tomorrow’s progress today - SKP · PDF fileKey Share Data Face Value (`)10.0 Equity Capital ... 0.1 0.1 0.1 0.1 EV/EBIDTA (x) ... (ACSR), Aluminium Conductor Alloy Reinforced

December 17, 2013

Apar Industries Ltd.

…tomorrow’s progress today

SKP Securities Ltd www.skpmoneywise.com Page 1 of 19

CMP ` 127 Target ` 202 Initiating Coverage‐ Buy

Source: BSE

Analyst: Vineet P. Agrawal

Tel No.: +91 22 2281 9012; Mobile: 9819510575 Email: [email protected]

Company Profile Apar Industries Ltd (Apar) is a leading conductor, speciality oil and cables manufacturing company, established in 1958. It is the second largest manufacturer of aluminium conductors and largest manufacturer of transformer oil in India with the market share of 23% and 60% (power transformers) respectively. The company derives 75% of its revenues from power sector. Investment Rationale

Tie‐up for ACCC Conductors with CTC Global ‐ Apar is all ready to take advantage of upcoming demand of conductors:

ACCC is the world’s most efficient high capacity power transmission conductor made of hybrid carbon core and aluminium. It provides increased span on fewer transmission line towers, thus reducing infrastructure cost.

Apar has technology tie‐up with USA based CTC Global under which it has license to manufacture ACCC cables. CTC Global is the technological leader in composite core technologies and has the patent for manufacturing ACCC cables.

Demand for high voltage conductors is expected to rise with the Government’s increasing focus on high voltage transmission grid. PGCIL is aiming to strengthen grid with a capital expenditure plan of ` 1 tn during the 12th Plan period starting 2013.

Focus on e‐beam electrical cables:

Apar has set up a technologically advanced state‐of‐the‐art greenfield plant at Khatelwad, Gujarat, for manufacturing e‐beam cables.

There are several applications where the technology can be deployed such as railways, ship wiring, wind mills cables, medical sterlisation, rubber sheets and moulded products etc.

Apar has already received approval from RDSO Railways for electrical locomotives and from Goa Shipyard and we expect to receive approvals from Defence headquarters, Indian Navy and RDSO for diesel locomotive soon.

We expect e‐beam should garner revenue of about ` 250 mn and ` 800 mn during H2FY14 and FY15 respectively.

Improvement in Margins:

EBIDTA margins of the company have improved by 70 bps during FY13 to 6.7% from 6.0% in FY12. It (standalone) has further moved upwards to 8.4% in H1FY14.

This has happened due to the initiatives taken by the company to improve the margins through improved product mix in all business segments, reduced volatility in forex with strong forex policy, focus on exports and improved cash flows.

We expect the company to stabilize its margin at 8.4% for next two years on account of better realizations.

Outlook and Recommendation

At the current market price of ` 127, the stock is trading at a P/E of, 6.1x and 3.8x of FY14E and FY15E earnings of ` 20.8 and ` 33.7 respectively.

We recommend BUY rating on the stock with a target price of ` 202/‐ (59% upside) in 15 months implying a P/E multiple of 6x of FY15E earnings.

Key Share DataFace Value (`) 10.0Equity Capital (` mn) 384.7M.Cap (` mn) 4885.752‐wk High/Low (`) 163/83Avg. Daily Vol 12969BSE Code 532259NSE Code APARINDSReuters Code APAR.BOBloomberg Code APR IN

Shareholding Pattern (as on Sept 30, 2013)

60%

5%

6%

30%Promoter

FII

DII

Public & Others

Particulars FY12 FY13 FY14E FY15ENet Sales 35948.9 46506.9 41900.4 51329.3Sales Gr. 18.5% 29.4% ‐9.9% 22.5%EBIDTA 2135.6 3112.5 3441.5 4302.1PAT 713.0 1094.5 800.5 1295.4PAT Gr. ‐26.3% 53.5% ‐26.9% 61.8%EPS (`) 19.8 28.5 20.8 33.7CEPS (`) 25.9 34.7 27.5 42.2

Financials (` mn)

Particulars FY12 FY13 FY14E FY15EInt Cover (x) 1.7 2.1 3.4 3.5P/E (x) 6.4 4.5 6.1 3.8P/BV (x) 0.9 0.8 0.7 0.6P/Cash EPS (x) 4.9 3.7 4.6 3.0M.Cap/Sales (x) 0.1 0.1 0.1 0.1EV/EBIDTA (x) 2.8 1.3 2.0 1.5ROCE (%) 12.8% 18.0% 17.4% 18.4%ROE (%) 13.7% 17.5% 11.7% 16.4%EBIDTM (%) 5.9% 6.7% 8.2% 8.4%NPM (%) 2.0% 2.4% 1.9% 2.5%Debt‐Equity (x) 1.9 1.6 1.7 1.7

Key Ratios

Price Performance Apar vs S&P BSE Small Cap

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Apar

S&P BSE Small Cap


SKP Securities Ltd. www.skpmoneywise.com Page 2 of 19

The Company: A snap shot

• Apar Industries Ltd (Apar), founded in 1958, is one of the best established companies in India operating in the diverse field of electrical, metallurgical and chemical engineering.

• Apar has three business divisions viz conductors, specialty oils and cables each of which has

significant market shares in their respective segments. • It is India’s one of the leading manufacturers of transformer oil with the market share of about

60% and 40% in power transformer oil and distribution transformer oil segment, in India and is the second largest producer of aluminium conductors with the market share of about 23% in India, after Sterlite Technologies (27%).

