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The Indian Hume Pipe Co. Ltd. (IHP)

No. of shares (m) 48.4

Mkt cap (Rs crs/$m) 1371/190.2

Current price (Rs/$) 283/3.9

Price target (Rs/$) 386/5.4

52 W H/L (Rs.) 510/220

Book Value (Rs/$) 99.1/1.4

Beta 0.9

Daily volume NSE (avg. monthly) 9550

P/BV (FY19e/20e) 2.7/2.2

EV/EBITDA (FY19e/20e) 8.7/7.2

P/E (FY19e/20e) 14.0/11.0

EPS growth (FY18/19e/20e) -13.6/13.8/27.5

OPM (FY18/19e/20e) 11.9/12.3/12.5

ROE (FY18/19e/20e) 21.0/20.6/21.9

ROCE(FY18/19e/20e) 16.0/15.6/16.9

Net D/E ratio(FY18/19e/20e) 0.7/0.5/0.5

BSE Code 504741

NSE Code INDIANHUME

Bloomberg INHP IN

Reuters IHME.NS

Shareholding pattern %

Promoters 69.9

MFs / Banks / FIs 5.1

Foreign Portfolio Investors 0.4

Govt. Holding 0.0

Public & Others 24.6

Total 100.0

As on September 30, 2018

Recommendation

BUY

Phone: + 91 (33) 4488 0011

E- mail: [email protected]

Standalone (Figures in Rs crs) FY16 FY17

FY18

FY19e FY20e

Income from operation 938.94 1704.31 1525.97 1660.25 1999.97

Other Income 2.96 2.92 2.59 10.53 1.94

EBITDA (other income included) 99.92 209.24 154.11 214.40 251.93

Profit after EO

29.01 99.51 85.96 97.80 124.66

EPS(Rs) 5.99 20.54 17.74 20.19 25.73

EPS growth (%) -17.6 243.1 -13.6 13.8 27.5

Highlights

• A 2018 report by WaterAid, a global advocacy group on water and

sanitation, reveals that India harbors 163 mn people who do not have access

to clean water, the highest in the world followed by Ethiopia with over 60

mn people. It also notifies that the burgeoning global population without

access to clean water has increased to 844 mn. The report blames lack of

political will and adequate funds as primary reasons for 11% of the world

being deprived of clean water.

• Getting ahead of the lack of clarity and transitional challenges posed by

implementation of GST, the company posted revenue growth of 94.3% in

Q2FY19, thanks to the abysmal performance in the same quarter last year.

Revenue adjusted for excise for the quarter stood at Rs 416.18 crs versus Rs

214.17 crs in Q2FY18 – the first quarter post GST which required the

necessary amendments to the pre GST contracts and compensation for the

additional tax liability. Additionally, departure from VAT to the GST

regime led to delay in receipt of raw materials, billing to clients and

collection thus, resulted in slow down of operations then.

• Sturdy revenue recognition for the quarter supported higher margins.

OPMs expanded by 88 bps y-o-y to 12.6% in Q2FY19, while NPM improved

by 327 bps y-o-y to 7.2%, which is traceable to recognition of Rs 8.31 crs in

other income owing to compulsory acquisitions of land parcels by

government authorities.

• Order book of the company swelled by 9.5% y-o-y with its estimated

balance of work at Rs 3736.93 crs as at October 31, 2018. The rise in order

book could be partially credited to the slowdown in order execution post

GST. In addition, unfaltering order inflows from the state of Karnataka and

Madhya Pradesh and revival of inflows from Tamil Nadu and Gujarat

helped ballooning of the order book in the current fiscal.

• The stock currently trades at 14.0x FY19e EPS of Rs 20.19 and 11.0x FY20e

EPS of Rs 25.73. Stroked by miserable execution ensued by GST

implementation, IHP’s earnings growth faltered last fiscal, constraining

return ratios as a result – ROE at 21% and ROCE at 16% down from 28.7%

and 20.2% y-o-y respectively. However, profit is expected to grow by 20.4%

on average over the next two years in the wake of sturdy pickup in order

execution post GST as well as sustenance of higher margins. Additionally,

governments continued focus on infrastructure and water supply schemes

would further spur order inflows. In view of growth prospects, we advise

buying the stock with a target price of Rs 386 (previous target: 478) based on

15.0x FY20e EPS over a period of 9-12 months.

