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Visaka Industries Ltd
Enhancing investment decisions
Initiating coverage
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Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISILFundamental Grade
Assessment CRISILValuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (
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January 18, 2011Fair Value Rs 151CMP Rs 119
Fundamental Grade 4/ 5 (Strong fundamentals)
Valuation Grade 5/ 5 (CMP has strong upside)
Industry Information technology
Polaris Software Limited Business momentum remains intact
Fundamental Grade 3/ 5 (Good fundamentals)
Valuation Grade 5/ 5 (CMP has strong upside)
Indu stry Construction Materials
Visaka Industries LtdP laying the volume game
Visaka Industries Ltd (Visaka) is Indias second largest manufacturer (by
capacity) of asbestos cement sheets (ACS). It also manufactures syntheticyarn. We assign Visaka a fundamental grade of 3/ 5, indicating that itsfundamentals are goodrelative to other listed securities in India.
Second largest ACS player in a concentrated indu stryOf the four industry players comprising 70% of the business, Visaka has a
market share of ~16%. The concentration has helped Visaka earn higher
realisations despite a rise in raw material costs, an indication that players are
collaborating to adjust prices.
Higher volumes to drive growthWe expect Visakas revenues from ACS to grow at a CAGR of 11%, mainly
driven by higher volumes from increased demand for rural housing and a shift
to ACS from other roofing alternatives. Visaka is setting up a 1.1 lakh tonne
capacity in Orissas Sambalpur, expected to be commissioned by H2FY12.
Margins to moderateHigher competition - Capacity addition of ~5 lakh tonnes in the industry,
expected over the next two years, could increase pressure on realisations and
margins.
Higher raw material costs - An increase in the price of asbestos fibre, a key
raw material, will also impact margins till FY13.
Key risks: Higher material cost, restriction on asbestos useOwing to mining restrictions, only a few countries like Canada, Brazil, Russia,
Zimbabwe and Kazakhstan can supply asbestos fibre. Any price control by
producing countries or regulatory directives banning asbestos mining can
affect profitability and disrupt supply. Further, regulations restricting the usage
of asbestos in India, due to perceived ill effects on health, though not animminent threat, will be a key monitorable over the longer term.
Expect three-year revenue CAGR of 10%We expect revenues to register a three-year CAGR of 10% to Rs 8 bn in FY13,
largely driven by 11% growth in the ACS segment and approximately 5%
growth in the synthetic yarn segment. We expect EBITDA margins to fall by
~360 bps and be under pressure at ~14%. We expect EPS to decline from Rs
37.7 in FY10 to Rs 29.7 in FY11 and then move up to Rs 35.6 in FY13.
Valuations the market price h as strong upside from current levelsCRISIL Equities has used the discounted cash flow method to value Visaka and
arrived at a fair value of Rs 151 per share. The stock is currently trading at Rs
119 per share. The fair value implies P/E multiples of 4.7x FY12 EPS of Rs 31.9
and 4.2x FY13 EPS of Rs 35.6. We initiate coverage on Visaka with a valuation
grade of 5/5.
