining ‘right of way’ is a challenge. We expect, based on the push for higher KV transmission lines in the 12th Plan and thrust on intra-state system strengthening, demand for Apar’s 765kv and HTLS conductors will increase. HTC has the potential to contribute to 15% of overall division sales in the next three years versus 3% as of 1HFY16.

Conductor volumes grew by 24% yoy in 1HFY16 to 82,851mt led by a pickup in demand from PGCIL (10% market share), private EPC transmission companies (30%+ market share) and export demand in the Middle East and Brazil, resulting in full utilisation of existing capacities (150,000mtpa). Expansion is underway to set up new capacity (36,000mtpa) at Jasurguda, Odisha at a cost of Rs360mn by 3QFY17 in view of the rising demand from domestic transmission companies. The recent fund raising of Rs710mn (7,35,387 shares at Rs436/share) from investors by offloading treasury stock will be utilised for working capital and to fund future capex plans.

Chart 7: Shorter delivery schedules lead to lower order book/bill ratio


High efficiency conductors

Conventional conductors

17 December, 2015


Apar Industries

The current order book is at Rs16bn (0.6x TTM revenue), comprising 46% exports and Rs2bn EPC orders from HTC, would see rapid execution due to shorter delivery schedules.

Steep rise in premiums on LME aluminum during FY14 (up to ~ $400/tonne versus normalised level of ~$100/tonne) impacted the export margins for conductors. In addition, the subdued ordering environment in domestic market in FY14 resulted in aggressive pricing and low margins on conductor orders. Thus, overall EBITDA/mt declined from Rs9,739 in FY14 to Rs7,747 in FY15. The premium on aluminum has normalised as LME eased the in-house warehousing requirement. However, led by the execution of legacy domestic orders, EBITDA/mt for 1HFY16 was at Rs6,516.

We estimate the EBITDA/mt to rise above Rs7,500 from 4QFY17e onwards versus Rs6,516 in 1HFY16 as the execution of legacy orders is completed and new orders with better margins in the current order book come up for execution. In addition, the increasing share of HTC (3x conventional conductors’ EBITDA) will also push up the EBITDA/mt.

Over FY15-18e, we expect 10% CAGR each in sales/EBITDA driven by 11% CAGR in sales volumes led by a pickup in demand for both conventional and HTC conductors.

Chart 8: Conductor volumes to rise on the back of pickup in demand… Chart 9: …Leading to margin improvement (forex adjusted)

Source: CEA, Systematix Institutional Research Source: Company, Systematix Institutional Research

Table 1: Conductors – Apar’s product profile

A) Conventional Type Application

AAC All Aluminum Conductors Mainly used in distribution lines 11KV/22KV/33KV

ACSR Aluminum Conductor Steel Reinforced Used in EHV and UHV transmission and distribution

AAAC All Aluminum Alloy Conductors

Perfectly suited to coastal regions for its anticorrosion features

AACSR/ACAR Aluminum Alloy Conductor Steel Reinforced

ACSR/AW Aluminum Conductor Aluminum Clad Steel Reinforced

Earth wires

B) High Temperature Conductors Type Application

AL59 & AL57 High Conductivity Alloy Conductors

Capable of carrying 30-100% more electricity and reduce line losses by 30-40%

TACSR/STACIR High Temperature Thermal Resistant Alloy conductors

GZTACSR, ACSS/TW High Temperature Low Sag conductors

ACCC Aluminum Carbon Core Conductor

Source: Company

17 December, 2015


Apar Industries

Industry overview

The renewed focus of the central government on power transmission sector is likely to result in investments of $50bn (Rs 3trn) by 2019-20. Of this, transmission lines worth Rs1trn are expected to be bid out by the government in the next six months. Successful implementation of UDAY programme, which intends to make discoms profitable by FY19, will lead to a revival in capex for network strengthening by state discoms. This coupled with an existing outlay of Rs1.4trn under DDUGYS and IPDS can drive demand for power equipments like conductors, transformers, energy metres and cables to improve last mile connectivity.

