apar_industries_value_pick cmp 255 target 468

For Private Circulation Only Anand Rathi Retail Research

Apar Industries

2 July 2014

CMP: Rs. 255 Target: 468

The Big Picture

India's Power Transmission networks constitute the vital arteries of the

entire power value chain. It goes without saying that the growth of power

sector is contingent to development of a robust and a non collapsible

transmission network. Over the past decades, the total power capacity

has witnessed commendable growth, with more than 232 GW of

generation capacity currently installed in India. However, India's peak

load supply is only 141 GW, and aggravating this situation further is

that some of India's power surplus regions do not have adequate

power evacuation infrastructure which could alleviate the recurring

supply shortages in other parts of the nation.

While the issues related to Generation and Distribution sectors,

rightfully, got due focus from policy makers to industry stakeholders,

Transmission which is the critical link of power supply with no fall

back option got downplayed due to multiple reasons.

With a planned generation capacity addition estimated at 88 GW in

the 12 Plan and improved generation with fuel issues getting sorted

out for existing capacity, a corresponding increase in Transmission

capacity is needed to ensure that power generated reaches the end

consumer.

More than 46% of the total investment required (in excess of Rs 2 lakh

crore) has to come from private sector. Clearly, successful PPP in

transmission would be vital to meet the huge investment & capacity

enhancement target in transmission.

Reco: Buy Nifty Level: 7711

In the last 5 years, power generation capacity has grown by ~50%,

whereas transmission capacity has increased by ~30% . As per the 12th

Five Year Plan, the future expansion in power generation capacity in India

is planned around 1,00,000 MW . In order to meet this capacity,

investment in the transmission sector needs to be increased. Overall, an

addition of 90,000 ckm of 765-220kV lines, 2,70,000 MVA of substation

capacity and 27,350 MW of national grid capacity is required in

order to meet the 12th Five Year Plan . For this purpose, an investment of

USD 35 billion is planned in the power transmission sector. Of this, about

USD 19 billion is planned from Power Grid Corporation of India Limited .

The remaining USD 16 billion,~46% of the total investments, needs to be

secured from private players.

CMP 255 PE 9.26

Market Cap 980.42 P/Bv 1.2

Sector Power EV/EBIDTA 4.69

Dividend Yield 2.06% EV/Sales 0.29

Bse Code 532259 Nse Code APARINDS

Key Matrix

VALUE

PIC

K


Apar Industries

2 July 2014

Company Introduction

Apar Industries caters to the demand of power T&D segment in

India as well as export markets. The Company pioneered in setting

up power conductor manufacturing facility in 1958 and transformer

and speciality oil business in 1969. Globally, it is amongst the top 5

producers of aluminum conductors and transformer oils. In India,

the Company commands 23% market share in power conductors

and 46% market share in transformer oils. In FY14, conductor

business contributed 36% of the total revenue, while oil business

contributed 50% followed by 9% from cables business. With its

reach in over 100 countries,

Apar's products and facilities (conductors, transformer oils and

cables) have received approval from domestic and overseas clients.

During FY13, Apar was declared as the largest exporter of

conductors from India and exported conductors for the first time to

US.

The Company entered in Auto Lubes business in 2007 under Agip

brand through licensing agreement with ENI Italy.

In 2008, Apar acquired Uniflex cables to diversify into cable

manufacturing and has recently set up Electron Beam irradiation

facility to make superior cables.

We initiate coverage on Apar Industries with BUY recommendation

for a target price of Rs.468/share.


Apar Industries

2 July 2014

Investment Thesis

Transformer Oil - Huge demand going forward

We believe new government is very serious as far as power sector is

concerned and Apar Industry will be one of major beneficiaries if

government does reform in power sector.

Transformer oil demand is linked with addition of new substations and

refurnish of oil into existing substations which is depend on maintenance

of existing substations. On an average 0.5-0.6 KL transformer oil is require

for every MVA.

Average life of oil in sub-stations is around 9-10 years that means

complete replacement of oil will occur in every 9-10th years so whatever

cumulative substations were there pre 2005 are ready for replacement in

2014 and to maintain existing substations 5-7% top up is require every

year.

In last two three years due to financial crunch of SEBs replacement

demand were relatively subdued and not replace adequately which

should have been replaced which ultimately put pressure on sub-stations

performance.