• The Company derives 75% of its revenues from power sector. Business mix of the company can

be broadly classified as follows:

Source: Company and SKP Research

Apar

Aluminium Conductors (Revenue Contribution: 48%)

AAC (Distribution of electricity)

AAAC (T&D of electricity)

ACSR & AACSR (T&D of electricity)

Speciality Oil (Revenue Contribution: 43%)

Transformer Oil (Used as coolant in Power and

Distribution Transformers)

Ink Oils (Used in the manufacturing of

printing inks)

Industrial Oils and Lubricants

(Automotive engine oil, Hydraulic Oils, Compressor Oils, Turbine Oils, Cylinder Oils, and Refrigerator oils

etc.)

Power & Telecom Cables (Revenue Contribution: 9%)

Specialty Cables (High performance under

water cables and Umbilical products designed for Naval

Defence Sector)

LT & HT Cables and Control Cables

(XLPE Cables, Control Cables)

ACCC (Distribution of electricity) Liquid Paraffins &

White Oils (Used in cosmetics and

medical purposes)

Rubber Processing Oils (Used in processing of

different types of Synthetic Rubber)

E- Beam (Electrical) Cables

(EBXL Wires & Cables; used in the wiring of Railway

coaches, ship wiring, Wind mills etc.)

Elastomeric (Flexible Rubber) Cables (These Cables finds

applications in Railways, Power, Mining, Defence,

Steel Cement etc.)

Optic Fiber (Telecom) Cables

House Wires



1. Aluminium Conductors: • Apar’s conductor division was started in 1958 with technical knowhow from Alcan, Canada and

Properzi, Italy. Today, Apar contributes half of India’s total export of aluminium power conductors and a significant portion of its domestic consumption.

• Types of Conductors: The division manufactures all types of bare overhead aluminium

conductors such as All Aluminium Conductors (AAC), All Aluminium Alloy Conductor (AAAC), Aluminium Conductors Steel Reinforced (ACSR), Aluminium Conductor Alloy Reinforced (ACAR), Aluminium Alloy Conductor Steel Reinforced (AACSR), Aluminium Carbon Composite Core (ACCC), Galvanized Steel Earth Wires and value added alloy based conductors.

• AAC are made up of one or more strands of aluminum wire depending on the required current

carrying capacity. These conductors are used for distribution of electricity especially at substations. AAC conductors have very high degree of corrosion resistance.

• AAAC conductors are manufactured consisting of one or more of high strength aluminium ‐

magnesium – silicon alloy wires. These conductors are widely used in overhead transmission lines for primary and secondary distribution of power. It provides very high strength than AAC. Aluminium alloy conductors by Apar were first in India through its own R&D activities.

• ACSR is a specific type of high capacity high strength stranded cable typically used for overhead

power supply. The outer strands are aluminium, chosen for its excellent conductivity, low weight and low cost. The centre strand is made up of steel, which facilitates the strength required to support the weight without stretching the aluminium due to its ductility.

• ACAR is formed by concentrically stranded wires of aluminium on high strength aluminium –

magnesium – silicon alloy core. These conductors are extensively used in overhead transmission and distribution lines. These conductors have better mechanical and electrical properties as compared to an equivalent AAC, AAAC or ACSR conductors.

• AACSR conductors are of one or more aluminium strands as outer wire and wire stranded with

zinc coated high steel core wire. These are also used for transmission and distribution of current. These conductors provide excellent mechanical and tensile strength, thus, are best suited for extra long spans, river crossing etc.

• ACCC conductors: ACCC is the world’s most efficient high capacity power transmission

conductor made of hybrid carbon core and aluminium. Its carbon core is 70% lighter and 50% stronger than steel core. This allows the use of more aluminium (up to 28%) which helps increase (twice) power carrying capacity and improved efficiency over AAC, ACSR and other conductors. It provides increased span on fewer transmission line towers, thus reducing infrastructure cost.

• Apar has technology tie‐up with USA based CTC Global under which it has license to

manufacture ACCC cables. CTC Global is the technological leader in composite core technologies and has the patent for manufacturing ACCC cables.

• Sterlite Technologies Ltd, Apar’s prominent competitor in conductors segment, also has license

to manufacture ACCC cables from CTC Global.

• Second largest conductor Company: Apar is the second largest conductor manufacturer in India, after Sterlite Technologies Ltd, with the installed capacity of 139,497 MTPA. The company controls 23% market share in the segment.



• Establishments: Apar has three state of the art manufacturing facilities at Silvassa (82,609 MT), Umbergaon (20,868 MT) and Athola (36,000 MT). All the facilities are strategically located in proximity to consuming points. Apar has developed Athola facility with focus on exports.

• Apar is the first conductor manufacturer to successfully test 765 KV and 800 KV conductors in

India.

• Clients: PGCIL is the largest client of Apar for conductors. It also sells conductors to BOOT contractors such as Adani Power, Reliance Infrastructures, JP Power, Jindal Power etc. The Company supplies conductors to all top 25 global turnkey operators and leading utilities.

• Being the largest exporter of aluminium conductors from India, Apar has presence in more

than 85 countries including USA, European region, Africa and CIS countries. The company enjoys preferred supplier status with them.

• Major Contributor to the revenues: Contribution from conductors has increased from 32% in

FY04 to 48% in FY13. The division has grown with the CAGR of 31% during FY10‐FY13.

2. Speciality Oils:

• The company ventured in to speciality oil business in 1969 with technical know‐how from US based Sun Oil Company. Today, it manufactures more than 300 different types of specialty Oils.

• The segment can be divided in five sub‐segments viz transformer oil, Industrial oils and lubricants, liquid paraffins and white oils, rubber processing oils(RPO) and Ink oils. Brief description of the products are as follows:

Transformer Oils: • Apar is India’s leading manufacturer of transformer oil with the market share of 60% and 40%

in power transformer oil and distribution transformer oil segments respectively.

• Apar is the dominant supplier in power transformer segment from 132 KV to 800 KV, meeting the special requirements of OEM’s, utilities and power transmission and distribution companies.

• Apar produces high quality transformer oils from selected severely hydro treated Naphthenic and Isodewaxed / hydrocracked Paraffinic Oils free from polar compounds and have very high oxidation stability and ageing properties guaranteeing long service life.