KEY FORECAST
(Rs mn) FY09 FY10 FY11E FY12E FY13E
Operating income 5,859 6,009 6,385 7,271 7,991
EBITDA 950 1,151 996 1,038 1,124
Adj PAT 359 600 472 508 567
Adj EPS-Rs 22.6 37.7 29.7 31.9 35.6
EPS growth (%) 368.4 59.2 (17.4) 7.6 11.6
Dividend yield 11.5 4.4 5.7 6.2 6.9
RoCE (%) 22.6 26.5 21.4 21.3 21.5
RoE (%) 20.7 28.3 18.6 17.5 17.2
PE (x) 1.8 3.5 4.0 3.7 3.3P/BV (x) 0.3 0.9 0.7 0.6 0.5
NM: Not meaningful; CMP: Current Market Price
S o u r c e : C o m p a n y , CR I S I L E q u i t i e s e s t i m a t e
CFV MATRIX
KEY STOCK STATI STICSNIFTY/ SENSEX 5742 / 19092
NSE ticker/ BSE ticker VISAKAIND /
VISAKA
Face value (Rs per share) 10
Shares outstanding (mn) 16
Market cap (Rs mn)/(US$ mn) 1906 / 41.9
Enterprise value (Rs mn)/(US$ mn) 2783 / 61.13
52-week range (Rs) (H/L) 193/ 113
Beta 1.01
Free float (%) 62.3%
Avg daily volumes (30-days) 8,367
Avg daily value (30-days) (Rs mn) 1.10
SHAREHOLDING PATTERN
PERFORMANCE VIS--VIS MARKETReturns
1-m 3-m 6-m 12-mVisaka -6% -23% -33% -20%
NIFTY -5% -8% 5% 8%
ANALY TICAL CONTACTSudhir Nair (Head) [email protected]
Niyati Dave [email protected]
Charulata Gaidhani [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
1 2 3 4 5
1
2
3
4
5
Valuation Grade
Fundam
entalGrade
Poor
Fundamentals
Excellent
Fundamentals
Strong
Downside
Strong
Upside
37.7% 37.7% 37.7% 37.7% 37.7%
2.4% 2.4% 3.1% 3.4% 3.0%4.2% 4.2% 4.0% 1.6% 1.3%
55.7% 55.7% 55.2% 57.2% 58.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10
Promoter FII DII Others
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Visaka Industries Ltd
Table: 1 Visaka I ndustries: Business environment
Product / Segment Building products Synthetic yarn
Revenue contribution(FY10)
81% 19%
Revenue contribution(FY13)84% 16%
Product / service offering Asbestos cement sheets, non-asbestos flatproducts such as cement boards and panels
Blended yarn, manufactured using polyester
staple fibre and viscose staple fibre
Geographic presence Eight plants across India catering to all majorstates
India, Europe
Market position Second largest player in India One of the smaller players in the highlyfragmented synthetic yarn industry
Industry growthexpectations
10-12% per annum 5% per annum
Sales grow th(FY07-FY10 3-yr CAGR)
21% 7%
Sales forecast(FY10-FY13 3-yr CAGR)
11% 5%
Demand drivers Rising demand for roofing of houses andsmall manufacturing units in rural areas,
supported by the governments thrust on
affordable rural housing
Shift from other roofing alternatives such asthatched roofing to ACS
Manufacturing of synthetic textiles in Indiaand abroad
Key competitors Hyderabad Industries, Everest Industries,
Ramco Industries
Sangam India, Rajasthan Spinning and
Weaving Mills Ltd
Key risks Higher competition Restrictions on mining of asbestos fibre in
key producing countries
Restrictions on usage of asbestos in India Inability to market the non-asbestos panel
and boards
Competition from other yarn manufacturers Drop in synthetic yarn prices
S o u r c e : Co m p a n y , C R I S I L E q u i t i e s
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Visaka Industries Ltd
Grading Rationale
Second largest ACS player with steady grow th
Visaka manufactures building products and synthetic yarn. Its building products
segment largely consists of asbestos cement sheet (ACS) products and a small
portion of non-asbestos flat products like boards and panels. The ACS products
are used for the roofing of rural houses and small industries. Having been in the
industry for over 25 years, Visaka has expanded its reach across India slowly to
become the second largest player in the ACS industry.
ACS indus t ry i s dom ina ted by f our la rge p layers
The Indian ACS industry has 17 players with 63 manufacturing plants. However,
~70% of asbestos manufacturing is controlled by four large players Hyderabad
Industries (a C.K. Birla group company), Everest Industries (earlier a part of the
ACC group of companies), Visaka and Ramco Industries. Visaka has steadily
grown its market share to ~16% in FY10 from 5.2% in FY01.
Figure 1: Top four players accounted for 70% of the market in
FY10
Source: Industry, CRISI L Equities
Except for Everest Industries, the other three players are based out of South
India. Over a period of time, these players have expanded into West and North
India, setting up manufacturing facilities close to the marketplace, in order to
save on freight and minimise breakages during transit (freight cost accounts for
7-10% of sales).
