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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries

APAR INDUSTRIES LTD. (APAR)

“To get powered from growth in power sector“

CMP Rs. 148 Target Price Rs. 201 BUY

COMPANY SNAPSHOT (Aug 08, 2009) INVESTMENT RATIONALE

Market Price Sensex P
Largest Manufacturer of transformer oil with around 55% market share
Rs.148 16124
Apar is the market leader in transformer oils with over 55% market share in India
under the brand POWEROIL. The company's focus is more on the power
52 Wk H / L Bloomberg Code
transformer side (132 Kv – 800 Kv), where it has more than 60% market share.
Rs.180 / 62 APR IN Apar's domestic customers include BHEL, Emco, Crompton Greaves, Bharat
Mkt Cap ( mn ) Equity Cap ( mn ) Bijlee and Alstom among others.
Rs.10,608 323
BSE CODE NSE CODE POne of the largest player of conductors in domestic market with around
532259 APARINDS 25% market share
Share Holding Pattern Apar has a strong presence in conductors and is the second largest
Shareholding Pattern manufacturer in India with around 25% market share after Sterlite Technologies.
Non Promoter Apar is the largest exporter of conductors from India. The export markets span
(Non Institution) Public & Others
8%
Middle East, Japan, Europe, USA, South America and Africa.
15%

P Huge capex expected in power transmission sector, which will boost

ancillary industries
Promoter & For the 11th Plan Rs1,400 billion is planned to be spent on transmission
group
62%
schemes, against Rs744 billion in the 10th plan. Power transformers account
Non Promoter for around 70% of the transformers market where as the distribution
(Institution)
15% transformers constitute around 30%.

Price Performance Chart PExport market: A lucrative advantage

Apar is the largest conductors exporting company in India. Its product goes in
Apar Sensex
more than 43 countries with significant presence in Africa. It is expected that
1.20 demand for transmission conductors is expected to grow by a CAGR of 8-9% till
1.00 CY 2011.
0.80

0.60
KEY CONCERNS
0.40
P
Highly volatile raw material prices
Aluminum and base oils are the two major raw materials of the company and
0.20
both of them are highly volatile.
0.00
Ju l-0 9
Se p -0 8

Oc t-0 8

No v -0 8

De c -0 8

Ja n -0 9

Fe b -0 9

M a r-0 9

M a y -0 9

Ju n -0 9

Se p -0 9
Ap r-0 9

Au g -0 9

P Foreign exchange variation

As more than 35% of business of the company comes from international
markets, it is inhered exposed to foreign currency.

Quick Fundamentals
Sector Power Ancillaries VALUATION AND RECOMMENDATION
Asset Class Small Cap
Fiscal Year 2008 2009 2010e 2011e Since all the losses are already accounted and looking at the inelastic nature of
Net Sales(INR Mn) 17,665 26,371 25,110 27,543 demand for the company's products, we believe that thing will start moving up
EPS 17 -1 22 27 soon.
OPM (%) 7% 2% 6% 6%
P/E Ratio 8.6 NA 6.6 5.5 At CMP of Rs148, the stock is trading at 6.63x its FY2010 estimates and 5.50x
Price/Sales 0.3 0.2 0.2 0.2 its FY2011 estimates and an EV/EBITDA of 0.87x and 0.84x its FY2010 and
Price/Book Value 1.7 1.7 1.4 1.2 FY2011 estimates respectively.
EV/EBITDA 0.7 0.6 0.9 0.8
EBITDA/Share 36.3 15.5 42.7 49.4 We INITIATE coverage on the company with a BUY rating with 12 month
LT Growth (CAGR) 2.2% price objective of Rs 201, implying a P/E multiple of 9.00x FY 2011 earnings,
Dividend Yield (%) 0.0% which is an upside of 36% from CMP. We value the company at EV/EBITDA
Source: GEPL Investment Research of 1.89x on FY2011(E) EBITDA of Rs1,598 million.

GEPL Investment Research I Gaurav Oza I +91 22 66182400 I gaurav@guptaequities.com I 1

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
COMPANY OVERVIEW
Apar Industries (Apar) formerly known as Gujarat Apar Polymers was Promoted by Late Mr.
Dharmsinh D. Desai in the year 1958, operating in the diverse fields of electrical, metallurgical and
chemical engineering. Apar is engaged in manufacturing specialty oils and power conductors
including transformer oils. It is the second-largest manufacturer of conductors and the leading
transformer oil manufacturer in India. Apar exited the non-core polymer business in FY2008 and
utilized that money for acquisition of around 65% stake in Uniflex cables, which produces cables
for power and other industries. It has huge list of clientele such as PGCIL, Reliance Power, ABB,
EMCO, BHEL etc. Apar has also entered a JV with ENI, an Italian integrated petroleum company,
to produce and market automotive lubricants under the globally renowned brand 'AGIP'.
Transmission Line.

