RETAIL RESEARCH Stock Note 14 July 2017

Ram Ratna Wires Limited

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Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon

Copper Wire Rs. 147 Buy at CMP and add on declines Rs.128-132 Rs.172 & Rs.199 2 - 3 quarters

Company Description: Ram Ratna Wires Ltd (RRWL) belongs to the Ram Ratna group of companies and is engaged in the manufacturing and sale of super enameled copper winding wires under the RR Shramik brand. The company was set up in 1995 by Mr Rameshwarlal Kabra and his sons Mr Tribhuvan Prasad Kabra, Mr Mahendra Kumar Kabra, and Mr Shreegopal Kabra. RRWL is the leading manufacturer and supplier of quality winding wires in the electrical equipment industry. Its products are utilised in various equipment including transformers, cables, transmission lines, switchgear, capacitors etc. RRWL has two state of the art manufacturing facilities located at Silvassa with a combined capacity of 2200 MT per month.

Investment Rationale:

Capex plans to bring about both organic and inorganic growth for company over a span of next 3 fiscals.

Strong/renowned clientele to help company excel in its newer product endeavors.

Good demand from the user industries to help company scale up its level of operations and utilize the same efficiently.

Better margin realizations with increasing share in turnover of higher value accretive products for the company.

GST to help organized players and help achieve better cost efficiencies.

Strong financials showing good long term solvency, improving margins, improving ROCE and RONW, etc.

Concerns:

Fluctuating copper prices in a commodity type business may put downward pressure on RRWL’s margins.

Fluctuating foreign exchange may bring down company’s profitability due to its imports exposure.

High receivables increasing the short term funding requirements for the company.

Poor operating efficiency may adversely impact profitability due to negative financial leverage indicated by high D/E ratio View and Valuation: RRWL is an established player in the enameled copper winding wire industry being the second largest in the domestic market. The demand for and applications of winding wire in the country are increasing with the increased level of automation in day to day life. RRWL has further chalked out plans to expand its current capacities, make strategic investments and initiate partnerships in order to bring in both organic and inorganic growth for the company. With the focus on increasing the revenue share of higher value products, company intends to expand its current margins. Further, company is reducing the operational risk, present currently in the business due to dominance by single type of product, by diversifying its product portfolio and this would help it achieve a higher valuation. All these factors combined together indicate a good potential upside for the company. Being the only listed company from a group having sales of ~Rs.4200 Crs and coming from the same group as R R Kabel (Sales Rs.1700 cr, engaged in business of LDECs & Housing wires), we think the initiatives by RRWL could lead to gradual rerating of

HDFC Scrip Code RAMRATEQNR

BSE Code 522281

NSE Code NA

Bloomberg RRW IN

CMP Rs.147

Equity Capital (Rs crs) 11.0

Face Value (Rs) 5.0

Equity Share o/s (crs) 2.2

Market Cap (Rs crs) 323.4

Book Value (Rs) 43.35

Avg. 52 Wk Volumes ~24000

52 Week High 178.8

52 Week Low 43.0

Shareholding Pattern % (June 2017)

Promoters 73.0

Institutions 0.0

Non Institutions 27.0

Total 100.0

Fundamental Research Analyst CA Arpit Bhatt arpit.bhatt@hdfcsec.com

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the stock. Further RRWL has healthy return ratios in the rage of 17.5-20.5% which could inch up further. Though it operates at a low margin currently, the fact that the topline is large (and growing), it has never made losses in the past 10 years despite low OPM and dependence on volatile commodity prices and the margins are slated to rise gradually gives comfort. The stock is currently trading at 10.7x FY19E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs.128-132 (9.50x FY19E EPS) for sequential targets of Rs.172 (~12.5x FY19E EPS) & Rs.199 (~14.5x FY19E) over the next 2-3 quarters. Financial Summary: Particulars (Rs cr)

Standalone Consolidated Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) FY15 FY16 FY17 FY18E FY19E

Net Sales 225.73 181.06 24.7% 193.85 16.4% 747.2 728.4 813.5 1002.1 1133.8 EBITDA 14.98 11.49 30.4% 14.76 1.5% 34.5 34.5 51.8 62.1 74.8 APAT 6.91 4.45 55.3% 6.48 6.6% 9.0 9.6 22.0 25.3 30.2 EPS (Rs) 3.14 2.02 55.3% 2.95 6.6% 4.1 4.4 10.0 11.5 13.7 P/E (x) 36.7 34.2 14.9 13.0 10.9 RONW 14.2% 13.7% 17.6% 18.6% 22.9%

