SURYA ROSHNI LTD (SURL) - MarketsMojo

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

SEPTEMBER 24, 2019

SURYA ROSHNI LTD (SURL) PRICE RS.185 TARGET RS.275 BUY We met the management of Surya Roshni (SURL) where they sounded positive in terms of future growth in the steel pipes division, while continue to maintain the cautious outlook on conventional lighting and expect the growth in LED to offset the impact. Going ahead, with no major capex is on the card, the future cash flow is expected to be diverted to deleverage balance sheet and the focus is on improving return ratios by 100 bps every year.

Key Highlights

Management expects the lighting business to grow at 10% in value terms, while steel business is expected to grow at 15% in volume terms. The growth in lighting business is capped due to sharp decline in the conventional lighting division. The company gets ~84% of its revenue from the Semi-Urban/Rural area.

The company derived ~Rs9.5 bn (Rs3.5 bn in the lighting and Rs6 bn in steel pipes) of its revenue from the PSU entities and Rs10 bn from the export market. The average debtor days for the company stands at 35 days and from the PSU entities its 90 days.

The management expects growth in steel pipes business and improvement in the operating performance of the segment is expected to come from Oil and Gas Segment. The company currently has an order book of ~Rs7 bn in API, which can garner incremental margin of Rs.4,000-7,000/tonne compared to average of Rs.3,000/tonne.

The company stated “Nal Se Jal” scheme of the government is likely to give a strong support to the demand, if implemented effectively. The management expects, of the total budgeted expenditure of Rs4.5 lakh crore, 40% will be utilised for the water pipes.

The PVC pipes growth in FY19 stood at 28% (Rs.481mn). The company has recently expanded its capacity by 3,000 tonnes in the month of May’19 to 8,200 tonnes, which is expected to support the growth. However, the contribution to the revenue is expected to remain low, given the scale of other segments.

The debt at the end of 1QFY20 stood at Rs15 bn (including LC of Rs3 bn), 2/3rd of the debt is for steel pipes division and remaining in lighting. The company indicated prepayment of debt in 1HFY20, supported by strong cash flow and no fresh capex. In addition, the annual repayment stands at Rs.600 mn.

Strong network helps the company to generate over 82% of the revenue in Lighting and over 70% revenue from B2C in steel pipes and strips segment.

Outlook and Valuation The slowdown in the conventional lighting division and higher advertisement costs impacted last quarter performance. Going ahead, we believe the growth in LED lighting and Fans & Appliances likely to offset the impact of conventional lighting. Also, increased focus of government on water related infrastructure, as a part of its ‘Nal se Jal’ scheme, which is expected to benefit the Steel pipes and PVC pipes division of the company. Though near term earnings is likely to remain under pressure due to decline in realisation in both the segment,

Management Meet Update

Stock Details Market cap (Rs mn) : 10055 52-wk Hi/Lo (Rs) : 277 / 150 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 79,536 Shares o/s (mn) : 54

Source: Bloomberg

Financial Summary Y/E Mar (Rs mn) FY19 FY20E FY21E

Revenue 59,770 63,306 67,132 Growth (%) 21.2 5.9 6.0 EBITDA 3,720 3,829 4,256 EBITDA margin (%) 6.2 6.0 6.3

PAT 1,209 1,360 1,682 EPS 22.2 25.0 30.9 EPS Growth (%) 11.9 12.5 23.7

BV (Rs/share) 212 234 262 Dividend/share (Rs) 2.0 2.0 2.1 ROE (%) 11.0 11.2 12.4 ROCE (%) 12.1 11.7 12.8

P/E (x) 7.9 7.0 5.7 EV/EBITDA (x) 5.6 5.1 4.4 P/BV (x) 1.5 1.3 1.2

Source: Company, Kotak Securities - PCG

Shareholding Pattern (%) (%) Jun 19 Mar 19 Dec 18

Promoters 62.9 62.9 62.9 FII 1.3 1.3 1.3 DII 2.3 2.3 2.3 Others 33.4 33.4 33.4

Source: Bloomberg

Price Performance (%) (%) 1M 3M 6M

Surya Roshni Ltd 17.7 (22.4) (26.6) Nifty 7.1 (1.1) 1.3

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Jatin Damania [email protected] +91 22 6218 6440 Deval Shah [email protected] +91 22 6218 6425

140

190

240

290

340

Sep-18 Jan-19 May-19 Sep-19

mailto:[email protected]


SEPTEMBER 24, 2019

however higher execution of API pipes orders shall help the company to maintain per tonne steel pipes profitability. At CMP, the stock is trading at 4.6x FY21 EBITDA, which in our view is attractive. We reiterate BUY rating on the stock with a target price of Rs275. Continue to value using SOTP valuation methodology ascribing EV/EBITDA of 12x to the lighting business and 4.5x to the steel pipe business.