We believe going ahead atleast three-four years we can witness

tremendous growth from transformer oil segments because of

replacement and new additional demand. We expect major activity will

start from H2, 15.

As far as new sub-stations are concerned going forward in 12th five years

plan lot of thrust is towards addition of 765KV which is high margin

business.

Existing sub-stations provide major chunk of revenue i.e. 80% while new

addition provide 20% of total transformer oil demand.


Apar Industries

2 July 2014

Because of working capital issue company has reduced its dependency on

SEBs and SEBs contributes only 10% of revenue of this segments. 90%

revenue is coming from major transformer producers such as Areva, ABB,

BHEL, Crompton Greaves, EMCO, Bharat Bijlee, Voltamp.

Apar also supplies oil to international players like Hyundai, Xusang.

Under 765 kv Transformer oil segment savita oil and Raj lubricants are

major competitors.

Conductor segment offer tremendous scope

Power Grid Corporation of India is a quasi-monopoly involved in setting

up transmission related infrastructure in India. Average per capita

consumption of power is at 879 kwh in 2013 in India compared to world

average of 2933 kwh. For FY13, the peak power deficit for FY13 continued

to be high at 9.0%. These are driving capacity addition across power

sector to meet the increasing demand.


Apar Industries

2 July 2014

Growth Drivers of for conductor segment

Demand-Supply gap of Power

India has always been a power-deficient country. Over the years, the

demand for power has always been greater than its supply. This power

deficit is expected to continue in future because India is an emerging

economy characterized by rapid urbanization and industrialization. The

Government has set a target of 1,00,000 MW of installed capacity for the

12th Five Year Plan (2012 2017). These capacity additions must be

supplemented by adequate T&D infrastructure. Hence, opportunities

available are good for transmission equipment companies.

Co-relation with the Power Generation Industry

The power transmission equipment industry is an important support

industry for the power sector of India and hence, the growth drivers for

the power sector also act as growth drivers for the power transmission

equipment industry. Globally, every dollar invested in generation has an

equal amount invested in T&D. However, in India traditionally every

dollar invested in generation has a corresponding half dollar invested in

T&D. Due to this, transmission capacity in India lags behind the

generation capacity. In order to make the rise in generation capacity

meaningful, huge investments are required in T&D infrastructure.

Government

Government plays a crucial role in the power sector considering the

critical nature of this sector for the Indian economy. Governments role in

the transmission and distribution sector can be understood from the

following points.

Investment plans by Government: The Government has increased the

share of expenditure of T&D as a percentage of total expenditure on

power from 44.2% in 10th plan to 51% and 56.4% in 11th and 12th plans.

Apar Industries, an early entrant, started conductor business in India in

1958 with technical knowhow from Alcan (Canada) and Properzi (Italy).

The Company is now amongst top 5 global producers and low cost

manufacturers of conductors in the world. The Company pioneered in

aluminum alloy rod and conductors in India that are used in overhead

power transmission and distribution and at present commands a market

share of 23% in India.


Apar Industries

2 July 2014

Apar is considered as one of the most reliable long-term suppliers in

fluctuating market and supplies conductors to all the top turnkey

operators in the world and also to all the leading utilities in Asia and

Africa. The Company has presence in more than 100 countries including

US, Europe, Africa, Middle East and CIS regions etc and is the largest

exporter of aluminum conductors.

Conductor division contributed 48% of the total revenues in FY13 and

exports were at 26% of the total division sales.

Strategic manufacturing location:

Apar's manufacturing facilities are located adjacent to ports thereby

giving strategic advantage for exports.

A new green field conductor plant with installed capacity of 36000 MT is

set up in Athola (close to ports around Mumbai) to cater to the domestic

market and increase focus on high quality products for the export

markets.

The total conductor manufacturing capacity now stands at 140,000 MT

excluding the Nalagarh facility (production reduced to cater to more

exports from Silvassa)

Diverse Product Mix:

Apar's backward integration enables it to make complete range of

aluminum conductors by altering chemical properties at the alloying

stage and tailoring products to match customer needs.

Apar manufactures full product range of ACSR, AAAC and high efficiency

conductors' upto 1200 KV. Over the years Apar has strengthened its

product mix through a shift from AAC and ACSR to value added alloy

based conductors.

Apar is recognized as a registered export house by the Indian Ministry

of Commerce and for the first time it exported conductors to US in FY13.

Apar has got product and plant approvals from many large clients

across the globe.

