Apar Industries

Stock Opportunities
22

One of the reasons for fall in volumes when compared to last year is due to EHV which takes more time. I think Apar is on a roll and should do well in the coming two years atleast. The key reasons are:

a) Increase in EHC volumes. If you see the conductor volumes this quarter EHC was only 8% going ahead next year this should reach around 13%-15% levels.
b) Upcoming T&D cycle: In few of the transformer oil segments (HVDC, 765 kV range) there is very little competition. Also the impact of UDAY and other government driven spending is yet to start.
b) Capacity addition at strategic location: The newly added conductor capacity in Jharsiguda and Sharjah are excellent location IMO. In cost+ high volume business transportation\freight costs can be significant 4% to 5%. Mfg. at these locations can give them that additional 2%/3% EBITDA advantage.
c) As your father said the management is very good. They have generally beaten their guidance. Even for this quarter their conductor margin guidance per ton was 10000 and they got to record high margins of 14000/ton. Their guidance for next year is around 13000/ton.

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How about the Valuations? It still look to be attractive or fair value? What are your views for taking positions at this price point ?

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I cannot give you a guidance or a buy sell reco, these are not in sync with the ethos of this forum. But my guess is they should do around 48/50 in EPS this year since Q4 is generally the biggest quarter in terms of project execution. Also with the upcoming capacity and increased margins they can do around 60 in the next year.

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Hey Amit,

Valuation is very subjective and everyone will give you their version of it based on their perception of the stock. Some might say that the stock has moved up quite a fair bit in the past two years and hence its overvalued while others might feel that the stock still has some way to go owing to its performance of the underlying business. I will give you my take on it- The company is still trading at 13 times forward PE which is in line with the multiple that the company has been given by the market historically. However, Apar was never as well positioned for growth as it is now. It has always been a quality company led by a quality management but it has never enjoyed sectoral tailwinds like now. There is large capex (provided it materializes) planned in the T&D space which has to match up the capacity added in generation historically and the capacity that is expected to be added in the future. Historically the ratio of spending on generation:distribution has been 2:1 , however going forward its going to be 1:2. Given the thrust on solar, T&D becomes even more crucial as without an adequate evacuation infrastructure there is a high risk of curtailment which will hamper the governments target of 100 GW.

Valuation also depends on the time horizon of an investor. I believe a long term investor will be willing to pay a higher multiple compared to an investor with shorter time horizon. The question you need to ask yourself is - Do you see the company expanding earnings in the next 3-5 years. Given your expectation is 13 PE really a high multiple? Given sectoral tailwinds , could there be a possibility of a PE re-rating going forward?

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Hi,

The company has a huge growth potential on a long term perspective, has posted good results with improved margins, got new orders, added capacity, trading at low pe and also is one of the largest players in the industry.
Looks like a value buy.
Check out this blog with write up on Apar, might help.

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Q3 Result summary and overview…

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http://www.thehindubusinessline.com/markets/stock-markets/funds-turn-active-on-certain-counters/article9589675.ece

It seems that L&T and Reliance MF bought while templeton sold it off. Stock down 7%

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Good set of numbers. Profit aided by growth in Conductors and Power/Telecom Cables. Power cable is still a drag on overall returns.

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Hi Rudra,

Cables business has seen a remarkable improvement since last few year and is surely heading in the right direction. The management had taken a conscious decision to focus on less commoditized cables and its seems to have borne fruit. The conductors business on the other hand has shown lower revenue YoY even though it has reported higher margin. This is due to higher share of HTLS conductors. Will be interesting to know the order book in this segment. Encouraging to see increased margins in transformer oils this quarter.

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Q4FY17 Concall Transcipt: http://www.apar.com/pdf/financedata/Concall-Transcript/2016-2017/Concall%20Transcript%20Q4FY17.pdf

Overall
Guidance for FY18 remains muted as this would be a year of consolidation for transition between different manufacturing bases, newly commissioned plants getting traction and GST implementation settling in. Management is fairly optimistic on all 3 business fronts - Conductors, Transformer Oils and Cables doing fairly well in FY19.