• Transformer oils are used as coolants in transformers and Apar’s low sulphur wax free naphthenic oils with low viscosity index ensure excellent cooling characteristics, high solvency and low corrosion.

• Its client profile comprises global power generation and transmission majors like ABB, Alstom, BHEL, Bharat Bijlee, Brush Transformers (UK), Crompton Greaves, Chevron, Daihen Electric , Emco Transformers, IMP Transformers, PGCIL, National Electricity Boards & Companies, NHPC, NPCIL, NTPC, Pauwels , SASO (Thailand & Japan), SEC (Saudi Arabia), Siemens AG, Transformer and Rectifiers, Schnieder Electric, Tata Power, Voltamp Transformer, Wilson Transformers (Australia), Maiden (Singapore) and others.



Industrial Oils and Lubricants: • Apar manufactures wide range of industrial and automotive oils and lubricants at its state‐of‐

the‐art blending plant at Rabale, Thane and Silvassa.

• It manufactures more than 150 grades of industrial oils including hydraulic oil, gear oils, compressor oils, long life turbine oils, cylinder oils, refrigeration oils, metal working fluids, automotive engine oils etc.

• These Lubricants are manufactured utilizing Hydro‐treated and Hydro‐cracked base oils, which

give distinct advantage in performance over the similar products made utilizing conventional base oils. Multinational oil companies adopt these types of base oils worldwide.

• Apar Chematek Lubricants Ltd, a subsidiary of Apar, markets the world‐renowned AGIP brand

of automotive lubricants. It markets a wide range of lubricants ranging from passenger car motor oils (PCMO), diesel engine oils (DEO), two wheeler oils, gear oils, greases etc. Chematek S.p.A of Italy has been the leading name in global fine and specialty chemicals marketing with presence in Europe and Asia.

• AGIP is the brand of Eni S.p.A. of Italy, an Italian industrial giant with a group turnover that

exceeds € 100 bn. With presence in over 70 countries, the Group offers 400 plus variants of lubricants to its end consumers. In order to provide the best solutions to the complex needs of modern engines, the Group works closely with major automotive manufacturers across the world.

• AGIP brand is recognized internationally for its high focus on technology drawn from its long

experience and the investment of millions of dollars for the development of high quality lubricants.

• Automotive Oils contributes about 5% to the total revenues of the company.

Liquid Paraffins and White Oils • Apar manufactures a wide range of pharmaceutical/food grade liquid paraffins and technical

grade white oils from selected base oils at its state‐of‐the art white oil plants at Rabale and Silvassa.

• Dominant Player: Apar is among the four dominant Indian players with 20% market share and enjoys approvals from all major pharmaceutical and FMCG companies in India including Marico, Emami, Uniliver, Dabur etc.

• Raw Materials: Light and Heavy liquid paraffins are produced from low pour severely hydro

treated base oils.

• Applications of liquid paraffins: These liquid paraffins are widely used in applications such as medical formulations, ointments, laxatives, repository vaccines, hair oils, hair cleaners and lotions.

• Applications of white oils: Technical grade white oils of wide viscosity range find extensive

usage in textile industry for non‐staining lubrication, incense‐perfume manufacture, plastic, paper and cosmetic industries and several oil based formulations, lotions, shoe polish and petroleum jelly manufacturing industries. They also meet the requirements of US FDA.



• These liquid paraffins and white oils are exported to many countries like Sri Lanka, Kenya, Tanzania, Singapore, Malaysia, Syria, Bangladesh, Nepal, Middle East and European countries.

Rubber Processing Oils (RPO): • Apar is one of the largest private sector producers of high quality special application RPO for

the domestic rubber and tyre industry. Apar accounts 25% of the market share in the segment and is the largest marketer of superior quality Napthanic RPO in India.

• Apar manufactures three types of RPOs viz aromatic oils, naphthenic oils and paraffinic oils

meeting the specific requirements of rubber and tyre industry. RPOs produced by the company are approved by renowned global tyre manufacturers.

• Aromatic oils are formulated from specially selected aromatic extracts which offer good

compatibility with natural rubber (NR), styrene butadiene rubber (SBR), poly butadiene rubber (PBR), and chloroprene rubber (CR).

• Aromatic oils are widely used in manufacturing of automotive tyres and tubes, bi‐cycle tyres,

tyre retreading materials, beltings, hoses, battery casings and containers, extruded products, technical molded goods, and rubber articles.

• Naphthenic oils are formulated from carefully selected hydro treated naphthenic base stocks

and are non‐staining in nature. It possesses excellent thermal, oxidation and colour stability.

• They are compatible for processing with NR, SBR, PBR, butyl and ethylene propylene rubber (EPM) / ethylene propylene diene monomer (EPDM) rubbers.

• Naphthenic oils are recommended for the manufacturing of automotive tubes, light coloured

non‐black foot wear products and molded & extruded products.

• Paraffinic oils are formulated from highly refined solvent extracted base stocks of low sulfur content. Paraffinic oils are used in the manufacture of butyl tubes and a variety of technical molded and extruded products based on polar rubbers like EPM & EPDM etc. They are suitable in the manufacture of light coloured products and have good thermal stability.

Ink Oils: • Apar is one of the pioneers in manufacturing of ink oils in India, which meets the requirements

of major printing ink manufacturers in the country.

• Apar manufactures ink oils from highly refined specially selected naphthenic and paraffinic base stocks of broad spectrum of viscosities and controlled boiling range.

3. Power and Telecom Cables: • Apar’s cables division is a leading manufacturer of electrical and telecommunication cables in

India. The company acquired Uniflex Cables in 2008 which is serving its clients since 1981.

• The Company is one of the leading exporters of cables from India with about 30% of its cable production getting exported. Apar exports its cables to SAARC countries, the Middle East and Africa.



