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Srikalahasthi Pipes - Initiating Coverage - Piping Gains - Reliance Securities

Posted On: 2017-02-21 21:51:41

Srikalahasthi Pipes (SPL) - formerly Lanco Industries - is an Andhra Pradesh based integrated manufacturer of Ductile Iron (DI) pipes. In DI pipes segment, SPL enjoys ~15% market share on pan-India basis, while in focussed Southern & Western markets, it enjoys ~75% market share. On the back of fresh governmental thrust on improving water supply and sewerage infrastructure coupled with leadership position in southern and western markets, we believe that SPL is well-placed to capitalise on the imminent opportunities. Expecting SPL''s Revenue, EBITDA & PAT to witness 8%, 11% & 13% CAGR respectively over FY16-FY19E, we initiate coverage on the stock with BUY recommendation and Target Price of Rs390.

Thrust on Water & Sanitation Infra to Boost Demand for DI Pipes

DI pipes find application in water transportation and sewage management. Its demand is closely linked to investment in water and sanitation infrastructure. Lack of adequate sanitation has been prompting the government to focus on improving water supply and sewerage infrastructure through multiple schemes like JNNURM & Swachh Bharat Mission and "Smart Cities Mission". Thus we believe that the demand for DI pipes would witness a healthy growth in medium to long-term, which would drive SPL''s order book going forward, which stood at ~250,000 tonne as of 3QFY17-end.

Backward Integration to Help Sustain Margins

SPL is fully backward integrated, which provides significant competitive advantage, while several cost-optimization measures - including commissioning of Sinter Plant - led to sustained margin expansion. Consequently, its EBITDA margins rose from 3.9% in 3QFY13 to 11.8% in 4QFY13 & 24% in 3QFY17. Though we see SPL''s EBITDA margin at 23% for FY17E (marred by planned shut-down of mini blast furnace for ~30 days in Aug''16) vs. 23.3% in FY16, we peg FY18E & FY19E EBITDA margin at 25.5% & 25.6%, respectively.

Outlook & Valuation

Government''s thrust of on improving water infrastructure through multiple schemes offers greater order inflows visibility for SPL. Further, ~75% market share in Southern & Western markets augers well for SPL, as the industry enjoys strong entry barriers for being capital-intensive having long gestation period. We expect SPL''s Revenues, EBITDA & PAT to report ~8%, 11% & 13% CAGR, respectively over FY16-FY19E led by higher government spend on infrastructure. At CMP, the stock trades at an inexpensive valuation of 5x, 3.9x & 3.3x its FY17E, FY18E & FY19E EV/EBITDA, respectively. Valuing at 4x FY19E EV/EBITDA, we initiate coverage on the stock with BUY recommendation and Target Price of Rs390.

Shares of LANCO INDUSTRIES LTD. was last trading in BSE at Rs.319 as compared to the previous close of Rs. 321.65. The total number of shares traded during the day was 18714 in over 483 trades.

The stock hit an intraday high of Rs. 327 and intraday low of 317.3. The net turnover during the day was Rs. 6033986.

Source: Equity Bulls

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