The mega capex of Rs 550 crores that was invested over the last few years to build capacities in new generation of higher value added products across the 3 businesses i.e. High temperature conductors, high voltage transformer oils and automotive oils and then some of the specialty cable products (Defense, Railways) now started to yield results as seen in FY17.

Capex Commissioning:
• Conductor plant in Jharsuguda started production in September’16 and Q1FY18 should see a 70+% utilization of that plant.
• Capacity expansion for high voltage power cables commissioning in the first half of FY18.
• Restructuring of the manufacturing of low voltage instrument and control cables from 3 locations to one,
• Rs. 100 crores of CAPEX in total for FY18, but then we expect a fairly sharp drop in CAPEX for FY19.
• Interest outgo to remain at similar levels of with 80 Cr of Interest and rest in forward hedging costs. Additional forex fluctuations to be booked at actual.

Growth Outlook
As FY18, marks the beginning of the 13th plan, the T&D investments are expected to be about Rs. 2.6 lakh crores with a sharper focus on higher voltage transmission lines. Power grid is also trying to spend approximately more than Rs. 1 trillion over the next 4 years to expand various T&D networks. GST implementation which is likely to kick off from July 17 will definitely have positive impact over the next 5-year period.

Conductors
• Conductor business reported growth in profitability where in EBITDA per metric tonne post Forex adjustments grew by almost 60% to Rs. 11,882 from Rs. 7,469 per metric tonne.
• This was on account of more profitable orders executed in the year and the increased contribution of high efficiency conductors which has increased to about 11% for the year compared to 6%, a year ago. Target is to reach 20% high efficiency conductors by 2020.
• Apar awarded the best company award for high efficiency conductors by PGCIL for the year 2016-17.
• Executed some fairly challenging re-conductoring projects in Kerala, Telangana and various other states.
• The segment revenue is at Rs. 2,251 crores and exports contributed approximately 39% of sales.
• Order book stands at Rs. 1,519 crores as of FY17 end with exports comprising 48% of this order book.
• Domestic demand was slightly subdued and some of the projects awarded did not result in orders
• Increased competition observed in the last few months with some of the participants actually passing on expected GST benefits. Be risk averse to lose short term business is better, than risking all.
• All approvals in place for the newly commissioned plant in Jharsuguda, Orissa. So once GST is in place, this can can ramp up 100% plus increase the capacity at Jharsuguda
• Company can extract a maximum benefit of almost about Rs. 4,000-5,000 per metric tonne, if one were to produce the product in Silvassa and sell it into that part of the country versus producing it directly in Jharsuguda and supplying it into east and central India. This will give them an edge over competition.
• For the new plant, target of approximately 50,000 metric tonnes worth of volumes in FY18, if this is achieved plant will break even in the first year of its functioning.
• The Jharsuguda plant would focus almost entirely on domestic and the Silvassa plants would focus
on certain parts of North West India and export.
• Seeing quite a lot of interest coming from the state utilities on HEC conductor. This business should definitely see higher traction in the coming years.

Transformer Oil

• Coming to the specialty oil side, the consolidated revenues came in at Rs. 1,699 crores.
• The volumes grew by about 4% for the year to volume of 352,655 KL and this was led by growth in the domestic transformer oil segment, transformer oil exports, rubber process oils as well as we saw a 6% growth in automotive oils in terms of volume terms in spite of fairly large dip that took place in the third quarter post demonetization.
• The EBITDA per KL after Forex adjustments for the year came in at about Rs. 4,931 per KL which is lower than the previous year which was at Rs. 5,439.
• Hamriyah, Sharjah plant is ramping up. Seen considerably increased utilization of capacity now in the month of April and May. Target to breakeven in FY18…
• Company aimed for integrated certification (ISO 9001, 14001 and 18001) of ISO and this forms actually a precursor to be able to bid on a lot of business with some of the utilities overseas.
• The automotive lubes segment delivered a volume growth of about 6% to reach 24,893 KL. The growth was limited on account of demonetization. Double digit growth was seen in the first half of the year.
• Expect volume growth to come in from the UDAY projects which are showing signs of picking up now and uptick in the sales that are taking place to the higher voltage transformers.
• The 12th 5-year plan has exceeded target in 400 KV and below but it has slipped on 765 KV and above. Only 70% was achieved. So that spillover will be executed in FY18 and early part of FY19. So given this, increased volumes can be expected in this segment.
• In transformer oil, some of the increased growth will happen at the lower end which is at the distribution transformer side coming out of the UDAY related project.
• Management has guided for lower margins, as some inventory recalls are expected in Q2 with respect to GST.