Visaka, 16%
HIL, 21%
Everest, 14%Ramco, 14%
Others, 34%
Visakas market share has
grown from 5% to ~16%
over the past decade
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Visaka Industries Ltd
I ndus t r y concen t r a t i on w o r ks i n the company s favou r
Although realisations and margins vary across players, they have been stable over
time, despite a secular uptrend in raw material prices. This we believe indicates a
tendency among the players to adjust production and realisations through
collaboration to maintain margins.
Figure 6: Key players realisations move along the same lines
Source: Company, CRISIL Equities
Moderately placed in terms of margins
Hyderabad Industries is the largest player, with state-wise highest penetration,
which ensures lower freight costs and higher margins. Visaka is moderately placed
in terms of realisation, cost competitiveness and margins.
Comparison of the top four ACS players
Units
EverestIndustries Ltd.
HyderabadIndustries Ltd. Visaka Comments
FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10
Realisation Rs/MT 7,477 8,980 9,804 6,365 7,666 8,494 6,484 8,199 9,010
Realisation net of freight Rs/MT 6,746 8,178 8,957 5,691 7,142 7,948 5,918 7,411 8,177 Moderate realisations net of
freight
Segmental PBIT margin % 8.0% 13.4% 17.0% 5.9% 14.2% 22.2% 8.1% 14.8% 18.3% Moderate levels of PBIT
Margins
Raw material cost Rs/MT 4,408 4,558 5,005 4,072 4,345 5,001 3,901 3,826 4,712 Raw material costs are the
lowest due to lowest cost of
wood pulp and flyash
Power cost Rs/MT 561 462 417 607 622 574 441 443 530 Moderate power cost per
tonne
Distribution expenses
(including freight)
Rs/MT 731 803 847 674 524 546 567 788 833 Distribution expenses for
Visaka are higher due to
higher freight costs.
Hyderabad Industries has
lowest realisations but
highest margins due to
lower freight costs (led by
presence across a larger
market)
S o u r c e : C R I S I L E q u i t i e s
5,0005,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
FY06 FY07 FY08 FY09 FY10
(Rs/ tonne)
Visaka Industries Everest Industries
Hyderabad Industries Ramco Industries
Visaka is on the
favourable side of
supplier collaboration
Visaka ranks second in
terms of profitability
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Visaka Industries Ltd
Visakas growth w ill be driven by higher volumes
Demand fo r ACS expec ted to g row a t ~ 10%
Demand (in volume terms) for ACS in India is expected to grow at a CAGR of 10-
12%. The prime reasons:
Shift from other roofing alternatives to ACS. Thatched roofing accounts for
80-85% of the roofing demand in rural India. However, with the improvement in
economic conditions, there is a shift in demand for the more durable ACS. This
provides a growing market for ACS manufacturers. Galvanised iron sheets,
another widely used roofing material, are not only historically priced 25-30%
higher than ACS but also need to be replaced once in five years as they are
subject to corrosion. Hence, consumers are showing a preference for ACS
compared to galvanised iron sheets due to lower prices, durability and non
corrosive nature of the product.
Governments thrust on rural housing. Schemes like the Indira Awas Yojna
(Rs 88 bn allocated in Budget 2009-10), Rural Housing Fund (Rs 20 bn), Pradhan
Mantri Adarsh Gram Yojana (Rs 1 bn) targeted at providing affordable housing to
the rural poor along with the growing empowerment of self-help groups are also
boosting the demand for ACS; an ACS roof accounts for about 15% of the average
cost of constructing a house in the rural areas.
Com m ission ing o f Samba lpur p lan t to augment v o lumes
In order to increase sales in the untapped eastern markets, Visaka is setting up a
1,10,000 TPA plant in Sambalpur, Orissa. This plant is expected to be
commissioned by Q2FY12 and add 14% to installed capacity. Post expansion,
Visaka will focus more on debottlenecking of existing facilities and efficiency
improvements. Currently, Hyderabad Industries is the only large player in Orissa.
Since realisations appear to have hit a ceiling
Although production is concentrated among a few players, affordability constraints
cap realisations since the end user is the rural Indian. ACS capacity additions have
increased competition resulting in a decline in realisations. We believe the
curtailment in production by Visaka is an indication of prices having hit a ceiling in
FY10. In such a scenario, a rise in top line for the company will be driven by an
increase in sales volumes.