Generally, transmission tower lines comprise of 60% of the total spend in transmission capex, while 40% goes towards sub-station. Within transmission line, it is estimated that conductors comprise 25% of the total line capex.

Based on CEA estimates for the 12th Plan, 765kv lines addition would comprise 25% of the total circuit km (ckm) as compared to 5% in the 11th Plan.

As of November 2015, construction of 76,490ckm (~72%) has been achieved of the total estimated transmission line addition of 107,440ckm for the 12th Plan.

Table 2: Share of 765kv rises in 12th

Plan Chart 10: Apar’s conductor business dependence on PGCIL lessens

Source: CEA, Systematix Institutional Research Source: Company, Systematix Institutional Research

Table 3: 11th-13th Plan transmission spending

(Rs bn) 11th Plan 12th Plan % yoy 13th Plan % yoy

Inter-state 550 1,250 127.3 1,600 28.0

Intra state 562 550 (2.1) 1,000 81.8

Total transmission capex 1,112 1,800 61.9 2,600 44.4

Source: CEA, Systematix Institutional Research

Table 4: EPC companies - transmission orders 2QFY16

Company Order value (Rs bn)

Kalpataru Power Transmission 14.0

KEC International 16.9

Alstom T&D 4.5

ABB India 2.4

L&T 43.2

Crompton Greaves 3.0

Punj Lloyd 4.9

Total 88.9


Addition Target addition

( in ckm) 11th Plan

% total

12th Plan %

total 13th Plan

% total

+/- 800 KV HVDC

3,560 6 7,440 7 10,600 7

765 KV 3,066 5 27,000 25 22,200 15

400 KV 31,097 53 38,000 35 30,000 20

220 KV 21,351 36 35,000 33 85,714 58

Total 59,074 - 1,07,440 - 1,48,514 -

17 December, 2015


Apar Industries

Private sector participation has been increasing through the Tariff Based Competitive Bidding (TBCB) route, a step initiated by the government to end PGCIL’s dominant position to ensure a level playing field for private sector developers. As stated by the power minister, 29 transmission schemes have been awarded for implementation through this route as of Nov 30, 2015. Of this, four transmission schemes have been commissioned.

In addition, the following transmission schemes have been identified to be bid out on TBCB route.

Table 5: Transmission schemes to be bid out on TBCB basis

Estimated length Estimated cost

(in km) (Rs bn)

Raigarh, Chhattisgarh to Pugalur, Tamil Nadu HVDC Line 2,505 268

Inter - regional AC link for import to Southern region 1,166 86

Strengthening transmission system beyond Vemagiri 1,111 70

Ajmer - Suratgarh - Moga 534 44

Jharsuguda (Sundargarh) to Raipur 380 26

North East region system Strengthening Scheme II 550 17

Strengthening transmission between India - Bhutan 550 22

Evacuation system in Odisha for 1,320mw 50 2

Total 6,312 535

Source: REC, Ministry of Power

CCEA approves intra-state transmission system: The Cabinet Committee on Economic Affairs (CCEA) approved the creation of intra-state transmission system in the states of Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra and Rajasthan at an estimated cost of Rs85.5bn, with the Government of India’s contribution from the National Clean Energy Fund (NCEF) of Rs34.2bn as recommended by IMG in its 12th meeting held on Apr 30, 2015. We believe this could propel demand for HTLS conductors, given the ‘right of way’ challenges faced to set up transmission lines.

Impact of UDAY (Ujwal Discom Assurance Yojana) implementation

Plan to reduce AT&C losses from 32% in 2013-14 to 15% by 2018-19.

Increased focus on faster completion of delayed transmission lines - 11.2 lakhs ckms conductors are expected to be installed by FY17-end.

Demand for transformers is expected to improve substantially - 4.2 lakhs distribution transformers are expected to be installed by FY17-end.

