Buy GUJARAT APOLLO LIMITED (GAL): Target Rs 170: Kotak Securities PDF Link

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight13032012.pdf



GUJARAT APOLLO LIMITED (GAL)
PRICE: RS.136 RECOMMENDATION: BUY
TARGET  PRICE:  RS.170 FY13E P/E: 9.5X
q Gujarat Apollo has been observing sluggish demand across Mobile Equipment Group (MEG) divisions. Public spending in new road construction
and maintenance has slowed down due to 1) increase in interest rates 2)
issues related to land acquisition and environmental clearances continues
to affect execution 3) elections in five states including Uttar Pradesh led
to a halt in government spending in respective areas.
q Margins are expected to remain subdued in short and medium term for
the company on account of higher input prices. Company has taken few
price hikes in the past to partly pass on the raw material pressure to its
customers.
q Unlike TIL (that operates in North and East India), GAL has not been observing significant increase in receivables. Company continues to enjoy
strong balance sheet at the end of 9MFY12. We highlight that company's
stock has outperformed the BSE MIDCAP index in past one year.
q We believe that the company is well positioned to benefit from the likely
recovery in road construction and maintenance activity in India over
FY13. We maintain our 'BUY' recommendation with a one year DCF
based unchanged price target of Rs 170.
Company Highlights
We recently interacted with the management of GAL to get perspective on the overall business environment unfolding mainly in the domestic markets. Below are the
key highlights of our interaction.
n Company has been experiencing moderate pick up in the Industrial Product
Group (IPG) segment which includes Asphalt Batch-mix plants, Asphalt Drum-mix
plant and Crushing and Screening plants. However, the pickup in demand in still
significantly lower than expected.
n Order flows from NHAI have expedited in 9MFY12 and we believe that this is
likely to benefit the company and its peer group (TIL, Greaves Cotton) with a lag
of 2-3 quarters.
n Concerns regarding muted public spending on road construction and maintenance continue to exist. Road sector has been observing sluggish growth due to
1) YoY increase in interest rates 2) issues related to land acquisition and environmental clearances continues to interrupt execution 3) elections in five states including Uttar Pradesh led to a temporary halt in government spending in respective areas.
n Company has been observing slowdown primarily in the MEG segment. Demand
for Asphalt Paver and Hydraulic paver has significantly declined vis-à-vis last
year.
n In 9MFY12, GAL has reported muted YoY revenue growth in IPG segment to
Rs.1.2 bn. However, revenues in MEG segment at Rs 409 mn were significantly
lower vis-à-vis last year at Rs 542 mn. We highlight that in last quarter, MEG segment was negatively impacted by inability of BSII and BSIII compliant engines for
Hydraulic Pavers. This has led to the production halt of over one month in the
quarter.

Buy GUJARAT APOLLO ; TARGET PRICE: RS.170:: Kotak Sec,

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GUJARAT APOLLO LIMITED (GAL)
PRICE: RS.128 RECOMMENDATION: BUY
TARGET PRICE: RS.170 FY13E P/E: 7.1X
q GAL Q2FY12 results are in line with our estimates. Margins decline YoY
on account of higher input prices. Company has taken few price hikes to
partly pass on the raw material pressure to its customers. This is likely to
get reflected in 2HFY12.
q Lower sales in Subsidiary 'Apollo Earthmovers ltd' that deals in MEG
(Mobile Equipment Group) is attributed to the inability of BS II and BS III
engines that has led to the temporary production halt in the quarter.
q Equipment manufacturers have recently started to experience a slight
pick up in business activity. Recently NHAI has also expedited its process
of allotment of new road contracts. This is likely to auger well for the
company and the peer group in the medium term.
q We lower our estimates for FY12 to account for 1) operating margin pressure
due to commodity price inflation 2) increase in interest rate affecting
working capital financing.
q We recommend 'BUY' with a one year DCF based revised price target of
Rs 170 (Rs 195 earlier).

Buy GUJARAT APOLLO LIMITED (GAL) Target: RS.195 ::Kotak Sec

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GUJARAT APOLLO LIMITED (GAL)
PRICE: RS.131 RECOMMENDATION: BUY
TARGET PRICE: RS.195 FY12E P/E: 7.3X
q Our interaction with the management of GAL and other industry majors
has highlighted concerns regarding higher input prices and interest rates
affecting profitability of the Industry.
q Margins are expected to remain subdued in short and medium term for
the company on account of higher input prices. Company has taken few
price hikes in the past to partly pass on the raw material pressure to its
customers.
q However, after sluggish Q1FY12 (sales for Gujarat Apollo was down by
30% YoY in Q1) equipment manufacturers have now started to experience
a relative pick up in business activity. Recently NHAI has also expedited
its process of allotment of new road contracts. This is likely to auger
well for the company and the peer group in the medium term.
q We lower our FY12 earnings estimate for the company to factor in slowdown
in road construction activity and recommend 'BUY' with a one
year DCF based revised price target of Rs 195 (Rs 237 earlier).
We recently interacted with the management of GAL and other
industry players 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 GAL has been experiencing a slight recovery in the business after sluggish
Q1FY12. However, the pickup in demand in still significantly lower than expected.
Order flows from NHAI have expedited in 2QFY12 and we believe that
this is likely to benefit the company and its peer group (TIL, Greaves Cotton) with
a lag of 2-3 quarters.
n Company has been observing slowdown primarily in the MEG segment. Demand
for sprayers and Batch Mix Plants has almost been in line with expectation.
n Our interaction with the other industry players highlights that the major part of
the new demand is driven by the small and medium size road contractors. Demand
from larger players like IRB, IVRCL etc. has been broadly stagnant.
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.
Company has taken certain price hikes in Q2FY12.
n We highlight that company's key customers are getting adversely affected by the
current higher interest rates in the system. Therefore, we believe that it would be
difficult for the company to take price hikes frequently.
n In Q1FY12, unavailability of EURO III compliant engines has negatively impacted
company's performance in the MEG (Mobile Equipment Group) segment. However,
management has stated that the availability of such critical components is
adequate at present. Company is now sourcing these engines from players like
Ashok Leyland and Kirloskar Bros.
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.


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 5000 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 the company and peer group viz. TIL,
Greaves Cotton etc. Orders should flow to these companies from road contractors
after the achievement of financial closure of various road projects.
n GAL's has reported weak Q1FY12 with revenues down by 30% YoY due to the
holdup in equipment ordering from its key customers. Management has highlighted
that overall demand scenario has significantly improved in Q2.
n We believe that company is likely to report meaningful growth in 2HFY12E on
back of 1) investments from NHAI in new road projects and 2) lower base of
FY11. We project muted revenue growth in FY12E at Rs. 2.9 bn in FY12E.
n We opine that the company would continue to prudently manage its overhead
expenses and mitigate the impact of increasing commodity prices to some extent.
We build an EBITDA margin of 18.3% for FY12 in our forecasts


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 lower our estimates to factor in slowdown in road construction activity in India.


Valuation and Recommendation
n At current price of Rs.131, stock is trading at 7.3x P/E and 4.3x EV/EBITDA on
FY12E respectively.
n We maintain BUY rating and a DCF based revised target price of Rs.195 (Rs 237
earlier), over a 12-month horizon.

Buy GUJARAT APOLLO -TARGET PRICE: RS.237 :: Kotak Sec

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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.

GUJARAT APOLLO :Key highlights : TARGET PRICE: RS.237 : Kotak Sec

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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.

Kotak Sec: Buy Gujarat Apollo, Target Rs 237; Q3FY11 Result Highlights

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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).

Gujarat Apollo: Management Meet Highlights: Kotak Securities

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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).