11 FEB 2016 Quarterly Update HOLD Target Price: Rs 377 Q3 muted; recovery ahead Astral sq3fy16 results were impacted due to: (1) adverse raw-material prices in pipe division (~Rs 80 mn), (2) closure of its plant at Baddi (Rs 10 mn) and (3) higher branding expenses in adhesive division. Moreover, pipe volume (up 4% YoY) was muted as dealersmaintained very low inventory in anticipation of price reduction in pipes. Management is confident of significant volume and value growth in Q4 - best quarter for pipes (~35% of yearly revenue), as demand picks up and RM has turned favorable. Moreover, adhesive division will continue 20-25% revenue growth with EBITDA margin improving 100 bps p.a. to~13% in FY18 as the division benefits from lower logistics cost and synergies accruing from distribution/cross selling. CMP : Rs 411 Potential Upside : -8% MARKET DATA. of Shares : 120 mn Free Float : 40% Market Cap : Rs 49 bn 52-week High / Low : Rs 534 / Rs 311 Avg. Daily vol. (6mth) : 50,134 shares Bloomberg Code : ASTRA IB Equity Promoters Holding : 60% FII / DII : 12% / 6% Maintain HOLD with revised TP of Rs 377 (25x FY17E) vs. Rs 396 earlier: We lower our FY16E and FY17E EPS to Rs11 andrs15 (Rs 12and Rs 17 earlier) to factor in 15% volume growth in piping division (20% earlier). While we remain positive on the long term prospects, valuations at 27x FY17E and 23x FY18E seem stretched. Key highlights Pipe division: Astral reported 5% YoY increase in revenue to Rs 3 bn, with volume growthof 4% to 18,463 MT. As raw material prices stabilize, EBIT margin is set to improve from the current 6%.Instead of importing CPVC (raw material), ithaspartially started procurement locally as Lubrizol commenced its India plant(dahej, Gujarat) in January 2016. This will benefit Astral as its forex volatility will recede and working capital requirementwill reduce. We expect 15%+ volume growth over FY15-18in pipes led by (1) new products like Blazemaster (CPVC fire sprinklers), low noise drainage system and column pipes (agri), (2) improving brand recognition and wider distribution reach, and (3) growing preference for branded plastic pipes Financial summary (Consolidated) Sales (Rs mn) 14,294 18,060 21,101 24,787 Adj PAT (Rs mn) 759 1,258 1,787 2,125 Con. EPS* (Rs.) - 10.6 15.1 17.6 EPS (Rs.) 6.4 10.6 15.1 18.0 Change YOY (%) (8.7) 65.7 42.1 19.0 P/E (x) 64.1 38.7 27.2 22.9 RoE (%) 16.2 18.8 22.7 22.8 RoCE (%) 22.2 22.8 28.2 29.5 EV/E (x) 29.8 22.0 16.9 14.2 DPS 1.3 2.0 3.0 4.0 Source: *Consensus broker estimates, Company, Axis Capital Key drivers Revenue growth FY16E FY17E FY18E Pipes 9% 15% 15% Adhesives 14%- 25% 25% Price performance 140 120 100 Sensex Astral Polytechnik 80 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 01
Exhibit 1: Results update 11 FEB 2016 Quarterly Update Quarter ended 12 months ended (Rs. mn) Dec-15 Dec-14 % Chg Sep-15 % Chg FY16E FY15 % Chg Net Sales 4,119 3,649 13 4,028 2 18,060 14,294 26 EBIDTA 403 354 14 521 (23) 2,250 1,678 34 Other income 2 9 (82) 3 (52) 25 36 (31) PBIDT 405 363 12 524 (23) 2,275 1,714 33 Depreciation 110 101 9 103 7 413 364 13 Interest 40 56 (28) 38 7 145 255 (43) PBT 255 206 24 384 (34) 1,717 1,095 57 Tax 35 37 (4) 131 (73) 429 313 37 Share from Associate (5) - - (10) - 30 23 32 Adjusted PAT 214 169 27 242 (12) 1,258 759 66 Extra ordinary income/ (exp.) (36) - - (61) (40) - - - Reported PAT 178 169 6 181 (2) 1,258 759 66. of shares (mn) 120 118 1 118 1 118 118 - EBIDTA margin (%) 9.8 9.7-12.9-12.5 11.7 - PBIDT margin (%) 9.8 10.0-13.0-12.6 12.0 - EPS - annualized (Rs) 7.2 5.7 26 8.2 (13) 10.6 6.4 66 Source: Company, Axis Capital ( continued from page 1) Adhesives: The division reported revenue of Rs 1 bn, while EBIT stood at Rs 101 mn, implying an EBIT margin of 10%. Results for the quarter are not comparable as Resinova and Seal IT services (UK) were acquired by Astral in H2FY15. Commissioning of the new adhesive plant in Gujarat is underway. This plant will manufacture the entire range of adhesive products (incl. products from Seal IT Services currently being manufactured in UK). We expect significant savings in logistics as most production shifts from Kanpur plant to Gujarat (key end user market in Western and Southern India). Moreover, synergies accruing from distribution and cross selling should help improve margin in the adhesive division. Astral will benefit from tax