(Source: Company, HDFC sec) Company Profile: RRWL a group concern of the Ram Ratna group which has a total of 9 manufacturing facilities, 8 brands (RR Shramik belonging to RRWL) and has a total turnover as a group of Rs.4200 crs. RRWL made a modest beginning in 1965 as a small electrical trading shop in the erstwhile city of Bombay. Currently, it is amongst the leading manufacturers of winding wires and the second in ranking in the organized market (after Precision Wires Ltd). It’s India’s only manufacturer of enamelled copper wires that offers the widest range starting from 0.018 mm to 4.876 mm (SWG 06 – 52) with additional intermediate and mm sizes. RRWL’s product line includes sixteen products that broadly fall into five groups i.e. Enamelled Copper Wire (ECW), Enamelled Copper Strips (ECS), Submersible Winding Wire (SWW), Bare Copper Strips (BCS) and Enamelled Aluminium Wire (EAW). Its end products meet all of the well-known Indian and international standards including IS, IEC, JS and NEMA. RRWL holds approx. 2.15% stake in in group concern RR Kabel which has a turnover of Rs.1700 crs and a market share of about 6-7% in housing wire industry. Further RRWL has set up a Joint Venture in Bangladesh in the name of RR Imperial Electricals Limited engaged in the business of Enamelled Wire & Strips and PVC Insulated Cables. The RR group as a whole holds 50% stake in this JV of which RRWL holds 10% stake. RR Imperial had earned a revenue of roughly Rs.120 Crs in FY17 and was at par with RRWL in terms of its PAT margins. RRWL operates in the transmission and distribution (T&D) industry, and it is the first choice for large Original Equipment Manufacturers (OEMs) and top electrical companies of India as well as MNCs. It also caters to thousands of small manufacturing and repairing units of electrical equipment in the country. As mentioned earlier, RRWL is engaged in manufacturing and selling of different categories of winding wires. Following is an extensive table showing the details of the products sold by the company and the primary applications of said products:

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Product Name Product Description Product Application

Super Enamelled Copper Wires

A superior range of enamelled copper wires aiming to cater the wide variety of applications in the industry ranging from a common motor rewinding to most critical applications like in automobiles. Enamelled winding wire is a film insulated copper (or aluminium) electrical conductor used in form of coil windings in motors, transformers, generators and other electromagnetic equipments. When wound into coils, and energized, enamelled winding wire creates an electromagnetic field, which is utilized to generate the required output form of energy – viz electrical to mechanical (or vice versa) electrical to electrical, and electrical to magnetic energy.

Domestic equipments, pumps, motors, stabilizers, transformers, fans, auto electricals, heavy duty domestic appliances, motors, compressors, large motors and generators.

Fine & Ultrafine Enamelled Copper Wires

An industry-leading range of high quality fine and ultra-fine enamelled copper wires. These are very small in radius and are generally produced on make to order basis.

Fine and Ultrafine Enamelled Copper Wires are mainly used in Small Transformers, Relays, Ignition Coils, Transformers & Small Motors

Corona Resistant Winding Wires

In inverter driven motors, for introducing corona resistance, corona resistant winding wires are used. This is a niche product.

Corona Resistant Winding Wires are used in Inverter drives & Stator Windings.

Super Enamelled Aluminium Winding Wires

Aluminium is an excellent electrical conductor after copper. Hence just like copper wires, aluminium wires are used to meet the winding wires requirement. These are manufactured as per Indian as well International standards and as per the specifications given by the customers. The product is available in different sizes, types and grades of coverings to cater to specific needs for special fields of applications. The latest technology is adopted for manufacturing to offer high quality products.

Mainly it is used in electronic circuits, television degaussing coils and so on for many more applications including washing machine motors, fans and AC compressors.

Submersible Winding Wires

Poly wrapped winding wire commonly are known as “Submersible Copper Winding Wire”. The copper conductor is wrapped with thin polyester film and Biaxial oriented poly propylene (BOPP) films which can be used under water.

Submersible Winding Wires are used in submersible pumps motors of all sizes for domestic and industrial application.