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Outlook & Recommendation

Industry Outlook

India’s construction industry is the second largest industry in the country after agriculture, accounting for little more than 10% of

India’s GDP. Thanks to the rising demand from real estate and infrastructure projects, India’s construction market is expected to

become the world’s third largest, while its contribution to GDP is expected to bolster to 15% by 2030 (by some estimates). As per

the second advance estimates by the Central Statistics Office’s (CSO’s) for the year 2017-18, GVA (at basic prices) by the

construction sector at constant prices of 2011-12 series stood at Rs 915878 crs ($ 140 bn), witnessing a growth of 4.3% over 2016-17

revised estimate. However, given the burgeoning population in India coupled with migration from rural to urban areas, the

existing infrastructure evidently fails to meet the growing demand.

A recent report by Business Wire, a Berkshire Hathaway company, reckons that infrastructure construction was estimated to be

$116.8 bn in 2017, posting a CAGR of 12% during 2013-2017, while residential construction industry posted a CAGR of 11.7%

during the review period. The report also estimates the Indian construction industry – comprising of residential building

construction, commercial building construction, industrial building, institutional building and infrastructure construction - to

register a CAGR of 15.7% during 2018-2022, to reach a value of $738.5 bn by 2022.

India’s construction industry is forecast to grow at 6.1% in 2018 versus 5% growth in 2017 - 2017 growth bogged down by the

impact of demonetization –according to BMI Research. Thanks to the government support and thrust on infrastructure projects

leading to expansion of budgetary allocation and regulatory reforms that is expected to impel private sector investments, the

outlook of the construction industry appears robust. The government has introduced several landmark policy initiatives like

Pradhan Mantri Awas Yojana (PMAY)-Housing for All, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart

Cities Mission, Real Estate (Regulation and Development) Act 2016 (RERA), Benami Transactions Act, Real Estate Investment Trust

(REITs), easing of FDI norms, all of which are expected to boost the sector in the long run.

Despite various measures by the government, the Global Infrastructure Outlook forecasts that the gap between the required

infrastructure investment and the current trend of investment in India would widen going forward. The recent Economic Survey

reveals that about $4.5 tn worth of investments is required by India till 2040 to develop infrastructure and eventually augment

economic growth. However, the current trend demonstrates that India can meet around $3.9 tn infrastructure investment out of its

requirement. On a cumulative basis, India’s infrastructure investment gap would stand at around $526 bn by 2040.

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Growing population has also strained the gap between supply and demand for water. As a result, optimal economical and

equitable use of water has become a matter of great concern. A recently conducted study of NITI Aayog warns that India is

encountering its ‘worst’ water crisis in history. The study also highlighted that unless adequate steps are undertaken, the potable

water demand would outstrip supply by 2030. Delhi, Bengaluru, Chennai and Hyderabad are among the twenty one cities that

are foreseen to exhaust its groundwater by 2020, and if the concerns are left unaddressed, India is estimated to lose 6% of its

GDP by 2050 owing to water scarcity.

Moreover, the report also unveils that groundwater resources, accounting for 40% of India’s water supply, is being run down at

‘unsustainable’ rates with as much as 70% of India’s water supply being ‘contaminated’. As per the Composite Water

Management Index (CWMI) – an exercise carried out by the NITI Aayog which evaluates states based on nine broad sectors and

28 indicators including groundwater, irrigation, farm practices and drinking water, nearly 60% of the Indian states were

manifested as low performers and states like Uttar Pradesh, Odisha, Chhattisgarh, that account for 20-30% of India’s agricultural

output, fared poorly on. Additionally, states that ranked lowest like Uttar Pradesh, Haryana and Jharkhand - domicile almost

half of India’s population along with the majority of its agricultural produce. The rapidly declining ground water levels coupled

with inadequate and ineffectual policy action threatens the country’s food security. The need of the hour is to provide adequate

awareness and education on India’s looming water crisis and put a constructive water management practice in place to preserve

this prime natural resource in a sustainable manner.

