- Price target: Rs108
- Market cap: Rs174 cr
- 52 week high/low: Rs139/41
- BSE volume: 38,285
(No of shares) - BSE code: 504220
- Sharekhan code: WSIND
- Free float: 1.2 cr
(No of shares)
- For Q4FY2008 WS Industries (WSI) has reported a 47.9% growth in its revenues to Rs66.3 crore. The revenue growth was led by a robust growth in both project and insulator sales.
- The operating performance of the company was disappointing with the operating profit margin (OPM) declining by 20 basis points year on year (yoy) on account of a rising input cost. The raw material cost as a percentage of sales increased by 840 basis points to 52.2%.
- The interest cost declined by 13.5% to Rs1.5 crore whereas the depreciation charge rose by 16.9% to Rs1.0 crore during the quarter.
- The net profit increased by 36.8% to Rs3.1 crore and was below our expectations on account of the lower than expected operating performance and a higher than expected tax rate. The tax rate in the current quarter came in at 44.9% on account of a high deferred tax provisioning.
- At the end of FY2008, the unexecuted orders of the company stood at Rs180 crore against Rs150 crore in Q3FY2008.
- The promoters have subscribed to 925,000 warrants of the company at Rs107 per warrant; the same on conversion would result in a 4.2% dilution of the equity. WSI is in the process of drawing up a concrete plan for the utilisation of the funds raised through this issue.
- The company’s additional capacity in the Andhra special economic zone (SEZ) is expected to come on stream by mid FY2009. In our view this capacity would be the growth driver for the company going forward. A healthy order book of Rs180 crore and increased production capacity provide visibility to the future earnings of the company.
- We have revised our FY2009 earnings estimate to Rs7.5 per share owing to the higher input cost. We have also introduced our FY2010 earnings estimate in this report--we expect WSI to report compounded annual growth rate (CAGR) of 17.8% and 26.5% in the revenues and profits respectively over FY2008-10.
- We maintain our positive outlook on the stock and maintain our Buy recommendation on it with a price target of Rs108. We have valued WSI on the basis of the sum-of-the-parts (SOTP) method. We have rolled forward the target multiple for the core business and valued the same at Rs80.2 per share. We have valued the real estate subsidiary at Rs27.9 per share. At the current market price the stock trades at 7.3x and 5.5x our fully diluted earnings per share (FDEPS) estimates for FY2009 and FY2010 respectively.
Shareholding pattern
| Price performance | ||||
| (%) | 1m | 3m | 6m | 12m |
| Absolute | 4.1 | -23.4 | -9.7 | 97.6 |
| Relative to Sensex | -8.1 | -20.1 | 0.6 | 57.0 |
| Result table | Rs (cr) | |||||
| Particulars | Q4FY08 | Q4FY07 | % yoy chg | FY2008 | FY2007 | % yoy chg |
| Net sales | 66.3 | 44.8 | 47.9 | 227.0 | 165.2 | 37.4 |
| Total expenditure | 58.5 | 39.5 | 48.3 | 194.6 | 145.3 | 34.0 |
| Operating profit | 7.7 | 5.3 | 44.9 | 32.4 | 20.0 | 62.3 |
| Other income | 0.3 | 0.1 | 229.9 | 0.5 | 0.3 | 31.2 |
| EBIDTA | 8.1 | 5.4 | 48.2 | 32.9 | 20.3 | 61.8 |
| Interest | 1.5 | 1.8 | -13.5 | 6.7 | 7.0 | -5.0 |
| Depreciation | 1.0 | 0.8 | 16.9 | 3.8 | 3.2 | 17.2 |
| PBT | 5.6 | 2.8 | 95.7 | 22.4 | 10.0 | 123.1 |
| Tax | 2.5 | 0.6 | 315.8 | 8.7 | 3.5 | 151.1 |
| PAT | 3.1 | 2.2 | 36.8 | 13.7 | 6.6 | 108.3 |
| Extraordinary Items | 0.0 | 0.0 | - | 0.0 | 0.0 | - |
| Reported PAT | 3.1 | 2.2 | 36.8 | 13.7 | 6.6 | 108.3 |
| Margins (%) | ||||||
| OPM | 11.7 | 11.9 | | 14.3 | 12.1 | |
| PATM | 4.6 | 5.0 | | 6.0 | 4.0 | |
| Source: Company, Sharekhan Research | ||||||
Revenue growth robust, profits hit by poor operating performance
For Q4FY2008 WSI has reported a robust 47.9% growth in its revenues to Rs66.3 crore. The sales in both insulator and the project businesses continue to be healthy. The net profit grew by 36.8% to Rs3.1 crore. It was below our expectation owing to a poor operating performance and a high tax rate. The tax rate in the quarter was 44.9% on account of a high deferred tax element
Rising steel prices hit OPM
For Q4FY2008 WSI has reported a growth of 44.9 % to Rs7.7 crore In its operating profits. The OPM declined by 20 basis points yoy to 11.7% on account of the rising steel prices. The raw material cost as a percentage of net sales increased by a staggering 840 basis points to 52.2%. The rise in the raw material cost was offset by the reduction in all the other costs (staff, power and fuel, and other expenses) as a percentage of sales. We believe the rising prices of commodities including crude oil would continue pose a threat to the company’s operating performance going forward. Consequently, we have reduced our OPM estimate for FY2009.