Demand for ACS to bedriven by a shift from
other roofing alternatives
to ACS
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Visaka Industries Ltd
Figure 7: In FY 10, Visaka curtailed sales to maintain
realisations
Source: Company, CRISIL Equities
Margins to moderate and stabilise
Margins in Visakas ACS segment are expected to moderate due to:
Higher raw material prices. Reduced ability to pass on price increases due to higher competition from the
new capacity additions in FY12.
Raw mat er ia l p r ices expec ted to go u p
Price of asbestos fibre is controlled by producersAsbestos fibre (composed mainly of magnesium) is a naturally-occurring
reinforcing agent, comprising 50% of the raw material cost of manufacturing ACS.
India imports almost all of its asbestos fibre requirements from Canada, Brazil,
Russia, Zimbabwe and Kazakhstan. Since mining of asbestos is banned in most
developed countries, prices are controlled by the producing countries. India
accounts for only 7% of the global asbestos fibre demand; therefore it is only a
price-taker.
The company tries to minimise the impact from fibre price fluctuations and
potential supply disruptions by entering into year-long contracts for price as well
as supply. We expect prices of fibre to increase by 10-12% each year over the
medium term.
Cement prices to cool off in FY11, to rise in FY12
Cement accounts for 35-40% of the raw material cost of manufacturing ACS.
Cement demand is expected to grow by 10-11% CAGR over the next five years.
However, with nearly 150 mn tonnes expected to be added during the same
period, prices are expected to decline by 2-3% in 2010-11. This is expected to be
followed by a rise of 5% in FY12.
We expect a ~500 bps decline in Visakas EBITDA margins to ~15% in FY11 and
the margins to be maintained thereafter.
334,
068
433,
602
550,
478
584,
892
557,
965
6,3656,825
6,484
8,199
9,010
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
100,000
200,000
300,000
400,000
500,000
600,000
700,000
FY06 FY07 FY08 FY09 FY10
(MT)
Sales Volume Realisation (Rs/tonne - RHS)
EBITDA margins are
expected to soften and
stabilise at 14-15%
Asbestos fibre prices to
rise by 10-12%
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Visaka Industries Ltd
Com pet i t ion f rom unorgan ised p layers to p ressur ise marg in s
Eight incremental units are expected to be commissioned in FY11 and FY12, with
a combined capacity of 5 lakh tonnes. With Visaka unit coming up in Orissa and
Ramco setting up a unit in Bihar, there will also be capacity additions from the
smaller players, reducing the dominance and control of the big players. This is
expected to put pressure on margins to a large extent. We expect the ACS
segment to grow at a CAGR of ~11% in FY10-13.
Table 1: Capacity reckoner
New capacities coming up State TPA (MT)
Ramco Industries Tamil Nadu 120,000
Hyderabad Industries Surat 240,000 cu mtrs
Haryana 2,400
Punjab 45,000
Everest Industries Orissa 180,000
Gujarat 40,000
Jaypee Cement UP 100,000
Vilsons Roofing Maharashtra 13,833
Premier Building Materials Tamil Nadu 60,000
Visaka Industries Orissa 110,000
Restriction on asbestos use potential long-termthreat
There is a view that asbestos is harmful if inhaled in excess, causing respiratory
illnesses. This is especially true of the low density Amphibole (blue) variety of
asbestos. Although the asbestos cement industry in India uses Chrysotile (white)
fibre (considered less harmful), there are concerns surrounding its usage, due to
which they are under the threat of being banned. The Government of India has
directed ACS manufacturers to track and maintain their workers health records
for a period of 40 years from employment. While Visaka follows a production
process wherein the asbestos fibre does not involve any human contact, any
developments prohibiting the use of asbestos fibre in India remain a key
monitorable.