• The cable division has 2 plants of which one is located at Umbergaon, in Gujarat, India, just 140 kms from Mumbai, with the installed capacity of 88,935 KM. Company’s other facility is located at Rabale, Maharashtra, near Mumbai. Both the facilities are well equipped with advance manufacturing and testing facilities.

Electron Beam Irradiation (e‐beam) Cables: • The company has also set up an e‐beam facility at Khatalwad with two e‐beam accelerators (of

1.5 electron volt (MeV) and 3.0 MeV) with beaming handling system for wide range of cables.

• The facility also handles products such as heat shrink tube and components PE pipes, medical products for sterilization, gems and diamonds etc.

• The Electron Beam Cross Linked (EBXL) wires and cables offer superior performance in

demanding application and in extreme environments.

High Tension (HT), Low Tension (LT) Power Cables and control cables: • Apar manufactures a broad range (from medium range XLPE cables up to 33kv) of power and

control cables from HT and LT cables to electron beam Irradiated cables.

• The Company is manufacturing power cables since 1991. The state‐of‐the‐art manufacturing facility of the company is equipped with high quality machines and equipments of most reputed makes such as Niehoff for Rod Break Down and multi‐wire drawing machine extruders from Nextrom and so on.

• Apar uses the best quality XLPE (cross linked polyethylene), PVC (polyvinyl Chloride) and other

raw material imported from reputed brands like Dow Chemicals, USA, Hanwa Corporation etc.

• Apar manufactures control cable in synchronization with Indian and international standards. These cables are manufactured in variety of cores, sizes, lengths to meet with the requirements of clients’ spread globally.

Elastomeric (Rubber) Cables: • Apar manufactures elastomeric cables in its state‐of‐the‐art manufacturing facility of Royale

System, USA. The Company can produce a wide range of cables with using natural and synthetic rubber for various applications.

• Apar supplies elastomeric cables to various industry segments such as railways, shipbuilding,

steel, cement, power, defence, mining etc. for almost three decades.

• Apar manufactures elastomeric cables from 1.1KV to 33 KV as per Indian and international standards.

Fiber Optic Cables (Telecom): • Fiber optic cables are manufactured by the telecom division of the company. Apar’s Uniflex

cable division is manufacturing these cables since 1995.

• Apar is one of the largest exporters of cable television cable (CATV) and broadband fiber optic cables.



Speciality Cables: • Cables division of Apar manufactures high performance underwater cable umbilical products

designed to fulfill different functions in a single cable for the naval defence sector.

• The Company provides a variety of custom‐engineered hybrid cable products involving integration of power, control, signaling and fiber optics such as tactical sonar cable systems, High & Low density tow and umbilical cables systems and submarine cable systems for sensors and power distribution and subsea vehicle cables.

• Apar is the only Indian company which provides highly customized integrated cable products and solutions for such critical applications.

• Apar can design and engineer sub‐sea cable system involving high voltage, low voltage cables,

fiber optic cables for sub‐sea applications due to rich experience gained in executing orders for Naval systems.

Source: Company

Key Raw Materials

The Company Structure

Petroleum Specialities Pte. Ltd, Singapore (100% S) (Trading in petroleum based products)

Apar (H)

Quantum Apar Speciality Oils Pty Ltd Australia (65% S)

(Marketing of Speciality Oils)

Apar Chematek Lubricants Ltd (97.5% S)(JV with Chematek SpA, Italy, for the marketing of Agip

brand of automotive Oil of ENI SpA. Italy)

Source: Company and SKP Research; H=Holding Company; S=Subsidiary; A=Associate



Investment Arguments

1. Tie‐up for ACCC Conductors with CTC Global: • As mentioned earlier ACCC is the world’s most efficient high capacity power transmission

conductor made of hybrid carbon core and aluminium. The Conductor was developed to increase the efficiency, capacity and reliability of the electric transmission and distribution power grid.

• The ACCC conductor uses a hybrid carbon and glass fiber core to replace the steel core strands found in several types of bare overhead conductors.

• The steel or composite core is used to augment the strength of the relatively weak but highly

conductive aluminium strands used in bare overhead conductors. Since the ACCC conductor's core is 70% lighter than steel and 50% stronger than steel core, it allows the use of more aluminium (up to 28%) which helps increase (twice) power carrying capacity and improved efficiency over AAC, ACSR and other conductors.

• The added aluminium content also reduces electrical resistance which serves to

reduce electrical line losses.

• It provides increased span on fewer transmission line towers, thus reducing infrastructure cost.

• Apar has technology tie‐up with USA based CTC Global under which it has license to manufacture ACCC cables. CTC Global is the technological leader in composite core technologies and has the patent for manufacturing ACCC cables.

• Sterlite Technologies Ltd, Apar’s prominent competitor in conductors segment, also has license

to manufacture ACCC cables from CTC Global.

• Demand for high voltage conductors is expected to rise with the Government’s increasing focus on high voltage transmission grid. Government’s plan for transmission lines in 12 five year plan at a glance:

Source: Twelfth Five Year Plan (2012‐17)



2. Focus on e‐beam electrical cables: • Apar has set up a technologically advanced state‐of‐the‐art greenfield project at Khatelwad

located about 20 KM away from Vapi, Gujarat with 1.5 MeV and 3.0 MeV electron beam accelerators along with handling systems suitable for irradiation of various types of electrical and automotive cables & wires, PE sheets, polymeric tubes/pipes, heat shrink products, gems & diamonds, medical product sterilization etc.

• As the name implies, electron beam is the flow of high energy electrons. The energy is obtained as kinetic energy when the electrons move in a high electric field. The radiation processing by electron beam is a physical reaction caused in a material by an exposure to its irradiation. The e‐beam irradiation is a process in which the polymer is exposed to an energetic, highly charged stream of electrons.