write backs as the amalgamation of ResinovaChemie with Advanced Adhesives has been approved. Astral is focusing on volume growth and increasing market share. It intends to invest on brand building and believes margin will follow.astral has started to re-brand and re-package all products of Resinova.It has written off old packaging which along with higher branding and promotional expenses(rs 20 mn) has dented profit margin Both Resinova and Seal IT services have strong product portfolio of adhesives, construction chemicals, silicones and water proofing solution. With a wide distribution channel and strong R&D, we expect the division to post 20% revenue CAGR over FY15-18 and margin to improve to ~13% in FY18 (100 bps improvement p.a.). 02
Financial summary (Consolidated) Profit &loss (Rs mn) Net sales 14,294 18,060 21,101 24,787 Other operating income - - - - Total operating income 14,294 18,060 21,101 24,787 Cost of goods sold (10,643) (13,635) (15,910) (18,652) Gross profit 3,651 4,425 5,191 6,135 Gross margin (%) 25.5 24.5 24.6 24.8 Total operating expenses (1,974) (2,175) (2,322) (2,797) EBITDA 1,678 2,250 2,869 3,337 EBITDA margin (%) 11.7 12.5 13.6 13.5 Depreciation (364) (413) (452) (490) EBIT 1,313 1,837 2,417 2,847 Net interest (255) (145) (25) (3) Other income 36 25 30 30 Profit before tax 1,095 1,717 2,422 2,874 Total taxation (313) (429) (606) (718) Tax rate (%) 28.6 25.0 25.0 25.0 Profit after tax 782 1,288 1,817 2,155 Minorities - - - - Profit/ Loss associate co(s) (23) (30) (30) (30) Adjusted net profit 759 1,258 1,787 2,125 Adj. PAT margin (%) 5.3 7.0 8.5 8.6 Net non-recurring items - - - - Reported net profit 759 1,258 1,787 2,125 Balance sheet (Rs mn) Paid-up capital 118 118 118 118 Reserves & surplus 6,069 7,050 8,421 9,993 Net worth 6,353 7,364 8,765 10,367 Borrowing 1,387 850 50 - Other non-current liabilities 177 177 177 177 Total liabilities 11,653 12,071 13,279 15,568 Gross fixed assets 4,826 5,326 5,826 6,326 Less: Depreciation (1,402) (1,815) (2,266) (2,756) Net fixed assets 3,424 3,512 3,560 3,570 Add: Capital WIP 268 - - - Total fixed assets 3,693 3,512 3,560 3,570 Total Investment - - - - Inventory 2,656 3,284 3,837 4,507 Debtors 2,327 2,257 2,638 3,098 Cash & bank 115 132 290 1,362 Loans & advances 702 722 791 868 Current liabilities 3,736 3,680 4,288 5,025 Net current assets 2,080 2,735 3,288 4,829 Other non-current assets 2,144 2,144 2,144 2,144 Total assets 11,653 12,071 13,279 15,568 Source: Company, Axis Capital Cash flow (Rs mn) 11 FEB 2016 Quarterly Update Profit before tax 1,095 1,717 2,422 2,874 Depreciation & Amortisation (364) (413) (452) (490) Chg in working capital (306) (635) (395) (470) Cash flow from operations 1,170 1,236 1,929 2,209 Capital expenditure (858) (768) (500) (500) Cash flow from investing (3,435) (768) (500) (500) Equity raised/ (repaid) 2,359 - - - Debt raised/ (repaid) 313 (537) (800) (50) Dividend paid (47) (237) (355) (473) Cash flow from financing 2,371 (919) (1,180) (527) Net chg in cash 106 (452) 249 1,182 Key ratios OPERATIOL FDEPS (Rs) 6.4 10.6 15.1 18.0 CEPS (Rs) 9.5 14.1 18.9 22.1 DPS (Rs) 1.3 2.0 3.0 4.0 Dividend payout ratio (%) 20.3 18.8 19.9 22.3 GROWTH Net sales (%) 32.4 26.3 16.8 17.5 EBITDA (%) 8.2 34.1 27.5 16.3 Adj net profit (%) (3.8) 65.7 42.1 19.0 FDEPS (%) (8.7) 65.7 42.1 19.0 PERFORMANCE RoE (%) 16.2 18.8 22.7 22.8 RoCE (%) 22.2 22.8 28.2 29.5 EFFICIENCY Asset turnover (x) 2.4 2.3 2.5 2.8 Sales/ total assets (x) 1.5 1.5 1.7 1.7 Working capital/ sales (x) 0.1 0.1 0.1 0.1 Receivable days 59.4 45.6 45.6 45.6 Inventory days 76.8 75.8 76.8 76.7 Payable days 105.5 82.9 83.7 83.5 FINCIAL STABILITY Total debt/ equity (x) 0.3 0.1 - - Net debt/ equity (x) 0.3 0.1 - (0.1) Current ratio (x) 1.6 1.7 1.8 2.0 Interest cover (x) 5.2 12.6 96.7 876.1 VALUATION PE (x) 64.1 38.7 27.2 22.9 EV/ EBITDA (x) 29.8 22.0 16.9 14.2 EV/ Net sales (x) 3.5 2.7 2.3 1.9 PB (x) 7.9 6.8 5.7 4.8 Dividend yield (%) 0.3 0.5 0.7 1.0 Free cash flow yield (%) 0.6 1.0 2.9 3.5 Source: Company, Axis Capital 03