Steel pipes & strips segment operating performance likely to remain strong The company’s current installed capacity of ERW stands at 900KT (including GI of 250KT). The segment witnessed 25% growth in revenue in FY19 (10% volume and 15% realisation) to Rs44.27 bn. The growth in FY20, is also expected to come from the volume, due to sharp fall in the steel prices in the last 6-9 months. Management expects the segment to report 15% YoY growth in volumes, largely supported by the execution of Oil and Gas order.

Revenue Break-up Product wise EBITDA (Rs/Tonne)

Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Despite the fall in realisation, management expects the company to report improvement in EBITDA/tonne in FY20, backed by higher execution of an API pipes order. API pipes have an incremental margin of Rs 4,000-7,000/tonne compares to the average of Rs3,000/tonne. The API based order book currently stands at Rs7 bn, which is likely to be executed in FY20. In addition, the 3LPE Coating manufacturing unit shall support the performance.

Steel Prices (Rs/T) EBITDA/tonne (Rs)


GI Pipes, 32%

Section Pipes, 17%

CR Sheets, 12%

Round Pipes, 23%

API & Spiral Pipes, 11%

Others, 5%

2500 3000+1000

+1000-15000

+4000-7500

RoundPipes

CompanyAverage

Export GI Pipes Api & SpiralPipes

25,000

30,000

35,000

40,000

45,000

50,000

2,387

1,956

2,868 2,845 2,794 2,870

FY15 FY16 FY17 FY18 FY19 1QFY20


SEPTEMBER 24, 2019

As per the management, the steel tubes and pipes market is expected to reach an estimated $97.7 billion by 2023 with a CAGR of 3.9% from 2018 to 2023. The major drivers for this market are increasing construction of new pipelines for oil and gas, water and wastewater, replacement of aging pipelines, and infrastructure development across the Middle East and North American markets. India has evolved as the leading ERW steel tube manufacturing hub in the world with the domestic demand levels of around 10 MTPA. The industry is set to leverage opportunity from India’s $10 billion push to expand its natural gas network.

LED and Fan & Appliances to offset conventional lighting impact Management expects the segment to grow 10% in the value term in FY20, largely supported by LED and Fans & Appliances. However, on the other hand, conventional lighting is likely to be a drag. Management expects conventional lighting business to witness decline of another 20% in FY20, while LED and Fans & appliances is expected to grow at 20% each.

The contribution from CFL in the last three years has declined form Rs3.7bn in FY16 to Rs 250 mn in FY19 and its further likely to decline to Rs180 mn in FY20. Management is planning to close the CFL division in FY20. As far as LED contribution is concerned, it has grown from Rs640 mn to 9.28 bn during the same period and is expected to grow 20% annually. The company has contributed to the various Government projects and accounts for 27% in street lights, 28% in the batons and 10% in bulbs. PSU’s accounts for Rs3.5 bn of the total revenue of the segment. We expect the revenue from lighting to grow at 4.5% CAGR during FY19-21E period.

Revenue Break-up Product wise EBITDA margin


Given the scale and large presence in semi-urban and rural region, the management expects that following government projects/programmes is expected to generate addition demand for LED lighting, which will offset the impact of the decline in conventional lighting (the contribution from the same has declined sharply in the last 2-3 years).

Street Lighting National Programme (SLNP): Replacing street lights with LED lamps

Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY): To improve electrical supply in rural India

Bijli Har Ghar Yojana (Saubhagya): To electrify 40 million families in rural and urban areas

Unnat Jyoti (UJALA): To provide affordable LED for all

Conventional Lighting, 24%

LED Lighting, 60%

Fans & Appliances, 16%

4%

7-8%

12%

ConventionalLighting

Fans & Appliances LED Lighting


SEPTEMBER 24, 2019

In addition, ELCOMA estimates that by the end of 2020 LED market share in the overall lighting industry will be 80% (Rs. 261 bn). India’s LED lighting market is projected to grow at CAGR of 26.6% during 2017-23. As per the management, LED offerings continued to retain strong market share in the organised segment.

SURL to continue to focus on the consumer side LED sales driven by higher acceptability, affordability and awareness of LEDs and will continue exploring institutional opportunities for illuminating major public attractions. The company will also capitalise on the Government orders through EESL (EESL seeks to replace 350 mn conventional street lights with energy efficient LED lights across the country. At present ~9mn street lights have been replaced, the project is implemented across 23 states and Union Territories).