• The principal effect of high velocity electrons is to break the existing weak hydrogen bonds &

create a free radical in the polymeric insulation materials. Similarly another electron penetrates and knocks off another H and creates other free radicals. These two free radicals react with each other and form a double bond which is known as cross‐links between molecules.

• This cross‐linking significantly improves Thermal, Mechanical and Chemical properties of the

polymer i.e. insulation & sheathing materials. • There are several applications where the technology can be deployed brief of which are given

below: Products Applications E‐beam cross‐linked wire & cables Railways, Ship wiring, wind mills cables, solar PV cables and

building wires Heat shrinkable products Cable termination, bus bar sleeves, wrap around, cable end

caps, breakouts, and other molded components. Rubber sheets and moulded products Rubber gaskets, rubber sheets etc. E‐beam cross‐linked polyethylene ‘O’ ring

The normal grade of PE cannot withstand operating temperature beyond 70°C unless these O‐Rings are cured under electron beam for applications requiring dimensional stability under higher operating temperature.

Medical sterilization EB technology is known globally for being the best method for sterilization (compared to Ethylene Oxide treatment) of various medical products like Stents, Dental implants, Lenses etc.

Degradation of Poly tetra flouro‐ ethylene (PTFE)

PTFE micro powders are popular additives in many industrial materials (solid or liquid) whose properties or end use are improved with the addition of PTFE’s unique characteristics. Lots of scrap is generated by machining of PTFE rods to convert it in to micronized powder which is almost impossible to treat. According to market reports, Every year more than 20,000 MT of PTFE scrap is generated which needs to be recycled. Scrap PTFE can be degraded under electron beam and thereafter grinded to fine powder, else its disposal is a major cause of concern. Fine Powder and Micro‐fine powder can be obtained to use as industrial lubricants & coatings as well as for mixing with virgin grade to produce moulded components.

E‐beam Irradiation of heat shrink tubes and moulded components

Apar’s e‐beam technology is very useful for irradiation of Polyolefin extruded tubes used for cable jointing kits. It is also used to repair the insulation on wires or to bundle them together, to protect wires, and to create cable entry seals, offering environmental sealing protection for connections, joints and terminals, bus bar sleeves, cable end caps etc.

Source: Company



• Apar has developed advanced processing technology, set up custom production equipment, and state‐of‐the‐art R&D laboratory along with its Electron Beam irradiation facility with suitable handling equipments to process PTFE scrap (scrap generated by machining of PTFE Rods, Sheets etc.) to convert to micronized powder. There is no other processing technique to reprocess such PTFE scrap.

• Heat shrink tubing (thin wall tubing to rigid, heavy‐wall tubing) is manufactured by cross‐linking either by chemical process or under electron beam. It is a proven fact that such tubes cross linked under electron beam have more uniform cross linking and therefore obtain higher shrink ratio, more uniform shrink properties etc.

• The under beam handling system at Apar is suitable to handle almost all varieties of heat

shrink tubes and moulded components. Apar does not manufacture these tubes, instead offers its electron beam system on service center basis to various manufacturers engaged in production of heat shrink tubes and components.

Apar has received very encouraging response from the market with regards to e‐beam project. It has already received approval from RDSO Railways for electrical locomotives and from Goa Shipyard and we expect to receive approvals from Defence headquarters, Indian Navy and RDSO for diesel locomotive soon. This will help Apar to participate in large tenders going forward. We expect that the growth in the cable business is driven by exports push, high value e‐beam products, improving product mix and expanded capacity. We expect e‐beam should garner revenue of about ` 250 mn and ` 800 mn during H2FY14 and FY15 respectively.

3. Growth is expected to trigger in optical fiber cables (OFC) – Apar has doubling its capacity of optic OFC anticipating the demand: • The OFC demand continued on growth trajectory with FTTx (Fiber to the x) deployments across

the globe which is one of the major factors driving growth in OFC.

• OFC is used in a number of different applications, and these range from the long haul intercontinental/transoceanic cables to metropolitan networks, to access networks and local area networks (LANs) in homes or buildings. Each application requires specific OFC characteristics.

• India is presently witnessing an upsurge in mobile broadband and data services due to growing

smart phone adoption. In order to accommodate high‐speed data services, mobile operators need to upgrade their network infrastructure by deploying optical fiber cables

• OFC’s are gaining ground over copper wires and microwaves and is expected that it will beat

these technology in the longterm.

• Governmental initiatives like the 'National Optical Fiber Network' will further spearhead growth in the OFC segment.

• Chief enablers for OFC deployment in India include deployment of next‐generation broadband

technologies, availability of low‐cost smart phones and Tablet PCs, proliferation of high‐bandwidth devices, and rollout of the National Optical Fiber Network.

• The OFC market in India is expected to be a USD 290.8 mn market by 2018, as per Frost &

Sullivan. The overall market is expected to grow at a CAGR of 12.5 % between 2011 and 2018.



• Keeping this in view the telecom operators in India are expanding their existing OFC networks.

• China had been the main driver in the market globally at more than 45% of all world demand. The demand in China was propelled by network operators’ efforts to improve connectivity and to cater to demand arising from 3G/4G usage.

• The global demand for optical fiber and cable was approximately 279 mn core kms, in 2012.

Keeping this in view Apar is doubling its capacity of OFC and is ready to cater the incremental demand arising in India as well as abroad.

4. Improvement in Margins: • EBIDTA margins of the company have improved by 70 bps during FY13 to 6.7% from 6.0% in

FY12. It (standalone) has further moved upwards to 8.4% in H1FY14. This has happened due to the initiatives taken by the company to improve the margins through improved product mix in all business segments, reduced volatility in forex with strong forex policy, focus on exports and improved cash flows.

Segment wise, conductor business enjoyed 8.9% margins at EBIT level during FY13 via‐a‐vis 2.8% during FY12. During H1FY14 it (standalone) has further increased to 10.5%. This has happened mainly due to execution of better margin orders and optimum utilization of capacity. The margins posted in H1FY14 are not sustainable and we expect that company should be able to garner margins of about 8.0% and 8.5% during FY14E and FY15E, respectively, at consolidated levels.