Textiles - steady stateThe textile segment comprises ~20% of Visaka revenues. Visaka operates a
9000-tonne unit to manufacture synthetic yarn of 30s to 76s counts, which are
used in the value-added segment of home textiles. Visaka caters to an established
customer base, both in the domestic and the export markets. Its domestic clients
include Siyaram, Pantaloon, Harrys Collection, RVIVA, Rolson Industries and BK
Lane. Its domestic-exports mix changes in response to relative price
attractiveness. Since FY08, domestic sales have grown faster than exports. In
FY10, the company exported 21% of its yarn output.
Textiles performing
well
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Visaka Industries Ltd
Figure 8: Export vs. domestic mix changes in response to
realisations
Source: Company, CRISIL Equities
Per fo r mance of t he ya r n segmen t a t pa r w i th i ndus t r y s
The performance of Visakas yarn segment is in line with the industrys; its closest
peers are Sangam India Ltd and Rajasthan Spinning & Weaving Ltd.
Peer Comparison
Companies Visaka Sangam Rajasthan Comments
Production (FY10) tonnes 8705 37126 85951
Realisation Rs/kg 135 132 148 Higher exports ensure higher realisation for Rajasthan
PBIT margin % 14.8 NA 9.6 Visaka earns better PBIT margins
R0CE % 19.86 6.58 3.14 Visaka enjoys better RoCE since the plant is old
S o u r c e : P r o w e s s
The companys foray into the yarn segment in 1996 was based on expectations of
robust demand for synthetic yarn, with higher synthetic yarn prices sustaining its
interest in the segment. The capacity for yarn was raised to 1,816 spinning
positions from 1,224 in FY05. Since the outlook on synthetic yarn prices remains
steady (2-3% growth over the medium term), the company is open to
opportunities in this segment. At the same time, its business focus will continue to
be on the ACS and allied products segments. We expect the textiles segments
revenues to grow at a CAGR of ~5% from FY10-13.
735673
524
801
941
165
316
464373
256
-
100
200
300
400
500
600
700
800
900
1,000
FY06 FY07 FY08 FY09 FY10
(Rs mn)
Domestic Sales Exports
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Visaka Industries Ltd
Figure 9: Yarn segment to grow at a steady rate (revenues and
PBIT)
Source: Company, CRISIL Equities
Panels and boards at a nascent stage
The company has identified non-asbestos based fibre cement sheets to broaden
its range of building products that can be manufactured using a technology similar
to asbestos-based fibre and sold largely through the existing product channels in
urban and semi-urban areas. Accordingly, the company has introduced fibre
cement sheets as an alternative to particle board and plywood used in internal
structures as well as external prefab applications. The company possesses an
installed capacity of 60,000 TPA and is one of three companies in India to
manufacture these emerging products.
V-Boards Introduced in 2008, fibre cement sheets (marketed as V-Boards), are
manufactured using cement, fly ash and cellulose fibre. Of the total sale of 15,000
tonnes (Rs 141 mn in revenues), about 6,000 tonnes was exported to the Middle
East. V-Boards face a tough competition from substitutes like plywood, medium
density fibreboard (MDH) and many more widely accepted materials in use by
architects and interior decorators in India.
V-Panels - Introduced in January 2010, V-Panels are manufactured using
cement, fly ash and polystyrene beads. The company possesses an installed
capacity of 500 panels a day. The product is supplied to GMR, Punj Loyd,
Shapoorji Pallonji, Soma Enterprises, TCS, Gujarat Ambuja Port, Eenadu Group,
Coastal Projects, Uranium Corporation and Larsen & Toubro.
Good products offering tangible benefits over plywood and RC
Advantages of V-Board over plywood Advantages of V-Panel over reinforced concrete
Up to 40% cheaper Since it is thinner, it enhances interior living area and is ideal in locations of high
real estate cost
Termite proof Its weight is lower than bricks
Fire resistant It is quicker to erect and matches wall strength and axle load
Water resistant It is labour efficient as it can be erected by just three individuals
Longer lasting It can be re-used at a different location
Source: Industry
988
1,173 1,1961,327 1,351 1,378
11%
8%
15%
13%
12%11%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
250
500
750
1,000
1,250
1,500
FY08 FY09 FY10 FY11E FY12E FY13E
(Mn)
Revenue(LHS) PBIT Margin(RHS)
Positive outlook for yarn
prices will ensure steady-
state profits
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Visaka Industries Ltd
Marke t accep tance is some w ay o f f
Both products are still unprofitable since the production method is yet to be
perfected (lower breakages and more standardisation required). Further, the
concept of fibre cement needs higher acceptance by architects who will be the
influencers for purchase decisions. The use of V-Boards depends on carpenter
education since they are more difficult to work with than plywood. Although a
widely accepted replacement for interior and exterior walls in the USA, Russia,
China, etc., the acceptance of panels by Indians is still a long way off and remains
a key monitorable for the company.