Apar Industries Ltd

(Apar)

Power Division Others

Transformer Oils Power Conductors

Speciality Oils Auto Lubricants
More than 50% market share One of the largest player in India with
around 25% market share Export Focus JV with ENI Italy for 'AGIP' Brand
Dominates power transformer segment
Substantial presence in export market Products for Pharma and FMCG Approvals from leading auto &
Established relationship with clients industry engine makers

Sold-off polymer business

P
Apar sold its polymers business to Paris-headquartered Eliokem India Private Ltd for Rs923
million in February 2008. Polymers contributed around 10% to the company's revenue in FY2008.

P Uniflex acquisition - synergy with conductor business

Apar has acquired 65% in Uniflex Cables through an investment of Rs795 million in FY2008.
Uniflex produces cables for sectors such as power distribution, aerospace, defence and
telecommunications. The power cables industry is around 3x as large as the conductor industry
and conductor and cables businesses are complementary to each other. Apar's conductor
division is jointly quoting many tenders along with Uniflex after the acquisition. It will help both the
conductor division and Uniflex to fetch orders and service clients better. This combination makes
Apar the only Indian company that provides conductors for transmission as well as distribution.
Apar is planning to merge the operations of Uniflex with itself by the end of FY2010.

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
INVESTMENT THESIS
Largest Manufacturer of transformer oil with around 55% market share
P

Apar is the market leader in transformer oils with over 55% market share in India under the brand
POWEROIL. Transformer oils are used in power generation and transmission transformers. The
company's focus is more on the power transformer side (132 Kv – 800 Kv), where it has more than
60% market share. Apar's domestic customers include BHEL, Emco, Crompton Greaves, Bharat
Bijlee and Alstom among others. It exports transformer oils to over 35 countries including Middle
East, Malaysia, Brazil, Kenya, South Africa, Australia and New Zealand. In FY2009, overseas
business accounted for 35% of total revenues. Apar is the fifth largest transformer oil producer
worldwide.
Transformer oil: Market Share

45%
55%

Apar Industries Others

Source: Company, GEPL Investment Research

Others Apar
Savita Chemicals is the next
leading player with around 35% 55% market share in transformer oil market (60%
market share market share in power transformers)

Raj Lubricants has the highest

market share in small and mid- Have an edge over other players due to long term
sized transformers relationship and good track record in the past

Other specialty oils

Apart from manufacturing transformer oils, Apar also manufactures liquid paraffins, white oils,
rubber processing oils, ink oils, industrial oils & lubricants. Apar's specialty oils division has a total
production capacity of around 170,000 tpa in its lube blending plants at Silvassa and Rabale
(Thane).

POne of the largest player of conductors in domestic market with around 25% market
share

Apar has a strong presence in conductors and is the second largest manufacturer in India with
around 25% market share after Sterlite Technologies, which is the market leader with around 27%
market share. PGCIL is the largest domestic customer. The other domestic customers include
various state electricity boards, KEC International, Jyoti Structures, NTPC, L&T and ABB among
others. It is the largest exporter of conductors from India. The export markets span Middle East,
Japan, Europe, USA, South America and Africa. Apar has manufacturing facilities at Silvassa and
Nalagarh (Himachal Pradesh) with a total capacity of 97,097MT.

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
Conductors
: Market Share

25%

75%

Apar Industries Others

Source: Company, GEPL Investment Research

Others Apar
Sterlite Technologies is the
dominant player and the other
main competitor being Diamond Second largest player in the country with around 25%
Power Infrastructure market share

Largest Exporter from India, PGCIL is the largest

customer

There is huge scope for replacement demand as the transformer oil is expected to be replaced in
every 5-6 years. With huge planned capital expenditure in power sector (across the board), we
believe that there is huge scope for consumption of transformer oil in domestic as well as other
developing economies like Africa and other parts of Asia.
th
Overall investment in power in 11 five year plan (across all the segments)
P

Source: Sterlite Technologies Annual Report, GEPL Investment Research

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
P Huge capex expected in power transmission sector, which will boost ancillary
industries

For the 11th Plan Rs1,400 billion is planned to be spent on transmission schemes, against Rs744
billion in the 10th plan. Typically, out of the transmission and distribution (T&D) investments 65%
goes towards transmission and 35 % towards – distribution. Around 15% of the investment in
Transmission system goes towards transformers. In terms of buyer groups, the demand for
transformers can be divided from utilities, industry and EPC contractors undertaking projects for
utilities and industry. Power transformers account for around 70% of the transformers market
where as the distribution transformers constitute around 30%. With increased focus on power
related infrastructure, the transformers industry has seen high growth rate in volume as well as
value terms.