| Cost analysis | |||
| % of sales | Q4FY08 | Q4FY07 | Change (basis points) |
| Raw material | 52.2 | 43.8 | 840.0 |
| Staff cost | 8.9 | 11.4 | -240.0 |
| Power and fuel | 13.5 | 15.5 | -200.0 |
| Other expenses | 13.7 | 17.4 | -370.0 |
| Total | 88.3 | 88.1 | 20.0 |
| Source: Company, Sharekhan Research | |||
Order inflow remains satisfactory
The order book of the company stands at Rs180 crore as at the end of FY2008 as against Rs150 crore at the end of Q3FY2008. The order inflow continues to be satisfactory.
Greenfield project implementation on track
WSI is setting up a greenfield project in the upcoming Andhra Pradesh SEZ. The plant is expected to be operational between July and September 2008 and would have an installed capacity of 8,000 metric tonne per annum. The plant is being set up at a cost of Rs110 crore and is capable of generating Rs120 crore of revenues on full operational basis. In the first year of operation we expect the plant to contribute Rs50-55 crore to the revenues of the company.
Reality venture
The information technology SEZ being developed by the company in Chennai is expected to be operational by August-September 2008. WSI holds a 51% stake in the real estate subsidiary. We have valued the land at a realisable value of Rs3,500 per square feet.
Promoters subscribe to 925,000 warrants to raise Rs9.9 crore
The promoters have subscribed to 925,000 warrants during FY2008 at a conversion price of Rs107 per share. The aforesaid issue will lead to 4.2% dilution in the equity from the current levels. WSI would raise Rs9.9 crore from the warrants. The company is still in the process of drawing up a concrete plan to deploy the funds raised.
Outlook—expect a CAGR of 26.5% in profits in FY2008-10
WSI is a leading maker of insulators; it is all set to reap the benefits of the increased investment in the transmission and distribution segment of the power sector in India. A strong order book position of Rs180 crore coupled with an increase in the manufacturing capacity provide visibility to its future earnings. We have changed our FY2009 estimates owing to the increasing input cost. We are also introducing our FY2010 FDEPS estimate at Rs9.9. We expect the revenues and profits of WSI to grow at 17.8% and 26.5% CAGR over FY2008-10.
We value WSI using the SOTP method. As per this method, the core business of the company is valued at Rs80.2 per share while the real estate subsidiary is valued at Rs27.9 per share on fully diluted equity of the company.
| SOTP method | Value per share |
| Value of core business | 80.2 |
| Real estate subsidiary | 27.9 |
| Total value | 108.0 |
| Source: Sharekhan Research |
| Valuation table | Rs (cr) | ||||
| Particulars | FY06 | FY07 | FY08 | FY09E | FY10E |
| Net sales (Rs cr) | 147.1 | 165.2 | 227.0 | 273.4 | 315.2 |
| Net profit (Rs cr) | 4.3 | 6.6 | 13.7 | 16.5 | 21.9 |
| FD EPS (Rs) | 1.9 | 3.0 | 6.2 | 7.5 | 9.9 |
| % yoy growth | 66.2 | 52.1 | 108.8 | 20.6 | 32.8 |
| PER* (x) | 42.2 | 27.7 | 8.8 | 7.3 | 5.5 |
| Book Value (Rs) | 22.6 | 32.1 | 38.6 | 47.8 | 56.5 |
| P/BV (Rs) | 3.6 | 2.6 | 2.1 | 1.7 | 1.5 |
| EV/EBIDTA (x) | 15.1 | 9.1 | 7.7 | 6.7 | 5.5 |
| RoCE (%) | 13.0 | 15.7 | 19.2 | 15.8 | 16.5 |
| RoNW (%) | 10.6 | 9.6 | 16.7 | 15.6 | 17.5 |
| *Adjusted for value in real estate subsidiary Source: Company, Sharekhan Research | |||||
Rohit
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