Table 6: Equipment installation target for UDAY - step towards improving billing efficiency

Area Units installed (in lakh) End date

Feeder & DT Metres 13.0 2017

Smart Metres - -

>500 units/ mth 100.0 2017

200-500 units/ mth 250.0 2019

Distribution Transformers 4.2 2017

Conductors 11.2 2017

LED Bulbs Domestic 7700.0 2019

Street lights 350.0 2019

Source Ministry of power

17 December, 2015


Apar Industries

T-oils and Specialty oils: Superior product mix to aid margin expansion

Apar forayed into manufacturing transformer oils in 1969 and is now the largest domestic player with 45% market share followed by the recently-qualified EHV transformer oil suppliers, Savita Oil at 26% and Raj Oil Lubricants at 10-11%. Apar is the preferred supplier to over 80% of the customer base for transformer oils and pioneered in the supply of 765kv and 800kv HVDC transformer oils in India. With product and plant approvals from large clients across the globe, Apar offers more than 300 varieties from its two manufacturing facilities -- Silvassa (220,000kl) and Rabale (220,000kl) totaling to 440,000kl. Currently, Apar supplies 40% to power transformers and 60% to distribution transformers. It exports to more than 100 countries in South East Asia, Middle East, Africa and South America and is the fourth-largest manufacturer of transformer oils globally.

Apar has graduated to the hub-and-spoke model by setting up storage, distribution and processing facilities in Sydney (Australia), Gebze (Turkey) and Durban (South Africa). This has avoided logistical delays and significantly improved proximity to consuming markets. Apar’s wholly-owned subsidiary, Petroleum Specialities Pte Ltd, Singapore is setting up a 100,000kl facility in the Middle East to cater to the rising oil demand in UAE at a cost of $15mn. This would be funded by a mix of debt ($9mn) and internal accruals.

Power sector’s revival and a move towards higher MVA transformers in the 12th Plan would augment volumes for 220kv and above transformer oils, which currently comprise 30% of sales. The demand for distributor transformers from discoms is expected to rise with the implementation of UDAY, thereby generating demand for oils below 220kv, leading to an increase in overall volumes in transformer oils. Auto lubes is the fastest-growing segment with expanded distribution and launch of high performance grade products, despite the sluggish rural demand. This coupled with a focus on niche specialty industrial oils has led to an improvement in EBITDA/kl to Rs6,112 in 1HFY16 versus Rs2,712 (inventory loss due to steep fall in crude oil price) in FY15.

Given the pricing discipline, mix of high value-added products and cost control, we expect 129% CAGR in EBITDA led by 22% CAGR in volumes over FY15-18e, despite -11% CAGR in sales (result of lower oil prices). We estimate EBITDA/kl would be at Rs5,000 for FY16e and Rs5,050/Rs5100 for FY17e/18e, in our view.

Chart 11: Oil volume breakup as on Aug’2015 Chart 12: Oil value breakup as on Aug’2015


17 December, 2015


Apar Industries

Table 7: Transformer and Specialty Oils – key product offerings Types of oil Downstream industry Application Comments

Transformer Oil Power T&D Used as a coolant. Stable at high temperature with excellent insulating properties

Largest selling product both volume and value-wise

Domestic as well as exports

White Oils FMCG, Pharma Serves as base material Predominantly exports

Process Oils Heavy Engineering Provides lubrication between moving machine parts

Caters to demand from wide spectrum of industries

Automotive Oils and Lubricants

Automotive Cooling effect Sells high margin AGIP lubricant oil in premium segment and Apar Oil in medium segment

Source: Company

Chart 13: Oil business to see uptick in volumes Chart 14: Enhanced product mix to boost profitability


Table 8: Substation: share of 765kv rises in 12th

Plan Chart 15: Apar’s value-added product mix offsets oil price fall

Source: CEA, Systematix Institutional Research Source: Systematix Institutional Research

Addition Target addition

( in MVA)

11th Plan

% total

12th Plan %

total 13th Plan

% total

765 Kv 25,000 17 149,000 55 79000 29

400 Kv 58,085 39 45,000 17 49000 18

220 Kv 67,277 45 76,000 28 142857 53

Total 150,362 - 270,000

270,857 -

Oil segment: EBIT margins

17 December, 2015


Apar Industries

Diversified into fast-growing auto lubes segment

To widen its sectoral spread, in 2007, Apar entered into a manufacture and licence agreement with ENI S.P.A to produce and market ENI branded lubricants in the automotive space.

