Apar inds Report

Apar inds Report

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.