Cable Business

• The cable business has delivered its best performance to date. Revenue growth came in at 28%. The EBITDA margins at 8.6% for FY17 compared to 5.7% for FY16.
• The power cable segment continues to be very competitive. Some of the niche segments, where Apar has leadership saw better margins.
• 20%+ growth is expected in FY18. Higher demand is seen from the non conventional energy segments which are solar and wind. The power cable segment also is showing increased demand from implementation of UDAY and more traction taking place in both Defence and the Railway side of the business.
• The capacity that is expanded in FY18 will be good to actually do about Rs 1,250 to Rs 1,300 crores worth of production.

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I am trying to understand Apar Lubricants (JV with Eni S.p.A. of Italy).


Can we compare it with Gulf Lubricants, considering both are international brands trying to establish in Indian market dominated by Castrol?

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Apar Q1FY18 conf call notes:

T&D epc companies orders increased 34% in Q1 should translate to good order book for Apar in future
Uday initiative - Losses of state discoms are down 20%. The health of discoms is improving.
GST was aberration for few months. June, July has been impacted
Aggressive pricing in specialty oils and conductors by chinese competitors
sales increased 19% ebidta declined 16% (7.4%) PAT down 17% - one of the reasons was higher overhead fixed costs of higher capacity
Depreciation up 36%

Conductors
Growth of 9%, Good pipeline of orders should push order book back to 1500cr by sept
HEC - 18% of total conductors sales should reach 20% in FY19 ahead of initial target of FY20
Chinese players were benefited due lower aluminium prices on shanghai exchange compared to LME in this quarter. Now the gap is reducing and apar is able to compete again.
Shifted infastructure from silvassa to Jhasiguda. Jhasiguda is at 55% utilisation will start ramping up further. New tenders are bid from jhasiguda.
Apar will start bidding for turnkey projects new HDLS line (High temperature conductors) . Apar has specialized knowledge for stringing these HTS together. Hence Apar is bidding on EPC businesses (already won one 50cr order)
Margin guidance of Rs10500/MT

Oils segment:
Growth of 19% this quarter.
Many products sales were impacted due to GST. Some of these were high margin products.
Sharjah facility doing well is at 55% capacity utilisation. Hit all the operating parameters in the first quarter. Sharjah facility is for middle east and african markets.
Apar will be more competitive in Q2FY18 due to GST in aug/sept as others will loose CST benefit
Savita oil tech which is a leading company in transfomer oil segments has plants which are sales tax free . But, now with GST, Apar is on level playing field

Cables
42% revenue growth in Q1FY18…
1100cr target in fy18 (10x in 8 years since acquisition of business by Apar)
Volume growth will lead to improved profitability this year.
capex going as per plan - production will begin in this qtr
GST rates confusion for defense cables, solar cables going on currently lead to lower sales. This confusion will get sorted out eventually
EBIDTA margins targetted above 8% and sales target of 1100cr for FY18 (may see blip in second qtr)
Optical fibres facility running at 50% - optical fibre has world wide shortage

Overall strong growth expected in Q3,Q4 onwards

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I saw that their interest expense is very high (> 100 crores) compared debt of 300 odd crores Any rationale for the same?

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Is crude oil the commodity that will chiefly affect Apar’s numbers?

