Earnings resilient, Retain Buy rating on Apar :; centrum

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Rating: Buy; Target Price: Rs530; CMP: Rs421; Upside: 26%



Earnings resilient, Retain Buy



We retain Buy rating on Apar with a revised price target of Rs530
(Rs470 earlier). The quarter saw robust capacity utilisation in
conductor business and stellar EBITDA per unit in the conductor,
transformer and speciality oil businesses. Over the next 1-2 quarters,
we expect earnings to remain weak for the conductor business with
likely pricing pressure for its oil business, but a bounce from FY16E.
We remain overall optimistic on Apar owing to its market leadership in
all segments, superior margins even on a conservative basis and bounce
in return ratios. Its steep discount to peers caps downside and makes
it very attractive.

$ Strong conductor earnings lend support: The stellar business
performance in conductors was led by high capacity utilization of 103%
and robust EBITDA/MT of Rs11,965 (+6% QoQ). Despite large execution of
low margin export orders, EBITDA margins were buoyant owing to an
order win of Rs3bn in Sep-14 from PGCIL and immediate part execution
of Rs1bn of this high margin order. In 2HFY15, we expect buoyancy in
capacity utilization but a sharp dip in EBITDA/MT as adverse impact of
high LME physical premium cost for its export orders is recognized.

$ Transformer and Speciality oil earnings remain resilient; Margin in
cables dip: Despite the challenging environment, average EBITDA/KL at
Rs4687 reflects resilience and is above estimates. If competition
resorts to price cuts, pricing pressure in transformer and white oils
could be felt in 2HFY15, though discipline was maintained YTD. The
impact will partly be offset with the kick-start in supply of high
margin (1.5x average margin) oil to 400KV and above transformers where
Apar has 65% market share and increase in market share of auto oil and
lubricants which command 15-20% EBITDA margin. Margins in cable
business dipped momentarily owing to skewed sales mix, but management
has guided for a bounce in 2HFY15.

$ Outlook: Apar with its dominant market share and diverse product mix
in conductors, transformer oil and E-beam cables will remain the key
beneficiary of renewed government focus on transmission and
distribution that will lead to imminent upcycle in industry capex
after a 3-year lull. We remain positive on Apar as (1) it would be FCF
positive in the forecast period; (2) margins and return ratios are set
to expand across the matrix; (3) volatility in earnings would subside
with renewed sales mix leading to execution of high margin orders and
a stable INR/USD and (4) stock price is trading at a steep discount to
peers, which caps downside.

$ Valuations and key risks: We retain BUY rating with a revised PT of
Rs530. The revision is led by roll-forward in valuation base to
Mar-17E from earlier Sep-16E. We emphasise that for such a turnaround
case, only FY17 would represent a return to stable earnings and hence
we valued it on FY17. Also, the possibility of monetising each
division can make it a multi-bagger, a potential not factored-in. Key
downside risks are (1) Lower margins; (2) Acquisition/Investment which
are not EPS accretive and (3) Skewed product mix. The stock has
limited coverage on the street.



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