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GUJARAT APOLLO LIMITED (GAL)
PRICE: RS.174
RECOMMENDATION: BUY
TARGET PRICE: RS.270
FY12E P/E: 6.8X
q NHAI has been sluggish in awarding fresh road projects vis-à-vis last
year. Pick up in NHAI and government spending is likely to spill over to
FY12. However, broader outlook for company's revenue growth remains
positive in medium to long term.
q Company is likely to report slippage in sales from FY11 to FY12 on account of elongated monsoon season this year and current slowdown in
NHAI activity for awarding new projects.
q Recently, from second half of third quarter, company has been observing
pick up in enquiries and orders from its key clients.
q We believe that the company would maintain its dominant position in
the domestic market. However we tweak our earning estimates downward to account for possible earning slippage and slight margin contraction due to increasing input prices.
q We remain positive on the road equipment sector as well as on the company and recommend 'BUY' with a one year DCF based price target of
Rs.270 (290 earlier).
Management Meet Highlights
We recently met with the management of GAL and visited its Mehensana plant to
get a perspective on the overall business environment unfolding in domestic and
overseas markets. Below are the key highlights of our interaction.
n Company has been experiencing a slight hold up in the business. This is due to
1) elongated monsoons in current year which has lead to slippage in revenues
from Q3FY11 to Q4FY11 and Q1FY12 and 2) lately, NHAI has slowed down in
awarding new road projects.
n Company has been observing slowdown mainly in the IPG segment. Demand for
pavers especially Hydraulic Pavers has been almost in line with expectation.
n Post monsoon, company has been observing pick up in enquiries (and orders)
from its key customers. However this is slightly lesser than what was anticipated
earlier. We opine that this is mainly due to the slowdown from NHAI.
n We reiterate that elongated monsoon season this year is likely to increase fund
allocations from NHAI and states agencies for road refurbishment programs. Government has made a fresh allocation of Rs.40 bn for these programs. We believe
that this would also get reflected in FY12.
n Management opines that the current slowdown is temporary and expects it to
get recovered in Q4FY11 and FY12.
n Company is currently observing continued interest from the overseas markets
especially Africa and Middle East. However, management has highlighted intensifying competition in some of these areas.
n Other than various low cost producers from China and Korea, several Indian players are also gaining grounds in these regions. However, management expects
reaching pre-slowdown levels of earning 25-30% of revenues from exports.
n Management has highlighted that the increase in input prices are likely to have
a slightly negative impact on the margins. However company is making all possible efforts to contain this and pass on the increased cost to the end customers.
n Company has highlighted the need for constant technological and product up
gradation on back of efficient R&D initiatives. GAL offers a wide product range
relevant for Indian conditions.
n Management expects to maintain its leadership position in key product categories. Company enjoys nearly 30-35% market share in key product categories
with over 50% market share in Ashphalt pavers.
n Management highlights that company's current capacity is adequate to suffice
the current demand and would not have to incur any capex w.r.t. Greenfield
expansion.
Financials
n We tweak our earning estimates downward to factor likely slippage in earnings
in the current year and deferment in new road project awards from NHAI.
n We opine that revenue growth in Q3FY11E is likely to remain muted due to large
base effect. We highlight that Q3FY10 has been the best quarter for the company so far and therefore even matching up with those levels would be meaningful.
n We build a 16.5% CAGR in revenues between FY10-12E from Rs.2.6 bn in FY10
to Rs.3.5 bn in FY12E. We reduce our margin estimates by 150 bps in FY11 to
account for increase in input prices.
n We also expect exports demand to improve in FY12E mainly attributed by low
base effect and recovery in the Middle East and African markets. We also
project stability in replacement market and growth in revenues through growth
refurbishment programs in FY12.
n We expect that any firming up in raw material prices from the current levels
should get obviated with likely increase in sales in future. Therefore we expect
margins to be maintained in FY12E.
n Company has reported increase in working capital in Q2FY11 mainly due to pile
up in finished goods inventory. We expect that going forward company would
reduce its working capital.
n With strong debt free balance sheet, we expect that the company is likely to
report EBITDA margins of 19.2% and PAT margins of 12% in FY12.
n Change in earning estimates
Valuation and Recommendation
n In view of the revised earnings affected by us, we arrive at a DCF based one
year price target of Rs 270 (290 earlier).
n At current price of Rs.176, stock is trading at 8.9x and 6.8x P/E and 5.1x and
4.0x EV/EBITDA multiples for FY11E and FY12E respectively.
n We maintain BUY rating and a target price of Rs.270 (290 earlier), over a 12-
month horizon.
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