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BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY|MERCHANT BANKING

Indian Hume Pipe Ltd 10th July 2017 BUY

For Private Circulation Only 1 Hem Research

CMP Rs. 530.10

Target Price Rs 700.00

BSE Code 504741

NSE Code INDIANHUME

Market Cap (Rs crore) Rs. 2565.68

52 Week High/Low 546.50/162.55

Industry Engineering Construction

Face Value Rs 2

Shares O/S 4.84 (Cr)

EPS* 20.37

Book Value 79.51

P/E 26

P/B 6.66

Note *: On FY17basis

Shareholding Pattern as on Mar’ 2017

Research Analyst :Astha Jain Shah

Co has shown strong growth during FY’17 as topline of company has

grown at CAGR of 28.83% since FY’12, operating profit of company has

grown at 42% CAGR from FY’12 to FY17 while bottomline of company

has registered whopping CAGR of 44% during the same year.

Co’s financial performance can be gauged from its strong return ratios

as co has posted ROE of more than 25% in FY17 while it has generated

more than 30% return on capital employed during the same year.

Recently company has won order of more than 400 crore which includes

work order of Rs 183.46 crore from Tamilnadu Water Supply & Drainage

Board, Coimbatore & work order of Rs.260.75 crore from Public Health

Engineering Department, Ajmer, Rajasthan, thus giving strong revenue

visibility in coming years.

Co has got client from various State Government & local bodies like Indian Railways, Indian Railway Construction Company (IRCON), Rail India Technical And Engineering Services (RITES), Bharat Heavy Electricals Limited (BHEL), National Hydro Power Corporation (NHPC), National Thermal Power Corporation (NTPC), Indian Farmers Fertiliser Co Operative Limited (IFFCO), Satlaj Jal Vidyut Nigam Limited (SJVN), Delhi Jal Board, Karnataka Water Supply & Drainage Board, Karnataka Power Corporation Ltd., Bhopal Municipal Corporation, Indore Municipal Corporation, Kerala Water Authority, Himachal Pradesh State Electricity Board, Chattisgarh Public Health Engineering Department etc. With widespreading urbanization. & shortfall of access to drinking water in rural area,. Government of India, State Governments and local bodies are making best efforts to supply safe drinking water. Hence number of water supply schemes are under consideration. Also to make cities and rural areas under more hygienic conditions and endeavour towards Swachha Bharat number of sewerage disposals and drainage schemes are also coming up which provides company an opportunity to cater more projects.

Valuation Established brand name, healthy balance sheet, robust financial

performance , strong order book & pioneer in the field of water supply

industry since last 90 years makes the company a strong candidate for

investment in medium as well as long run. The company is currently

trading at 26x of FY17 eps of Rs 20.37 while it is trading at 21x of FY18E

eps of Rs 24.80 & 18x of FY19E eps of Rs 29.40. We recommend “Buy” on

the stock with price target of Rs 700 (appreciation of almost 30%) for

medium to long term investment horizon.



Business

Company has been in the business of manufacturing, laying and jointing of pipelines of various pipe materials such as RCC

pipes, Steel pipes, Prestressed Concrete pipes, Penstock pipes, Bar Wrapped Steel Cylinder pipes (BWSC), Prestressed

Concrete Cylinder pipes (PCCP) etc., which provide infrastructure facility and development for drinking water supply projects,

irrigation projects, Hydro Electric Projects, Sanitation and Sewerage Systems. For over three decades as a part of nation

building, company has also been undertaking infrastructure development programmes by way of executing on turnkey basis

the combined water supply projects i.e. undertaking the complete job of water supply from source to distribution centers

which apart from manufacturing, laying and jointing of pipelines included construction of intake wells, water sumps, water

treatment plants, water pumping stations, installation of pumping machineries, electro-mechanical works, branch mains,

ground level reservoirs, elevated reservoirs, leading to executions of complete systems for water supply to various towns and

villages of India. The total number of factories of the Company as at the end of the year stands at 22.