Paper Covered Magnet Wires

Kraft paper insulation is most commonly used in oil-filled transformers. The plain kraft papers are wrapped in a number of layers around conductors, to acquire the needed insulation strength. For this purpose, kraft papers are fabricated or creped which increases the elasticity and flexibility during shaping of coils and also enlarges the surface area of insulation and absorbs insulating oils.

Crepe Kraft Paper Insulated Copper Cables are mainly used as an insulation in oil cooled transformers, current transformers of type IMB, CT, CVT as leads and shields.

Cotton Covered Copper Conductors

In certain low voltage applications, cotton yarn is used as wrap-around insulators, which proved to be long lasting, flexible and tough insulation. Cotton yarn soaked in impregnating resins and cured properly can be used for critical applications like servo stabilizer windings, magnet coils etc.

Cotton Covered Copper Conductors are exclusively used in dimmer stat windings of 40, 50, 75, 80, 90 Amp or even higher capacity.

Glass Fibre Covered Strips

The glass in glass fibre conductor may be applied in woven tape form or as a continuous fibre. It has proven to be an efficient insulator, providing coil winders with thermal stability, and equate electrical properties and good resistance to abrasion after varnishing.

Glass Fibre Covered Strips are used in Motor Stators, Generators, Special Transformers and High Voltage Motors

Super Enamelled Copper Strips

Enamel film insulated rectangular copper conductors are known as enamelled copper strips. The manufacturing process of enamelled strips, are essentially same as round wires, but most critical. The rectangular shape of copper conductors with nominal corner radii, helps to pack maximum copper in small space. This characteristic is beneficial in design aspect of the transformer windings. At the same time the insulation strength and flexibility has to be excellent to withstand the winding stresses, bending / shaping etc.

Super Enameled Copper Strips are used in various types of transformers.

Nylon Coated Enamelled Wires

Nylon top coat is used over the regular enamelled copper wires to enhance the mechanical properties of insulation coat. Normal enamelled coating is stressed in coil winding applications like high speed auto winding and auto coil insertions in slots. Nylon top coat exhibits a smooth and tough, slippery surface of top layer of insulation, thus, reducing chances of insulation damage and

Nylon top coat wires can be used in high speed windings for armature coils of home appliances, power tools, auto coiling machines for switch gears miniature coils in electronics etc.

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failures related to mechanical abuse of the thin insulation layer.

Self Bonding Enamelled Wires

For certain applications, where the secondary insulation is not practical, self-bonding enamelled wires can be used. These wires have an outer layer of bondable material which is usually thermoplastic and bonds the wires surfaces with each other once heated to the bonding temperature of the outer layer. Bondable wires, thus, benefits in reduction of cycle time and elimination of process of secondary insulation application / baking / curing cycle etc.

Bondable wires can be used in power tools armature coils, electronics, miniature coils, TV yoke coils, continuous-transposed conductors etc.

Sole Coat AIW Enamelled Wires

For certain applications the thermal, mechanical and dielectric properties are highly demanding. A typical example is in the automotive industry where the reliability of components is the crucial factor. The development of sole coat Polyamide-imide (PAI or AIW) wires, have cutting edge advantages over previous dual coated class 200 wires. The insulation is capable of withstanding harsh environments like extreme temperatures, chemicals, oils, greases, mechanical stresses and vibrations.

AIW Enamelled wires are mainly used in automobile industry in various component coils.

LITZ Wire-Bunched Enamelled Wires

Litz wire is a type of cable used in electronics to carry alternating current. The wire is designed to reduce the skin effect and proximity effect losses in conductors used at frequencies up to about 1 MHz.

Typical applications for litz wire conductors include high-frequency inductors and transformers, motors, relays, inverters, power supplies, AC/DC converters, communication equipment, ultra-sonic equipment, sonar equipment, television equipment and heat induction equipment.

Triple Insulated Winding (TIW) Wires

TIW, a unique product for small transformers. Three layer extruded coatings of high performance polymer resins gives excellent dielectric properties to this type of winding wires. Unlike enamelled wires, three layers of insulation are extruded over the copper conductor by an automated manufacturing process ensure perfect central position of conductor.

Their applications cover most switching transformers, information and telecommunications equipment, game machines, consumer goods, inverters and other similar devices.

