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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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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.
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