Surya Roshni - Buy
Surya Roshni is a diversified company manufacturing steel pipes
and branded lighting products. During FY2010-12E, we expect
the company's top line and bottom line to register CAGRs of
23.8% and 39.0%, respectively. At the current price of Rs113,
the stock is trading at 5.7x its FY2012E standalone EPS.
Strong capacity expansion to lead to high sales growth: Surya
Roshni has completed its capacity expansion across products
in the lighting and steel divisions (including capacity increase
of 358% in CFL and 29% in steel pipes). Post the substantial
capacity expansion, sales contribution from the high-RoIC
lighting division is expected to increase, thereby increasing the
company's RoE from 19.7% to 20.4% over FY2010-12E, despite
an improvement in net debt-to-equity from 2.5x to 1.3x over
the same period. As an indication of its strong prospects, the
company has already delivered strong yoy growth of 24.6% in
its top line and 99.5% in net profit in 1QFY2011.
Strong brand in the lighting industry: Surya Roshni has been a
household name in the lighting space for over two decades.
The company’s CFL market share surged from 2.4% in FY2007
to 10.7% in FY2010, reflecting its increased dominance in the
space. The company has presence across more than 100,000
retail outlets. The company has maintained its brand identity
through substantial advertisement spend and a strong retail
network. In FY2010, the company spent more than Rs11cr on
advertisements, which is 2.0% of its lighting division's sales.
Promoters hiking their stake: The company's promoters have
subscribed to two rounds of warrant allocations. The first was
at a price of Rs59/share and the second at Rs83/share. The
first tranche was partially converted into equity in FY2010,
thereby increasing the promoters' stake to 29.1% from 25.3%
at the end of FY2009. We expect the remaining warrants to be
converted by FY2012, which will increase the promoters' share
to 55.0% from 29.1% currently. Overall, the promoters would
invest Rs133cr through these two rounds of warrant conversion.
Financial outlook: Surya Roshni is poised for strong growth
over the next few years, led by higher production from its
expanded capacities across products. The company's top line
is expected to grow to Rs2,751cr in FY2012E from Rs1,794cr
in FY2010, registering a 23.8% CAGR over FY2010-12E.
Quick Take
Research Analyst - Jai Sharda
Price - Rs113
Target Price - Rs143
Going ahead, since the contribution of the high-margin lighting
division to the top line is expected to increase, the company's
overall margins are also expected to expand to 7.5% in FY2012E
from 7.2% in FY2010. Surya Roshni's Kashipur unit is exempt
from income tax, as it is located in Uttaranchal, where it gets
tax benefits due to local regulations. We expect the tax rate to
remain at the current levels of ~16.0% in FY2011E, before
increasing marginally to 18.0% in FY2012E.
Valuation: Currently, Surya Roshni is trading at 5.7x and 1.0x
its FY2012E EPS and book value, respectively. Historically, it
has traded in the range of 3.4x to 9.5x its one-year forward
EPS, with the average of 6.6x one-year forward EPS. We have
valued the company on an SOTP basis, valuing the standalone
business at the five-year average P/E of 6.6x FY2012E EPS of
Rs19.9 and valuing the investment in subsidiary at 1.0x. We
assign a Buy rating to the stock with a Target Price of Rs143.Surya Roshni - Buy
Surya Roshni is a diversified company manufacturing steel pipes
and branded lighting products. During FY2010-12E, we expect
the company's top line and bottom line to register CAGRs of
23.8% and 39.0%, respectively. At the current price of Rs113,
the stock is trading at 5.7x its FY2012E standalone EPS.
Strong capacity expansion to lead to high sales growth: Surya
Roshni has completed its capacity expansion across products
in the lighting and steel divisions (including capacity increase
of 358% in CFL and 29% in steel pipes). Post the substantial
capacity expansion, sales contribution from the high-RoIC
lighting division is expected to increase, thereby increasing the
company's RoE from 19.7% to 20.4% over FY2010-12E, despite
an improvement in net debt-to-equity from 2.5x to 1.3x over
the same period. As an indication of its strong prospects, the
company has already delivered strong yoy growth of 24.6% in
its top line and 99.5% in net profit in 1QFY2011.
Strong brand in the lighting industry: Surya Roshni has been a
household name in the lighting space for over two decades.
The company’s CFL market share surged from 2.4% in FY2007
to 10.7% in FY2010, reflecting its increased dominance in the
space. The company has presence across more than 100,000
retail outlets. The company has maintained its brand identity
through substantial advertisement spend and a strong retail
network. In FY2010, the company spent more than Rs11cr on
advertisements, which is 2.0% of its lighting division's sales.
Promoters hiking their stake: The company's promoters have
subscribed to two rounds of warrant allocations. The first was
at a price of Rs59/share and the second at Rs83/share. The
first tranche was partially converted into equity in FY2010,
thereby increasing the promoters' stake to 29.1% from 25.3%
at the end of FY2009. We expect the remaining warrants to be
converted by FY2012, which will increase the promoters' share
to 55.0% from 29.1% currently. Overall, the promoters would
invest Rs133cr through these two rounds of warrant conversion.
Financial outlook: Surya Roshni is poised for strong growth
over the next few years, led by higher production from its
expanded capacities across products. The company's top line
is expected to grow to Rs2,751cr in FY2012E from Rs1,794cr
in FY2010, registering a 23.8% CAGR over FY2010-12E.
Going ahead, since the contribution of the high-margin lighting
division to the top line is expected to increase, the company's
overall margins are also expected to expand to 7.5% in FY2012E
from 7.2% in FY2010. Surya Roshni's Kashipur unit is exempt
from income tax, as it is located in Uttaranchal, where it gets
tax benefits due to local regulations. We expect the tax rate to
remain at the current levels of ~16.0% in FY2011E, before
increasing marginally to 18.0% in FY2012E.
Valuation: Currently, Surya Roshni is trading at 5.7x and 1.0x
its FY2012E EPS and book value, respectively. Historically, it
has traded in the range of 3.4x to 9.5x its one-year forward
EPS, with the average of 6.6x one-year forward EPS. We have
valued the company on an SOTP basis, valuing the standalone
business at the five-year average P/E of 6.6x FY2012E EPS of
Rs19.9 and valuing the investment in subsidiary at 1.0x. We
assign a Buy rating to the stock with a Target Price of Rs143.
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