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GUJARAT APOLLO LIMITED (GAL)
RECOMMENDATION: BUY
TARGET PRICE: RS.237
FY12E P/E: 6.8X
q Our interaction with the industry majors' viz. IRB, IVRCL has highlighted
positive outlook for the road construction activity. Recently NHAI has
also expedited its process of allotment of new road contracts.
q Company has been observing slow-moving demand for its equipment
mainly due to sluggish road projects awarding from NHAI through Q1-
Q3FY11. However meaningful YoY growth in FY12E revenues expected
on account of 1) order flows from newly awarded road projects mainly
in Q4FY11 2) lower base of FY11E.
q Margins are expected to remain subdued in short run on account of
higher input prices; company has restrained itself from taking price hike
as its key customers are affected by adverse interest scenario.
q We believe that the company would maintain its dominant position in
the domestic market. 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 237.
Key highlights about the company
We recently had con call with the management of GAL to get a perspective on the
overall business environment unfolding in the domestic and overseas markets. Below
are the key highlights of our interaction.
n Company has been experiencing a slight hold up in the business. However, industry
looks attractive on account of order flows from NHAI that has expedited in
4QFY11. We believe, that this is likely to benefit the company and the peer
group (TIL, Greaves Cotton) with a lag of 2-3 quarters.
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 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 We believe that going ahead the company is likely to observe pressure on margins
before it can pass on the commodity price inflation to the customers.
Company's customers are getting negatively impacted by the current higher interest
rates in the system.
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 Asphalt pavers.
n Going ahead, company's revenue mix is expected to remain 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.
Financial Outlook
n In FY11 NHAI has awarded approximately 5100 Kms of new road orders vis-à-vis
3300 kms in FY10. Major portion of which came in the later part of FY11. NHAI
has recently stated that it will award close to 7300 kms of new road orders in
FY12.
n We believe that this augers well for TIL and Gujarat Apollo. Orders should flow to
these companies from players like IRB etc after the achievement of financial closure
of various road projects.
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
at a CAGR of 14% on account of recovery in FY12 due to increased expenditure
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 At current price of Rs.145, stock is trading at 6.8x P/E and 4.1x EV/EBITDA on
FY12E respectively.
n We maintain BUY rating on company’s stock with a DCF based target price of
Rs.237, 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
FY12E P/E: 6.8X
q Our interaction with the industry majors' viz. IRB, IVRCL has highlighted
positive outlook for the road construction activity. Recently NHAI has
also expedited its process of allotment of new road contracts.
q Company has been observing slow-moving demand for its equipment
mainly due to sluggish road projects awarding from NHAI through Q1-
Q3FY11. However meaningful YoY growth in FY12E revenues expected
on account of 1) order flows from newly awarded road projects mainly
in Q4FY11 2) lower base of FY11E.
q Margins are expected to remain subdued in short run on account of
higher input prices; company has restrained itself from taking price hike
as its key customers are affected by adverse interest scenario.
q We believe that the company would maintain its dominant position in
the domestic market. 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 237.
Key highlights about the company
We recently had con call with the management of GAL to get a perspective on the
overall business environment unfolding in the domestic and overseas markets. Below
are the key highlights of our interaction.
n Company has been experiencing a slight hold up in the business. However, industry
looks attractive on account of order flows from NHAI that has expedited in
4QFY11. We believe, that this is likely to benefit the company and the peer
group (TIL, Greaves Cotton) with a lag of 2-3 quarters.
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 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 We believe that going ahead the company is likely to observe pressure on margins
before it can pass on the commodity price inflation to the customers.
Company's customers are getting negatively impacted by the current higher interest
rates in the system.
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 Asphalt pavers.
n Going ahead, company's revenue mix is expected to remain 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.
Financial Outlook
n In FY11 NHAI has awarded approximately 5100 Kms of new road orders vis-à-vis
3300 kms in FY10. Major portion of which came in the later part of FY11. NHAI
has recently stated that it will award close to 7300 kms of new road orders in
FY12.
n We believe that this augers well for TIL and Gujarat Apollo. Orders should flow to
these companies from players like IRB etc after the achievement of financial closure
of various road projects.
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
at a CAGR of 14% on account of recovery in FY12 due to increased expenditure
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 At current price of Rs.145, stock is trading at 6.8x P/E and 4.1x EV/EBITDA on
FY12E respectively.
n We maintain BUY rating on company’s stock with a DCF based target price of
Rs.237, over a 12-month horizon.
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