Transformer and specialty oil business posted the EBIT margin of 5.9% during FY13 as against 7.7% in FY12, on consolidated levels. The reason behind the decline are fluctuation in base oil prices, fluctuation in forex rates, and poor financial liquidity in the market resulting into higher debtor days which resulted in limited turnover put up by the company to reduce debtor exposure. The division has posted 9.7% margin during H1FY14 (8.6% in Q1FY14 and 10.7% during Q2FY14). This has happened on account of favourable product mix in auto oils and positive forex movement. The margins posted during Q2FY14 are not sustainable and we expect the division to stabilize its margin at EBIT level at about 9.5% by FY15E.

Power and telecom cables division of the company has posted a loss of ` 8.6 mn during FY13 vis‐à‐vis profit of ` 28.4 mn during FY12 due to un‐remunerative margins on standard products. Apar has posted a loss of 0.2% in the segment during H1FY14 (‐6.5% and 3.4% during Q1FY14 and Q2FY14, respectively). We expect the margins to stabilize at around 4% by FY15E with newly installed e‐beam accelerators which will help penetrate niche high margin markets of irradiated cables.



Margins of the company at a glance:

EBIDTA & EBIDTM PAT & PATM

ROE & ROCE

• PAT margin of the company has improved from 2.0% in FY12 to 2.4% in FY13. The profitability

then declined to 2.0% in H1FY14 due to MTM losses due on the back of rupee depreciation and hedging cost of the same. We expect the company’s PAT to remain at the similar levels during FY14E and to improve to 2.5% by the end of FY15E.

Key Concerns

1. High volatility in raw material prices: Aluminium, steel and base oil are highly price sensitive and key raw materials of the company. Any adverse price movement in any of them may put pressure on the results of the company.

2. Crude price fluctuation: Apar import almost 95% of the required base oil, which is one of the by‐products of the crude oil. Any unforeseen rise in crude prices may also adversely affect the performance of the company.

2187

.49

2152

.99

3112

.50

3441

.46

4302

.09

7.2%

6.0%6.7%

8.2% 8.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

FY11 FY12 FY13 FY14E FY15E

EBID

TA M

argi

n (%

)

EBID

TA (`

mn)

953.

27

730.

38 1094

.50

800.

54

1295

.41

3.1%

2.0%

2.4%

1.9%

2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

200

400

600

800

1000

1200

1400


PAT

Mar

gin

(%)

PAT

(`m

n)27%

14%

17%

12% 16%

21%

13%

18%

17%18%

0%

5%

10%

15%

20%

25%

30%


ROE (%)

ROCE (%)

Source: Company & SKP Research



Financial Outlook

Top‐line to dip by 9.9% in FY14E and to grow by about 22% in FY15E

• For FY13, consolidated net sales have gone up to ` 46,506.9 mn by registering a growth of 29% y‐o‐y basis. Conductors, specialty oil and power & telecom cables segments have contributed 48%, 44% and 8% respectively.

• Conductors Division: Conductor division of the company has grew phenominally during FY13 to ` 21,950.2 mn vis‐a‐vis ` 12,813.6 mn in FY12 due to optimum capacity utilization.

• The domestic orders executed included large component from PGCIL which

were booked in 2011‐12, whereas exports hovers about 30% of the total conductor business.

• Apar has posted a revenue of ` 7,535.2 mn during H1FY14 vis‐à‐vis ` 10,874.7 mn during H1FY13. This decline has happened on the back of volume drop seen in conductor segment on account of sluggish demand from PGCIL. It is estimated that PGCIL is sitting on conductors worth ` 70 bn which is enough inventory for two years, because of which it has not finalized much order during 2012‐13.

• The Company has the total order book of ` 11.5 bn as on October 1, 2013.

Apar has booked orders from private sector contractors rather than PGCIL. Orders from private sector contractors are small in size but steady, whereas the orders from PGCIL are big.

• We expect a dip of about 31% in the revenues from conductor division

during FY14E and a growth of 28% during FY15E. We expect the growth will be driven by increasing demand for Apar’s high voltage and high temperature conductors as central and state governments are serious about strengthening the grid.

• Furthermore, Apar has also set up the state‐of‐the‐art conductor plant at

Athola whose commercial production started in Q1FY14. The plant will be manufacturing conductors targeting domestic and export markets. This will help in improving product mix and margin profile for the conductor business.

• Transformer and Specialty Oil Division: The division contributed 44% of

the Apar’s revenue. It has posted a revenue of ` 20,393.6 mn during FY13 vis‐à‐vis ` 19,580.2 mn in FY12, garnering a growth of 4.2%. FY13 was the challenging year for the specialty oil division in the domestic market. Overall, volume of oil segment was up by 6.8%.

• Transformer oil sales in the domestic market was affected most in the

distribution transformers segment due to poor financial health SEBs, which has resulted in lower demand of distribution transformers and slow recovery of payments from these SEBs’. Thus the company has to resort to careful approach to this segment, limiting sales.



1171

7.83

1281

3.60 21

950.

20

1505

1.57

1929

8.76

35.7%

9.4%

71.3%

‐31.4%

28.2%

‐40%

‐20%

0%

20%

40%

60%

80%

0

5000

10000

15000

20000

25000


Gro

wth

(%)

Cond

ucto

r Re

venu

es (`

mn)

1471

9.81 19

580.

20

2039

3.60

2161

7.22

2496

7.88

38.2%

33.0%

4.2%6.0%

15.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

5000

10000

15000

20000

25000

30000


Gro

wth

(%)

Spec

ialt

y O

il Sa

les

(`m

n)


3034

4.85

3594

8.90

4650

6.90

4190

0.41

5132

9.34

35.7%

18.5%

29.4%

‐9.9%

22.5%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

0

10000

20000

30000

40000

50000

60000


Gro

wth

(%)

Ove

rall

Sale

s (`

mn)



• Demand in the power transformer segment was also affected.

