Pitti Laminations (PITLAM) 48

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1 Result Update Rating matrix Rating : Hold Target : 5 Target Period : months Potential Upside : 4% What s changed? Target Changed form 78 to 5 EPS FY16E Profit to Loss EPS FY17E Changed from 5.6 to 3.6 Rating Changed from Buy to Hold Quarterly performance Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales EBITDA Net Profit (.4) 9.6 EPS ( ) NA 3.6 Valuation summary FY14 FY15 FY16E FY17E P/E NA 13.4 Target P/E NA 14. EV / EBITDA P/BV RoNW (.4) 8.2 RoCE Stock data Stock Data Market Capitalization Crore Total Debt (FY15) Crore Cash & Investments (FY15) 15.3 Crore EV 25.7 Crore 52 week H/L 82/ 18 Equity capital 13.5 Crore Face value 5 MF Holding (%) - FII Holding (%) 2.9 Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia shashank.kanodia@icicisecurities.com Pain to continue in medium term November 2, 215 Pitti Laminations (PITLAM) 48 Pitti Laminations (Pitti) reported a dismal set of Q2FY16 numbers with EBITDA margins dropping 8 bps YoY to 5.% in Q2FY16 Topline for the quarter was at 78.2 crore with corresponding EBITDA at 3.9 crore (margin 5.%) and PAT at negative 2.8 crore Lamination sales volume in Q2FY16 was at 4738 tonne, up 3.9% YoY while realisations improved 5.3% YoY on the back of higher stator volume in the sales product mix Reasons behind such strong downgrade Pitti Laminations Q2FY16 results were a negative surprise on account of a sharp deterioration of the margin profile. This was on account of a writedown of high cost inventory and a drastic fall in scrap prices. We expect the trend to continue in Q3FY16E with the company posting reasonable EBITDA margins only in Q4FY16E. Henceforth, FY16E is expected to be a washout year for the company with almost nil profitability at the PAT level. There was also some ramp down in the volume offtake by the largest customer i.e. GE group companies, which will limit export growth and, hence, the earnings profile at Pitti. Hence, on the back of some more pain in the medium term, we revise down our estimates for Pitti. Product profile; basic necessity of any process engineering Pitti Laminations (Pitti) is a leading manufacturer of electrical steel laminations, motor cores, sub-assemblies, die-cast rotors and press tools. These products find application in basic capital goods products viz. motors and alternators, which are quintessentially products used in process engineering. It manufactures laminations from 5 mm to 1,25 mm outer diameter. It is an end-to-end product & service provider in the electrical lamination segment and a market leader in the special purpose motors segment. It is one of the few suppliers with tooling, laminations, casting and machining, all under one roof. The company is a pioneer in the manufacture of traction motor sub-assemblies in India and possesses an indigenously developed tool room with a portfolio of over 3,4 tools. Domestic business to pick up, exports to lag behind Pitti manufactures electrical laminations, which constitute a healthy ~86% of its gross sales and has a strong clientele for this product both globally as well as domestically. In exports, GE group companies are their largest customer, which is realigning its delivery schedule and will limit the export growth at Pitti. They, however, stayed committed to their three year contract (CY15-17) worth 6 crore. We expect export sales at Pitti to grow at a CAGR of 3.7% in FY15-17E to 178 crore in FY17E. Domestically, with a new government at the helm, renewed emphasis on capacity creation, we expect sales to match up to its customer s (Siemens, ABB, among others) growth rate. We expect domestic sales to grow at a CAGR of 12.5% in FY15-17E to 217 crore in FY17E. Operating margins take knock, pain to persist, downgrade to HOLD Incorporating the muted profitability in FY16E we have revised down our estimates for Pitti. We expect sales and PAT to grow at a CAGR of 8.% and 2.1% vs. 13.8% and 27.6%, respectively, earlier, in FY15-17E. On account of an elongated working capital cycle, debt-equity is expected to remain at ~1.2x (FY15-17E). We have valued Pitti at 5 i.e. 14x P/E on FY17E EPS of 3.6/share and assigned a HOLD rating to the stock. FY17E is expected to be the turnaround year for Pitti wherein the company will adjust itself to the declining commodity cycle coupled with ramp up of order by GE group companies. This will drive the overall profitability at Pitti and support our long term investment thesis on the company. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q2FY16E Q2FY15 YoY (%) Q1FY16 QoQ (%) Comments Sales Sales came in line with our estimates; export sales came in lower but were compensated by higher domestic sales Other Operating Income Total Operating Income Total Raw Material Expenses Raw material as a percentage of sales in Q2FY16 came in on expected lines at ~65% Employee Cost Employee costs came in much ahead of estimates and stood at 12.7% of sales vs. our expectation of 1.% Other operating expense Other expenses came in higher-than-expected at 17.5% of sales vs. our expectation of 14.%. Total Expenditure EBITDA EBITDA Margin (%) bps bps EBITDA margins came in much lower -than-expected due to higher employee costs and other operating expenses Depreciation Interest Interest costs for the quarter include forex loss amounting to 1 crore on account of depreciation of the rupee against US$ Exceptional item... NA. NA Other Income PBT Taxes Tax rate in Q2FY16 stood at 31.7% PAT PAT came in negative on account of lower EBITDA margins and forex loss in the quarter Key Metrics Sales Volume (tonne) 4,738 4,824 4, , Sales volume of lamination sheets in Q2FY16 came in marginally lower than estimates due to lower export sales volume Blended realisation ( /tonne) 164,24 159, , , Blended realisations in Q2FY16 came in better-than-expected on account of presence of stator volume in Q2FY16 vs. its absence earlier. Stator is a high value product wrt to laminations at Pitti Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Net Sales Muted Q2FY16 coupled with a delay in pick-up industrial activity domestically and deferral of offtake by GE group companies leads us to revise downward our sales estimates for FY16E & FY17E EBITDA EBITDA Margin (%) bps bps Decline in metal prices, write-down of high cost inventory and subdued scrap prices leads us to downward revise our margin estimates for FY16E & FY17E PAT PL EPS ( ) 3.9 NA PL EPS reduces consequent to lower sales & margin estimates above PL: Profit to Loss Assumptions Current Earlier FY14 FY15 FY16E FY17E FY16E FY17E Comments Domestic Sales Volume (tonne) 1,747 13,528 14,285 17,136 15,75 16,2 Due to delay in pick up in industrial activity domestically we have shifted some domestic sales from FY16E to FY17E Domestic realisation ( /tonne) 18, , ,32 126, , ,32 Subdued metal prices domestically leads us to downward revise our realizations estimated for FY16E & FY17E Export Sales Volume (tonne) 4,38 7,885 8,35 8,64 9,45 1,8 Due to slower offtake by GE group companies we have downward revised our export volume estimates going forward Export realisation ( /tonne) 192,572 21, ,399 22, ,399 22,784 We have largely maintained our export realisations estimates for FY16E & FY17E Total Sales Volume (tonne) Blended realisation ( /tonne) Decrease in domestic realizations leads to downward revision of blended realizations for FY16E & FY17E ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Pitti Laminations (Pitti) is a leading manufacturer of electrical steel lamination, motor cores, sub-assemblies, die-cast rotors and press tools domestically. These products find application in basic capital goods products, viz. motors and alternators, which are quintessentially used in any process engineering. The company was founded in 1983 by Sharad B Pitti. Pitti s main product i.e. laminations is sold both domestically as well as globally while motor housings are meant only for exports. The company is a pioneer of the manufacture of traction motor subassemblies in India and possesses an indigenously developed tool room with a portfolio of over 3,4 tools. Pitti also holds a 47% stake in Pitti Castings Pvt Ltd, which manufactures castings. Main product: Electrical steel laminations Exhibit 1: Pictorial description of main product of Pitti Lamination Stator; around which electrical field is generated and copper coil Basic Motor wounded. It is the most critical component of a motor This stack is made of electrical steel and is of various forms ; It is the main product being manufactured by Pitti Laminations Single lamination Sheet This can either be sold in the form of single sheet or a stack of electrical sheets welded together Stack of lamination sheets Product being manufactures by Pitti Definition: Laminations are the steel portions of the stator and rotor consisting of thin lamination sheets stacked together. These laminations can be stacked "loose", welded, or bonded together depending upon application. ICICI Securities Ltd Retail Equity Research Page 3

