WEDNESDAY TELEFOLIO DT:5.12.07

CAPITA TELE FOLIO RECOMMENDATION

W S Industries (India)

Has a winning formula for strong growth

Surging investment in power T & D sector, yield improvement in tie-up with PPC Insulators, USA and commissioning of a new plant will keep this insulator major on strong growth path

Buy


W S Industries (India)

BSE Code


504220

NSE Code


WSI

Bloomberg


WSI@IN

Reuter


WSIN.BO

52-week High/Low


Rs 107/41

Current Price


Rs 106 (as on 05/12/07)

W S Industries (India) (WS) manufactures insulators within the power equipment sector. Insulators are basically protective tools, which subdues the current. They are non-conductors which are used in transmission and distributing (T&D) segment. Often when the current from grid say of 400 KV needs to be stepped down to around 4 MW to reach to household, one needs a strong equipment to withstand or hold the current and to act as a safety wall so that only that portion of the electricity which is required passes and the rest is distributed to various locations as per the capacity norms specified.

WS manufactures insulators of high end starting from 220 KV till 1200 KV. Various types of insulators manufactured by WS are Hollow insulators, Pin insulators, solid core insulators and hollow porcelain insulators.

Strong visibility in Power Transmission and Distribution (T&D) sector

The government has planned a capacity addition of 78000 MW in the 11th plan to reach the overall target of 2 GW by 2012. This massive requirement of the power addition would require huge investment both in power generation and in power transmission and distribution sector. Also the power sector performance is very critical for maintaining the growth rate of 8-9% of GDP. The country was able to achieve 52% of the planned generation capacity in 10th plan.

T&D sector however is not entirely dependent on the generation sector. Although the growth in generation sector would of course provide additional requirement for power transmission and distribution sector, the current imbalances in the inter regional grid capacities will augur well for the growth of entire T&D sector. There is a surplus in the north-grid whereas deficit in west-grid. So power grid, rural electrification etc present tremendous opportunity for T&D sector and anything from new generation capacity will be a bonus. The inter-regional capacity for power evacuation increased to 14000 MW, which the government has planned to reach to 34000 MW in 11th plan. Insulators form about 8% of the total power T&D requirement. Aditya Birla Nuvo, Bhel are some other existing players in insulator industry. The company has technology, which is at par or even better than its competitors.

The company has installed capacity of 8000 tons of substation insulators and 8000 tons of transmission insulators. The company is operating at more than 100% of the installed capacity.

Nearly 95% of the transmission insulators manufactured are being sold domestically. Power Grid is the largest customer with more than 50% of the transmission insulators being sold to it.

Of the total production of substation insulator, most of the insulators are exported to OEM’s like ABB, Siemens, Areva etc. There is a huge demand for substation insulators both in India and in exports and the company has set a standard of 50:50 on domestic and export to balance out any risk in both the markets. Relaisations even at the current appreciated rupee levels are better in exports compared to domestic markets.

The company has rolled out an expansion plan to increase the installed capacity of substation insulators from 8000 tons to 18000 tons in two phases. This is a Greenfield expansion in Visakhapatnam, Andhra Pradesh. For this the company had raised Rs 107 crore by preferential allotment to Schroder Credit Renaissance fund at Rs 67 per share. Phase 1 of 8000 tons new capacity will be on stream from July’08. Gradually the phase 2 will be operational by end of FY’09. Once again the company will balance out the geographical risk by sales to domestic and export markets in ratio of 50:50.

Enters into turnkey projects

The company has also entered into turnkey projects from FY’07 onwards. The company renders the design, execution, and construction work of insulators and transmission lines of below 220 KV as against its manufacturing insulator facility of above 220 KV. Since the company is new in this business, it is moving cautiously and is currently into lower end turnkey projects. The company is looking for strategic alliance in this business and going forward will scale up the capacity but with a cautious view. Of the total sales of Rs 165 crore in FY’07, insulators formed Rs 145 crore of sales and the rest came from turnkey projects. The company has order book position of Rs 180 crore for insulators (Rs 145 crore last year) and Rs 30 crore for turnkey projects (Rs 15 crore last year).

After a year of consolidation in FY 2007, a new growth phase has started

The company has rationalized its products by manufacturing only high capacity products. In 2007, the prices of fuel (kerosene) increased by 46%. It was not possible for the company to manufacture at this level some of the low end products. Hence the company rationalized its product base and concentrated only on high voltage capacity of above 220 KV. So FY’07 was a low growth year for the company in terms of topline. As against a CAGR of 20% growth in previous three years, the company reported a modest 12% growth in sales in FY 2007. However, the product rationalization advantage helped the margins to increase by 200 basis points.

In Chennai, now the company uses LPG along with kerosene as a fuel and hence has reduced to some extent its high fuel cost. The new capacity, which will come up in Andhra Pradesh, will use gas as its fuel. Hence there will be overall significant savings in fuel cost.

This has resulted in optimum capacity utilization and economies of scale advantage, which are seen in the first half results. The company reported topline growth of 30% in H1 FY’07 to Rs 104.49 crore and OPM improved by 340 basis points to 15.3%.