Business Segments

A) Water Supply & Sewerage Projects: Company is in the business of executing turnkey projects for the supply of drinking

water and irrigation water to many parts of India. Company have completed and is executing a number of prestigious turnkey

projects involving various components such as intake wells, electrical transmission lines, pumping stations with pumping

machineries, water treatment plants, water transmission mains, ground level reservoirs, elevated service reservoirs along

with supplying, laying, jointing, testing, commissioning of various pipe materials along with allied civil works.

B) Bar Wrapped Steel Cylinder (BWSC) Pipes/Prestressed Concrete Cylinder Pipes (PCCP): The BWSC and PCCP pipes

introduced by the Company as an alternative pipe materials to M.S. and D.I. pipes have become popular amongst various

Government authorities. The Company has undertaken / is undertaking several projects involving BWSC pipes. To meet the

demand of BWSC pipes, the Company had specially set up manufacturing plants at Choutuppal in Telangana, Chilamathur in

Andhra Pradesh and Dhule in Maharashtra. These plants are running continuously with better productivity yields. In addition

to the above the Company has also created facilities to manufacture these pipes in its existing factories at Miraj, Rajkot,

Kanhan, Patancheru, Yelhanka, Thanjavur, Kekri, Sikar, Karari and Kovvur to cater the local demands. During the year under

review, these plants produced 295.64 Km of BWSC pipes valued at Rs 11,919.57 Lakhs. During the year the Company has

received orders worth Rs 10,672.57 Lakhs for BWSC pipes, orders worth Rs 3,484.95 Lakhs for PSC pipes and orders worth Rs

16,225.58 Lakhs for PCCP pipes along with other civil works.

(C) Railway Sleepers: The Company has manufactured 97,364 railway sleepers amounting to Rs 1,485.47 Lakhs against the

order(s) received from Ministry of Railway, Railway Board, New Delhi. During the year the Company has received work orders

for 3,08,256 nos. railway sleepers worth Rs 5,003.69 Lakhs.

(D) National Rifle Division: The Company has a business under the brand of National Air Rifle at Vatva, Ahmedabad, since

1970, which manufactures Air Rifles / Air Pistols for sports and target shooting competitions. The Company manufactures 10

types of Air Rifles and Air Pistols of 0.177 (4.5mm) and 0.22” (5.5mm) calibers.



Recent Order Win

The company has secured work order of Rs 183.46 crore from Tamilnadu Water Supply & Drainage Board, Coimbatore for providing improvements to water supply distribution to the added areas of Tiruppur Corporation in Tiruppur District including trial run, commissioning, The project is to be completed within 24 months for construction from the date of issuance of the work order and paid maintenance for a period of one year. Also, Company has secured work order of Rs.260.75 crore from Public Health Engineering Department, Ajmer, Rajasthan, for Cluster Scheme of 213 Villages of Jahazpur and Kotri Tehsils along with augmentation of Urban Water Supply Scheme of Jahazpur Town under CHAMBAL-BHILWARA WATER SUPPLY PROJECT PHASE-II with Operation and maintenance for 10 years. The project is to be completed within 31 months.

Also during the year,co has secured some big orders from Commissioner, Kobra Municipal Corporation, Kobra, Chhattisgarh, for Water Supply Scheme to Kobra consisting of DI & PCCP Pipes, Raw Water pumping Main of the value of Rs 11,551.28 Lakhs. It has secured order from the Addl. Chief Engineer, PHED, Region Alwar, Rajasthan, for Urban Water Supply Scheme Alwar and Bhiwadi Dist, Alwar consisting of DI K7 pipes and HDPE Pipes including 12 Nos OHSR, SO5 Nos CWRS, 09 Nos Pump Rooms 61 Nos Tube Wells SCADA etc of the value of Rs 10,963.71 Lakhs. Also, it has received order from Commissioner, Municipal Corporation, Bhilai, Chhattisgarh, for Water Supply Scheme to Bhilai for Distribution Network for Bhilai Municipal Corporation consisting of DI Pipes of the value of Rs 10,395.08 Lakhs.

