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GUJARAT APOLLO LIMITED (GAL)
RECOMMENDATION: BUY
TARGET PRICE: RS.237
FY11E P/E: 6.8X
q GAL Q3FY11 results are below our expectation on revenue as well as
profitability front. Revenues de-grew due to high base effect and sluggish
spending by NHAI.
q Margins decline on account of higher input prices; company restrained
from taking price hike as its customers are getting affected by increasing
interest rates and hold up in public investing.
q Improvement in infrastructure spending is critical for the IE (Infrastructure
equipment) sector. Company is likely to report slippage in sales
from FY11 to FY12.
q We moderate our earnings growth and margins estimates for FY11-12E.
Any recovery in infrastructure spending would have a positive impact on
company's financials.
q We maintain our 'BUY' rating on the stock with revised price target of
Rs.237 (Rs.270 earlier).
Result Highlights
n GAL revenues decreased by 23% YoY and increased 6% sequentially at Rs 463
mn in Q3FY11. Revenues got affected from 1) higher base of Q3FY10 which is
reported as company's best quarter from historical perspective and 2) muted
spending on road projects by NHAI and state governments.
n Company reported EBITDA margins at 18.5% via-a-via 22.6% last year. This is
mainly due to the substantial increase in input prices. Management has stated
that it is difficult to take price hike in the current situation where its key customers
are facing headwinds from increasing interest rates and sluggish public
spending.
n Company reported a 6.6% YoY growth in consolidated revenues in 9mFY11. We
expect it to report muted revenue growth in FY11 and slippage of revenues to
FY12.
n Company reported an exceptional income of Rs 171 mn in this quarter on account
of sale of land in its subsidiary Appolo Earthmovers Ltd.
n Adjusted for the one off effect from this, company has reported a 11% degrowth
in profits in 9MFY11E (consolidated).
n Company's revenue mix remains more or less same with 35% contribution from
BMP (Batch mix plants) and 30% from Pavers (both Hydraulic and Mechanical).
Company has been observing a slight pick up in demand for Drum mix plants.
n Going ahead we believe that the company is likely to observe pressure on margins
before it can pass on the commodity price inflation to the customers. In our
estimates we build 17% EBITDA margins for FY11.
n Management has also indicated that the company has offered certain discounts
in the IPG products to its customers to give thrust to sales. We believe that this is
also one of the reasons for depressed margins in last two quarters.
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 While company reported PAT at Rs 52 mn in the quarter vis-à-vis Rs 88 mn in
Q3FY10 and Rs 40 mn in the previous quarter. We opine that the company is
likely to observe traction over FY12 subject to revival in public spending on road
infrastructure.
Financials
n We project 12% CAGR in revenues over FY10-12E from Rs. 2.5 bn in FY10 to Rs.
3.2 bn in FY12E. Within the revenue streams, we expect domestic sales to grow
by 12% CAGR on account of recover in FY12 on spending on road infrastructure.
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 the replacement market.
n We opine that the company would continue to prudently manage its overhead
expenses in the current increasing commodity prices scenario.
n We expect that the company is likely to take a price hike across key product
categories in FY12 and report EBITDA margins of 17-18% going ahead.
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.
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 237 (270 earlier).
n At current price of Rs.147, stock is trading at 8.7x and 6.8x P/E and 5.3x and
4.1x EV/EBITDA multiples for FY11E and FY12E respectively.
n We maintain BUY rating and a target price of Rs.237 (270 earlier), over a 12-
month horizon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GUJARAT APOLLO LIMITED (GAL)
RECOMMENDATION: BUY
TARGET PRICE: RS.237
FY11E P/E: 6.8X
q GAL Q3FY11 results are below our expectation on revenue as well as
profitability front. Revenues de-grew due to high base effect and sluggish
spending by NHAI.
q Margins decline on account of higher input prices; company restrained
from taking price hike as its customers are getting affected by increasing
interest rates and hold up in public investing.
q Improvement in infrastructure spending is critical for the IE (Infrastructure
equipment) sector. Company is likely to report slippage in sales
from FY11 to FY12.
q We moderate our earnings growth and margins estimates for FY11-12E.
Any recovery in infrastructure spending would have a positive impact on
company's financials.
q We maintain our 'BUY' rating on the stock with revised price target of
Rs.237 (Rs.270 earlier).
Result Highlights
n GAL revenues decreased by 23% YoY and increased 6% sequentially at Rs 463
mn in Q3FY11. Revenues got affected from 1) higher base of Q3FY10 which is
reported as company's best quarter from historical perspective and 2) muted
spending on road projects by NHAI and state governments.
n Company reported EBITDA margins at 18.5% via-a-via 22.6% last year. This is
mainly due to the substantial increase in input prices. Management has stated
that it is difficult to take price hike in the current situation where its key customers
are facing headwinds from increasing interest rates and sluggish public
spending.
n Company reported a 6.6% YoY growth in consolidated revenues in 9mFY11. We
expect it to report muted revenue growth in FY11 and slippage of revenues to
FY12.
n Company reported an exceptional income of Rs 171 mn in this quarter on account
of sale of land in its subsidiary Appolo Earthmovers Ltd.
n Adjusted for the one off effect from this, company has reported a 11% degrowth
in profits in 9MFY11E (consolidated).
n Company's revenue mix remains more or less same with 35% contribution from
BMP (Batch mix plants) and 30% from Pavers (both Hydraulic and Mechanical).
Company has been observing a slight pick up in demand for Drum mix plants.
n Going ahead we believe that the company is likely to observe pressure on margins
before it can pass on the commodity price inflation to the customers. In our
estimates we build 17% EBITDA margins for FY11.
n Management has also indicated that the company has offered certain discounts
in the IPG products to its customers to give thrust to sales. We believe that this is
also one of the reasons for depressed margins in last two quarters.
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 While company reported PAT at Rs 52 mn in the quarter vis-à-vis Rs 88 mn in
Q3FY10 and Rs 40 mn in the previous quarter. We opine that the company is
likely to observe traction over FY12 subject to revival in public spending on road
infrastructure.
Financials
n We project 12% CAGR in revenues over FY10-12E from Rs. 2.5 bn in FY10 to Rs.
3.2 bn in FY12E. Within the revenue streams, we expect domestic sales to grow
by 12% CAGR on account of recover in FY12 on spending on road infrastructure.
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 the replacement market.
n We opine that the company would continue to prudently manage its overhead
expenses in the current increasing commodity prices scenario.
n We expect that the company is likely to take a price hike across key product
categories in FY12 and report EBITDA margins of 17-18% going ahead.
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.
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 237 (270 earlier).
n At current price of Rs.147, stock is trading at 8.7x and 6.8x P/E and 5.3x and
4.1x EV/EBITDA multiples for FY11E and FY12E respectively.
n We maintain BUY rating and a target price of Rs.237 (270 earlier), over a 12-
month horizon.
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