Apar has undertaken R&D initiatives to penetrate markets for High

efficiency conductors.


Apar Industries

2 July 2014

We expect company will maintain its market share in conductor segment

will be able to grow @ 22% CAGR from FY 14-FY 17. As transmission lines

is expected to grow by 55% in current 12th plan vis a vis 11th plan.

Enter into high margin auto lube business

In order to widen its sectoral spread, in 2007, Apar ventured into

premium automotive lubricant space by entering into license and

technical know-how agreement with ENI-S.p.A of Italy to produce and

market auto lubes under AGIP brand.

The lubes were marketed by Apar Chematek Lubricants Ltd (ACL) a 50:50

Joint venture company with Chematek SPA. Apar has now acquired

47.5% stake from Chematek SpA in the distribution JV and Apar

Chematek Ltd has become subsidiary (97.5%) of Apar Industries.

Apar Chematek is increasing efforts by increasing distribution network

to grow automotive lubes

Aggressive marketing and distribution strategy with 450 distributors and

15,000 stockist spread across India

Increasing presence in the OEM market by adding new OEMs will help

the Company to grow sales volume.

Launched several high performance grades of synthetic type auto

lubricants

Improved product mix and higher sale of small packed branded

Products as opposed to bulk packs in drums have improved profitability.

Advertised for the first time this year on television for AGIP brand

automotive lubricants

Received large orders in marine engine oils from Lakshadweep Islands.

Automotive lubes sales up 5% in FY14 despite muted growth in the

sector due to growing OEMs sales and increased promotions and direct

channel marketing efforts

Strong growth in Auto lubes expected with improvement in customer

sentiment

Many branding & new product initiatives like rebranding ENIlubricants,

new 4 Trange with ClutchLok, upgraded products lined up for launch to

drive growth

Strong focus on expanding OEM tie ups in Power oil autolubricants


Apar Industries

2 July 2014

Enter into niche Cable segment Emerging Segment

During FY08, Apar acquired 66% equity stake in Uniflex Cables engaged in

manufacturing of power and telecom cables for a total consideration of

Rs.84.5 core.

The revenue of Uniflex cables in the last four and a half years under the

Apar's management (Sept'2008 onwards) has grown from Rs.31.3 crore

to Rs.407.5 Crore representing a CAGR of 76.9%.

New Initiatives: Moving towards value added products Apar has

undertaken numerous initiatives over the years to differentiate from

other players in the industry and move away from conventional cables

business.

The Company is increasing its presence in the optical fibre cable segment

with new approvals from BSNL, Reliance and export customers. Apar has

doubled the Optic fibre capacity to meet expected growth in domestic

and export market.

To offset the slowdown in conventional cables demand in domestic

markets, Apar has increased thrust on exports of power cables - 40-45%of

total division sales, mainly to customers in Middle East and Africa.

Apar has set up commercial Electronic beam (E-Beam) facility, only 3rd

company in India, to make an entry into electron-beam insulated cables

for special & high performance applications. New green field cables plant

set up at Khatalwad for Elastomeric cables,E-beamscables

Several applications of E-Beam will drive growth in next 2-3 years.

Management expects revenues from E-Beam will drive growth for next 4-

5 years as it is emerging business.

India currently has only 3 players with five E-Beams (2 with Apar, 2 with

Radiant and 1 with Nikko). China has over 100 E-beams of which 60%

areused in cables.

Growth in cables business driven by exports push, high value E-BEAM

products, improving product mix and expanded capacity will drive

revenues and improvement in margin profile going ahead. We expect

revenue CAGR of 26.6% over FY13-FY16.


Apar Industries

2 July 2014

Finance & Valuation (Standalone)