Over the years, Apar has obtained approvals from large auto OEMs and has launched several high performance grades of synthetic auto lubricants, leading to 2.9x growth in revenue to Rs275mn versus Rs94mn in FY09.

These are marketed and sold through 450 distributors and 15,000 stockists spread across India with 40% revenue generated from Southern India in FY15. A slowdown in rural demand led by depressed sluggish tractor and commercial vehicle sales impacted the segment sales in 1HFY16. Inspite of this, a focus on disciplined pricing, lower raw material cost and improved product mix has added to the profitability of oil division. Auto lubes contributed 5% to the overall revenue in 1HFY16.

Chart 16: Rising share of auto lubes in revenue mix


17 December, 2015


Apar Industries

Focus on value-added cables to propel revenue and earnings growth

Apar forayed into the cables business in 2008 with the acquisition of Uniflex Cables, which was engaged predominantly in the manufacturing of power and telecom cables. To offset the slowdown in HT/LT power cables demand in domestic markets, Apar increased the thrust on exports of power cables. To move up the value chain, the company set up two commercial electronic beams (e-beam) and elastomeric cable facilities at Khatalwad to cater to the demand of specialised cables from solar, wind, railways, defence and mining sector. The capacity of optic fiber cables was also doubled in 2014 to meet growing domestic demand from BSNL, Reliance and export demand. Overall, Rs1.5bn was invested in the above expansions over FY13-15.

Given that major power cables sub-segment was still plagued with overcapacity and low margin, the above expansion measures were taken predominantly to improve profitability of cables division.

The demand for elastomeric cables from wind and solar segment has increased led by strong thrust on renewable power. Elastomeric cables are operating at 70% and are expected to touch full utilisation by 2HFY16. The share of high value-added optic fiber and elastomeric cables has gone up from 29% in FY14 to 57% in 1HFY16. Led by improved product mix, the cables division witnessed a revenue CAGR of 28% over FY09-15.

Going forward, the successful implementation of UDAY scheme can augment demand for HT/LT power cables, led by higher spending from the participating state discoms to provide last mile connectivity to the end user in 24x7 power for all.

As the overall volumes for power cables rise, profitability is expected to improve, given that capacities in the sector have contracted led by the exit of old players. Apar will incur a nominal capex of Rs100-120mn in FY16/17 to de-bottleneck the existing power cables facility at Umbergaon.

Volumes of optic fiber cables are expected to rise with the demand from BBNL/NOFN order. Value-added elastomeric and optic fiber cables-led product mix and pickup in distribution cables can result in 12% revenue CAGR over FY15-18e and EBITDA margin of 7.5% in FY18e versus 6.1% in FY15, in our view.

Chart 17: Value-added specialty cables to drive growth Chart 18: Export sales offset sluggish domestic demand in FY11-14


17 December, 2015


Apar Industries

Industry Overview

The India wires and cables market is comprised of various independent manufacturers that specialize in designing, manufacturing of their products.

Power cables led the revenues from the wires market with more than 50% contribution to the total market in FY14. The wires and cables industry in the India has grown at a CAGR of 16.7% from FY09-FY14. With a move towards complete digitization of TV cables networks in the country, the demand for OFC network is propelling.

The market is expected to grow in the coming years with increasing number of innovative product launches by the existing players, focusing on niche uses and convenience such as fire resistant (retardant) wires and cables, optical fibre cables and others. The overall wires and cables industry is expected to grow at a CAGR of 18.5% during FY14-FY19.

Chart 19: 18.5% CAGR in wires and cables industry over FY14-FY19

Source: Systematix Institutional Research

Elastomeric cables are widely used in railways locomotives and for coach wiring. Government has formulated the five year action plan for railways where spend on rolling stock comprises 12% of the total planned capex. This along with focus on metro lines across India should propel demand for elastomeric cables for coaches.