• The other sub‐business segments of white oils, RPO, industrial and

automotive lubricants have seen increase in sales over FY12. The overseas business has seen strong volume growth of 25%.

• The division posted a revenue of ` 10,600.2 mn during H1FY14 vis‐à‐vis `

9,800 mn in H1FY13, enjoying the growth of 8.2%. This has happened due to 23% growth in the segment during Q2FY14 driven by strong growth of transformer oil and auto lubes in spite of rupee depreciation. Apar’s diverse set of products and broad customer base has helped in achieving growth in topline and expansion in margins.

• Q1FY13 has seen a decline in revenues by 5%.

• Apar being the pioneer in 765 KV transformer oil and amongst the only

two domestic players, it is expected to gain significantly with government’s current crusade to strengthen the national grids through high margin, high voltage transmission lines. The focus has become strong after the failure of national grid in Northern India, during July 2012.

• PGCIL is aiming to strengthen grid with a capital expenditure plan of ` 1

tn during the 12th Plan period starting 2013. The investment will basically connect projects under construction and also strengthen the national grid from the existing capacity of 20 GW to 32 GW.

• PGCIL’s major focus will be to provide transmission linkage to independent power producers with an investment of ` 520 bn. Another ` 225 bn will go into creating transmission links for central sector generation and ` 140 bn for ultra mega power projects. Strengthening the grid, which is the backbone of the sector, would see ` 115 bn investments.

• We expect strong growth from rural markets in auto lubes business with

Apar’s expanded distribution network. Strong rural market growth and the return of demand for petrol cars have sparked hopes of a turnaround in the auto sector that has stagnated for around two years.

• The optimism comes on the back of 18% jump in two‐wheeler sales for

both the festive months — October and September — besides a 7% rise in utility vehicle (UV) sales at 57,020 units in October after three consecutive months of decline.

• Already, two‐wheeler sales are inching up, tractor sales are booming and

banks are hiring employees in far‐flung regions, hoping to benefit from a monsoon that has increased the kharif area by 5% and water reservoir levels by 15%.

• Thus, we expect 6.0% growth in the segment during FY14E and 15.5% in

FY15E.



• Power & telecom cable division: The cable division has seen a growth of 18% during FY13 with the revenue increased by ` 4,185.3 mn vis‐à‐vis ` 3,545.5 mn. The main growth driver was high tension cables. Apar also increased its presence in OFC segment with new approvals from BSNL, Reliance and export customers.

• The division witnessed a growth of 38% during H1FY14. Revenues of `

2,710.2 mn was posted by the division during the period vis‐à‐vis ` 1,959 mn in corresponding period last year. This has happened due to strong growth in the division during Q2FY14 led by strong export growth of 851%. Apar exports its cables to more than 25 countries.

• Future growth in the division is expected to be driven by exports push,

high value e‐beam products, improving product mix and improved demand for OFC’s.

• As mentioned earlier, Apar’s recently installed e‐beam accelerators are

also expected to help penetrate niche margin market of irradiated cables and services. Apar has already received approval from RDSO (Research Designs and Standards Organization) Railways for electrical locomotives and from Goa Shipyard.

• Currently Apar is part‐2 supplier of railways and we expect that with the

successful implementation of projects in two years, it will become Part‐1 supplier for Indian Railways.

EBITDA margin to be maintained around 8.4%

As mentioned earlier, EBIDTA margins of the company have improved by 70 bps during FY13 to 6.7% from 6.0% in FY12. It (standalone) has further moved upwards to 8.4% in H1FY14. This has happened due to the initiatives taken by the company to improve the margins through improved product mix in all business segments, reduced volatility in forex with strong forex policy, focus on exports and improved cash flows. We expect the company to stabilize its margin at 8.4% for next two years on account of better realizations. PAT margin to stabilize at 2.5% PAT margin of the company has improved from 2.0% in FY12 to 2.4% in FY13. The profitability then declined to 2.0% in H1FY14 due to MTM losses due on the back of rupee depreciation and hedging cost of the same. We expect the company’s PAT to remain at the same levels during FY14E and to improve to 2.5% by the end of FY15E.


3112

.73

3545

.50

4185

.30

5231

.63

7062

.69

72.3%

13.9%18.0%

25.0%

35.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1000

2000

3000

4000

5000

6000

7000

8000


Gro

wth

(%)

Cabl

e Sa

les

(`m

n)

2187

.49

2152

.99

3112

.50

3441

.46

4302

.09

7.2%

6.0%6.7%

8.2% 8.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


EBID

TA M

argi

n (%

)

EBID

TA (`

mn)

953.

27

730.

38 1094

.50

800.

54

1295

.41

3.1%

2.0%

2.4%

1.9%

2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

200

400

600

800

1000

1200

1400


PAT

Mar

gin

(%)

PAT

(`m

n)





At the current market price of ` 127, the stock is trading at a P/E of, 6.1x and 3.8x of FY14E and FY15E earnings of ` 20.8 and ` 33.7 respectively. We recommend BUY rating on the stock with a target price of ` 202/‐ (59% upside) in 15 months implying a P/E multiple of 6x of FY15E earnings.