(Source: Company, HDFC sec)

Q4FY17 Review: In the last quarter ended March 2017, company achieved an all-time high turnover with a Q-o-Q revenue growth of 16.4% and and Y-o-Y growth of 24.7% at Rs.225.7 Crs. This was majorly due to higher copper prices passed on to customer in-turn resulting in higher realizations per tonne. Company has grown on EBITDA front marginally Q-o-Q which is majorly due to increase in the turnover. However, the EBITDA margins have contracted Q-o-Q due to rise in input cost. In Q3FY17 company realized its all-time-high operational margins due to increased realizations on wires sold but lower input cost due to low cost raw material lying in inventories. With stability in copper prices, company is expected to realize margins in line with the margins realized in Q4FY17 unless it is able to increase proportion of high value accretive products soon which is one of the goals of their planned capex.

Investment Rationale: CAPEX and strategic investments to help company grow organically and inorganically: RRWL has witnessed decent growth in its revenue numbers over the past 6 years growing at a CAGR of 8% on a standalone basis. In FY17 it experienced a good growth of approx. 11.4% in its topline. The core business of the company is expected to grow at a faster rate for the coming 2-3 years.

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Further, Company has undertaken expansion program to expand its current capacities by embarking on a greenfield project in Silvassa where its other two facilities are located. Company has purchased the land, commenced the construction of the plant, ordered and received the plant and machinery and said machines are under inspection at present. Company plans to make first phase of this plant operational by end of November 2017 and is desirous to have a minimum of 5 months of operations from the new plant in FY18. The second phase of the plant will go on stream in Oct/Nov 2018. By this expansion, company aims to boost its organic growth in the high value accretive business products. Company aims to: - raise the capacity of 50MT per month of micro magnet wires to 100 MT per month (Micro magnet wires are sold at a

mean price of Rs.6 to Rs.6.5 lacs per tonne), - commence manufacture and sale of aluminium strips business with an installed capacity of 150 Mt per month having a

potential to increase the revenue stream by approx. 2 Crs per month. - increase the capacity of its submersible wires from 150 to 250MT per month with introduction of newer products like

BOPP & Paper covered submersible wires having a potential revenue of about Rs.10 Crs per month. This expansion will have two fold benefits for the company i.e. one it shall be able to improve its margins as these products whose capacities are being increased are all high value accretive product and two it shall be able to diversify its product portfolio meaningfully with decreasing dependency on its sales of super enameled copper wires which currently account for approx. 81% of its total sales. Also company has the plans to increase the production of other products at the existing two facilities. Further, company has invested Rs.10 Crs to acquire 60% majority stake in a domestic company which is engaged in the business of manufacturing and selling of copper tubes. These copper tubes are mainly used in the air conditioners and refrigerators. The air conditioners and refrigerators segment of the consumer durables is a fast growing industry and has a good growth prospects over the medium term. This company presently has a capacity of 250 MT per month of copper tubes which the company intends to take to 3000 MT per month over the span of 3 years. The acquired company had a turnover of ~Rs.125Crs in the previous fiscal and a bottomline of roughly Rs.75-80 lacs. Company expects good growth prospects in the future from this segment on account of its brand and marketing strategies aiding the manufacturing capabilities of the target company generating synergies and higher revenues. RRWL is also in talks with an international major to enter into a joint venture to manufacture and market copper component including busbars. The stake that RRWL is aiming in the joint venture is 65% and it expects to set up a plant for the same with a minimal capex of roughly Rs.5 Crs and a capacity of 50 MT per month to start with and then scale it up to about 100 MT per month. At 50 MT per month of capacity company shall be able to generate an additional turnover of Rs.3-5 Crs annually with EBITDA margins of 18-20% from this business. This JV plant shall be set up in Baroda where company already owns a piece of land and which is ready for use. Company aims to benefit in the long term from this JV by gaining some exposure to the trolley-wires business of this major which can scale up its turnover considerably.