Table 9: Railways- proposed investment under the five-year Action plan (2015-2019)

Rs bn

Network Decongestion (including DFC, Electrification, Doubling including 1993

electrification and traffic facilities)

Network Expansion (including electrification) 1930

National Projects (North Eastern & Kashmir connectivity projects) 390

Safety (Track renewal, bridge works, ROB, RUB and Signalling & Telecom) 1270

Information Technology / Research 50

Rolling Stock (Locomotives, coaches, wagons – production & maintenance) 1020

Passenger Amenities 125

High Speed Rail & Elevated corridor 650

Station redevelopment and logistic parks 1000

Others 132

TOTAL 8560

Source: Indian Railway Ministry

17 December, 2015


Apar Industries

Peer comparison

Table 10: Ratio comparison for key players in power T&D segment

EBITDA margin (%) NPM (%) RoE (%)

FY14 FY15 FY14 FY15 FY14 FY15 FY16e

Savita Oil technologies 7.3 3.3 2.4 (0.1) 8.9 (0.2) 0.0

Sterlite Technologies 10.8 14.9 (1.4) (0.1) (3.1) (0.2) 9.2

KEC International 6.2 6 0.8 1.9 5.6 12.1 14.3

Kalpataru Power 9.5 9.6 3.6 3.4 7.5 8.0 9.0

Finolex Cables 10.5 10.6 8.4 7.4 18.0 14.4 17.9

Skipper 10.6 16.4 2.6 6.8 11.6 29.3 28.8

Average 9.5 10.1 2.7 3.2 8.1 10.6 13.2

Apar Industries 6.4 4.9 1.9 1.0 13.6 6.9 13.8

Source: Bloomberg, Systematix Institutional Research

Key risks

Slow turnaround of state discoms’ losses can hamper last mile capex and in turn the demand for Apar’s cables and conductors.

Emerging competition in high voltage transformer oils can exert pressure on Apar’s competitive edge.

Increase in commodity prices’ volatility, namely base oil and aluminum, may not be passed on fully thus impacting margins.

Postponement of payment from OEM customers in the transmission segment can further stretch the working capital cycle.

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Apar Industries

Valuation and view

Apar Industries, with its diversified product profile, is positioned aptly to witness a surge in profitability led by multiple levers which can lead to significant re-rating. The levers include 1) completion of capex cycle in the lean period to reap benefits of higher demand across its product led by successful implementation of UDAY, 12th Plan capex and other government initiatives, 2) increase in composition of better margin HTC coupled with growing conventional conductor volumes and 3) value-added product mix in transformers, specialty oils and cables. We expect stable commodity prices to drive 5%/51% CAGR in sales/net profit over FY15-18e.

We initiate coverage on Apar with a Buy rating and a target price of Rs595. The target price is the average fair price arrived at by assigning a fair multiple of 15.0 P/E and 7.0 EV/EBITDA in line with the sector average.

Table 11: Valuation

FY17 Multiple Fair multiple Fair price

EPS (Rs) 37.2 P/E 15.0 555

EBITDA (Rs bn) 4.0 EV/EBITDA 7.0 635

Average (Rs) - - - 595


Chart 20: PE band: One-year rolling forward Chart 21: EV/EBITDA: One-year rolling forward

Source: Systematix Institutional Research Source: Systematix Institutional Research

Table 12: Domestic peer valuation matrix

P/E (x) EV/EBITDA (x) P/BV (x)

FY16e FY17e FY16e FY17e FY16e FY17e

Sterlite Technologies 33.8 19.1 10.1 7.8 3.0 2.5

KEC International 19.2 13.8 8.6 7.2 2.6 2.2

Kalpataru Power 17.4 13.8 8.7 7.4 1.6 1.5

Finolex Cables 19.7 15.9 12.2 10.3 3.0 2.6

Skipper 16.0 11.6 8.4 6.7 4.2 3.2

Average 17.9 14.8 9.6 7.9 2.9 2.4

Apar Industries 16.6 12.9 6.7 5.6 2.1 1.8

Source: Bloomberg, Systematix Institutional Research

17 December, 2015


Apar Industries

Key management team

Narendra D Desai (Chairman)

He is the Chairman of the company. He had been founder Chairman of GE Apar Lighting India Limited (a 50% joint venture with General Electric, U.S.A). Also an ex-chairman of DGTD, Light Electrical Industry Panel, Govt. of India. Past President of ELCOMA (Electrical Lamp and Component Manufacturers Association), and many other associations.