Robust Financial Performance

Co has shown strong growth during FY’17 as topline of company has grown at CAGR of 28.83% since FY’12, operating profit of

company has grown at 42% CAGR from FY’12 to FY17 while bottomline of company has registered whopping CAGR of 44%

during the same year. Co’s financial performance can be gauged from its strong return ratios as co has posted ROE of more than

25% in FY17 while it has generated more than 30% return on capital employed during the same year.

During the FY17 company has successfully realized profit from its sales by generating net profit margin of 5% as compare to 3%

in FY16.This is amongst the one highest margin which company has posted since FY12.However,on operating front too ,

company has posted the margin of 11.42 % which is again one of the highest margin posted by company since FY12.



Strong Sectoral Outlook

A scarce natural resource, water is fundamental to life, livelihood, food security and sustainable development. India has more than 18% of the world’s population, but has only 4% of world’s renewable water resources and 2.4% of world’s land area. There are further limits on utilizable quantities of water owing to uneven distribution over time and space. In addition, there are challenges of frequent floods and droughts in one or the other part of the country. With a growing population and rising needs of a fast developing nation as well as the given indications of the impact of climate change, availability of utilizable water will be under further strain in future with the possibility of deepening water conflicts among different user groups. Low consciousness about the scarcity of water and its life sustaining and economic value results in its mismanagement, wastage, and inefficient use, as also pollution and reduction of flows below minimum ecological needs. In addition, there are inequities in distribution and lack of a unified perspective in planning, management and use of water resources Access to safe water for drinking and other domestic needs still continues to be a problem in many areas. Skewed availability of water between different regions and different people in the same region and also the intermittent and unreliable water supply system has the potential of causing social unrest. (Source:- National Water Policy 2012). India has highly diverse climate conditions by region that can cause weather-related disasters such as severe floods and droughts. The country’s erratic weather patterns tend to create hydrological shocks while rainwater harvesting, a common source of water, becomes challenging. More than 60 percent of India’s irrigated agriculture and 85 percent of drinking water supplies are dependent on ground water. However, it is foreseeable that India’s rivers and other surface water sources are not able to cope with the growing demand for water as many of such water sources are either polluted or dried due to prolonged drought.

With growing urbanization and industrialization, demand of water for municipal and industrial use has been increasing accordingly. This presents a great opportunity for innovation and solutions in water supply project market .



P& L Statement (Rs Cr)

Particulars FY15 FY16 FY17 FY18E FY19E

Total Revenue 1009.86 953.79 1817.81 2145.03 2531.12

Growth(%) --- 5.55 90.59 18.00 18.00

Expenditure 900.15 856.83 1610.23 1887.61 2227.38

EBITDA 109.71 96.96 207.59 257.40 303.73

Growth (%) -- -11.62 114.09 24.00 18.00

EBITDA Margin(%) 10.86 10.17 11.42 12.00 12.00

Other income 9.57 2.96 2.96 3.43 3.80

Depreciation & Amortization 12.13 9.80 10.53 11.80 12.15

EBIT 97.58 87.16 197.06 245.60 291.58

EBIT Margin(%) 9.66 9.14 10.84 11.45 11.52

Interest 48.30 45.26 47.74 64.00 76.00

PBT 58.85 44.86 152.30 185.04 219.38

Tax 20.40 15.76 53.52 64.76 76.78

PAT 38.45 29.10 98.78 120.27 142.60

Exceptional Item 3.13 0.00 0.00 0.00 0.00

Adjusted PAT 41.58 29.10 98.78 120.27 142.60

Growth (%) --- -30.01 239.45 21.76 18.57

NPM (%) 4.12 3.05 5.43 5.61 5.63

Equity Capital 4.85 4.85 9.69 9.69 9.69

Res. & Surplus 282.04 301.81 375.92 486.19 618.79

Equity Shares 2.43 2.43 4.85 4.85 4.85

EPS* 8.57 6.00 20.37 24.80 29.40 . *Note :Adjusted For Bonus Issue

Ratios


Return on Equity (%) 14.49 9.49 25.62 24.25 22.69

Debt/Equity 1.04 1.01 0.67 0.07 0.06

Asset turnover 1.05 0.93 1.39 1.52 1.46

Current Ratio 1.34 1.33 1.32 1.46 1.48

Book value per share* 59.15 63.23 79.51 102.24 129.58 *Note :Adjusted For Bonus Issue