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With all of these capex and investment plans in place, company aims to achieve an additional turnover of not less than Rs.200 Crs in the next year and a half and to achieve a sustainable growth rate in the said businesses over the medium term. Strong clientele to help lift newer products in the market: As mentioned earlier, RRWL’s 75% of sales is in the OEM markets and the remaining is in the replacement market. Company has a good strong clientele of big domestic business houses and highly reputed MNCs. The major corporates where company has a strong hold include Crompton Greaves Ltd, Emerson Ltd, Cummins Ltd, Siemens, ABB, Schindler, CRI Pumps, Aquasub group, Godrej group, etc. To pitch a new product to an existing client always adds to the probability of success for new products. Company can thus push its newer endeavors in various segments with ease and exploit the opportunity it has. Strong & stable demand for winding wires: India being a power deficit country is expected to see a constant surge in investments in the power sector over the next decade. Also, the government has ambitious plans for increasing installed capacity for electric power generation, four fold, during next twenty years. The Company being a supplier to the Electrical Equipment manufacturing industry is expected to benefit from the trend. The living standard of the people in the country is generally improving so also the Industrial Development & combined effect thereof will anyhow; force the accelerated growth of Electric-Power Sector and consequently that of Electricity Equipment Manufacturing and Winding Wire Sector. Customers include many large and medium electrical and electronic equipment manufacturers in India and abroad. The wires are used in rotating machines, alternators, power and distribution transformers, control and power supply transformers, auto electrical, electrical tools, house hold appliances, fans and other general engineering segments. We expect healthy outlook for electric-power-sector for long term prospect. The government is trying to take effective measures to improve the overall industrial growth in India. Winding wires are used in the manufacture of electrical equipment which are in turn used in engineering, infrastructure and consumer durable companies. Growth in infrastructure sector such as Airport, Metros, Highways, and Surface Transport etc could be a booster for demand for winding wires. Long term future of Electrical Equipment Manufacturing is bright. Company is engaged in the business of producing copper enameled wires majorly and the same is useful everywhere in the electrical equipment industry where there is requirement for the equipment to rotate. This further has a humongous prospects when the electric vehicles hit the auto industry in full swing. This is because of the number of applications that a winding wire has in an electric car is much more than a normal car. All these factors put together keep the demand picture of company’s major product in a good state having good prospects for the company. Better margin realizations due to change in product mix: RRWL’s revenues have been historically dominated by sale of super enameled copper wires which tend to be less value accretive and thus carry (relative to its other products) lighter margins. Company has now intention to increase the share of its

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revenue from higher value products like the enameled aluminium wires, micro-magnet wires, submersible winding wires etc., by resorting to the capex plans it has framed. Also in FY17, RRWL has carried out a program of modernization of its existing plants which has already shown some improvement in its margins in the said year. With modernized plants, the capacity utilization increases and the growing revenues help company to generate a positive effect on its profitability. However, these margin expansion shall be negated partially by the increase in the depreciation cost associated with company’s capex and greenfield project. This however, helps to grow its profits by growing its revenues and a stable margin realization over the next two fiscals. Improving market visibility for the group: RRWL is a part of the Ram Ratna group of companies and its major unlisted group concerns include – RR Kabel Ltd., Ram Ratna International, Ram Ratna Electricals Ltd., Ram Ratna Infrastructure Pvt. Ltd., etc. These entities are growing and have established themselves as a large and dependable group in the wires, electrical appliances, etc businesses. RRWL belongs to a group having sales of ~Rs.4200 Crs and comes from the same group as R R Kabel (Sales Rs.1700 cr, engaged in business of LDECs & Housing wires), and being the only listed company in the group could get more interest from investors and consequently higher valuations. GST to be advantageous for organized player: As mentioned earlier, RRWL is the second largest player in the copper winding wire industry domestically. With the advent of GST the cost efficiencies to be experienced by the organized players would help them price their products better as compared to the unorganized players in the industry. This may help a company like RRWL to increase its market share in an already growing market. Apart from higher pricing power, company may also experience better margins due to improved cost structure for the company positively affected by the GST. Healthy Financials: Over the years, RRWL has maintained good long term solvency position with its debt DER never crossing 0.8x and having an interest coverage ratio at around 5.3 times. RRWL has a good and improving current and liquid ratio portraying company’s ability to meet its short term liabilities. Company’s margins have been improving over the last 2 years on account of the structural changes that have taken place over past two years and the change in the product mix. Its return ratios have remained healthy and could improve further going forward.