Kushal N. Desai (Managing Director)

He is the Managing Director of the company. He is Bachelor of Science from Moore School of Electrical Engineering, USA and Bachelor of Science in Economics from Wharton School, USA. Before joining the company, he was holding senior management position in General Electric India from 1993 to 1996, including the position of Managing Director of GE Lighting Private Limited, now known as GE Lighting India Limited.

Chaitanya N. Desai (Managing Director)

He is the Managing Director the company. He is a chemical engineer from University of Pennsylvania, and a business management graduate from Wharton Business School. He is a member of the Executive Council of the Indian Electrical & Electronic Manufacturers Association (IEEMA), which is the Apex trade organisation for the power T&D sector.

Mr. F.B. Virani (Independent Director)

He has 42 years of corporate sector experience, both private and public sectors, in the areas of chemical / petrochemical and energy businesses. Mr. Virani developed a number of pioneer chemical and energy projects in the joint sector with private sector participation. He also actively participated on behalf of GIIC in the financing and implementation of the projects at the Board of Directors level. He was also advisor (Business Development) in Adani & Essar Groups. He is the Director of the company since 27th July, 2001.

Mr. Rajesh Sehgal (Non-Executive Investor Director)

Rajesh Sehgal joined the emerging markets group of Franklin Templeton in 1999. He has research responsibilities for companies in India, Africa and the Middle East and is involved with both listed as well as unlisted investments across emerging markets. Prior to joining Franklin Templeton, Mr. Sehgal worked with SBI Capital Markets Limited as the manager of the Treasury & Investments Group.

Dr. N. K. Thingalaya (Independent Director)

He joined the Syndicate Bank as Economic Advisor and Head of the newly created Economic Research Department and rose to the level of Chairman and Managing Director of the said bank. He is presently Professor – Emeritus and Chairman of the Academic Council of Justice K. S. Hegde Institute of Management, Nitte, Karnataka. He is a trustee on the board of trustees of Corporation Bank Economic Development Foundation, Mangalore. He is the Director of the company since 27th July, 2001.

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Apar Industries

Nikhil Khandelwal Managing Director +91-22-6704 8001 [email protected]

Equity Research

Analysts Industry Sectors Desk-Phone E-mail

Jaspreet Singh Arora - Head of Research Cement, Building Material, Construction +91-22-6704 8062 [email protected]

Rahul Jain IT, E-commerce +91-22-6704 8025 [email protected]

Priya Ranjan Auto & Auto Ancs +91-22-6704 8067 [email protected]

Salil Utagi Capital Goods, Engineering, Consumer Durables +91-22-6704 8064 [email protected]

T. Ranvir Singh Pharma, Healthcare, Agrochem +91-22-6704 8016 [email protected]

Ajit Agrawal BFSI +91-22-6704 8066 [email protected]

Ankit Gor Mid Caps +91-22-6704 8028 [email protected]

Divyata Dalal Cement, Building Material, Construction +91-22-6704 8059 [email protected]

Bibhishan Jagtap Auto & Auto Ancs +91-22-6704 8068 [email protected]

Rahul Khandelwal Mid Caps +91-22-6704 8003 [email protected]

Birendrakumar Singh Technical Research +91-22-6704 8024 [email protected]

Equity Sales & Trading

Name Desk-Phone E-mail

Pankaj Karde Head - Institutional Sales & Sales Trading +91-22-6704 8061 [email protected]

Jitendra Marchino, CFA Asia Sales +91-22-6704 8085 [email protected]

Dhanesh Padhya Sales +91-22-6704 8090 [email protected]

Dinesh Bajaj Sales +91-22-6704 8065 [email protected]

Jigar Kamdar Sales +91-22-6704 8060 [email protected]

Bhavik Shah Sales Trading +91-22-6704 8053 [email protected]

Vinod Bhuwad Sales Trading +91-22-6704 8051 [email protected]

Vahila Thoomu Assistant Manager +91-22-6704 8055 [email protected]

