Salzer Electronics. 2QFY16 Result Review BUY. Steady performance continued; maintain BUY. Sector: Electric Equipment

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1 $CompanyN ame$ Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 2QFY16 Result Review (Wholly owned subsidiary of Bank of Baroda) BUY Salzer Electronics Ltd. Steady performance continued; maintain BUY Salzer Electronics Ltd. (SEL) continued robust growth in 2QFY16 with revenue growth of 19.4%/-11.2% YoY/QoQ, respectively, to Rs 809mn led by higher contribution from industrial switchgears (55%). EBITDA margins for 2QFY16 stood at 13.4% a decrease of ~42bps due to onetime TDS expense of Rs 4.6mn on account of Employee Stock Options. Revenue grew by 19.4% YoY: SEL s revenue grew by 19.4%/-11.2% YoY/QoQ to Rs 809mn mainly due to higher contribution from industrial switchgear segment (55%) copper business contributed (33%) YoY growth of 36% / 1% respectively however, energy saving segment contributed merely 8% as energy segment is an order book driven segment. We expect, revenue to grow at a CAGR of 21.6% over FY15-18e led by change in product mix (more skewed to industrial switchgear), introduction of new products, wide range of products and increasing visibility for energy saving business. EBITDA margin contracted by ~40bps YoY: SEL posted 13.38% EBITDA margin, contraction of 41bps/20 bps YoY/QoQ due to onetime TDS expense of Rs 4.6mn on account of Employee Stock Options. The normalized EBITDA margins stood at 13.95% after onetime adjustment of employee stock option. We expect EBITDA margin expansion ~200bps over FY15-18e due to change in product mix in switchgear segment with new product introduction and increasing contribution from energy saving. Earning Call Highlights: 1) Working capital cycle remains under pressure for the quarter with ~3.5 month. Management expect WC cycle to improve led by improvement in collection, 2) QIP proceeds will be used for new product development and growth plans of Company, 3) Exports contributed ~24% of revenues, 4) Management expect ~200bps expansion in EBITDA margins in next two years, 5) The Company plans to spend~220mn for transformer, ~500mn for capacitor and ~ 180mn for Latching Relays, 6) The company expect additional revenue of ~Rs2-2.5bn by three new products, 7) As per the management, dry type transformer has ~Rs200bn market size Valuation: At CMP of Rs 232 the stock is trading at 13.4x/9.9x/7.5x of FY16/17/18e EPS. We expect, Salzer with the three new products and preferred supplier to GE, Schneider and Indian Railways will continue to grow its revenue/earnings at a CAGR of 22%/44% respectively. We maintain our BUY rating with the target price of Rs th November, 2015 Sector: Electric Equipment Price Price Target Up/Down (%) Rs. 232 Rs % Bloomberg Code Reuters Code SZE IN SALZ.BO. Share Holding (%) As on 30th September 2015 Promoters 25.8 FII 11.5 DIIs 6.6 Stock Data Nifty 7,843 Sensex 25, week high/low 364/150 Maket Cap (Rs. bn) 3.1 Face Value Rs. 10 Price performance (%) 1M 3M 6M 1Y Absolute Relative to Sensex Relative Performance BSE Sensex Salzer Electronics Source:-Bloomberg Exhibit 1: Financial summary (Rs mn) Y/E March FY13 FY14 FY15 FY16e FY17e FY18e Net sales 2,287 2,445 2,850 3,597 4,354 5,134 Growth (%) Operating margin (%) PAT Adjusted PAT EPS (Rs) Growth (%) P/E(x) ROE (%) ROCE (%) Debt/equity (x) P/Bv (x) Vaishali Parkar Kumar [email protected]

2 Exhibit 2: Salzer Electronics Financial Results (Rs Mn) 2QFY16 2QFY15 YoY (%) 1QFY15 QoQ (%) Net Sales Raw material consumed (%) of net sales Staff cost (%) of net sales Manufacturing & Other Expenses (%) of net sales EBITDA Depreciation EBIT Interest Other Income PBT Less: Taxation Less: Minority Interest Recurring PAT Exceptional items Reported PAT EPS Source: Company, BOBCAPSe Equity research 2

3 Financials Exhibit 3: Income Statement Net sales 2,287 2,445 2,850 3,597 4,354 5,134 growth (%) COGS 1,574 1,682 1,959 2,418 2,905 3,400 Staff Cost R&D Cost SG&A Cost EBITDA growth (%) (1) Depreciation EBIT Other income Interest paid Extraordinary items PBT Tax Minority interest PAT Non-recurring items Adjusted PAT growth (%) (14) Source: Company, BOBCAPSe Exhibit 4: Balance Sheet Cash & Bank balances Other Current assets 1,387 1,455 1,771 2,033 2,400 2,780 Investments Net fixed assets ,077 1,091 1,088 Goodwill Other non-current assets Total assets 2,216 2,327 2,751 3,569 3,946 4,409 Current liabilities ,111 Borrowings Other non-current liabilities Total liabilities 1,316 1,360 1,672 1,702 1,830 1,967 Share capital Reserves & surplus ,731 1,980 2,307 Shareholders' funds ,079 1,867 2,115 2,442 Total liabilities 2,216 2,327 2,751 3,569 3,946 4,409 Equity research 3

4 Exhibit 5: Cash Flow Statement Profit after tax Depreciation Chg in working capital (190) (129) (126) (142) (239) (242) Total tax paid (0) Cash flow from operations (33) Capital expenditure (128) (75) (40) (500) (100) (100) Change in investments (1) 0 (0) Cash flow from investments (129) (75) (40) (500) (100) (100) Free cash flow (161) (63) 46 (337) Issue of shares Net inc/dec in debt (89) - - Dividend (incl. tax) (14) (18) (32) (50) (68) (89) Other financing activities (0) 0 Cash flow from financing (68) (89) Inc/(Dec) in Cash & Bank bal. (41) (4) 88 Exhibit 6: Ratio analysis Y/E Mar FY13 F14 F15 F16e F17e F18e Per share data (Rs) EPS CEPS DPS BV Profitability ratios (%) Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE RoIC Equity research 4

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