Investment
Central Sector (INR Billion)
Transmission Scheme for 44,000 MW of generation capacity 592
Transmission Scheme for 6,000 MW of IPP generation requiring open access 80
Spill-over expenditure of 10th plan transmission scheme 70
Other important central sector schemes 8
Total 750
State Sector
Transmission scheme for 16,000 MW of generation capacity 144
220Kv, 132Kv & 66Kv transmission scheme to meet growth in demand 348
Spill-over expenditure of 10th plan transmission scheme 78
schemes for modernization and renovation of transmission system 80
Total 650
Grand Total (Total investment in the transmission sector) 1,400
Source: Ministry of Power, GEPL Investment Research

As a thumb rule, around 20% of the total investment in T&D sector is done in transmission
conductors, which leaves an opportunity of around Rs280 billion worth of business.

P Increased demand for high voltage transmission

In countries, such as Brazil, China and India, the challenge lies in getting the electricity from the
power generating stations thousands of kilometers away to the urban populations.

High Voltage – or HV – is defined as voltages of 1,000 kV alternating current, or higher, and 800kV
direct current, or higher, and it is needed for two main reasons. The first is to deliver large quantities
of power over very long distances with very little loss of power (higher voltage means lower current
on the transmission line and therefore lower loss). The second is to deliver large quantities of
power to cities without having a proliferation of transmission lines.

With government's increased focus on high-voltage transmission grid, the demand for high
voltage conductors is expected to witness major push.

Export market: A lucrative advantage

P
Apar is the largest conductors exporting company in India. Its product goes in more than 43
countries with significant presence in Africa. It is expected that demand for transmission
conductors is expected to grow by a CAGR of 8-9% till CY 2011. A major chunk of this demand is
expected from infrastructure spending in developing economies in Africa and Asia. We believe
that diversification will reduce the domestic risks of delay in setting up of a project, which in turn
would delay the order for ancillaries.

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries

INVESTMENT CONCERNS

The following factors could have an impact on our valuations :

P Highly volatile raw material prices

Aluminum and base oils are the two major raw materials of the company and both of them are
highly volatile. Prices of base oils are directly related to crude oil prices, any significant volatility in
the price of crude oil and aluminum can affect our estimates.

PForeign exchange variation

As more than 35% of business of the company comes from international markets, it is inhered
exposed to foreign currency. Any significant change in currency valuation could change our
estimates.

OUTLOOK & VALUATION

We expect Apar to gain significantly from huge spending on power in India and other developing
economies. Apar is expected to be better due to its market leadership in transformer oils (in India)
and second largest status for in transmission conductors space. However, recently the company
suffered huge losses on account of high cost raw-materials and forex fluctuations. Since all the
losses are already accounted and looking at the inelastic nature of demand of the company's
products, we believe that thing will start moving up soon.

At CMP of Rs148, the stock is trading at 6.63x its FY2010 estimates and 5.50x its FY2011
estimates and an EV/EBITDA of 0.87x and 0.84x its FY2010 and FY2011 estimates respectively.

We INITIATE coverage on the company with a BUY rating with 12 month price objective of
Rs 201, implying a P/E multiple of 9.00x FY 2011 earnings, which is an upside of 36% from
CMP. We value the company at EV/EBITDA of 1.89x on FY2011(E) EBITDA of Rs1,598
million.

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
FINANCIAL OVERVIEW

Table 1 : Income Statement

Income Statement (INR Million) 2008A 2009A 2010E 2011E

Net Sales 17,665 26,371 25,110 27,543

Other Income 74 62 50 55
Total Income 17,739 26,433 25,160 27,598
Total Expenditure 16,490 25,868 23,729 25,946

Operating profit - Other Income 1,175 503 1,381 1,598

EBITDA 1,249 565 1,431 1,653
Interest 371 412 333 290
Depreciation & Amortization 140 147 131 199
Earnings Before Taxes 739 5 967 1,164
Operating profit - other income &
Dep 1,035 356 1,250 1,399
Total Taxes 181 23 242 291
Net Income After Taxes 558 (18) 725 873
Extraordinary Items (348) 17 - -
Share of associate's loss (13) 58 - -
Minority Interest 4 40 3 3
Reported Net Income 915 (53) 722 870
Reported EPS (INR) 28.28 (1.65) 22.33 26.89
Adjusted EPS (INR) 17.25 (0.56) 22.42 27.00
Shares o/s (in million) 32.34 32.34 32.34 32.34
Source: Company data , GEPL Investment Research