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Financial & Valuation

IHP’s income from operations in H1FY19 was subjacent by 1.3% y-o-y, thanks to delay in Q1FY19, for two major projects

aggregating to Rs 1230.77 crs bagged by the company from Telangana in FY16 for supplying drinking water. Yet, pickup of

project execution in the second quarter of this fiscal arrested suppression of revenues any further owing to execution of projects

in various states like Rajasthan, Madhya Pradesh, Telangana and Andhra Pradesh.

Influx of a slew of orders from the Bangalore Water Supply & Sewerage Board in FY18 and a sizable order from Karnataka

Power Corporation Ltd worth Rs 468.58 crs undoubtedly underline a redux of orders from Karnataka and helped augment

order book of the company to record high at the end of October. Yet, order receipts from the state of Telangana has dried up

whereby, it constituted a considerable share to the order inflows in the three fiscals ending FY17.

Buttressed by major order inflows from states of Karnataka (Rs 481.32 crs), Chhattisgarh (Rs 465.09 crs), Madhya Pradesh (Rs

380.29 crs) and Andhra Pradesh (Rs 373.76 crs), IHP’s order book surged by 20.7% y-o-y as on May 15, 2018 and order inflows

from major projects peaked at Rs 2226 crs in FY18. However, contract revenues trampled by 17.5% in FY18, thanks to the

disruptions posed by GST that bogged down revenues. Pre GST, execution of such contracts for various state governments was

out of the purview of service tax, while pipes and other material used in contract execution was exempt from excise duty.

Merely about 5% VAT was imposed on IHP’s contracts in most cases. However, introduction of GST placed IHP’s contracts in

18% slab initially, which was eventually revised to 12% with effect from August 22, 2017.

The company, in the current fiscal, has also undertaken initiatives to monetize land that it had purchased in Vadgaon, Pune, to

set up a pipe manufacturing factory in 1969 which was eventually shut down in 2015 due to lack of demand. This land,

measuring about 643518 sq. feet, has been proposed for development and sale of developed real estate that would consist of

residential group housing as well as commercial/retail areas. Therefore, the company has approved the proposed revenue

sharing transaction with M/s. Kalpataru Gardens Pvt. Ltd. in which, IHP would be entitled to 34% of the revenues generated

from the land development.

With the adverse impact of GST behind and maintenance of current momentum of project execution over the next two fiscals,

we expect revenues to augment by 14.5% on average over the next two years, precipitating 20.4% average growth in the post

tax earnings. Margins are expected to improve, while short term debt is expected to marginally reduce owing to execution of

orders currently categorized as work in progress resulting in improvement of interest coverage ratio to 4.9 in FY20 versus 4.0 in

FY18.

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The stock currently trades at 14.0x FY19e EPS of Rs 20.19 and 11.0x FY20e EPS of Rs 25.73. Not oblivious of client concentration

risks (revenue of the company from a single large customer stood at 53% and 22% in FY17 and FY18 respectively), cluster of

similar type of orders, primarily water supply scheme and laying, jointing and testing of pipes, would doubtlessly fortify

execution. Vanquishing challenges posed by GST, revenue and earnings are estimated to augment in the FY19 and FY20,

galvanized by sturdy pickup in order execution. Much would also reckon upon speedy execution of existing prominent

projects – water supply pipeline work from Karnataka Power Corporation Ltd, combined water supply scheme from Tamil

Nadu. Additionally, ahead of the upcoming 2019 general elections, Government of India’s spending on infrastructure, water

supply schemes and various initiatives under Swachha Bharat are likely to get a boost and auger well for the company.

Weighing odds, we maintain our ‘buy’ rating on the stock with a revised target price of Rs 386 (previous target: 478) based on

15.0x FY20e EPS over a period of 9-12 months. For more information, refer to our April report.

