Surya Roshni, engaged into two businesses of steel pipes & lighting, is #1 exporter of ERW pipes & #2 player in lighting business. Revenue from steel pipes business constitutes ~ 76% & EBIT margin stands at 4.2%. Lighting business EBIT margin stands at 7.9%. D:E ratio for the company as a whole stood at 0.5:1 at FY'21 end. In FY15, the company has entered into Consumer Durables product business with products like fans, water heaters, domestic appliances & air-coolers. It also has presence into PVC pipes pipes business that it entered in 2010.
Leading player across both its businesses
Surya Roshni is #1 exporter of ERW pipes & is the largest manufacturer of GI pipes in the country. In Lighting business, the company is ranked #2 in India. It has installed capacity of 90mn LED bulbs & 200mn of conventional lighting. In steel pipes, installed capacity stood at 1mn TPA (ERW pipes), 0.2mn TPA (spiral pipes), 0.1mn TPA (CR strips) & 3.85mn sq. mtr. Of API pipes post completion of recent capacity expansion of at MP.
Enriched product mix of Steel pipe business & changing dynamics of lighting industry leading to profitability expansion
During FY21, profitability has expanded substantially across both businesses with steel pipes business reporting 8% increase in terms of EBITDA/tonne to INR 3525. In fact, profitability during Q4FY21 stood at INR 4250/tonne. Lighting business EBITDA margin witnessed whopping 200bps increase to 10% during FY21. Steel pipes business is witnessing accelerated growth in relatively high value added segments of GI pipes & API coated pipes. In Lighting business, ouster of fringe players & unorganised sector driven by reduced imports from China, organised players like Surya Roshni are experiencing profiability expansion led by market share gains.
Strong FCF generation leading to deleveraging of BS
Both its businesses are generating strong FCF with robust increase in operating cash flows equally supported by moderate CAPEX as sizeable capacities have already been set up over the past few years. During FY20 & 21, the company has cumulatively repaid ~ INR 4.8bn of borrowings resulting into drop in D:E ratio to 0.5:1 from 1:1.
Outlook & Valuation:
Widening profitability accompanied by growing revenue base and shrinkage in working capital cycle as well as moderate CAPEX is leading to substantial generation of FCF. This should result into rerating of the stock. Accelerated topline growth accompanied by profitability expansion across both businesses should lead to Revenue, EBITDA & PAT to compound annually at 19%, 25% &41% respectively during FY21-23. We initiate coverage with a BUY rating, PT 875 (15x FY23E EPS).
* Volatility in input costs
* Increase in Intensity of Competition
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