Strong network help the company to garner higher contribution from semi-urban/rural area The company has strong distribution network of over 2,500 distributors and 2,50,000 retailers countrywide for lighting and consumer durables and network of 2,500 distributors for Steel Pipes and Strips segment. Strong network helps the company to generate over 82% of the revenue in Lighting and over 70% revenue from B2C in steel pipes and strips segment. The company will continue to focus on further strengthening dealer and distribution network and expects with the effective implementation of various government programmes announced, rural India to continue to remain a strong focus area.

Revenue by region Revenue by area


Demerger can re-rate the stock, but focus is on reducing debt currently Consumer durables companies’ trade at higher premium compared to steel pipe companies, due to the higher capital intensive and lower return ratios in the latter. The company has recognized the need of having two separate entities having precise focus and dedicated bandwidth for both the lighting/consumer durable and pipes business. As of now the focus is on reducing debt which at the end of FY19 stands at Rs 15bn (including LCs of Rs3 bn), management expects to repay Rs2-3 bn in FY20 (annual repayment schedule stands at Rs. 600 mn), which will bring down the interest cost. Steel pipes and strips segment accounts for Rs7.8bn of debt, while lighting segment debt stands at Rs.4 bn.

East, 18%

West, 25%

North, 28%

South, 29%

Metro Cities, 16%

Tier II, 32%Rural, 52%


SEPTEMBER 24, 2019

Strong cash flow (Rs Mn) Leverage position (Rs mn)


Outlook and Valuation The slowdown in the conventional lighting division and higher advertisement costs impacted the last quarter performance. Going ahead, we believe the growth in LED lighting and Fans & Appliances is likely to offset the impact of conventional lighting and increased focus of government on water related infrastructure, as a part of its ‘Nal se Jal’ scheme, which is expected to benefit the Steel pipes and PVC pipes division of the company augurs well. Though near term earnings is likely to remain under pressure due to decline in realisation in both the segment, higher execution of API pipes orders shall help the company to maintain per tonne steel pipes profitability. At CMP, the stock is trading at 4.6x FY21 EBITDA, which in our view is attractive. We reiterate BUY rating on the stock with a target price of Rs275. Continue to value using SOTP valuation methodology ascribing EV/EBITDA of 12x to the lighting business and 4.5x to the steel pipe business.

Valuation Table

Rs mn FY21E

B2C EBITDA (Lighting/CD) 1,865 Target EV/EBITDA (Lighting/CD) 12 Target EV (B2C) (a) 22,381 EBITDA (Steel Pipes) 2,654 Target EV/EBITDA (Steel Pipes) 5 Target EV (B2B)(b) 11,943 Target EV (SURL) (a+b) 34,325 Less Debt 10,200 Add Cash 805 Market Capitalization 24,929 Conglomerate Discount @40% 9,972 Target Market Capitalization 14,957 Target price per share (SURL) 275 Upside (%) 48.6%

Source: Kotak Securities – Private Client Group

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500

1,000

1,500

2,000

2,500

FY16 FY17 FY18 FY19 -

2,000

4,000

6,000

8,000

10,000

12,000

FY16 FY17 FY18 FY19


SEPTEMBER 24, 2019

Background SURL (estd. 1973), founded by Mr J.P Agarwal, is a manufacturing company with business interest aligned broadly divided into two areas- Lighting and Steel pipes. Under Lighting, the Company offers a wide range of lighting products- from GLS, CFL, Luminaries to LEDs and luminaries. Company also operates its fans and appliances business where it offers several models of fans and kitchen appliances. The Company’s lighting manufacturing units are located in Uttarakhand and Madhya Pradesh. While company manufactures an array of pipes, it has been the largest manufacturer of ERW-GI pipes in India. The company’s pipe manufacturing units are located in Haryana, Gujarat, Andhra Pradesh and Madhya Pradesh. SURL has a wide presence across the length and breadth of India along with considerable overseas presence spread across 50 countries.