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(Source: Company, HDFC sec)

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Concerns:

Fluctuating RM prices may pressurize margins: Copper is the major raw material component for production and manufacturing of winding wires. It constitutes roughly 85-90% of the total raw materials consumed by the company. Historically over previous 5 years the total cost of materials has been around 90-91% (except for FY17 where the copper prices plummeted and the materials cost for the company came down to 87%). Also, it can be noted that the company on a gross level performed well when the copper prices were in a downtrend. This goes to show that any major rise in the copper prices which the company is unable to pass out its customers by way of price hikes would lead to contraction of gross margins and can hamper company’s profitability at least temporarily.

(Source: Company, HDFC sec)

FOREX Fluctuation may wipe out company’s profitability: Company imports roughly 30-33% of its raw materials. This leaves the company exposed to foreign exchange fluctuations. Higher volatility in the foreign exchange market may make it difficult for company to sustain its margins on a net level due to the one time losses that it could occur every time the forex movement beats company’s expectations. Tight Inventory policy may impair company’s operations: RRWL has a very less number of inventory days (although position improved marginally in FY17). Over the past 6 years company has had an average of 9 days of inventory. This although is a good sign indicating lesser capital being locked in the working capital cycle, the same can misfire on account of demand that needs to be met immediately where company is out of stock. The procurement policy also is indicated of being such that an order for the raw materials is placed only after an order is

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received by company from any of its OEM customers or other customers. However, in some extra-ordinary event where company is unable to procure the required amount of raw materials, it may negatively affect company’s turnover. Higher receivable days: RRWL is engaged in a business which requires good amount of working capital investment with respect to its receivables. This raises the concern for higher finance costs on account of higher funding requirements when the company grows on account of its future expansion plans. On an overall basis, this could affect company’s PAT margins and may bring down the overall profitability.

(Source: Company, HDFC sec)

High debt driven company may negatively impact company’s profitability: Company’s balance sheet is already loaded with debts (both long term and short term). It shall be further leveraging its position in order to finance its organic and inorganic growth plans. If RRWL is unable to grow its topline through these capex plans to commensurate levels, company may experience effects of negative financial leverage on its returns. The profitability would come down despite increasing asset base. This is a downside which generally is attached to any expansion plan which is not financed internally. Too many companies and large number of related parties: Ram Ratna group has many other companies in India apart from RRWL operational in similar business. RRWL also enters into transaction with related parties. Apart from concerns about arm’s length between related parties, it could also raise concerns about the possibility of future growth initiatives (in the same business or allied businesses) for the group being diverted to any other company within the group.

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Economic Slowdown: Economic slowdown, though not very likely, may bring down the level of activity in the overall industry. In this case, since company majorly derives its income from a demand in these segments, the company’s sales may be negatively impacted. View and Valuation: RRWL is an established player in the enameled copper winding wire industry being the second largest in the domestic market. The demand for and applications of winding wire in the country are increasing with the increased level of automation in day to day life. RRWL has further chalked out plans to expand its current capacities, make strategic investments and initiate partnerships in order to bring in both organic and inorganic growth for the company. With the focus on increasing the revenue share of higher value products, company intends to expand its current margins. Further, company is reducing the operational risk, present currently in the business due to dominance by single type of product, by diversifying its product portfolio and this would help it achieve a higher valuation. All these factors combined together indicate a good potential upside for the company. Being the only listed company from a group having sales of ~Rs.4200 Crs and coming from the same group as R R Kabel (Sales Rs.1700 cr, engaged in business of LDECs & Housing wires), we think the initiatives by RRWL could lead to gradual rerating of the stock. Further RRWL has healthy return ratios in the rage of 17.5-20.5% which could inch up further. Though it operates at a low margin currently, the fact that the topline is large (and growing), it has never made losses in the past 10 years despite low OPM and dependence on volatile commodity prices and the margins are slated to rise gradually gives comfort. The stock is currently trading at 10.7x FY19E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs.128-132 (9.50x FY19E EPS) for sequential targets of Rs.172 (~12.5x FY19E EPS) & Rs.199 (~14.5x FY19E) over the next 2-3 quarters. Peer Comparison:

Company FY17 Revenue OPM PATM EPS BV DE Ratio RONW P/E P/BV Precision Wires India LtdIL

884.1 4.4% 2.5% 9.5 89.7 0.2 4.7% 16.2 1.7 RRWL 813.5 5.3% 2.7% 10.0 43.6 1.5 17.6% 14.9 7.5

(CMP as on 13 Jul,2017) (Source: Company, HDFC sec)

