Earnings resilient, Retain Buy rating on Apar :; centrum

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Apar Inds Report : Centrum

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Rating: Buy; Target Price: Rs470; CMP: Rs335; Upside: 40%



Multiple triggers ahead; Initiate with a BUY



We initiate coverage on Apar Industries (Apar), a diversified company,
with a BUY rating and a PT of Rs470 implying a 40% upside. We are
optimistic on the company due to (1) Apar being a preferred play on
T&D reforms in the power sector; (2) Margins bouncing back; (3) Return
ratios jumping, revealing a strong outlook and (4) Attractive
valuations. This apart, we highlight that monetisation through listing
of each division could unlock value and make Apar a multi-bagger
entailing an upside of 142%, which we have not factored-in.

$ Preferred play on the uptick in Transmission & Distribution cycle:
With reforms nearly over in power generation space, we strongly
believe that pick-up in T&D capex cycle is imminent and is the crux of
power sector reforms. As a thumb rule, +25% of the T&D capex is
represented by conductors, transformer oil and cables. Apar with its
45% market share in the supply of transformer oil, 23% market share in
conductors and positive turnaround in its cables division is a key
beneficiary. Also, its cost competitiveness, consistent order wins,
healthy order book, niche product offerings, increasing exports,
preferred supplier to over 80% customer base and shift to high margin
products like high efficiency conductors and supply of transformer oil
in the 400kV and above transformers make Apar the best preferred play
on the T&D upcycle.

$ Robust financials make Apar a strong investment case: A conservative
16% CAGR in EBITDA earnings and 30% CAGR in PAT earnings over FY14-17E
coupled with RoE of 21% in FY17E, turning free cash flow positive over
FY15-FY17E and current valuations at a discount to peers, make Apar a
compelling investment bet. We emphasise that for such a turnaround
case, only FY17 would represent a return to stable earnings, and
demonstrate that even modestly better margins, realistic for Apar, can
lead to materially positive earnings surprises.

$ Possible value unlocking through monetization of divisions – A
multi-bagger in the making: We believe that as a logical long term
outcome, Apar will look at monetizing its divisions – conductors,
transformer oil and cables through separate listings on the bourses,
unlocking value for its shareholders. Apar trades at a discount to its
peers and on assigning comparable valuations of peers to each of its
divisions we see further deep discount, an anomaly which would be
rectified through re-rating. Our scenario analysis indicates fair
value following different methodologies between Rs635 to Rs810 thus
making Apar a multi-bagger.

$ Valuation and Key risks: We initiate coverage with a BUY rating and
a PT of Rs470 based on Sep-16E which is derived as the average value
using fair multiple assigned to EV/EBITDA, EPS and BV. Apar currently
trades at steep discount to its peers, which cap the downside. 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.



Thanks & Regards



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JPMorgan, A closer look at Apar Industries Ltd. post 1x1 with Promoters

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In a 1x1 we met executive promoters of Apar Industries Ltd (APR IN). Apar is the
world's 4th largest producer of transformer oil (domestic leader with 50% market
share) and India's second largest aluminium conductor manufacturer with 22%
share, as per company. Over FY05-11 the company's topline (Rs30.3bn in FY11)
and PAT (Rs953mn) have grown at 23.2% and 20.2% CAGR respectively. Key
customers include PGCIL, transformer suppliers, EPC developers, and ~25% of
revenues come from exports. ~80% of FY11 revenues were from customers
associated with Apar for over 3years, as per company.
 Growth pegged to T&D spend. According to mgmt size of domestic market
for conductors ~Rs60-65bn. Company expects single digit conductor volume
growth in FY12 and recovery to ~15% in FY13. It derives ~60% of its order
backlog of conductors (~Rs16bn currently) from PGCIL. Based on their
experience, Apar believes that PGCIL’s pace of execution and contract awards
will pick up under it’s new CMD Mr. RN Nayak. In case of transformer oil,
Apar has a dominant position in HV/EHV segment, followed by Savita Oil
Tech (STEC IN) with 30% share, as per mgmt. Promoters expect the
transformer and specialty oil business to grow at 15% CAGR.
 Margin outlook. As per mgmt, conductor segment margins are expected to
recover from lows of 3.9% in FY11 to ~6% levels by FY13. Oil margins are
expected to remain stable as per company.
 Capex outlook and balance sheet quality.Apar had net-cash of Rs2.8bn as of
FY11, negative net working capital (ex-cash) and has reported 30% RoE over
last two years. Management plan is to incur ~Rs850mn capex over FY10-13.
 Apar has marginally outperformed Sensex over last 12months; overall T&D
equipment suppliers have underperformed by 16%.
 How do valuations stack up? Apar is trading at ~5.9x FY11A EPS based on
Bloomberg consensus. Sterlite Technologies is trading at 7x FY13E P/E and
STEC is trading at 7.75x FY11A reported EPS (as per Bloomberg).
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.


Key takeaways from the meeting
In a 1x1 we met executive promoters, Mr. Kushal N. Desai (Managing Director)
and Mr. C.N. Desai (Jt. Managing Director) of Apar Industries Ltd. Promoters
hold 65.2% in Apar (Mcap: US$129mn). The objective of the meeting was to discuss
management view on industry dynamics, competitive positioning, growth prospects
and pricing trends in relation to Apar's product portfolio.
As per management, Apar is the world's 4th largest producer of transformer oil
(50% market domestic share) and India's second largest Aluminium conductor
manufacturer with 22% market share (after Sterlite Technologies which has 26%
domestic market share).
Apar's clientele includes-
 leading power generation and transmission utilities in India spanning centre
(PGCIL, NTPC), state (SEBs) & private sector (Adani, Lanco, Jaypee,
Reliance Infrastructure etc.), and a few Asian and African utilities too.
 They are suppliers to EPC contractors on the substation side (ABB, Areva,
BHEL, Bharat Bijlee, Crompton Greaves, Siemens, Emco etc.) and to tower
EPC players (Jyoti Structures, KEC International, Kalpataru Power, L&T
etc.).
The company is headquartered in Mumbai and has production facilities at Rabale
(Maharashtra), Silvassa (in Union Territory of Dadar & Nagar Haveli), Nalagarh (in
Himachal Pradesh) and Unbergaon (Gujarat). Over FY05-11 the company's
consolidated topline (Rs30.3bn in FY11) and PAT (Rs953mn in FY11) have
grown at 23.2% and 20.2% CAGR respectively.
Parentage
Apar commenced business through the conductor division in 1958 and diversified
into speciality oil manufacture in 1969. Gujarat Apar Polymers Ltd. was incorporated
in 1989 and renamed as Apar Industries in April 1997, consequent to transfer of
industrial businesses of erstwhile Apar Ltd. The company entered automotive
lubricant manufacture under a license agreement with ENI, Italy, in 2008 to produce
and market high-end automotive and industrial lubricants under the Agip brand in
India (their only B2C product, rest are all B2B). The company acquired a majority
stake in Uniflex Cables Ltd in 2008 to enter cable manufacturing.