Sugandha Rane Support – Back office +91-22-6704 8056 [email protected]

Corporate Access

Shaheen Chamadia Manager +91-22-6704 8091 [email protected]

Production

Ramesh Nair Editor +91-22-6704 8071 [email protected]

Mrunali Pagdhare Production +91-22-6704 8057 [email protected]

Institutional Equities Team

17 December, 2015


Apar Industries

DISCLOSURES/ APPENDIX

I. ANALYST CERTIFICATION

I, Divyata Dalal, Jaspreet Singh Arora; hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Disclosure of Interest Statement Update

Analyst holding in the stock No

Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, Unless specifically mentioned in Point No. 9 below:

1. The Research Analyst(s), Systematix Shares & Stocks(I) Limited (SSSIL), Associate of Analyst or his relative does not have any financial interest in the company(ies) covered in this report.

2. The Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies) covered in this report as of the end of the month immediately preceding the distribution of the research report.

3. The Research Analyst, his associate, his relative and SSSIL do not have any other material conflict of interest at the time of publication of this research report.

4. The Research Analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months.

5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report.

6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report.

7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report.

8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research report.

9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. No.

Particulars Yes / No.

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by SSSIL

No

2 Whether Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the Research report No

4

SSSIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report No

5 Research Analyst, his associate, SSSIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve month

No

10. There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities.

STOCK RATINGS

BUY (B): The stock's total return is expected to exceed 20% over the next 12 months. ACCUMULATE (A): The stock's total return is expected to be within 10-20% over the next 12 months. HOLD (H): The stock's total return is expected to be within 0-10% over the next 12 months. SELL (S): The stock's total return is expected to give negative returns over the next 12 months. NOT RATED (NR): The analyst has no recommendation on the stock under review.

INDUSTRY VIEWS

ATTRACTIVE (AT): Fundamentals/Valuations of the sector are expected to be attractive over the next 12-18 months. NEUTRAL (NL): Fundamentals/Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months. CAUTIOUS (CS): Fundamentals/Valuations of the sector are expected to deteriorate over the next 12-18 months.

III. DISCLAIMER

The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.

This document is for information purposes only. This report is based on information that we consider reliable, but we do not represent that it is accurate or complete, and one should exercise due caution while acting on it. Descriptions of any company or companies or their securities mentioned herein are not complete and this document is not, and should not be construed as an offer or solicitation of an offer to buy or sell any securities or other financial instruments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. All opinions, projections and estimates constitute the judgment of the author as on the date of the report and these, plus any other information contained in the report, are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. This report is intended for distribution to institutional investors.

17 December, 2015


Apar Industries

This report is not directed to or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject to SSSIL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. Any unauthorized use, duplication, redistribution or disclosure of this report including, but not limited to, redistribution by electronic mail, posting of the report on a website or page, and/or providing to a third party a link, is prohibited by law and will result in prosecution. The information contained in the Report is intended solely for the recipient and may not be further distributed by the recipient to any third party.

SSSIL generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, SSSIL generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein. Our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The views expressed in this research report reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The compensation of the analyst who prepared this document is determined exclusively by SSSIL however, compensation may relate to the revenues of the Systematix Group as a whole, of which investment banking, sales and trading are a part. Research analysts and sales persons of SSSIL may provide important inputs to its affiliated company(ies).

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Systematix Shares & Stocks (I) Ltd. CIN : U65993MH1995PLC268414 BSE SEBI Reg. No.: INB/F011132736 (Member Code: 182) | NSE SEBI Reg. No.: INB/F/E231132730 (Member Code: 11327) | MCX-SX SEBI Reg. No.: INB/F261132733 (Member Code: 17560) | Depository Participant: IN-DP-CDSL-246-2004 (DP Id: 34600) | PMS : INP000002692 | AMFI : ARN - 64917|Research Analyst : INH200000840 Regd. office address: 2nd floor, J. K. Somani Bldg, British Hotel Lane, Fort, Mumbai - 400001 Corporate office address: A 603-606 , The Capital, BKC, Bandra (E), Mumbai, India – 400051

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