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Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* Profit* OPM (%) NPM (%) Int Cov ROE (%) Mcap/Sales P/BV P/E

IHP 10 283 1371 1516 84 11.5 5.6 4.0 18.9 0.9 2.9 16.3

NCC Ltd 120 87 5247 10439 485 12.2 4.4 2.4 12.6 0.5 1.2 10.8

*figures in crores; calculations on ttm basis

Book value adjusted for goodwill & revaluation reserves, wherever applicable

NCC Limited, one of the largest construction players in India, enjoys a well diversified business portfolio that is spread across

nine verticals – buildings & housing, roads, water & environment, electrical, irrigation, metals, mining, power and railways –

where buildings and housing constitutes more than one third of its revenue and order book. Significant thrust of the government

on the infrastructure sector with 20% increase in allocation of funds in FY18 enabled the company to secure orders worth Rs 25304

crs as against Rs 9226 crs in FY17. As a result, its cumulative order book ballooned to Rs 32532 crs (80% growth y-o-y) as on

March 31, 2018.

Though revenue for the year degrew by 6.8% y-o-y in FY18 (owing to delay in billing by clients on account of GST), its margins

witnessed improvement – OPM rose from 7.5% in FY17 to 10.5% in FY18 and NPM also improved to 3.2% in FY18 helped by

higher operating efficiency and reduction in finance cost (-10.5% y-o-y). During the year, the company also raised equity of about

Rs 550 crs (price of Rs 123 per share) through QIP issue to meet the needs of long term working capital in the wake of fortifying its

construction business.

NCC Limited posted 55.2% y-o-y revenue growth in H1FY19 aided by better order execution. As at the end of the second quarter

of the current year, order book stood at Rs 32955 crs, marginally aided by order inflows of Rs 8359 crs in H1FY19 after adjusting

for Rs 1039 crs worth of old orders that have been largely inactive. Revenue growth helped operating margins to improve from

8.8% in H1FY18 to 12.3% in H1FY19. Going forward, government’s initiatives and higher budgetary allocation would continue to

boost the sector and thus auger well for the company.

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Financials Quarterly Results - Standalone Figures in Rs crs

Q2FY19 Q2FY18 % chg H1FY19 H1FY18 % chg

Income From Operations (Net) 416.18 214.17 94.3 749.11 758.68 -1.3

Other Income 9.14 0.71 1188.3 9.75 1.40 595.5

Total Income 425.32 214.88 97.9 758.86 760.08 -0.2

Total Expenditure 363.87 189.14 92.4 658.22 690.50 -4.7

EBITDA (other income included) 61.45 25.75 138.7 100.64 69.58 44.6

Interest 12.83 11.31 13.4 23.27 22.11 5.2

Depreciation 2.66 2.61 1.9 5.12 5.11 0.2

PBT 45.97 11.82 288.8 72.25 42.37 70.5

Tax 16.17 3.50 362.0 25.48 14.18 79.7

PAT 29.79 8.32 258.0 46.78 28.19 66.0

Extraordinary Item 5.45 0.00 - 5.45 -20.18 -127.0

Adjusted Net Profit 24.34 8.32 192.5 41.33 48.36 -14.5

EPS (Rs) 5.02 1.72 192.5 8.53 9.98 -14.5

Income Statement - Standalone Figures in Rs crs

FY16 FY17 FY18 FY19e FY20e

Income From Operations (Net) 938.94 1704.31 1525.97 1660.25 1999.97

Growth (%) -7.0 81.5 -10.5 8.8 20.5

Other Income 2.96 2.92 2.59 10.53 1.94

Total Income 941.90 1707.23 1528.56 1670.78 2001.90

Total Expenditure 841.98 1497.99 1374.45 1456.38 1749.97

EBITDA (other income included) 99.92 209.24 154.11 214.40 251.93

Interest 45.26 45.71 42.88 45.95 49.29

Depreciation 9.80 10.53 10.84 11.05 12.62

PBT 44.85 153.00 100.38 157.40 190.03

Tax 15.76 53.33 34.32 54.14 65.37

PAT 29.10 99.68 66.06 103.25 124.66

Extraordinary Item 0.09 0.17 -19.90 5.45 -

Adjusted Net Profit 29.01 99.51 85.96 97.80 124.66

EPS (Rs) 5.99 20.54 17.74 20.19 25.73

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Balance Sheet Figures in Rs crs