Balance Sheet Rs. Crore


Share Capital 4.85 4.85 9.69 9.69 9.69

Reserves & Surplus 282.04 301.81 375.92 486.19 618.78

Shareholders’ funds 286.89 306.66 385.61 495.88 628.48

Borrowings 20.63 13.65 8.16 36.20 38.22

Other Long Term Liabilities 26.96 23.50 17.56 30.00 37.72

Net Deferred tax Liability 0.00 0.00 0.00 0.00 0.00

Sources of funds 334.48 343.81 411.33 562.08 704.42

Net Fixed Assets 75.06 75.70 78.85 105.00 132.00

Investments 0.46 0.29 0.29 0.29 0.29

Other Non Current Asset 32.11 29.33 39.50 42.00 50.92

Inventories 375.55 436.27 597.31 564.84 669.48

Sundry debtors 335.21 335.45 402.73 481.74 589.78

Cash and bank balance 23.54 10.06 43.48 42.97 52.60

Other current assets 0.42 1.26 1.19 0.61 0.75

Loans and advances 164.44 174.40 165.10 229.84 281.92

Total current assets 899.65 957.43 1209.81 1302.00 1594.00

Deferred tax asset -0.89 0.55 0.99 1.59 1.90

Current liabilities and provisions 671.93 719.51 918.11 888.80 1074.69

Net current assets (Ex Cash) 204.18 227.86 248.22 370.23 466.71

Uses of funds 334.46 343.78 411.33 562.08 704.42



Quarterly Financial Highlights

Rs. Crore

Particulars Q4FY17 Q4FY16 Q3FY17 YoY% QoQ%

Revenues 500.12 301.96 407.41 65.62 22.76

Expenditures 436.62 274.02 363.97 59.34 19.96

Operating Profit 63.50 27.94 43.44 127.27 46.18

Net Profit 33.24 9.43 17.80 252.49 86.74

PBIDTM% (ex OI) 12.70 9.25 10.66 37.30 19.14

NPM % 6.65 3.12 4.37 113.14 52.17

EPS* 6.86 1.95 3.67 251.79 86.92

*Adjusted at current number of equity shares

Past Price movement of the stock

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INDIAN HUME PIPE CO. LTD. (517.050, 523.400, 514.000, 515.950, -0.64996)




[email protected]

HEM SECURITIES LIMITED

MEMBER-BSE,CDSL,SEBI REGISTERED CATEGORY I MERCHANT BANKER

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PHONE- 0091 141 405 1000 FAX- 0091 141 510 1757

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PHONE- 0091 22 2267 1000 FAX- 0091 22 2262 5991

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Disclaimer & Disclosure: This document is prepared for our clients only, on the basis of publicly available information and other sources believed to be reliable. Whilst we are not soliciting any action based on this information, all care has been taken to ensure that the facts are accurate, fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sell of any financial instrument and at any point should not be considered as an investment advice. Reader is requested to rely on his own decision and may take independent professional advice before investing. Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited, Directors and any of its employees shall not be responsible for the content. The person accessing this information specifically agrees to exempt Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and further agrees to hold Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The companies and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities there of, company (ies) mentioned herein and the same have acted upon or used the information prior to, or immediately following the publication.

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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Disclosure of Interest Statement

1. Analyst Ownership of the Stocks No

2. Hem & its Group Company Ownership of the Stock No

3. Hem & its Group Company Director Ownership of the Stock No

4. Broking relationship with Company covered No

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