The company has technology collaborations with Westinghouse Electric, US and MWB AG, Germany from its inception. Later on the company absorbed the entire technology and is presently working independently.

In order to further increase the yield in manufacturing insulators, the company has entered into strategic alliance with PPC Insulators USA, who are the world’s largest insulator manufacturer having 23 geographical presences across the globe. It is a mutual sharing agreement where both the parties share their technologies and benefit each other. This is one of the important reasons for optimum output and hence better margins in the current year. Also there is a possibility of PPC using WS manufacturing facilities as a base going forward, due to the cost advantage.

The subsidiary will generate rental/sale of property income in future without any investment

The company has 60% stake in WS Electric, which has surplus land of more than 2 Million sq feet in industrial estate of Chennai. The company has entered into an agreement with one of the developers in Chennai, whereof the company has allocated its land to the developer and will have a stake in the developed property. Hence there will be no capex on part of the company except the land. There will be a total development of 2000 thousand sq feet area in four phases. FY’09 will see completion of the phase 1 of 300 thousand sq feet area and the company has the right to sell or lease 60 thousand sq feet area.

The above will bring regular or one-time cashflow depending on the company’s decision on sale/lease and will boost its financials further. However we have not taken in to account these incomes/cash flows in our projections.

Financials are surging

During the quarter-ended Sep’07, the company reported topline growth of 38% to Rs 56.83 crore, The OPM stood at 15.7% from 12% last year. The insulator sales stood at Rs 51.72 crore and the PBIT stood at Rs 7.64 crore. The revenues from turnkey projects stood at Rs 5.10 crore and company booked profits of Rs 0.34 crore in this quarter. After providing interest cost and deprecation of Rs 1.60 crore and Rs 0.93 crore respectively, the PAT stood at 3.17 crore, up by 68%.

For the half year ended Sep’07, the company reported topline growth of 30% to Rs 104.49 crore, The OPM stood at 15.3% from 11.9% last year. The PAT stood at Rs 7.11 crore, up by 104%.

Valuation

For the year ended Mar’08, we expect the company to report net sales and PAT of Rs 206.20 crore and Rs 14.24 crore. For Mar’09, we expect the company to register net sales and PAT of Rs 303.13 crore and Rs 23.63 crore. This gives an EPS of Rs 6.7 for FY’08 and Rs 11.2 for FY’09. At current market of Rs 106, the scrip is available at 15.8 times its FY’08 earnings and 9.5 times its FY’09 earnings.

WS Industries (India): Standalone Financials






0403 (12)


0503 (12)


0603 (12)


0703 (12)


0803(12P)


0903(12P)

Net Sales


103.73


120


147.06


165.25


206.20


303.13

OPM %


14.1


10.2


10.1


12.1


15.2


15.5

OP


14.63


12.29


14.89


19.95


31.28


46.99

Other income


1.75


0.21


0.19


0.42


0.32


0.32

PBIDT


16.38


12.5


15.08


20.37


31.60


47.31

Interest


6.49


6.2


6.36


7.12


6.63


7.00

PBDT


9.89


6.3


8.72


13.25


24.97


40.31

Depreciation


4.07


4


3.32


3.24


3.29


5.04

PBT


5.82


2.3


5.4


10.01


21.68


35.27

Tax


0


0.19


1.08


3.46


7.44


11.64

PAT


5.82


2.11


4.32


6.55


14.24


23.63

EPS


2.8


1.0


2.0


3.1


6.7


11.2

* Annualised on current equity of Rs 21.41 crore of face value of Rs 10 each
(P): Projections,
Figures in crore,
Source: Capitaline corporate database



WS industries (India): Standalone Result






0706(03)


0606(03)


Var


0706(06)


0606(06)


Var


0703(12)


0603(12)


Var

Sales


56.83


41.07


38


104.49


80.49


30


165.25


147.06


12

OPM%


15.7


12.0





15.3


11.9





12.1


10.1




OP


8.90


4.91


81


16.02


9.56


68


19.96


14.90


34

Other Income


0.01


0.01


0


0.03


0.05


-40


0.34


0.07


386

PBIDT


8.91


4.92


81


16.05


9.61


67


20.3


14.97


36

Interest


1.6


1.79


-11


3.33


3.68


-10


7.04


6.25


13

PBDT


7.31


3.13


134


12.72


5.93


115


13.26


8.72


52

Depreciation


0.93


0.95


-2


1.84


1.91


-4


3.24


3.32


-2

PBT


6.38


2.18


193


10.88


4.02


171


10.02


5.4


86

Tax


3.21


0.29


999


3.77


0.53


611


3.46


1.08


220

PAT


3.17


1.89


68


7.11


3.49


104


6.56


4.32


52

*EPS


6.0


3.6





6.7


3.3





3.1


2.0




* Annualised on current equity of Rs 21.41 crore of face value of Rs 10 each
Figures in crore,
Source: Capitaine Corporate database