Ajcon Global Services Ltd. research reports are also available on Bloomberg [AGSL<Go>] Email: [email protected]Website: www.ajcononline.com Akash Jain – MBA (Financial Markets) ------------------------------- Research Analyst Salzer Electronics is a leading player offering Total and Customized Electrical Solutions in Switchgears, Wires & cables, Energy Management business. It is the largest manufacturer of CAM Operated Rotary switches, with a market share of 25%. The Company caters to a wide range of products with five in-house manufacturing facilities, located in Coimbatore and Himachal Pradesh. Engineering giant Larsen & Toubro (L&T) owns 26% in SEL (strategic investment) with two directors on the board. Long term association with L&T offers synergies to SEL in the form of access to L&Ts domestic network of more than 350 distributors and supplies 38% of its revenues to L&T. SEL has strong focus on product development and innovation. It owns a registered patent for Rotary switches and 5 product patents are in process. SEL is the first Company in India to introduce Toroidal Transformers in technical collaboration with Plitron. In addition, it has Joint venture with C3Controls for contactors and relays. As a result, its products are internationally certified and have universal acceptance. SEL has marquee clients and is a preferred supplier to various leading companies like GE, Schneider, Nuclear Power Corporation, American Power Corporation and Indian Railways. The Company has improved its product mix by bringing in innovation to launch new products like Three Phase Dry Type Transformer, Latching Relays and Capacitors which would improve its EBITDA and EBITDA margins. SEL is increasing its thrust to increase exports in fast growing markets of US, Africa and Middle East. We expect the Company to clock a topline and bottomline CAGR of 19% and 60% respectively over the period FY15-17E. With the investment of Rs.600mn in the three new products and expansion of industrial switch gear segment along with the improvement in EBITDA margins, we expect return ratios to improve over FY15-17E. SEL has track record of Consistent Dividend Payout for past 15 years. We recommend a “BUY” and value the Company at 15x at estimated FY17EPS to arrive at a price target of Rs. 371/-. Financial Summary - Consolidated (Rs. Mn) Particulars FY13 FY14 FY15 FY16E FY17E Total Income 2,287 2,445 2,833 3,400 4,012 Growth (%) 2.6 6.9 15.9 20.0 18.0 EBITDA 285 302 355 499 62 OPM (%) 12.4 12.3 12.5 14.7 15.7 PAT 71 84 121 211 311 Growth (%) (14) 19.1 43.8 74.5 47.1 PAT (%) 3.1 3.4 4.3 6.2 7.7 Equity cap. 103 103 103 126 126 Reserves 798 864 968 1,777 2,088 Networth 901 967 1,071 1,903 2,214 Dil. EPS 6.9 8.2 11.8 16.8 24.7 Book Value (Rs.) 88 94 104 151 174 P/E (x) 38 33 23 16 12 Price/Book (x) 3 2.8 2.6 1.8 1.75 ROE (%) 7.8 8.7 11.3 11.1 12.9 ROCE (%) 13.4 13.5 15.2 17.1 16.8 D/E (x) 0.8 0.8 0.9 0.5 0.4 Source: Company, Ajcon Research CMP Rs. 266 Target Price Rs. 371 Upside 39.4% Time Horizon 9-12 months Sector Electronics Beta vs Sensex 1.08 BSE Code 517059 Bloomberg Code SZE:IN Reuters Code SALZ.BO 52 Week High/low Rs. 281.8/Rs. 92.10 Face Value Rs. 10 Share Capital Rs. 103 mn (FY15) Total Debt Rs. 926 mn (FY 15) Market Capitalization Rs. 2,656 mn Book Value Rs. 104 per share (FY15) Shareholding Pattern (%) As on March 2015 Promoters 29.18 FIIs 0.95 DIIs 2.67 Others 67.20 Price Performance % Salzer Electronics 1M: 21%, 3M: 13%, 6M: 22%, 12M: 166% Investor’s Delight: Salzer Electronics Ltd. (SEL) –”BUY” 17 th July, 2015
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Salzer Electronics is a leading player offering Total and Customized Electrical Solutions in Switchgears, Wires & cables, Energy Management business. It is the largest manufacturer of CAM Operated Rotary switches, with a market share of 25%. The Company caters to a wide range of products with five in-house manufacturing facilities, located in Coimbatore and Himachal Pradesh. Engineering giant Larsen & Toubro (L&T) owns 26% in SEL (strategic investment) with two directors on the board. Long term association with L&T offers synergies to SEL in the form of access to L&Ts domestic network of more than 350 distributors and supplies 38% of its revenues to L&T.