Figure 10: Allied building products slow and steady growth
Source: Company, CRISIL Equities
152
301
359
417
0
50
100
150
200
250
300
350
400
450
FY10 FY11E FY12E FY13E
(Mn)
Revenue
Too little, too early
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Visaka Industries Ltd
Key risks
Raw material production is concentrated
Any price control by producing countries or regulatory directives banning the
mining of asbestos can cause a threat to profitability and supply disruptions.
Pro fitability is subject to raw material price volatilityAny sudden increase in raw material prices (cement, asbestos fibre and wood
pulp) compounded by an inability to pass on excess costs will put pressure on
Visakas margins.
Industry concentration may weaken
The low capital intensity and simple process of manufacturing make for low entry
barriers in the industry. Further, capacity expansions by the unorganised players
may also lead to margin pressure.
Banning of asbestos in India
Asbestos is believed to cause respiratory diseases, which is why its use has been
banned in most of the developed countries. Any regulation banning the product in
India will be severe for the company, since 80% of its revenues come from this
segment. However, we believe this is not an imminent threat since there is no
comparable alternative at the moment to replace asbestos roofing at the required
scale.
Supplier concentration
and weakening player
collaboration are key risks
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Visaka Industries Ltd
Financial Outlook
Figure 11: Muted ACS growth in FY10 and FY 11, to
improve in FY12
Figure 12: ACS products w ill dominate the revenue
mix in the medium term
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
Figure 13: EBITDA margins to correct in FY11, to be
under pressure thereafter due to compet ition in
asbestos segment
Figure 14: EPS to moderate in FY11 due to subdued
performance of asbestos segment, to recover
thereafter
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
Figure 15: Gearing to continue to improve from
0.6x to 0.3x
Figure 16: RoCE to moderate post FY 10, but return
to historic levels
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
5,859 6,0096,385
7,271
7,99136%
3%
6%
14%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY09 FY10 FY11E FY12E FY13E
(% )(Rs mn)
Revenues growth % (RHS)
78% 81% 81% 81%83% 84%
22% 19% 19% 19%17% 16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY08 FY09 FY10 FY11E FY12E FY13E
Building Products Synthetic Yarn
9501,151
996 1,0381,124
16.2%
19.2%
15.6%14.3%
14.1%
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1,000
1,200
1,400
FY09 FY10 FY11E FY12E FY13E
(% )(Rs mn)
EBITDA EBITDA margin (RHS)
22.6
37.7
29.731.9
35.6
0
5
10
15
20
25
30
35
40
0
100
200
300
400
500
600
700
FY09 FY10 FY11E FY12E FY13E
(Rs)(RS mn)
Adj PAT Adj EPS (RHS)
0.84
0.63
0.41
0.33
0.28
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
FY09 FY10 FY11E FY12E FY13E
Gearing
20% 20%
17%9%
23%
27%21%
21% 22%22%
25%
21%
5%
21%
28%
19% 18% 17%
0%
5%
10%
15%
20%
25%
30%
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
ROCE (%) ROE (%)
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Visaka Industries Ltd
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Promoter - doctor turned politicianVisaka is promoted by Dr. Vivekanand, a MBBS qualified medical practitioner. In
2009, Dr. Vivekanand was elected as the Member of Parliament from Pedapalli in
Andhra Pradesh. He served as the managing director of Visaka till FY09.
Currently, his wife Mrs Saroja Vivekanand is the MD of the company. His son has
also been recently inducted into the company and is expected to eventually
occupy a key management position.
