Beruflich Dokumente
Kultur Dokumente
Industrials-Machinery-Metalworking Machinery
BUY
in key sectors like steel, construction, infrastructure, power and cement are giving
an optimistic outlook for future. We believe the Gross Fixed Capital Formation
(GFCF) to GDP to improve to 33% by FY17E, also ESABs current blended capacity
utilization levels of ~60% leaves enough headroom to sustain the anticipated
increase in demand. We expect the revenue to grow at 5.9% CAGR for FY16-18E.
Profitability and return ratios to improve by FY18E: EBITDA & PAT margins
are expected to reach 12.4% & 8.3% respectively by FY18E, mainly owing
to incremental revenue from new product launches, increased revenue from
higher margin services segment. Also we believe RoE & RoCE to expand by
180 & 130 bps over FY16 to reach 10.8% & 15.4% by FY18E respectively.
Strong financial position to sustain growth: Net debt to Equity at -0.2x, Net
working capital to sales at less than 50% and cash per share of Rs.32.9 indicate
ESABs balance sheet strength to remain debt free while maintaining operational
efficiency in the revenue model that could be sustained going forward through
FY16-18E. Also, ESABs ability to produce consistent positive cash flows through
harsh times together with healthy asset turnover ratio, huge cash & investments
balance (~Rs. 1705 mn) enable it to price competitively to gain market share going
forward.
Recommendation (Rs.)
CMP (as on Jun 24, 2016)
561
Target Price
670
Upside (%)
19
Stock Information
Mkt Cap (Rs.mn/US$ mn)
8631 / 127
689 / 435
3421
Beta (x)
1.0
Sensex/Nifty
26398 / 8088
O/S Shares(mn)
15.4
10.0
73.7
FIIs
10.7
DIIs
0.9
Others
14.6
Relative to Sensex
3M
6M 12M
Source: Bloomberg
Relative Performance*
Key Risks
110
100
90
80
70
ESAB IN
Apr-16
May-16
Mar-16
Feb-16
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
60
Jun-15
We value the company based on P/E basis. At CMP of Rs. 561, ESAB is trading at
20.5x of FY18E EPS. Historically, ESAB has been trading at 1 standard deviation
of one year average forward P/E multiple of 24.5x. Furthermore, ESAB has been
trading at an average P/E multiple of 24.5x & average P/B of 3.2x for the last five
years. We ascribe a multiple of 24.5x to FY18E EPS. We initiate a coverage with a
BUY rating for a target price of Rs. 670 representing an upside potential of 19%
for 9-12 months period.
Sensex
CY13
FY15**
FY16
FY17E
FY18E
Net Sales
4356
5519
4510
4740
5064
11.9
9.2
10.2
11.3
12.4
EPS (Rs.)