As has been stated earlier, RRWL’s dominant product segment has been the super enameled copper wires with a total revenue share of approx. 81%. However, company is now on its way to give a boost to its other products by gradually increasing the capacities in the respective product segments. This shall help company de-risk its current operations and help it derive a better valuation for itself. PWL is currently engaged in the business of copper winding wires which gives an edge to RRWL over its competitor. In view of same, we expect RRWL to get higher P/E to price in the benefits it is to receive from the capex plans and strategic investments it intends to make. The higher margins of RRWL and its debt also get reflected in the higher RONW for RRWL.

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Standalone Quarterly Financials- Rs in Cr Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) FY17 FY16 YoY (%) Revenue from operations 225.7 181.1 24.7% 193.9 16.4% 801.0 719.1 11.4% Raw Material Consumed 190.0 157.5 20.7% 168.7 12.6% 695.9 642.0 8.4% Stock Adjustment 5.3 -0.9 -693.3% -4.3 -225.1% -1.5 -2.6 -44.2% Employee Expenses 5.7 4.9 18.4% 5.3 8.3% 20.2 16.6 21.8% Other Expenses 9.6 8.1 18.5% 9.4 2.9% 35.5 29.2 21.7% Total Expenditure 210.8 169.6 24.3% 179.1 17.7% 750.2 685.2 9.5% EBITDA 15.0 11.5 30.4% 14.8 1.5% 50.8 33.8 50.1% Depreciation 2.1 2.0 7.1% 2.1 2.4% 8.3 7.4 13.0% EBIT 12.9 9.5 35.2% 12.7 1.3% 42.5 26.5 60.4% Interest 2.7 2.9 -6.2% 3.0 -10.3% 11.0 13.7 -20.0% Other Income 0.4 0.3 68.0% 0.3 50.0% 1.6 1.7 -5.3% Profit before Tax 10.6 6.9 53.9% 10.0 6.2% 33.1 14.5 128.7% Tax Expenses 3.7 2.4 51.2% 3.5 5.5% 11.5 5.1 125.0% Reported Profit After Tax 6.9 4.5 55.3% 6.5 6.6% 21.6 9.4 130.7% EPS 3.14 2.02 55.3% 2.95 6.6% 9.81 4.25 130.7%

Consolidated Financials- Profit & Loss - Cash Flow (Consolidated except for FY15) -

Particulars, Rs in Cr FY15 FY16 FY17 FY18E FY19E

Particulars, Rs in Cr FY15 (SA) FY16 FY17E FY18E FY19E Revenue from Operations 747.2 728.4 813.5 1002.1 1133.8

EBT 15.1 14.8 33.6 39.0 45.9

Cost of RM 675.3 649.2 706.3 875.7 989.5

Depreciation 6.5 7.6 8.6 9.9 12.6 Stock Adjustment -5.3 -2.4 -2.1 -2.5 -2.8

Interest paid 14.8 13.8 11.2 15.2 18.5

Purchase of finished goods 0.0 0.0 0.0 0.0 0.0

Other Adjust. -0.6 -0.6 0.5 -1.0 1.3 Employee Expense 14.3 17.1 21.0 24.8 28.1

(Inc)/Dec in W Cap -9.0 -6.0 -24.1 -23.2 -27.5

Other Expenses 28.4 29.9 36.5 42.1 44.2

Tax Paid -4.5 -5.7 -11.6 -13.6 -15.7 Total Expenses 712.7 693.8 761.8 940.1 1059.1

Operating CF 22.4 23.9 18.2 26.1 35.0

EBITDA 34.5 34.5 51.8 62.0 74.7

Capex -6.9 -14.2 -28.7 -36.0 -45.0 Depreciation 7.6 7.6 8.6 9.9 12.6

Sale of FA 0.1 0.4 0.5 0.6 0.4

EBIT 26.8 26.9 43.2 52.2 62.2

Investment change -0.3 0.0 0.0 0.0 0.0 Interest 14.9 13.8 11.2 15.2 18.5

Others 0.5 0.9 1.3 1.1 1.3

Other Income 2.3 1.7 1.6 1.9 2.1

Investing CF -6.7 -12.9 -27.0 -34.3 -43.3 Profit before Tax 14.2 14.8 33.6 38.9 45.8