Income Statement (standalone) FY 13a FY 14a FY 15e FY 16e

Sales 4532.2 4483.2 5512.7 6429.4

Operating Expenditure 4236.8 4211.3 5179.0 6018.5

EBIDTA 295.4 271.9 333.7 410.9

Depreciation 23.9 26.9 27.6 32.1

EBIT 271.5 245.0 306.1 378.8

Other Income 4.5 7.7 4.5 4.5

Finance Cost 134.3 145.8 135.0 125.0

EBT 141.7 106.9 175.6 258.3

(less)Abnormal Items 0.9 4.6

Tax 38.1 34.0 56.2 82.6

Net Income 102.7 68.3 119.4 175.6

EPS 26.7 17.7 31.0 45.7

Balance sheet (standalone) FY 13a FY 14a FY 15e FY 16e

Share Capital 38.5 38.5 38.5 38.5

Reserve & Surplus 521.7 568.3 652.4 776.0

Total Debt 973.3 778.1 750.0 800.0

Deferred Tax Liabitlies 11.0 22.5 22.5 22.5

Other Long term Liabilties 16.3 9.5 6.7 6.7

Total Liabilities 1560.7 1416.9 1470.0 1643.7

Assets 15.75372797 12.59960092 12 12

Fixed Assets 287.7 355.8 459.4 535.8

Non Current Investments 28.5 28.5 28.5 28.5

Long term loans 45.7 44.6

Cash & Equivalent 1111.7 228.7 320.6 307.9

Working Capital (excluding cash) 87.2 759.2 661.5 771.5

Total Assets 1560.8 1416.9 1470.0 1643.7


Apar Industries

2 July 2014

Apar - Subsidiaries

Petroleum Specialities Pte. Ltd, Singapore (PSPL): PSPL is a wholly owned

subsidiary of Apar Industries involved in selling transformer oil and base

oils.

It caters to markets in Turkey and South Africa. During FY13, revenue of

PSPL was at Rs.241.9 Crore ($ 44.78 mn) down 17.6% yoy and PAT was at

Rs.11.52 Cr. ($ 1.64 mn) down 14.7% yoy.

Quantum Apar Speciality Oils Pty. Ltd; Australia (Quantum): PSPL holds

65% equity in Quantum that caters mainly to Australia and New Zealand

markets.

During FY13, revenue of Quantum was at Rs.53.32 Crore (AUD 9.5 mn) up

14.25 yoy and PAT was at Rs.1.85 Crore (0.16 mn) down 39.7% yoy.

Apar ChemateK Lubricants Limited (ACLL), subsidiary: Apar Chematek

Lubricants Ltd (ACL), earlier a 50:50 joint venture company with

Chematek SPA, is involved in marketing of auto lube oil. Apar acquired

47.5% stake from Chematek SpA in the distribution JV and ACLL is now

subsidiary (97.5%) of Apar Industries. During FY13, ACLL has reported

total Income of Rs.29.83 Crore, up 35% yoy and earned PAT of Rs.0.49

crore as against a loss of Rs.1.57 crore in the previous year.

We valued Apar Industries based on P/Bv ratio. Historically (last 9 years

Average) stock is quoting at the book value in a range of 4.5x 1x while

average is around 2.5x. We value company based on P/BV basis.

Company standalone P/BV per share for FY 16e is around 211 and

subsidiaries book value is around Rs. 90Cr (Book Value per share is

around Rs. 23 crore) in FY 14. Even if we assume there is no growth in

subsidiaries book value total book value per share will be Rs. 234 Cr. We

valued it based on 2x P/BV and arrive our target price of Rs. 468.

Ratio Analysis( Standalone) FY 13a FY 14a FY 15e FY 16e

EBIDTA Margin % 6.5% 6.1% 6.1% 6.4%

EBIT Margin% 6.0% 5.5% 5.6% 5.9%

PAT Margin% 2.3% 1.5% 2.2% 2.7%

BV 145.66 157.76 179.63 211.78

PE 9.55 14.37 8.21 5.58

EV/EBIDTA 5.17 5.62 4.58 3.72

ROCE 19% 20% 23% 25%

ROE 18% 11% 17% 22%


Apar Industries

2 July 2014

Key Risk

Apar imports 90% of the base oil requirements from Korea's S-Oil and other refineries in US. Only 10% of the requirement is procured from domestic market as the quality of oil is low-grade compared to imports. Imports of materials from overseas suppliers on an average take 40-45 days to reach Apar refineries. Any volatility in currency and base oil prices will impact bottom line. Growth is depend on government policy towards power sector reform and any delay will be detrimental for companys performance.


Apar Industries

2 July 2014

CA Vivek Gujrati

[email protected]

This report has been issued by Anand Rathi Share & Stock Brokers Ltd.(ARSSBL ), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities, options, future or other derivatives related to such securities (related investment). ARSSBL and its affiliated may trade for their own accounts as market maker/ jobber and /or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARS, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial situation and the particular needs of any specific investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.

apar_industries_value_pick cmp 255 target 468

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