21.5
15.4
18.4
23.1
27.3
PE (x)*
19.5
45.0
30.8
24.3
20.5
EBITDA
516
331
12.4
505
236
8.2
462
283
9.0
534
355
10.2
627
421
10.8
Source: Company, Karvy Research; *Represents multiples for CY13, FY15 & FY16 are based on historic market price
**FY15: for 15 months from Jan 2014 to Mar 2015
For private circulation only. For important information about Karvys rating system and other disclosures refer
to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>,
Thomson Publishers & Reuters
Analyst Contact
Arvind Vinjamoori
040 - 3321 6273
arvind.vinjamoori@karvy.com
Company Background
FY17E
FY18E
Net sales
4510
4740
5064
EBITDA
462
534
627
4048
Depreciation
95
Interest
Other Income
80
4207
102
76
4437
102
76
PBT
446
508
601
Adj. PAT
283
355
421
Tax
128
152
180
10.2
11.3
12.4
P/E (x)
30.8
24.3
20.5
0.2
0.2
0.2
6.3
EV/EBITDA (x)
17.8
7.5
14.7
8.3
12.1
FY17E
FY18E
Total Assets
3856
4251
4664
Current assets
1578
1908
2242
Tax
Total Liabilities
3856
4251
4664
821
Other assets
1457
Networth
3155
Debt
Current Liabilities
658
Deferred Tax
42
804
1539
3493
716
42
802
1620
3895
726
42
RoCE (%)
9.0
10.2
10.8
(0.2)
(0.2)
(0.3)
2.8
2.5
2.2
14.1
Net Debt/Equity
0.8
P/BV (x)
14.5
0.8
15.4
Depreciation
Changes in WC
FY17E
FY18E
411
508
601
(128)
(152)
(180)
(80)
(76)
(76)
(86)
(85)
95
(139)
Others
CF from Operations
160
Capex
Investment
21
Others
80
CF from Investing
Dividends
(8)
373
(72)
76
102
(76)
371
(100)
(76)
76
16
(81)
(100)
(18)
(18)
(18)
(18)
CF from Financing
102
158
(18)
275
(18)
252
0.8
Source: Company, Karvy Research
Others
14.6%
Equipments
& Cutting
26%
FIIs
10.7%
Consumables
74%
Promoters
73.7%
FY16P
Industry Scenario:
Exhibit 4: Application Industries
Heavy
Machinery
10.7%
Energy
23.4%
Ship building
8.5%
Construction
19.2%
Process &
Others
14.9%
Automotive
& Transport
20.4%
Aerospace &
Defense
2.9%
have strong presence. While ESAB dominates the welding consumables market, many organized and unorganized players
also operate in the segment with significant market shares. Demand for welding consumables is directly proportional to steel
production in the country. The key driver of the welding consumables market is growth of its end-use industries, especially the
building and construction industry. Other drivers include increasing investment in the oil and gas as well as energy sectors.
End-use industries such as transportation, building & construction, oil & gas and power are likely to drive the welding consumables
market in India in the near future. However, factors such as inconsistent supply of quality raw materials, shortage of skilled labor
and competition from international companies may hamper market growth.
RoW
11.0%
S. Korea
4.0%
Russia
4.0%
China
50.0%
US
5.0%
India
6.0%
Japan
7.0%
EU
10.0%
yyAs per the report of the Working Group on Steel for the 12th Five Year Plan, there are many factors which carry the potential of
raising the per capita steel consumption in the country. These include among others, an estimated infrastructure investment
of nearly a trillion dollars, a projected growth of manufacturing from current 8% to 11-12%, increase in urban population
to 600 mn by 2030 from the current level of 400 mn, emergence of the rural market for steel currently consuming around
10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana and Rajiv Gandhi Awaas Yojana
among others.
3
yyThe National Steel Policy 2005 is currently being reviewed keeping in mind the rapid developments in the domestic steel
industry (both on the supply and demand sides) as well as the stable growth of the Indian economy. With the Governments
focus on manufacturing industry coupled with spending on infrastructure (roads, rail and ports etc.), the demand for steel is
projected to increase in the coming years which may augur well for ESAB.
Exhibit 6: Indias Steel Production Vs Consumption (Mn Tonnes)
90
71
60
74
66
78
71
82
73
89
77
74
67
59
30
0
FY11
FY12
Crude steel production
FY13
FY14
FY15
Consumption
FY16 (Apr-Dec)
40
1.5
30
1.0
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
-0.5
FY05
FY04
0.0
FY03
10
FY02
0.5
FY01
20
Sector
Services
18
8
6
5
5
4
4
4
yyThe Government of India has announced highway projects worth US$93 Bn, which include government flagship National
Highways Building Project (NHBP) with total investment of US$45 Bn over next three years.
yyInternational Finance Corporation (IFC), part of The World Bank group, plans to invest at least US$700 Mn in existing transport
and logistics infrastructure projects in India.
yyThe World Bank has approved a US$650 Mn debt funding for a part of the eastern arm of the Dedicated Freight Corridor
(DFC) project in India.