FY16 FY17 FY18 FY19e FY20e

Sources of Funds

Share Capital 4.84 9.69 9.69 9.69 9.69

Reserves 301.57 390.42 443.40 526.80 631.60

Total Shareholders' Funds 306.41 400.10 453.09 536.49 641.29

Long Term Debt 13.65 8.16 2.66 2.62 1.70

Total Liabilities 320.06 408.26 455.76 539.11 642.98

Application of Funds

Gross Block 65.39 78.27 86.53 106.76 126.76

Less: Accumulated Depreciation 0.00 7.80 16.65 27.71 40.32

Net Block 65.39 70.48 69.88 79.05 86.43

Capital Work in Progress 2.60 0.96 2.22 2.00 2.00

Investments 9.47 9.83 9.20 9.04 9.04

Current Assets, Loans & Advances

Inventory 46.07 59.97 47.29 52.02 57.23

Trade receivables 333.78 400.71 474.90 451.59 479.99

Cash and Bank 8.85 42.42 18.84 62.75 84.07

Short term loans (inc. other current assets) 460.95 646.69 876.65 965.59 1067.73

Total CA 849.64 1149.79 1417.69 1531.95 1689.01

Current Liabilities 640.83 829.72 1031.14 1069.06 1128.62

Provisions-Short term 2.88 57.51 47.25 49.20 62.71

Total Current Liabilities 643.71 887.23 1078.40 1118.26 1191.33

Net Current Assets 205.93 262.56 339.29 413.69 497.69

Net Deferred Tax 1.18 2.25 9.35 6.95 6.95

Long term assets (net of liabilities) 35.50 62.19 25.80 28.37 40.87

Total Assets 320.06 408.26 455.76 539.11 642.98

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Key Financial Ratios FY16 FY17 FY18 FY19e FY20e

Growth Ratios (%)

Revenue -7.0 81.5 -10.5 8.8 20.5

EBITDA -11.6 109.4 -11.8 11.8 22.2

Net Profit -17.6 243.1 -13.6 13.8 27.5

EPS -17.6 243.1 -13.6 13.8 27.5

Margins (%)

Operating Profit Margin 10.3 12.1 11.9 12.3 12.5

Gross profit Margin 5.8 9.6 9.3 9.6 10.1

Net Profit Margin 3.1 5.8 5.6 5.9 6.2

Return (%)

ROCE 9.6 20.2 16.0 15.6 16.9

ROE 9.8 28.7 21.0 20.6 21.9

Valuations

Market Cap/ Sales 0.8 1.1 1.0 0.8 0.7

EV/EBITDA 10.8 10.3 10.0 8.7 7.2

P/E 26.4 19.3 17.6 14.0 11.0

P/BV 2.5 5.0 3.5 2.7 2.2

Other Ratios

Interest Coverage 2.0 4.3 4.0 4.2 4.9

Debt Equity 1.0 0.7 0.8 0.7 0.6

Net Debt-Equity Ratio 1.0 0.6 0.7 0.5 0.5

Current Ratio 1.3 1.3 1.3 1.3 1.4

Turnover Ratios

Fixed Asset Turnover 13.4 25.1 21.7 22.3 24.2

Total Asset Turnover 3.0 4.8 3.7 3.5 3.5

Inventory Turnover - 28.3 25.1 29.3 32.0

Debtors Turnover 2.8 4.6 3.5 3.6 4.3

Creditor Turnover 3.4 5.2 3.6 3.3 3.8

WC Ratios

Inventory Days - 12.9 14.6 12.4 11.4

Debtor Days 130.0 78.7 104.7 101.8 85.0

Creditor Days 106.1 70.0 101.9 111.2 95.8

Cash Conversion Cycle - 21.5 17.4 3.1 0.6

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Cumulative Financial Data FY09-11 FY12-14 FY15-17 FY18-20e