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Q2 Results

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Key takeaways of conference call (source : capital market)

  • Conductor business division has bagged fresh orders of over Rs 700 crore in Q2FY18. Order book as end of Sep 30, 2017 stood at Rs 1406 crore up from Rs 1162 crore as end of Q1FY18. Both domestic and export order book stood higher. Export orders account for about 49% of the order book.
  • The company bid more aggressively in domestic tenders resulting in increased order flow. Margins for conventional conductors continue to be under pressure due to increased competition level.
  • Revenue of conductor business impacted on account of lower off take due to GST and slow execution due to monsoon. Share of Exports to revenue stood at 53% in Q2FY18 up from 42% in Q2FY17. Contribution of high efficiency conductor to revenue stood at 12% in Q2FY18.
  • EBITDA per MT (post forex adjustment) declined by 18% to Rs 8934 in Q2FY17 due to MTM forex losses and lower volumes. The EBITDA per MT (post forex adjustment) for H1FY18 was down by 12% to Rs 10079 per MT.
  • Volume sale of specialty oil was up by 12% in Q2FY18 to 95484 KL. Sales volume for Q2FY18 was a historic high for a second quarter. Sales in July was lower due to GST implementation, but picked up in the months of August 2017 and September 2017.
  • Auto Lubes saw robust volume growth of 30% to 8196 KL in Q2FY18 despite lower volumes in July 2017 due to GST implementation.
  • EBITDA per KL (post forex adjustment) of specialty oil division was down by 27% to Rs 3756 impacted by MTM forex losses and aggressive pricing in domestic & exports markets. Increase price competition seen in Q2FY18 from base oil supply overhang.
  • Revenue of cables business increased by 20% in Q2FY18 driven largely by 52% growth in power cables and 36% growth in OFC cables as the revenue of Elastomeric cables stood lower.
  • OFC volume in Q2FY18 improved due to orders from BBNL. Elastomeric cable business witnessed lower demand due to slowdown in wind mill segment and temporary decline in demand from solar segment due to monsoon. Defence cable shipments got delayed due to prolonged inspections.
  • The general tariff for cable is 28% but any supply to renewable energy projects attracts a GST of 5%. Several state governments want to capture the lower GST and asked for review of PPA and supply contracts. This hit the off-take in Q2FY18; however most of these cases got settled by now.
  • Elastomeric cable is completely of copper conductors and power cable is now largely aluminum.
  • Adjusted EBITDA margin of cable business stood at 8.6% in Q2FY18.
  • Commissioned new CCV Plant for high voltage cables and this plant are now running at over 50% capacity utilization. By Q4 FY18 the company is expected to reach full capacity utilization.
  • The company is on course to reach revenue of Rs 1000 for FY18 in cables business.
  • Shifting from balance equipment from Silvasa to Jharsuguda is still underway and will be completed by end of Q3FY18. Apart from shifting equipment from Silvasa plant to Jharsuguda, the company is also in the process of setting up a rolling mill from molten steel at Jharsuguda plant complex and this facility will go on stream from Q4FY18 giving further edge to the company against competition.
  • Second half is expected to be a lot better than first half with worst of GST is over even though complete return of normalcy takes some more quarters.
  • Conductor volume for current fiscal is expected to be about 140000 tonnes compared to earlier guidance of about 160000 tonnes. Margin for H2FY18 is also to be better than second quarter. The company expects its conductors margin for FY18 to be at about Rs 9500/MT compared to year start guidance of about Rs 10500/MT.
  • The company however is confident of achieving the year start guidance of Rs 4680/KL given for specialty oils business division. The cables business margin was guided to clock a margin of 8.3% but the company will exceed that as new orders from players like railways comes with higher margin.
  • Conductor capacity of major competitor are still in high cost western region. So the company having a plant at Jharsuguda, that has lower production cost than west region plants gives competitive edge in tenders.
  • Cable order by Railway is expected to be increased. Fibre prices have increased and availability is difficult for OFC.
  • Hamriyah plant of specialty oils division had a slow quarter on account of Ramadan, better Q3FY18 expected. Much better profitability from both India and Hamriyah is expected in second half.
  • MTM loss in Q2FY18 in case of conductors was Rs 2 crore and on oil division it was about Rs 3 crore.
  • Mix on transformer oil side in second half will be better.
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Power grid tenders won by APAR

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Notes for Q3FY18 conf call:

General:

Uday scheme has been implemented 27 states and 4 uniion territories. Discom losses reduced from 51000crore to 35000cr losses

Prices of commodities like aluminium, steel have increased.