SEPTEMBER 24, 2019

Financials: Standalone Profit and Loss Statement (Rs mn)

(Year-end Mar) FY18 FY19 FY20E FY21E

Revenues 49,312 59,770 63,306 67,132 % change yoy 27.0 21.2 5.9 6.0 EBITDA 3,459 3,720 3,829 4,256 % change yoy 10.5 7.5 2.9 11.2 Other income 27 41 41 41 Depreciation 873 885 921 972 EBIT 2,586 2,835 2,907 3,284 % change yoy 12.7 9.6 2.5 13.0 Net Interest 1,052 1,151 1,121 1,065 Earnings Before Tax 1,561 1,726 1,828 2,260 % change yoy 32.8 10.5 5.9 23.7 Tax 481 517 468 579 as % of EBT 30.8 30.0 25.6 25.6 XO Items - - - - Recurring PAT 1,080 1,209 1,360 1,682 % change yoy 25.2 11.9 12.5 23.7 Shares outstanding (m) 54.4 54.4 54.4 54.4 EPS (Rs) 19.9 22.2 25.0 30.9 DPS (Rs) 2.0 2.0 2.0 2.1 CEPS 35.9 38.5 41.9 48.8 Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) (Year-end Mar) FY18 FY19 FY20E FY21E

PBT 1,561 1,726 1,828 2,260 Depreciation 873 885 921 972 Current liabilities incl provisions 792 110 356 386 Increase in inventory (1,727) (150) (584) (545) Increase in sundry Debtors (808) (1,251) (495) (536) Increase in advances - - - - Tax Paid (481) (517) (468) (579) Other Adjustments 1,046 1,159 1,015 950 Net cash from operations 1,256 1,962 2,573 2,908 (Inc)/Dec in F.A+CWIP (472) (1,486) (141) (970) Net investments - (1) 1 - Net cash from investing (472) (1,486) (142) (970) Change in Borrowings 401 601 (215) (900) Dividend Paid (132) (132) (132) (139) Net Cash from financing (754) (710) (1,474) (2,110) Net Cash Flow 31 (233) 957 (171) Cash at the end of year 254 21 978 806 Source: Company, Kotak Securities – Private Client Group

Balance sheet (Rs mn) (Year-end Mar) FY18 FY19 FY20E FY21E

Cash and cash equivalents 254 21 977 805 Accounts receivable 7,126 8,377 8,872 9,409 Inventories 8286 8435 9019 9564 Other current assets 8,286 8,435 9,019 9,564 Current Assets 17,210 18,602 19,787 20,983 Net fixed assets 10,710 10,886 10,107 10,105 Investments - 1 - - Other non-current assets 380 778 779 779 Total Assets 28,554 30,287 31,649 32,671 Debt 10,714 11,315 11,100 10,200 Equity & reserves 10,473 11,519 12,739 14,275 Other liabilities(deferred tax) 1,450 1,427 1,427 1,427 Current Liabilities 5,917 6,027 6,383 6,769 Total Liabilities 28,554 30,287 31,649 32,671 BVPS (Rs) 192 212 234 262 Source: Company, Kotak Securities – Private Client Group

Ratio Analysis

(Year-end Mar) FY18 FY19 FY20E FY21E

EBITDA margin (%) 7.0 6.2 6.0 6.3 EBIT margin (%) 5.2 4.7 4.6 4.9 Net profit margin (%) 2.2 2.0 2.1 2.5 Receivables (days) 52.7 51.2 51.2 51.2 Inventory (days) 61.3 51.5 52.0 52.0 Sales / Net Fixed Assets (x) 4.6 5.5 6.3 6.6 Interest coverage (x) 2.5 2.5 2.6 3.1 Debt/ equity ratio 1.0 1.0 0.9 0.7 ROE (%) 10.8 11.0 11.2 12.4 ROCE (%) 11.8 12.1 11.7 12.8 EV/ Sales 0.4 0.3 0.3 0.3 EV/EBITDA 5.8 5.6 5.1 4.4 Price to earnings (P/E) 8.8 7.9 7.0 5.7 Price to book value (P/B) 1.6 1.5 1.3 1.2 Price to cash earnings 4.9 4.5 4.2 3.6 Source: Company, Kotak Securities – Private Client Group


SEPTEMBER 24, 2019

RATING SCALE (PRIVATE CLIENT GROUP) Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target

for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our

internal benchmark.

FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Rusmik Oza Arun Agarwal Amit Agarwal, CFA Priyesh Babariya Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Research Associate [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433

Sanjeev Zarbade Jatin Damania Deval Shah K. Kathirvelu Cap. Goods & Cons. Durables Metals & Mining, Midcap Research Associate Support Executive [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6425 +91 22 6218 6427

Sumit Pokharna Pankaj Kumar Krishna Nain Oil and Gas, Information Tech Midcap M&A, Corporate actions [email protected] [email protected] [email protected] +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 7907

TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected] +91 22 62185499 +91 22 62185498

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP)

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810








SEPTEMBER 24, 2019

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and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at

[email protected] or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj)

at [email protected] or call on 91-(022) 4285 8301.

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