Income from operations 1795 2054 3653 5186

Operating profit 201 172 413 636

EBIT 190 158 389 608

PBT 125 74 250 470

PAT 81 49 164 308

Dividends 16 19 38 60

OPM (%) 11.2 8.4 11.3 12.3

NPM (%) 4.5 2.4 4.5 5.9

Interest coverage 2.9 1.9 2.8 4.4

Debt-equity* 0.9 1.0 0.7 0.6

ROE (%) 15.3 7.0 17.0 20.4

ROCE (%) 12.3 7.8 14.7 16.1

Fixed asset turnover 10.9 8.8 15.8 22.0

Debtors turnover 10.4 4.1 3.9 3.9

Creditors turnover 4.7 3.9 4.3 3.9

Debtor days 34.9 88.1 94.3 93.0

Creditor days 78.4 93.9 84.7 94.0

Dividend payout ratio (%) 19.7 29.7 22.3 20.3

FY09-11 implies three years ending FY11

*As on terminal year

Geographical diversification of its order book over the years across states like Karnataka, Tamil Nadu, Gujarat, Chhattisgarh,

Madhya Pradesh, Andhra Pradesh and Rajasthan has helped IHP contain its business risk and fortified its order book. Brisker

execution of orders along with influx of new distinguished projects – water supply pipeline project from KPCL, combined

water supply scheme from Tamil Nadu Water Supply & Drainage Board, etc - will help in recognition of sturdier revenues that

would enable cumulative revenue growth of 42% in FY18-20e period. The “pass through” clause established in most of its

contacts will help the company to cushion itself from volatility in input prices of steel and cement. Thus, expansion of

operating margins (12.3% vs 11.3% in FY15-17 period) would assist in cumulative post tax earnings growth of spectacular

88.4%.

Array of similar orders, primarily water supply scheme and laying, joining and testing of pipes, would doubtlessly spur

economies of scale and help improve return ratios going forward (see table). Constraint over debt amassment (though largely

short term in nature) will help increase interest coverage ratio to 4.4 as compared to 2.8 in FY15-17 period.

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Financial Summary – US dollar denominated

million $ FY16 FY17 FY18 FY19e FY20e

Equity Share capital 0.7 1.5 1.5 1.3 1.3

Shareholders' funds 46.2 59.5 66.6 71.7 86.2

Total debt 47.9 41.4 52.6 48.4 51.7

Net fixed assets (incl. CWIP) 10.2 11.0 11.1 11.2 12.3

Investments 1.4 1.5 1.4 1.3 1.3

Net Current assets 31.0 38.3 49.1 54.6 66.3

Total Assets 48.3 60.8 67.0 72.0 86.4

Revenues 143.4 254.0 236.8 230.3 277.4

EBITDA 15.2 31.1 28.6 28.6 34.9

EBDT 8.3 24.3 21.9 22.2 28.1

PBT 6.8 22.8 20.3 20.7 26.4

PAT 4.4 14.8 13.3 13.6 17.3

EPS($) 0.09 0.31 0.28 0.28 0.36

Book value ($) 0.95 1.23 1.37 1.48 1.78

Income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates

(Rs 72.10/$). All dollar denominated figures are adjusted for extraordinary items.

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Disclosure & Disclaimer CD Equisearch Private Limited (hereinafter referred to as ‘CD Equi’) is a Member registered with National Stock Exchange of India Limited,

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conflict of interest in the subject company(s) (kindly disclose if otherwise).

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engaged in market making activity of the company covered by analysts.

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While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or

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Registered Office: 37, Shakespeare Sarani, 3rd Floor, Kolkata – 700 017; Phone: +91(33) 4488 0000; Fax: +91(33) 2289 2557 Corporate Office: 10,

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2276 Website: www.cdequi.com; Email: [email protected]

buy: >20% accumulate: >10% to ≤20% hold: ≥-10% to ≤10% reduce: ≥-20% to <-10% sell: <-20%

Exchange Rate Used- Indicative

Rs/$ FY15 FY16 FY17 FY18

Average 61.15 65.46 67.09 64.45

Year end 62.59 66.33 64.84 65.04

All $ values mentioned in the write-up translated at the average rate of the respective quarter/ year as applicable. Projections converted at

current exchange rate. Cumulative dollar figure is the sum of respective yearly dollar value.

CD Equisearch Pvt Ltd… · by 327 bps y-o-y to 7.2%, which is traceable to recognition of Rs 8.31...

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