Much of bidding TPCB is on fixed price basis. Increase of commodity prices lead to cost escalation which lead to strain on profitbaility/timing of entire supply chain
This has lead to delayed ordering.
Managing commodity price risk will be the key in FY19

Electricity amendment bill will lead spending of discoms will drive demand for products like Apar.

Higher depreciation has lead to reduced PAT margin of 2.6%.
New manufacturing came up in fy18- jahrisiuda, lapang , humriyah - There was lot movement of plant of machinery which impacted the bottomline

Management sees much stronger visilbity for FY19

Segments:

Conductor

  • order book of 1531cr with 109cr in domestic
  • distribution conductor growing very fast - demand has surprised on upside
  • Q4 jharisugda will be running at 100% level
  • HEC contribution 13% of Q3
  • pipeline of HEC conductors is very strong- Q4 will have substantial jump in order book from HEC with many orders being short cycle. Most of execution in fy19.
  • EBIDTA 7000 ton Q3Fy18 vs 13000rs /MT in Q3Fy17
  • New aluminium rod making facility in lapanga commenced production with agreement with hindalco for 10 years. This is adjacent to the Hindalco facility.
    This makes apar fully self sufficient in getting raw materials also logistics cost will go down. This can add Rs 1000rs/ tone difference and will result to cost savings.
    To take advantage of this, Apar moved quite a bit of machinery from silvassa to Jhasiguda.
    Original plan was to have to 1,50,000 ton conductor capacity in silvass and 30000tone at Jharsiguda. But now its been changed to 1,00,000 tone and 80000 in jharsiguda.
    This movement of mmachineary lead to lot of costs, delays and disruption which reflects in the numbers.
    Apar will become the lowest cost producer of conductor in the country.
  • higher growth and trend of lower margins will reverse in fy19.
  • One of the reason for lower margin was % of HEC bit low. But it is expected that there will be big surge of HEC for fy19. There is a large big pipeleine form india/south asia
  • There was also higher competition which lead to lower margin in Q3FY18.
  • Expecting margin improvement in fy19 and order book going up sharply in fy19
  • Company did not participate in first half tenders due to GST uncertainity.Now, participating in all tenders with Jharsiguda as the location. Q4 running flat up in Jharsiguda.
  • HEC is 13% of order book - Q4Fy18 and Q1Fy19 should substanitally go up with orders from PGC, interstate, bangaladesh and nepal.
  • Bangaladesh and Nepal have adopted HEC faster than india. Joint bidding with EPC contractors for bangla and nepal, big orders will be executed in FY19.
  • Conservative guidance of Fy19 - 150000-155000 to 160000-170000 tone + 10000+MT due to HEC

Oils

  • 106KL vs 91KL - highest historical sales for apar in a quarter
  • There has been a sharp increase in crude oil which is mostly a pass through for Apar. This has caused base oil price and addtivies increase.
  • 4255rs ebidta/KL for Q3FY18 will get similar result in Q4Fy18.
  • New plant in Humriyah did 43KL for 9m.
  • Target to get to past higher levelsof margins by getting into higher margin products
  • Autolube segment - highest volume ever for a quarter 8716KL 52% growth driven OEM segment - 10% of retail sales.
  • Margin in auto segment is double ompared to white oils etc -
  • Going forward focussed on mix to go to higher margins.
  • FyY19 will be 8-10% volume growth with margins of atleast 4100rs /KL

cables - 36% growth of 285cr in Q3FY18

  • 97% growth in power cables this was limited by capacities
  • Targetting 1100cr sales for FY18 EBIDTA of 9.2%.
  • Apar acquired this business with sales 120cr and now taken to 1100cr after 8 years.
  • Elastomeric cables used in wind has good profitabilty
  • Apar is planning to enter into
    1. medium volatage conductors,
    2. auto cables business with ebeam cables (used in safety)
    3. increased business from railways - railway harness business
    These will start contributing from FY19
  • Targetting 20% growth in topline in fy19 at these level margins.
  • 20-25cr capex in fy19.
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NOTES FROM EDELWEISS CONFERENCE - 02-FEB-18