Table 2 : Balance Sheet

Balance Sheet ( INR Million) 2008A 2009A 2010E 2011E

Cash 4,920 6,109 4,613 4,880
Receivables 3,933 5,133 4,816 5,358
Inventories 2,808 3,635 3,509 3,567
Loans and Advances 1,366 1,690 1,513 1,434
Total Current Assets 13,027 16,567 14,451 15,238
Gross Fixed Assets 1,469 2,794 2,824 2,864
Less:Depriciation 396 1,126 1,257 1,456
Net Fixed Assets 1,073 1,668 1,567 1,408
CWIP 33 124 33 33
Investments 374 0 1,500 1,800
Goodwill on consolidation - 603 - -
Fixed asset held for sale/disposal 1 1 1 1
Misc. Exp (to the extent not w/o) 29 12 12 12
Total Assets 14,537 18,975 17,562 18,491
Current Liabilities 10,432 14,399 13,002 12,795
Provisions 191 20 20 20
Current Liab & Provns 10,624 14,419 13,022 12,815
Total Debt 1,009 1,614 1,025 1,440
Equity Capital 323 323 323 323
Reserves 2,521 2,476 3,050 3,771
Deferred tax liability 54 63 63 63
Minority Interest 6 79 79 79
Total Liabilities and Equity 14,537 18,975 17,562 18,491
Capital Employed 3,914 4,556 4,540 5,676
Source: Company data , GEPL Investment Research
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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
Table 3 : Cash Flow Statement

Cash Flow Statement (INR Million) 2008A 2009A 2010E 2011E

Profit Before Tax 1,069 5 967 1,164
Plus Depreciation 140 147 131 199
Others (15) 416 (50) (55)
Total Tax paid (242) (239) (242) (291)
Extra-ordinary Item (4) - (3) (3)
Changes in working capital 3,425 1,921 (777) (727)
Cash Flow from Operations 4,375 2,251 27 286
Capital expenditure (332) (300) (30) (40)
Proceeds from Asset Sales 53 9 91 -
Uniflex Industries (370) (253) - -
Others 1,248 420 653 55
Cash Flow from investing 599 (123) 714 15

FCF from Operations 4,043 1,951 (3) 246

Redemption of Pref. Shares 6 - - -
Debt raised/(repaid) (319) (52) (589) 415
Others - - - -
Dividend (incl. tax) paid (139) (152) (149) (149)
Interest Expenses (467) (850) (1,500) (300)
Cash Flow from Financing (919) (1,054) (2,237) (34)

Net Cash Flow 4,054 1,074 (1,496) 267

Beginning Cash Balance 866 5,036 6,109 4,613
Ending Cash Balance 4,920 6,109 4,613 4,880
Source: Company data , GEPL Research

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Sept 08, 2009 India Equity Research l Research Report l Power Ancillaries
Table 4 : Ratio Analysis

Ratio Analysis 2008A 2009A 2010E 2011E

Liquidity Ratios
Current Ratio 1.2 1.1 1.1 1.2
Quick Ratio 1.1 1.0 1.0 1.1
Interest Coverage Ratio 3.0 1.0 3.9 5.0
Activity ratios
Asset Turnover Ratio 9.5 12.4 8.9 9.7
Collection ratio 4.5 5.1 5.2 5.1
Inventory Turnover Ratio 6.3 7.3 7.2 7.7
Financing Ratio
Debt/Equity 0.4 0.6 0.3 0.4
Debt/Asset 0.1 0.1 0.1 0.1
Performance Ratio
Book Value per share 88.0 86.6 104.3 126.6
EBITDA Per share 38.6 17.5 44.3 51.1
EPS (Reported) 28.3 (1.6) 22.3 26.9
EPS (Adjusted) 17.2 (0.6) 22.4 27.0
EBITDA margin(%) 6.7% 1.9% 5.5% 5.8%
PAT margin(%) 3.2% -0.1% 2.9% 3.2%
P/E 8.6 NA 6.6 5.5
Return on Networth 36% -2% 23% 23%
Return on Capital Employed 29% 10% 29% 28%
Return on Assets 6% 0% 4% 5%
P/BV 1.7 1.7 1.4 1.2
Free Cash Flow Per Share 125.0 60.3 (0.1) 7.6
Sales Per Share 546 816 777 852
Growth Ratio
Net Sales 17% 49% -5% 10%
Source: Company data , GEPL Research

Gaurav Oza
gaurav@guptaequities.com I +91 22 6618 2400 I GEPL Investment Research

Disclaimer: This document has been prepared by the Research Desk of M/s Gupta Equities Pvt. Ltd. and is meant for use of the recipient only and is not for
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support any security. The information contained herein is obtained and collated from sources believed reliable and we do not represent it as accurate or complete
and it should not be relied upon as such. The opinion expressed or estimates made are as per the best judgment as applicable at that point of time and are subject to
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