Surya Roshni – 2QFY2011 Result Update Angel Broking

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 Surya Roshni – 2QFY2011 Result Update

Angel Broking maintains an Buy on Surya Roshni with a Target Price of Rs143.

Surya Roshni (Surya) reported top-line growth of 12.4% yoy to `597cr (`532cr)

which was below our expectations. However, there was a 52bp improvement in

OPM to 5.5% (5.0%), which was in line with our estimates. However, there was an

increase in interest cost and tax rate. Overall, net profit increased 45.3% to `7cr

(`5cr). The company has expanded its capacity across products in recent years.

Going ahead, this expanded capacity is expected to start contributing to sales,

thereby driving the company’s growth. At current levels, the stock is trading at

attractive valuations. Hence, we maintain a Buy on the stock.

Top-line growth sluggish; margins expand: Surya reported sluggish

top-line growth for the quarter mainly because of slow yoy growth of 8.3% in the

steel products division. However, the lighting division sales increased a healthy

21.2% yoy. Overall, contribution from the lighting division to sales increased to

34.0% in the quarter. As a result, OPM improved to 5.5%. Net profit increased

45.2% owing to the 12.4% growth in sales and expansion in margins.

Outlook and Valuation: We remain bullish on the company’s business prospects,

given completion of its recent expansion and strong presence in the lighting

space. Higher contribution from the lighting division is expected improve the

company’s margin going ahead. We expect the company to post revenue CAGR

of 23.8% over FY2010-12, while net profit is expected at `97cr in FY2012,

increasing at a CAGR of 46.6% over the period. Our bullish stance on the

company is further reinforced with the promoters’ hiking their stake from 29.1%

to 55.0%. Currently, the stock is trading at 8.9x and 5.7x FY2011E and FY2012E

standalone EPS, respectively. We maintain a Buy on the stock with an SOTP

Target Price of `143.

Other Developments

􀂄 Management is confident of achieving strong growth in sales over the coming

years. The money infused from the warrant conversion would be used to meet

working capital and other requirements.

􀂄 The promoters converted the warrants issued earlier; during the quarter, fresh

warrants worth `60.8cr, convertible at `111/share were also issued.

􀂄 The conversion of warrants during the quarter triggered an open offer to

acquire up to 20% of the company outstanding equity at the offer price of

`111/share. The offer would remain open from December 08, 2010 to

December 27, 2010.

􀂄 Owing to the conversion of warrants, the promoters’ stake has increased to

55.0%. When the fresh warrants are converted, promoters’ stake would further

increase to 60.0%, assuming there is no tendering of shares in the open offer.

Investment Arguments

Large capacity expansion to lead to high sales growth: Surya has completed its

capacity expansion across products, including capacity increase of 358% in

compact fluorescent lamps (CFL) and 29% in steel pipes. This is expected to result

in high sales growth at a 23.8% CAGR over FY2010–12. Post the substantial

capex, sales contribution from the high-RoIC lighting division is expected to

increase, thereby resulting in RoE of 19.2%. In the same period, net debt-to-equity

is expected to reduce from 2.5x to 1.0x. The company has delivered strong yoy

growth of 17.7% in top line and 70.5% in net profit in 1HFY2011, indicating its

strong prospects.

Strong brand in the lighting industry: Surya has been a household name in the

lighting space for over two decades. The company has presence across more than

100,000 retail outlets. Surya has maintained its brand identity through substantial

advertisement spend and a strong retail network. In FY2010, the company spent

more than `11cr on advertisements, which is 2.0% of its lighting division sales.

Promoters hiking their stake: The promoters have subscribed to three rounds of

warrant allocations, amounting to a total investment of `193cr. The first was at

`59/share, the second at `83/share and the third at `111/share. The first two

tranches have been converted into equity recently, increasing the promoters’ stake

to 55.0% from 24.1%. We expect the third round of warrants to be converted by

FY2012, which will increase the promoters’ stake to 60.0% from 55.0% currently.

Outlook and Valuation

We remain bullish on the company’s business prospects, given completion of its

recent expansion and strong presence in the lighting space. Higher contribution

from the lighting division is expected to improve the company’s margin going

ahead. We expect the company to post revenue CAGR of 23.8% over FY2010-12,

while net profit is expected at `97cr in FY2012, increasing at a CAGR of 46.6%

over the period. Our bullish stance on the company is further reinforced with the

promoters’ hiking their stake from 29.1% to 55.0%. Currently, the stock is trading

at 8.9x and 5.7x FY2011E and FY2012E standalone EPS, respectively. We

maintain a Buy on the stock with an SOTP Target Price of `143.