New opportunities in conductors
• Copper conductors for railways, wherein diesel locomotives are to be replaced with electrical locomotives.
• Optical fiber through earth wires (OPEW).
• Copper transpose conductors (CTC), heart of a transformer.
Management believes these higher margin new segments within conductors can generate incremental INR3.5bn revenue with incremental capex of mere INR750mn.
• High efficiency conductors (HeC) prospects: Management estimates HeC segment to clock INR5.5-6.0bn revenue in FY19 from less than INR3.0bn in FY18.
• EBIDTA/MT of conductors will keep moving higher as the mix will improve from INR8-10,000 of traditional conductors to INR12-15,000/MT of HeC and further INR20,000/MT for copper conductors.
• With the INR6.6bn of capex completed across all the three segments, management believes incremental capex can be within the depreciation of the company (INR500mn) mainly catering to automotive oil towards expansion and automation. Further INR200mn capex will be towards copper conductors for cables.
• HeC contribution: Management expects HeC to contribute 25% to sales by FY20 versus 20% expected earlier ( 15% currently). This is driven by strong demand in India as well as Asia (Nepal and Bangladesh).
• Management believes sales of oils portfolio can grow at ~15% on blended basis led by pick up in transformer oil demand and automotive & industrial oils.
• Management believes cables can grow at 20% consistently going forward.

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Karvy: 5th Feb

Apar’s revenue came in line with expectations but margins were impacted due to
poor performance from conductors segment. The conductor’s margin impacted due
to aggressive bidding in domestic market, lower base of High Efficiency Conductors
orders and substantial rise in raw material prices. We expect the segment to recover
back by FY19E on the back of robust order book providing performance visibility
for FY19E and higher contribution from HEC conductors which should effectively
improve the margins. Cables and oils segment have performed well and are poised
to do well. We retain a BUY rating for a target price of Rs.924, with an upside
potential of 27%.
Conductors Segment: Conductors segment revenue was down by 5.7% for
9MFY18 due to poor performance in H1FY18. For QoQ and YoY conductors
segment have shown a growth of 29.1% and 14.2% respectively. The margins have
come down to 5.4% from 7.5% due to increasing completion and aggressive pricing
in domestic and international market, lower contribution from HEC conductors.
Exports contributed 48% of 9MFY18 sales. High Efficiency Conductors (HEC)
contributed around 15% to total conductor sales as compared to 11% in 9MFY17.
The current order book is at Rs. 15310 Mn which is higher due to substantial orders
from domestic market. We expect the margins to recover back due to significant
contribution from HEC conductors in FY19E.
Oils and Lubricants: Segment has performed well by growing 16.2% for
9MFY18. The volumes have grown by 14% to reach 297686 kl which is highest
among all quarters. The quarter has witnessed a sharp increase in crude oil prices
which company has passed on to customers. The EBIT margins have seen a dip
from 9.4% to 6.9% due to aggressive pricing in both domestic and exports markets.
Automotive oil segment delivered sales volume of 8716KL representing a growth of
52% led by growth in OEM sales.
Valuation and Risk
We have rolled down FY20E numbers and have taken a relook on FY18E and
FY19E numbers. At CMP of Rs.728 Apar trades at 11.0x to FY20E EPS. We value
the company on 14x (5 years Average PE) to FY20E EPS maintaining a “BUY”
rating for a target price of Rs.924 representing an upside potential of 27% for
9-12months. Intense competition and volatility in raw material prices may pose risk
to the call.

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Apar
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