SEL has strong focus on product development and innovation. It owns a registered patent for Rotary switches and 5 product patents are in process. SEL is the first Company in India to introduce Toroidal Transformers in technical collaboration with Plitron. In addition, it has Joint venture with C3Controls for contactors and relays. As a result, its products are internationally certified and have universal acceptance. SEL has marquee clients and is a preferred supplier to various leading companies like GE, Schneider, Nuclear Power Corporation, American Power Corporation and Indian Railways.
The Company has improved its product mix by bringing in innovation to launch new products like Three Phase Dry Type Transformer, Latching Relays and Capacitors which would improve its EBITDA and EBITDA margins. SEL is increasing its thrust to increase exports in fast growing markets of US, Africa and Middle East. We expect the Company to clock a topline and bottomline CAGR of 19% and 60% respectively over the period FY15-17E. With the investment of Rs.600mn in the three new products and expansion of industrial switch gear segment along with the improvement in EBITDA margins, we expect return ratios to improve over FY15-17E. SEL has track record of Consistent Dividend Payout for past 15 years. We recommend a “BUY” and value the Company at 15x at estimated FY17EPS to arrive at a price target of Rs. 371/-.
1) Change in Product Mix and new products to drive growth: The Company has added various new products in its portfolio. New products being Toroidal Transformer, Contactors & Overload Relays (Tie up with C3 Controls, US – leading player in electrical switch gears in US, will target US and Asia as key markets), DC load Break Switches (very few manufacturers in the world, exporting good volume to US and Europe, low cost – can compete with good quality high cost European & low price Chinese manufacturers. SEL has Innovated and designed two new products for their customer – Indian Railways.Products are “Fuse Change over System‟ and “Track Feed Battery System‟ for changingover the battery chargers in railway track feeding system. The following are the new products that would drive topline growth for the Company:
a) Three phase Dry Type Transformer
SEL’s new high tech product – “Three phase Dry Type Transformer” has application in large MW UPS, renewable energy business, railways, power generation, and marine industry. Salzer Electronics has entered a technical licensing agreement with Austria-based firm Trafomodern Transformatorengesellschaft m.B.H, a leading manufacturer of dry type transformers in Europe. Salzer will tap Trafomodern's technology, design and assistance to manufacture dry type air cooled transformers, chokes and inductors in India, to be manufactured at a location adjacent to the factory. Dry type transformers are a highly specialised and technical product with applications in medium and large UPS, renewable energy business, railways, power generation and the marine industry. According to the Management, Salzer will market this new product, with a project cost of Rs 22 crore, to business segments such as energy management (UPS), Metro rail, solar and wind energy, Salzer Electronics Managing Director R Doraisamy, who signed the agreement with Trafomodern. With an estimated business value of USD 250 million in UPS and USD 200 million in solar/wind energy, the company saw big opportunities in Metro rail/railways and industrial segments. The Management expects CAGR of 35% over next 5 years. The Company is in discussion with large MNCs like Schneider, ABB, GE who import the product and have shown interest to source locally. b) Latching relays
The Company has launched new kind of relays used in various applications, particularly used in smart meters. Smart meter business has high potential in developing economies as one Smart meter has one latch relay. The Company expects a CAGR of 40% over next 5 years.
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c) Capacitors Capacitors are widely used in electronic units for power conditioning, power factor correction, motor starter application, smoothing, filtering, bypassing etc. IEEMA estimates market to grow at a CAGR of 30% from Rs. 750 cr.
2) EBITDA and EBITDA margins to improve:
With change in product mix (increased contribution from Industrial Switches) and the introduction of new products like Three phase Dry Type Transformer, Latching relays, Capacitors EBITDA is set to witness a CAGR of 31% over the period FY15-17E and OPM is set to improve by 220 bps to 14.7% in FY17E.