One Year forward looking P/E Band

‐50

0

50

100

150

200

250

300

350

400

450

Mar‐0

4

Mar‐0

5

Mar‐0

6

Mar‐0

7

Mar‐0

8

Mar‐0

9

Mar‐1

0

Mar‐1

1

Mar‐1

2

Mar‐1

3

2x 4x 6x 8x 10x

Valuation

Source: Capitaline & SKP Research



Income Statement FY12 FY13 FY14E FY15E Balance Sheet FY12 FY13 FY14E FY15ENet Operating Income 35948.9 46506.9 41900.4 51329.3 Equity Capital 359.7 384.7 384.7 384.7Operating Expenditure 33813.3 43394.4 38458.9 47027.2 Reserves 4845.6 5878.8 6443.0 7502.1EBIDTA 2135.6 3112.5 3441.5 4302.1 Net Worth 5205.3 6263.5 6827.7 7886.8Depreciation 217.7 240.1 257.9 327.4 Sh Cap Suspence Accou 24.98 0.00 0.00 0.00EBIT 1917.9 2872.4 3183.5 3974.6 Minority Interest 11.63 17.80 21.99 27.12Interest 1155.3 1345.7 940.6 1136.2 Loan Funds 9836.2 9732.6 11432.3 13696.5Other Income 7.1 22.5 83.8 102.7 Deferred Tax Liab. 131.1 103.1 103.1 103.1Forex Diff/Hedging Cost 0.0 0.0 ‐1125.6 ‐1000.0 Other Long Term Liab 242.4 410.5 137.9 124.2EBT 750.1 1503.0 1201.1 1941.1 Total Liabilities 15619.7 16254.9 18509.3 21865.8Tax 26.5 401.7 396.4 640.6 Goodwill on Consolidat 0.00 206.50 206.50 206.50PAT before Minority Int 723.61 1101.30 804.73 1300.54 Net Fixed Assets 1853.2 2428.6 3491.1 3313.6Minority Interest 10.6 6.8 4.2 5.1 Capital WIP 62.2 212.9 451.0 0.0PAT after Minority Int 713.0 1094.5 800.5 1295.4 Investments 0.2 796.2 796.2 796.2EPS (`) 19.8 28.5 20.8 33.7 Net Current Assets 13553.4 12372.6 14015.6 17549.4

Total Assets 15619.7 16254.9 18509.3 21865.8

Cash Flow Statement FY12 FY13 FY14E FY15E Ratios FY12 FY13 FY14E FY15EPBT 750.1 1503.0 1201.1 1941.1 Valuation ratios (x)

P/E 6.6 4.6 6.2 3.9P/Cash EPS 5.0 3.7 4.7 3.1

Net change in WC, Tax, Int ‐1542.0 2776.0 ‐3242.0 ‐1572.8 P/BV 0.9 0.8 0.7 0.6EV/EBIDTA 2.9 1.3 2.1 1.6EV/Sales 0.2 0.1 0.2 0.1

Capital Expenditure ‐445.0 ‐1062.1 ‐869.4 ‐150.0 Earning Ratios (%)EBIDTAM 5.9% 6.7% 8.2% 8.4%OPM 5.3% 6.2% 7.6% 7.7%NPM 2.0% 2.4% 1.9% 2.5%ROE 13.7% 17.5% 11.7% 16.4%ROCE 12.8% 18.0% 17.4% 18.4%B/S RatiosCurrent ratio (x) 2.1 1.8 1.9 2.0D/E (x) 1.9 1.6 1.7 1.7

Opening Cash Balance 4161.1 8316.5 10543.4 9354.4 Debtor Days 79 66 76 73Creditor Days 92 106 146 118Inventory Days 74 72 88 80

Closing Cash Balance 8316.5 10543.4 9354.4 11928.1 FA/Turnover (x) 10.5 11.8 8.4 8.9

Cash Flow from Operating Activities 231.8 4533.3 ‐842.4 1832.0

Add: Depreciation, Interest & Other 1023.7 254.3 1198.6 1463.6

Cash flow investing Activities ‐431.6 ‐2076.4 ‐869.4 ‐150.0

Investments, Sales of FA, Dividend received and 13.4 ‐1014.3 0.0 0.0

Net Increase/Decrease in Cash & Cash equivalents 4155.3 2226.9 ‐1189.0 2573.7

Cash flow from Financing Activities 4355.2 ‐230.0 522.8 891.7

Cash balance of acquired subsidiaries 0.0 0.0 0.0 0.0

Consolidated Financials (Rs mn)



Notes: The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities.

DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable in any manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such securities or an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. Any recommendation or view or opinion expressed on investments in this document is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this document are those of the analyst which are subject to change and do not represent to be an authority on the subject. SKP may or may not subscribe to any and/ or all the views expressed herein. It is the endeavor of SKP to ensure that the analyst(s) use current, reliable, comprehensive information and obtain such information from sources, which the analyst(s) believes to be reliable. However, such information may not have been independently verified by SKP or the analyst(s). The information, opinions and views contained within this document are based upon publicly available information, considered reliable at the time of publication, which are subject to change from time to time without any prior notice. The Document may be updated anytime without any prior notice to anybody. SKP makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this Report. SKP, its Directors, affiliates and employees do not accept any liability whatsoever, direct or indirect, that may arise from the use of the information or recommendations herein. Please note that past performance is not necessarily a guide to evaluate future performance. SKP or its affiliates, may, from time to time render advisory and other services to companies being referred to in this document and receive compensation for the same. SKP and/or its affiliates, directors and employees may trade for their own account or may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or on any other committee of those companies or may sell or buy any securities or make any investment, which may be contrary to or inconsistent with this document. This document should be read and relied upon at the sole discretion and risk of the reader. The value of any investment made at your discretion based on this document or income there from may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. Neither SKP nor its affiliates or their directors, employees, agents or representatives/associates, shall be responsible or liable in any manner, directly or indirectly, for information, views or opinions expressed in this document or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the document or inability to use or access our service or this document or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits or any loss or damage that may arise from or in connection with the use of or reliance on this document or inability to use or access our service or this document.

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tomorrow’s progress today - SKP · PDF fileKey Share Data Face Value (`)10.0 Equity Capital ... 0.1 0.1 0.1 0.1 EV/EBIDTA (x) ... (ACSR), Aluminium Conductor Alloy Reinforced