yyGovernment-owned Kolkata Port Trust has signed an agreement with the West Bengal government to set up a new port at
Sagar Island in South 24 Parganas district. The Sagar Island port is estimated to cost Rs. 119 Bn and will be the first port to
be built by the Union government in 14 years.
yyThe Reserve Bank of India (RBI) has notified 100% Foreign Direct Investment (FDI) under automatic route in the construction
development sector. The new limit came into effect in December 2014.
yyThe Government of India has relaxed rules for FDI in construction sector by reducing minimum built-up area as well as
capital requirement. It has also liberalized the exit norms. In fact, the Cabinet has also approved the proposal to amend the
FDI policy.
4
1200
30000
1025
800
30231
1000
25000
20000
600
10th plan
11th plan
12th plan
PV
2350
5000
218
697
10000
10000
200
CV
FY15
19449
15000
514
3220
400
FY21E
Improved market dynamics coupled with adequate capacity headroom to strengthen margins
Exhibit 11: Improving Margins
15%
12.1%
11.9%
10%
10.8%
10.9%
5%
7.5%
7.6%
9.2%
10.2%
8.7%
9.9%
11.3%
10.7%
7.5%
6.3%
12.4%
11.9%
8.3%
4.3%
0%
CY12
CY13
FY15*
FY16
FY17E
FY18E
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
Healthy financial position and focus on services segment may augur well
ESAB is zero debt cash rich company with cash & cash equivalents of Rs. 507 Mn in FY16 representing cash per share of
Rs. 32.9 and the same is expected to grow at a CAGR of 42.8% during FY16-FY18E to reach Rs. 67.1 per share or Rs. 1034 Mn.
With comfortable cash position along with healthy asset turnover ratio, ESAB is well poised to aggressively position itself to gain
market share in highly competitive markets. ESABs new product launches and a potentially leaner organization structure would
augur well for sales and profitability margins. ESAB is now focused on growing services segment to cushion the impact of any
sustainable difficulties in the manufacturing segment.
Exhibit 12: Liquidity Cushion
80%
60%
-0.2
-0.1
-0.1
48.5%
40%
20%
-0.2
26.4%
36.4%
53.4%
58.0%
-0.3
-0.2
0.0
1.6
-0.1
1.5
-0.2
1.4
-0.3
34.4%
-0.4
0%
-0.5
CY12
CY13
FY15*
FY16
FY17E
FY18E
1.5
1.5
1.3
1.2
1.2
1.1
1.0
CY12
CY13
FY15*
1.2
1.1
FY16
FY17E
1.1
FY18E
FY15*
FY16P
FY17E
FY18E Comments
Revenue
5519
4510
4740
26.7
(18.3)
5.1
EBITDA
505
462
534
9.2
10.2
11.3
PAT (normalized)
236
283
355
EPS (Rs.)
15.4
18.4
23.1
(28.6)
19.9
25.4
(55)
(86)
(85)
(100)
Net CFO
164
160
373
371
Net Debt
(349)
(507)
(781)
(1034)
108
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
74
288
6.8
12.4
18.4
271
6000
6.8%
5.1%
40%
4510
20%
5064
4740
0%
5519
2000
4356
4000
-18.3%
-13.5%
FY18E
FY17E
FY15*
FY16
-40%
CY13
-20%
11.9%
600
10.2%
9.2%
15%
12.4%
11.3%
10%
627
534
462
505
200
516
400
FY18E
FY17E
FY15*
FY16
0%
CY13
5%
7.6%
600
6.3%
8.3%
7.5%
8%
6%
4.3%
421
FY18E
FY17E
FY16
CY13
2%
0%
FY15*
355
236
283
4%
331
400
200
10%
373
351
300
371
400
271
288
74
160
108
164
100
260
200
0
CY13
FY15*
CFO (Rs. Mn)
FY16
FY17E
FY18E
FCF (Rs. Mn)
Continuous profitability has resulted in positive cash flows for ESAB during
CY13-FY16.Going forward, we expect CFO & FCF to reach Rs. 371 Mn
& Rs. 271 Mn by FY18E respectively owing to expansion in profitability
and we expect any funding requirements for the company to be met by
internal accruals. We expect only maintenance capex in near term, as all
the capacities are in place with ~40% head room available.