4 Electrical steel laminations business: main revenue driver Pitti s sales can be broadly classified under four business heads viz. sale of electrical stampings, sale of scrap (bi-product of stamping), sale of tools & job work charges. Exhibit 2: Revenue Bifurcation Sales Bifurcation Units FY11 FY12 FY13 FY14 FY15 Sale of Stampings crore Sale of Scrap crore Sale of tools crore Job Work Charges crore Total Gross Sales crore Total Net Sales crore As of FY14, electrical laminations/stampings constitute a healthy ~86% of its total gross sales followed by scrap (~12%), job work (~2%) and tools (~1%). Stamping business: Volume led growth to prevail!! Pitti has an installed capacity of 32 tonne/annum (TPA) of electrical stampings/laminations and 3 motor housing/stator frames. It is currently undergoing de-bottlenecking, which will increase its electrical laminations capacity to 36 TPA in the near term. Exhibit 3: Stampings volume & realisation trend In FY15, Pitti recorded sales of tonne of laminations while blended realisations at /tonne. Export sales during FY15 were at 7885 tonne with corresponding realisations at 21146/tonne. Domestic sales during FY15 were at tonne with corresponding realisations at /tonne Going forward, total sales volumes are expected to grow at a CAGR of 8.5% in FY15-17E. Domestic sales volume are expected to grow at a CAGR of 12.5% in FY15-17E to tonne while export sales volume are expected to grow at a CAGR of 1.1% in FY15-17E to 864 tonne in FY17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Total Volume Blended Realization 1 5 /tonne Domestic vs. export sales volume & realisation Exhibit 4: Domestic sales volume to 12.5% CAGR in FY15-17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Domestic Volume 8 4 Domestic Realization /tonne Exhibit 5: Export sales volume to 1.1% CAGR in FY15-17E tonne FY11 FY12 FY13 FY14 FY15 FY16E FY17E Export Volume Export Realization /tonne ICICI Securities Ltd Retail Equity Research Page 4

5 Strong clientele both domestically, globally Pitti by virtue of supplying specialised custom made quality product has a very strong clientele with most clients sticking with Pitti for a fairly long time. Domestically, in the laminations segment, Pitti s clients include ABB, Alstom and Ritz Hydro, Bhel, Crompton Greaves, Cummins, L&T, ReGen Powertech, Siemens and Voith among others. On the global front, GE group entities mainly GE Transportation Systems (GETS) and GE Consumer & Industrial (GECI) constitute the major chunk of its exports. Products of Pitti s customers are used in power generation, transportation, mining, industrial motors, locomotives, aerospace, automobile, oil & gas, earth moving and mining. Stretched working capital - here to stay! By virtue of importing raw material for orders from GE group companies and shipping the final product to GE entities through sea, the company has elongated working capital needs with net working capital days (NWCD) at 146 days as of FY14. The company is shifting some of its manufacturing capacity from Hyderabad to Pune, which should help in cutting down the lead time. However, conservatively we have built in NWCD at 13 days in FY16E and FY17E, going forward. Exhibit 6: Net working capital days (NWCD) days FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net WC days Debt to remain at elevated levels, working capital loans to prevail!! By virtue of having an elongated working capital cycle, Pitti has a considerable amount of debt on its books (FY15 total debt at 136 crore, debt: equity 1.2x). However, majority of the debt is in the form of shortterm borrowing, thereby catering to working capital needs. Going forward, the debt at Pitti is expected to remain at same levels with consequent debt to equity at ~1.2x in FY16E & FY17E. Exhibit 7: Equity, debt, debt: equity crore x FY11 FY12 FY13 FY14 FY15 FY16E FY17E Equity (LHS) Debt (LHS) Debt:Equity (RHS) ICICI Securities Ltd Retail Equity Research Page 5