Inc/(Dec) in Eq Cap 0.0 0.0 0.0 0.0 0.0

Tax Expenses 5.3 5.2 11.6 13.6 15.7

Inc/(Dec) in Debt 1.0 5.4 34.6 31.9 50.9 PAT 9.0 9.6 22.0 25.2 30.1

Divi and Int Paid -16.4 -18.3 -13.9 -18.0 -21.8

EPS 4.1 4.4 10.0 11.5 13.7

Financing CF -15.4 -12.9 20.7 13.9 29.1

Net Cash Flow 0.3 -1.8 11.9 5.8 20.8

Opening Balance 3.8 5.2 3.3 15.2 21.0

Closing Balance 4.2 3.4 15.2 21.0 41.8

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Balance Sheet - Financial Ratios - Particulars, Rs in Cr FY15 FY16 FY17 FY18E FY19E

Particulars FY15 FY16 FY17 FY18E FY19E

LIABLITIES

No of ES 2.2 2.2 2.2 2.2 2.2 Share Capital 11.0 11.0 11.0 11.0 11.0

EV - cr 428.5 434.4 457.4 487.2 499.1

Reserves 55.5 63.3 84.8 107.4 134.4

SH Funds: 66.5 74.3 95.8 118.4 145.4

EPS 4.1 4.4 10.0 11.5 13.7

Long Term Debt 13.7 12.4 30.2 59.3 80.3

Cash EPS 7.5 7.8 13.9 16.0 19.4 Deferred Tax Liab 3.4 3.0 3.5 3.1 3.0

BVPS(Rs.) 30.2 33.8 43.6 53.8 66.1

Long Term Prov 0.5 0.6 0.7 0.8 0.9

Non-Curr Liab: 17.6 16.1 34.5 63.2 84.2

PE(x) 36.1 33.6 14.7 12.8 10.7

Short Term Debt 96.7 103.4 120.1 123.0 136.8

P/BV (x) 4.9 4.4 3.4 2.7 2.2 Tr. Payables 16.7 5.5 43.5 41.2 49.7

Mcap/Sales(x) 0.4 0.5 0.4 0.4 0.3

Other Curr Liab 11.1 11.5 12.7 12.7 13.9

EV/EBITDA 12.6 12.8 9.0 8.8 7.4 Short Term Prov 4.6 2.6 0.9 2.1 2.7

Current Liabilities: 129.2 122.9 177.2 179.0 203.1

EBITDAM (%) 4.6% 4.7% 6.4% 6.2% 6.6% Total 213.3 213.3 307.5 360.6 432.7

EBITM (%) 3.6% 3.7% 5.3% 5.2% 5.5%

ASSETS:

PATM (%) 1.2% 1.3% 2.7% 2.5% 2.7% Fixed Assets: 47.6 53.9 74.0 97.0 110.5

Non Curr Investments. 0.4 0.4 0.4 2.8 2.8

ROCE (%) 17.0% 15.7% 20.7% 19.9% 19.4% Long Term Advances 7.6 7.1 10.2 12.8 16.7

RONW (%) 14.2% 13.7% 17.6% 18.6% 22.9%

Non-Current Assets: 55.6 61.4 84.6 112.6 130.0

Dividend Payout % 24.6% 17.2% 12.5% 10.9% 10.9% Inventories 15.9 19.9 41.6 35.7 43.5

Tr Receivables 117.9 115.6 151.3 177.1 198.8

Current Ratio 1.22 1.24 1.26 1.39 1.49 Cash and Bank 5.2 3.3 15.2 21.0 41.8

Quick Ratio 1.10 1.07 1.02 1.19 1.28

Short Term Advances 16.2 11.3 13.0 12.5 16.7

Other Curr Assets 2.5 1.8 1.8 1.7 1.9

Debt-Equity 1.64 1.53 1.54 1.54 1.49

Current Assets: 157.7 152.0 223.0 248.0 302.7

Int Coverage Ratio 1.95 2.07 4.01 3.56 3.49 Total 213.3 213.3 307.5 360.6 432.7

(Source: Company, HDFC sec)

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One Year Price Chart

(Source: Company, HDFC sec)

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Fundamental Research Analyst: CA Arpit Bhatt (arpit.bhatt@hdfcsec.com) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.

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