17.8%
16.7%
14.1%
15%
14.5%
12.4%
10%
8.2%
5%
CY13
15.4%
9.0%
10.2%
10.8%
FY16
FY17E
FY18E
FY15*
RoE (%)
Return ratios have always been healthy for ESAB even during challenging
times, considering the positivity ahead in the markets. We expect RoE
and RoCE to expand by over ~180bps and ~130bps respectively during
FY16-18E to reach 10.8% and 15.4% levels by FY18E.
RoCE (%)
173.6
10
0
18.4
15.4
20
205.0
187.8
8.9
CY13
27.3
23.1
21.5
226.9
253.1
250
200
1.2
1.2
1.2
1.2
FY15*
FY16
FY17E
FY18E
EPS (Rs.)
300
150
100
EPS, DPS & BVPS have been quite consistent for CY13-FY16 and we
believe EPS & BVPS will grow at a CAGR of 22.4% & 39.2% respectively
for FY16-FY18E on account of increased revenue & profitability. ESAB has
so far adapted constant dividend payout policy and we expect the trend to
continue in future as well.
DPS (Rs.)
Exports
Net Debt/Equity
Corporate Governance
Source: Karvy Research
33
Quality of Earnings
Domestic Sales
High
33
33
33
33
33
33
33
33
40
30
20
10
2
0
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 FY16
1Year Forward P/E
Average
P/BV
1 SD
Average
We value the company based on P/E basis. At CMP of Rs. 561, ESAB is trading at 20.5x of FY18E EPS. Historically, ESAB has
been trading at 1 standard deviation of one year average forward P/E multiple of 24.5x. Furthermore, ESAB has been trading
at an average P/E multiple of 24.5x & average P/B of 3.2x for the last five years. We ascribe a multiple of 24.5x to FY18E EPS.
We initiate a coverage with a BUY rating for a target price of Rs. 670 representing an upside potential of 19% for 9-12 months
period.
Exhibit 24(a): Comparative Valuation Summary
EV/EBITDA (x)
P/E (x)
EPS (Rs.)
CMP
Mcap
(Rs.)
(Rs. Mn)
FY15
FY16
FY17E
FY18E
FY15
FY16
FY17E
FY18E
FY15
FY16
FY17E
FY18E
8631
20.4
17.8
14.7
12.1
45.0
30.8
24.3
20.5
15.4
18.4
23.1
27.3
ESAB*
561
Ador Welding
281
3781
9.3
9.0
Source: Bloomberg, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
7.7
6.6
9.2
17.4
14.6
12.0
23.4
16.5
19.2
23.3
Ador Welding
RoE (%)
Sales
EBITDA
EPS
6.0
16.5
21.8
9.6
5.5
19.0
9.0
17 10.7
Source: Bloomberg, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
10.2
NA
3m
10.8 (14.3)
NA
5.9
6m
FY15
FY16
FY17E
FY18E
(10.4) (13.6)
5519
4510
4740
5064
(21.1)
19.0
3860
4060
4360
4880
Key Risks
yyDelay in economic recovery.
