Banking on power reforms

PENNY WISE

Power sector reforms are likely to light up Apar Industries' prospects.

Apar Industries "� a Rs 1,000 crore firm which mainly manufactures aluminium conductors, and specialty oils and polymers "� is bullish on reforms in the power sector that are expected to gain momentum.

The company's conductor business, which accounts for about 32 per cent of its revenues, is expected to benefit from improvements in infrastructure that power reforms will bring in (power segment accounts for 60 per cent of the firm's total business).

Apar managing director Kushal Desai is optimistic. "Reforms in the power sector are expected to bring sustained investment in the segment over the next five-seven years. And we see a 10-15 per cent growth in business," he says. An analyst report on the domestic power sector, too, presents similar views.

"Though grid privatisation is unlikely for the next couple of years and there could be delays in implementation, factors like availability of gas and allocation of coal mining blocks augur well for power companies," it says. The revenues the company earns from the power sector are generated via its conductor and transformer oil businesses.

Apar has a market share of over 20 per cent in large-size power conductors in the country. Its capacity to manufacture aluminium conductors will go up from 53,000 tonnes per annum at present to 66,000 tonnes by the end of FY06, after it completes the expansion at its Silvasa plant by September 2005.

Desai says demand is growing for conductors in northern Africa, Middle East and Asia Pacific as well. In many countries the money generated from oil and gas is used to create better infrastructure in the power sector.

The company finds logistics costs too high in the US market, while there is less action in the European market. Exports of conductors account for one-third of the firm's total revenues from the conductor business.

Apar expects the conductor business to show better profits going forward as contracts awarded last year will be delivered this year, leading to growth. The company has shifted its conductor plant to the free zone in Silvasa, from Vadodara. But this involved VRS costs, which led to lower profits from the conductor division in the March 2005 quarter.

According to Desai, the company had fixed-price export orders for conductors, which despite hedging led to increased exposure, forcing the firm to take a one-time hit. Going forward the firm expects better profits from the conductor business, as seen in the June 2005 quarter when the business clocked an 84 per cent growth in profit.

The diversified manufacturing firm expects a 10-14 per cent growth in its specialty oils business and is planning to form tie-ups with a couple of companies. Within specialty oils, transformer oil accounts for 25 per cent of the company's turnover and 50 per cent of its sales from oils.

Margins are higher in transformer and industrial oils compared to other categories. The transformer oil business is expected to grow faster than white oil. The company has already made Rs 15 crore investments in the oil business and has a capacity of two lakh litres per annum. The capacity is expected to further increase through debottlenecking.

The firm currently has a market-share of 50 per cent in transformer oil, 20 per cent in rubber processing oil (where Indian Oil and Hindustan Petroleum are bigger players), 20 per cent in white oil and 2 per cent in industrial oil. Its exports of transformer oil and white oil are growing faster on a small base.

Apar has already invested Rs 7.5 crore in its polymer business. It has a 60 per cent market share in nitrile rubber and a 35-40 per cent share in high styrene rubbers (HSR) where Apcotex is the competitor.

It plans to hike its capacity to 13,800 tonnes per annum from 10,500 tonnes. The company's HSR capacity is 9,000 tonnes per annum, but it is not utilised fully at present. 
 

Financials
(Rs crore)	3 months			1 Year
	JQ05	JQ04	% change	FY05	FY04	% change
Net sales	230.62	216.71	6.42	950.05	742.58	27.94
Other income	0.70	0.77	-9.09	6.53	4.84	34.92
Operating profit	12.24	16.00	-23.50	55.84	41.85	33.43
OPM%	5.31	7.38	-	5.88	5.64	-
Net profit	6.27	3.23	94.12	30.18	29.46	2.44
NPM%	2.72	1.49	-	3.18	3.97	-
EPS (Rs)	3.02	1.48	-	14.43	13.86	-
P/E (12 months)						15.23

Overall, Apar exports its products to 22 countries. However, only 5 per cent of its polymers reach markets overseas as realisations for polymers are better in India.

The company's Rs 18 crore capex plan for FY06 involves Rs 7.4 crore in conductors, Rs 8.6 crore in polymers and Rs 2 crore in oils. Desai says the thrust will be on organic growth going forward, as there are no obvious acquisition targets. Moreover, valuations are high at the moment and the company will prefer to build up its cash position.

Apar posted a 94 per cent y-o-y growth in net profit to Rs 6.3 crore for the June 2005 quarter and a 6.4 per cent growth in net sales to Rs 231 crore. At Rs 184, the stock trades at a P/E of 15.2x on an annualised EPS of Rs 12.08, compared to its peers like Savita Chemicals (9.9x) and Sterlite Industries (51.3x). With the power sector investments in the country likely to light up, Apar will benefit in future.

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RESEARCH CALLS

MARUTI UDYOG (hold)
ICICI Securities maintains its 'hold' recommendation on Maruti Udyog. Although the company concedes that there could be short-term blips, it emphasises that the long-term growth drivers are intact.

Given the competitive advantage the company enjoys - highest market share of 54 per cent, largest number of models/variants and the strongest distribution network - and its aggressive initiatives to gain market-share, it is well positioned to capitalise on the emerging opportunities.

However, there are some concerns of a slowdown in revenue growth in FY06 and margin pressures. The company witnessed a slowdown in sales in April-July 2005, with just 2.6 per cent y-o-y growth in domestic volumes and 28.4 per cent y-o-y decline in exports, resulting in an overall 0.3 per cent y-o-y decline.

This was mainly due to product price hikes by 3-4 per cent on account of introduction of stricter emission norms from April 2005 as well as steel price hikes, increase in fuel prices and the introduction of VAT.

PANTALOON RETAIL (sell)
Citigroup Research maintains its 'sell' recommendation on Pantaloon Retail. It says the company's aggressive growth agenda and forays into new businesses are adding risks, while valuations still appear expensive.

Although Pantaloon is well positioned to gain from the success of modern retail formats in India, Citigroup Research believes that the recent expansion of multiples is unsustainable, as it has been driven by strong monthly sales growth numbers, few options for investors in the sector and very strong liquidity in the stock market.

The firm adds, "We are reducing our EPS estimates, as we expect margins to peak in FY05E and because of anticipated higher finance costs. We have lowered our gross margin assumptions due to the higher contribution from value retailing. However, based on a 30x one-year forward P/E, our target price rises from Rs 692 to Rs 1,060. The recent acquisitions - Galaxy and Planted Sports - are unlikely to be scaled up while the company has aggressive plans to enter the home solutions segment."