6 Revenues to grow at 8.% CAGR in FY15-17E We expect Pitti to clock revenue growth of 8.% CAGR in FY15-17E to crore in FY17E ( crore in FY15) primarily on the back of a pick-up in volumes domestically and almost flat realisations on a blended basis (domestic + exports). Laminations sales volume is expected to grow at a CAGR of 8.5% in FY15-17E to 252 tonne in FY17 (21413 tonne in FY15) while blended realisations are expected to remain at ~ 157/tonne ( /tonne in FY15). Exhibit 8: Revenue trend Exhibit 9: Revenue bifurcation- Domestic vs. Exports crore crore FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E Domestic Exports Domestic sales turnover is expected to grow at a CAGR of 12.5% in FY15-17E to 217 crore while exports turnover is expected to grow at a CAGR of 3.7% in FY15-17E to 178 crore. EBITDA & PAT to grow at 4.1% & 2.1% CAGR respectively in FY15-17E We expect EBITDA to grow at a CAGR of 4.1% in FY15-17E to 43.9 crore in FY17E ( 4.5 crore in FY15) primarily on the back of an increase in sales (8.% CAGR) and a decline in margin profile. PAT is expected to grow at a CAGR of 2.1% CAGR in FY15-17E to 9.6 crore in FY17E ( 9.3 crore in FY15). Exhibit 1: EBITDA & EBITDA margins trend Exhibit 11: PAT trend crore % FY13 FY14 FY15 FY16E FY17E crore (4) (.4) FY13 FY14 FY15 FY16E FY17E EBITDA EBITDA Margin ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation Incorporating muted profitability in FY16E, we have downward revised our estimates. We expect sales, PAT to grow at a CAGR of 8.%, 2.1%vs. 13.8% and 27.6%, respectively, earlier in FY15-17E. On account of an elongated working capital cycle, debt-equity is expected to remain at ~1.2x (FY15-17E). We have valued Pitti at 5 i.e. 14x P/E on FY17E EPS of 3.6/share and assigned a HOLD rating to the stock. FY17E is expected to be a turnaround year for Pitti wherein the company will adjust itself to the declining commodity cycle coupled with ramp up of order by GE group companies, driving overall profitability at Pitti. This supports our long term investment thesis on the company. The company is a net exporter but also has account receivables outstanding against its exports for a period of ~18 days, thereby making itself susceptible to losses on account of domestic currency (rupee) depreciation. In the recent company presentation, the company also expressed its long term vision wherein it plans to reach a topline of ~ 1 crore by FY18E. This will involve some amount of corporate restructuring (merger of group entity Pitti Castings) and inorganic expansion (acquisition of some motor company; forward integration). Pitti intends to realise ~57% of the targeted revenues in FY18E form the current laminations business, ~18% from Pitti Castings and ~25% from the motors business. Since the plan is on the drawing board, we await clarity on this matter and have not factored this in our target price calculation. Exhibit 12: What s changed Particulars FY16E FY17E Old New % Change Old New % Change Revenue (11.5) (9.9) EBITDA (35.) (17.5) EBITDA Margin % bps bps PAT PL (36.1) EPS 3.9 NA NA (36.2) PL: Profit to Loss Exhibit 13: Valuation matrix Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY NM FY16E NA NA FY17E NM ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot Target Price: Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date/Year Event 28 Records capacity utilisation of 68% on its new expanded capacity of 25 tonne (production volume at 1785 tonne) 29 Promoters pledge 25.9% of their stake in the company 211 Appoints G Vijay Kumar as Chief Financial Officer (CFO) 212 Expands its capacity from 25 tonne to 32 tonne (production in FY12; 2522 tonne, capacity utilisation 78%) 212 Buys assets of Andhra foundry unit 214 Gets awarded a firm three year contract from GE group companies for supplying laminations worth 6 crore over CY15-17E 215 Board of directors of company approve stock split of company's shares in the ratio of 1:2 215 Sets April 17, 215 as the record date of stock split Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Position Change (m) 1 Pitti Electrical Equipment Pvt. Ltd. 3-Jun Pitti (Sharad B) 3-Jun Pitti (Akshay S) 3-Jun Pitti (Madhuri S) 3-Jun Lalita Steel Industries Pvt. Ltd. 3-Jun Barclays Wealth 3-Jun Shah (Dhiren Shevantilal) 3-Jun Shah (Sharad Kanayalal) 3-Jun Pitti (Shanti B) 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Lalita Steel Industries Pvt. Ltd. -.14m -.14m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material Expenses Employee Expenses Other Operating Expense Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item.... Total Tax PAT Growth (%) NM NM NM NM EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Share Cap Interest Paid CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others.... Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Others Assets.... Application of Funds Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E NM 13.4 EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

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