3) Energy Management Business – Key growth driver
SEL is the only manufacturer in India for a) Energy savers and b) Street light controllers. SEL claims 30% energy saving under normal working conditions. It reduces the power consumption by reducing the voltage to the lamps, taking care to maintain the lux levels as per regulatory standards. SEL is CRISIL rated Grade I ESCO operator for street lighting. The Company has successfully installed energy saving instruments in Madurai Corporation, Coimbatore Corporation and Navi Mumbai Corporation. This segment currently contributes ~2% of total revenue, which has grew by 10% over FY11-15 we expect, going forward this segment can contribute healthy growth of 19% CAGR over FY15-17E led by participation of different states (Company is in talks with Gujarat, Jaipur, Karnataka Corporations).
4) Advanced engineering capabilities SEL has strong engineering capabilities backed by in –house manufacturing and R&D team. It has technical Collaboration with M/S. Plitron Manufacturing Inc., Toronto, Canada to manufacture Toroidal transformers. SEL has forged a strategic alliance with C3Controls, which was a prominent player in the electrical switch gear space in the US, for the manufacture of contactors. The product that had been developed was under validation with UL, which was a leading certification agency. The company had already commenced production and was targeting the US and Asia which are they key markets for this product.
5) Product portfolio is internationally certified
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6) Good global penetration Highly competitive international markets have been well penetrated and having presence in more than 50 countries
globally with 20% of export turnover and also another 20% as deemed exports.
7) Strong customer base with marquee clients The Company has developed strong relationships across the world. It is only approved supplier from India for Rotary Switches to Nuclear Power Corporation of India and preferred supplier to GE, Schneider.
Largest supplier to Indian railways – SEL has also designed two products for the Indian Railways. While the fuse
change over system was used in signalling, the track feed battery system was used for changing over the battery chargers in the track feeding system.
About the Company SEL was incorporated on January 8, 1985, by the core promoter, R Doraiswamy, in technical collaboration with
Salzer Schaltgerate Fabrik, Germany. The company's thrust is on manufacturing CAM operated rotary switches with improved versions of utility for both domestic and industrial purposes. The company has long term business relations with Larsen and Toubro (L&T), in which the engineering giant L&T holds about 26 per cent stake.
Journey so far: From a single product Company, SEL is into manufacturing of multiple
Source: Company, Ajcon Research
1985•Established to manufacture of CAM operated Rotary Switches
1991-95
•Unit I (Coimbatore) - manufacture contactors, relays, panels, energy savers
•Starting of long term association with L&T
• Technical collaboration with Plitron for manufacture of Toroidal transformers
•Ist Indian Company to bring this technology to India
2001-06
• Unit III - manufacture modular switches
• Started Wire & Cable manufacturing for L&T
2010-14
•Foray into tailor made products and branding for large customers
•Specialized panels for OEMs
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Mr. R. Doraiswamy – MD Core Promoter for over 2 decades of experience
Mr. D. Rajeshkumar – JMD Electrical Engineer, India, Post Graduate in Business Management, US JMD and CEO of Company – responsible for driving the vision of the Company
Mr. S. Baskarasubramaniam - Director, Corporate Affairs & Company
Secretary
Qualified Company Secretary & member of FCS India Wide experience in Company Law/Corporate Affairs
P. Sivakumar - GM – Marketing Corporate
Bachelors in Engineering with 22 years of experience Responsible for Sales & Marketing Division
M Lakshminarayana GM –Operations BE (Electrical) with 17 years of experience Responsible for Production, Planning, Inventory Management,
Maintenance & general Administration
D. Govindaraj – Sr. Manager ( Corporate Accounts & Projects)
Masters in Commerce, DLL and DTL with 26 years of experience Responsible for project finance and corporate accounts
R Karunakaran – Sr. Manager (PR, Central Excise)
BSc, Diploma in Marketing Management with 24 years of experience Responsible for Central Excise and Public Relations of Company
Source: Company, Ajcon Research
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