Financials
Exhibit 25: Income Statement
(Rs. Mn)
Revenue
Growth (%)
Operating Expenses
EBITDA
Growth (%)
CY13
FY15*
4356
5519
3839
5013
(15.2)
71
(13.5)
516
112
EBIT
475
Tax
144
PBT
Adjusted PAT
Growth (%)
475
331
FY16
FY17E
FY18E
4510
4740
5064
4048
4207
4437
(2.2)
(8.6)
15.6
17.5
115
80
76
76
26.7
505
138
(18.3)
462
95
5.1
534
102
6.8
627
102
482
446
508
601
70
128
152
180
482
236
446
283
508
355
601
421
(12.3)
(28.6)
19.9
25.4
18.4
CY13
FY15*
FY16
FY17E
FY18E
326
349
507
781
1034
Inventory
614
540
585
615
663
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
Gross Block
Net Block
CWIP
Miscellaneous
Total Assets
Other Liabilities
Total Liabilities
Shareholders Equity
Reserves & Surplus
Total Networth
274
27
437
30
454
32
481
32
513
32
1048
1219
1198
1270
1346
959
830
821
804
802
1906
31
225
3503
763
67
1961
12
270
3687
759
38
2054
12
248
3856
658
42
2139
12
257
4251
716
42
2239
12
262
4664
726
42
830
796
700
758
768
2519
2737
3002
3339
3742
154
2673
3503
154
2891
3687
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
154
3155
3856
154
3493
4251
154
3895
4664
10
Tax Paid
CY13
FY15*
FY16P
FY17E
FY18E
475
306
411
508
601
112
138
95
102
102
(184)
(119)
(128)
(152)
(180)
Other Income
(71)
(94)
(80)
(76)
(76)
351
160
373
Inc/dec in Net WC
Other non cash items
(5)
24
(88)
(120)
52
164
94
80
76
76
(269)
(120)
(137)
(18)
(55)
371
(100)
(137)
(85)
(158)
Dividend paid
(76)
(86)
(270)
89
(8)
(55)
Inc/dec in investments
Others
(139)
(18)
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
27
21
(72)
(76)
16
(81)
(100)
(18)
(18)
(18)
(18)
158
(18)
275
(18)
252
FY15*
FY16
FY17E
FY18E
11.9
9.2
10.2
11.3
12.4
7.6
4.3
6.3
7.5
8.3
RoCE (%)
10.9
41.2
8.7
7.6
9.9
6.4
10.7
5.1
11.9
4.3
(0.12)
(0.12)
(0.16)
(0.22)
(0.27)
17.8
16.7
14.1
14.5
15.4
CY13
FY15**
FY16
FY17E
FY18E
21.5
15.4
18.4
23.1
27.3
173.6
187.8
205.0
226.9
253.1
12.4
8.2
Source: Company, Karvy Research, *FY15: for 15 months from Jan 2014 to Mar 2015
9.0
10.2
10.8
DPS (Rs.)
BVPS (Rs.)
PE (x)*
P/BV (x)*
EV/EBITDA (x)*
EV/Sales (x)*
8.9
19.5
2.4
11.9
1.4
1.2
45.0
3.7
20.4
1.9
1.2
30.8
2.8
17.8
1.8
1.2
24.3
2.5
14.7
Source: Company, Karvy Research; *Represents multiples for CY13, FY15 & FY16 are based on historic market price
**FY15: for 15 months from Jan 2014 to Mar 2015
1.7
1.2
20.5
2.2
12.1
1.5
11
Sell
Hold
Absolute Returns
> 15%
5-15%
<5%
research@karvy.com
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to change without notice. Actual results may differ materially from those set forth in projections.
yy Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject
company for any other assignment in the past twelve months.
yy Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from
the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services
rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory
services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other
capacity.
yy KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report.
yy Compensation of KSBLs Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service transactions.
yy KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of
any companies that the analysts cover.
yy KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the
last day of the month preceding the publication of the research report.
yy KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with
preparation of the research report and have no financial interest in the subject company mentioned in this report.
yy Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report.
yy It is confirmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not
received any compensation from the subject company mentioned in the report in the preceding twelve months.
yy It is confirmed that Arvind Vinjamoori, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report.
yy KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
yy Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report.
yy We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities.
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