11 FEB 2016 Quarterly Update Disclosures: 1. Business Activity: Axis Securities Limited (ASL) is engaged in the business of providing Retail broking services & distribution of various financial products. ASL is also registered with SEBI as Research Analyst under SEBI regn.no.inh000000297 2. Disciplinary History: There has been no instance of any Disciplinary action, penalty/stricture etc. levied/passed by any regulators/administrative agencies against ASL and its Directors. Pursuant to SEBI inspection of books and records of ASL as a Stock Broker, SEBI has issued an Administrative warning to ASL in 2014. 3. Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. 4. Details of Associates: ASL is a 100% subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company. The following are the SEBI Registration s. Particulars Merchant Banking (Category 1) Bankers to the Issue Debenture Trustee Custodian of Securities NSDL CDSL Clearing Member (MCX-SX Futures & Option) Clearing Member (NSE Future & Options) Clearing Member (BSE - Future & Options) Trading Clearing Member (NSE Currency Futures) Trading Clearing Member (MCX Currency Futures Trading Clearing Member (BSE Currency Futures) Trading Clearing Member (USE Currency Futures) Portfolio Manager Other Associates are as follows: Sr. Name of the Associates 1 Axis Private Equity Limited 2 Axis Trustee Services Ltd Particulars Axis Infrastructure Fund. It is registered with SEBI as a Domestic Venture Capital Fund under SEBI (Venture Capital Funds) Regulations 1996. It is registered with SEBI as a Debenture Trustee under Securities and Exchange Board of India (Debenture Trustees) Rules, 1993. 3 Axis Asset Management Company Limited Portfolio Management Services 4 5 Axis Mutual Fund Trustee Limited- It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. Axis Capital Limited - It is engaged in the business of providing stock broking services mainly to Institutional clients and HNIs and also into distribution of financial products. It is also a SEBI registered entity. It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. BSE - Stock Broking (Cash Segment) BSE - Stock Broking (Derivatives Segment) NSE - Stock Broking (Equity Segment) NSE - Stock Broking (Future & Options) NSE - Stock Broking (Currency Derivatives) BSE - Stock Broking (Wholesale Debt Market) Association of Mutual Funds of India (AMFI) Merchant Banker 04
11 FEB 2016 Quarterly Update 5. Disclosures with regard to ownership and material conflicts of interest: Sr.. Disclosures Yes/ Details, if applicable 1 ASL or its research analyst, his/her associate or relative has any direct or indirect financial interest in the subject company and the nature of such financial interest. 2 ASL or its associates, research analyst, his/her relatives have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report. 3 ASL or its Research analyst, his/her associate or relative, has any other material conflict of interest at the time of publication of the research report. 6. Disclosures with regard to receipt of compensation: Sr.. Disclosures Yes/ Details if applicable 1 ASL or its associates have received any compensation from the subject company in the past twelve months. Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 2 ASL or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months. Axis Capital Ltd., has managed or co-managed public offering of securities for various companies in the past twelve months 3 ASL or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 4 5 ASL or its associates have received any compensation for investment banking or merchant banking or brokerage services from subject company in the past twelve months. ASL or its associates have received any compensation or other benefits from the subject company or third party in connection with the research report. Axis Capital Ltd., has provided investment banking or merchant banking or brokerage services to various companies and received compensation in the past twelve months from such companies. 7. Other Disclosures: Sr.. Disclosures Yes/ Details, if applicable 1 The research analyst has served as an officer, director or employee of the subject company. 2 ASL or its research analyst has been engaged in market making activity for the subject company. 05
11 FEB 2016 Quarterly Update Disclaimer: The views expressed / recommendations made in this report are based on fundamental research and other inputs and could be at variance with the company s / group s views based on technical analysis. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of Axis Securities Limited (ASL). The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. 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