Private Client Research

Rating Company Date

Buy
Surya Roshni Ltd
May 22, 2017
Sensex 30570.97

CNX Nifty 9438.25

Reco Price Rs. 280.00

Price Target (6 - 9 Months) Rs. 420.00 Exchange Code

Sector NSE SURYAROSNI
Diversified Upside 50.00% BSE 500336

Likelihood of the lighting business demerger could Stock Data

potentially lead to value unlocking. CMP (Rs) 276.35

Face value (Rs) 10

Untapped potential, LED business to witness exponential growth: 52 Week Range (Rs) 299.80 - 148.35
Surya Roshni Ltd. is the second-largest lighting company after Phillips India in terms of revenue, and
has over 30 years of experience. The company’s forte has been in traditional light sources like FTL, Market cap (Rs Crores) 1212.81
CFL and GLS, with an estimated market share of ~20% in terms of volume as on FY16, given its
Price To Book Value (x) 2.09
strong distribution network and price competitiveness, based on 100% backwards integration. It is
highly likely that they would be able to replicate the success in the LED business too. P/E Ratio (x) 17.83

Better mix & match: product diversification, lighting business demerger: EV/EBIDTA (x) 8.56
Company has a strong distribution network of 2 lakhs retailers, which will enable it to scale up its
existing businesses as well as newer ventures. It entered the fans business in FY15, and generated
sales worth Rs. 130 crores in the first year of operations itself. It started its appliances business in
One Year indexed Stock Performance
FY16 (with sales of Rs. 40 crores) and we believe it can successfully scale up the business owing to its
wide distribution reach. In the steel pipes business (54% of overall revenue of Rs. 3100 crores in Surya Roshni Ltd Sensex
FY16), the company has changed its strategy to restructure the business by merging its associate
company, Surya Global Steel Tubes (SGSTL). SGSTL is an exports-focused unit with cost advantages
over others and likely demerge its lighting business.

Strong USP from 100% backward integration:

Surya Roshni Ltd. has been able to sustain the volume of lighting products given its price
competitiveness. It is the only 100% backward-integrated lighting company in India, which provides
it an edge over its peers. Its products are priced lower than market, which is complemented by their
ability to provide the best quality in the space.

Asset light model for appliance, and better mix would drive ROE’s: Return (%) 1m 6m 12m 36m
The company will scale up its fans & consumer appliances business without incurring a huge capex,
as it is opting to adopt the contract manufacturing route. As is the case with Bajaj Electricals, which Absolute 30.54 42.38 82.35 170.27
predominantly relies on outsourcing, we expect outsourcing to improve the lighting segment ROCE.
Sensex 3.09 5.91 21.17 25.42
This will result in improving an overall asset turnover despite capex being undertaken at the Andhra
plant for the steel pipes business in the near term.

Shareholders

(in %) 31-Mar

Promoter 63.32

Public 36.68

Others 0.00

Total 100

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Industry
India's lighting market is worth $1.75 Billion, with year-on-year growth of 7.5%, and is stipulated to reach $2.75 Billion. CFL is the biggest and fastest
growing segment across the Indian lighting marketspace, accounting for 27.5% of total sales value. The CFL segment is stipulated to reach $760 Million,
contributing to 28% of the total domestic market. Luminaires is the second leading segment constituting 22% of the total. India's Government initiatives
to replace incandescent bulbs with LED bulbs, increasing energy demand supply gap and declining prices have been leading to an increase in India's LED
market, which is stipulated to reach $1457 Million by 2019, with a CAGR of 35.9% between 2014 and 2019.

The National government's mandate of rural electrification along with usage of energy efficient formats is the core driver of the lighting marketspace on
the long-term basis (especially CFL variant). Rajiv Gandhi Grameen Vidyutikaran Yojana and BYL programs have been implemented for the past 4-5 years,
with approximately 53% households receiving electricity and subsidized replacement of US$8.5 million ICL technology with CFL variants. On the other
hand, the national government of India is the largest customer of the lighting product portfolio for urban housing, airports, railways, and highways
(NHAI).

Profile
SYR commenced operations in 1973 by setting up a steel plant at Bahadurgarh in Haryana to manufacture steel pipes. In 1984-85, the company
diversified into manufacturing lighting products by setting up its first lighting plant at Kashipur in Uttarakhand. Today, SYR is the second-largest
manufacturer of lighting products and the largest manufacturer of GI steel pipes in India. The lighting business accounted for 46% of total turnover and
the steel (tubes) business 54% in FY16.

Profit & Loss Statement:- (Consolidated) (Rs Crores)

Particulars Mar 14 Mar 15 Mar 16 Mar 17 Mar 18E

Income:-

Net Sales 3030.97 2857.10 3068.86 3299.02 3628.93

Growth (%) - -5.74 7.41 7.50 10.00
Total Expenditure 2797.32 2634.01 2828.60 3051.60 3344.06
EBITDA 233.65 223.09 240.26 247.43 284.87
% Margin 7.71 7.81 7.83 7.50 7.85
Other Income 3.58 3.73 1.85 1.20 1.20
Operating Profit 237.23 226.82 242.11 248.63 286.07
Interest 114.47 109.00 96.43 88.72 85.17
PBDT 122.76 117.82 145.68 159.91 200.90
Depreciation 55.64 56.04 60.67 57.50 55.00
Profit Before Taxation & Exceptional Items 67.12 61.78 85.01 102.41 145.90
Exceptional Income / Expenses 0.00 0.00 0.00 0.00 0.00
Tax 13.77 7.69 22.96 30.72 43.77
Profit After Tax 53.35 54.09 62.05 71.69 102.13
Share of Associates 0.00 0.00 0.00 0.00 0.00
Consolidated Net Profit 53.35 54.09 62.05 71.69 102.13
Adjusted EPS 12.17 12.34 14.16 16.36 23.31

Source: Stockaxis Research, Company Data

Valuation
With demerger on the cards, there would be value unlocking and the company would be able to showcase the same performance in LED which they had
shown in CFL. However at consolidated level the company at CMP of Rs 280 the company is trading at 12x of its FY18E EPS of Rs 23.31. We therefore
believe the combined valuation of both demerged company can be around Rs. 420 at valuation of 16.7x its FY18 EPS.

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