Strong second line ensures smooth operations
While the top management has undergone a change, Dr. Vivekanand continues to
be involved in all strategic decisions with inputs from the board. Visakas strong
and professional second line of management, with more than two decades of
association with the company, is successful in running the day to day operations.
Top management has
recently undergone a
change but the second
line continues to run
the show smoothly
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Visaka Industries Ltd
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors such
as industry and business prospects, and financial performance. In this context,
CRISIL Equities analyses the shareholding structure, board composition, typical
board processes, disclosure standards and related-party transactions. Any
qualifications by regulators or auditors also serve as useful inputs while assessing
a companys corporate governance.
Overall, corporate governance at Visaka meets the minimum levels supported by
reasonably good board practices and an independent board.
Board composition
Visakas board comprises eight members, of whom five are independent directors,
which is more than the requirement under Clause 49 of SEBIs listing guidelines.
The directors have strong industry experience and have been with the company
for more than 10 years. Given the background of directors, we believe the board
is experienced. The independent directors have a fairly good understanding of the
companys business and its processes.
Boards processes
The companys quality of disclosure can be considered good judged by the level of
information and details furnished in the annual report, websites and other publicly
available data. The company has all the necessary committees audit,
remuneration and investor grievance - in place to support corporate governance
practices. The audit committee consists of four independent directors apart from
the managing director.
Corporate Governance
practices at Visaka are
good
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Visaka Industries Ltd
Valuation Grade: 5/ 5
We have used the discounted cash flow (DCF) method to value Visaka and arrived
at a fair value of Rs 151 per share. The stock is currently trading at Rs 119 per
share. Consequently, we initiate coverage on Visaka with a valuation grade of
5/ 5, indicating that the market price has strong upside from the current
levels.
Key DCF assumptions
We have considered the discounted value of the firms estimated free cash flow
from FY13 to FY17.
We have included capital expenditure of Rs 315 mn in FY11 and FY12 for the
Sambalpur plant in Orissa and a maintenance capex of Rs 100 mn per annum
thereafter.
We have assumed a terminal growth rate of 3% beyond the explicit forecast
period until FY17.
WACC computation
FY13-17 Terminal value
Cost of equity 17.5% 17.5%
Cost of debt (post tax) 7.04% 7.04%
WACC 14.45% 15.78%Terminal growth rate 3.00%
Sensitivity analysis to terminal WACC and terminal grow th rate
Terminal growth rate
TerminalWACC
1.0% 2.0% 3.0% 4.0% 5.0%
13.8% 158 167 177 190 206
14.8% 147 154 163 174 186
15.8% 138 144 151 160 170
16.8% 130 135 142 149 157
17.8% 124 128 133 139 146
S o u r c e : C R I S I L E q u i t i e s e s t i m a t e s
One-year forward P/ E band One-year forward EV/ EBITDA band
Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities
0
50
100
150
200
250
300
350
400
450
Apr-04
A
ug-04
D
ec-04
Apr-05
A
ug-05
D
ec-05
Apr-06
A
ug-06
D
ec-06
Apr-07
A
ug-07
D
ec-07
Apr-08
A
ug-08
D
ec-08
Apr-09
A
ug-09
D
ec-09
Apr-10
A
ug-10
D
ec-10
(Rs)
Visaka 5x 7x 9x 10x 11x
0
1000
2000
3000
4000
5000
6000
7000
8000
A
pr-04
A
ug-04
D
ec-04
A
pr-05
A
ug-05
D
ec-05
A
pr-06
A
ug-06
D
ec-06
A
pr-07
A
ug-07
D
ec-07
A
pr-08
A
ug-08
D
ec-08
A
pr-09
A
ug-09
D
ec-09
A
pr-10
A
ug-10
D
ec-10
(Rs mn)
EV 3x 4x 5x 6x
We assign a fair value of
Rs 151 per share to Visaka
and initiate coverage w ith a
valuation grade of 5/ 5
The fair value implies P/ E
multiples of 4.7x FY12 EPS
of Rs 31.9 and 4.2x FY13
EPS of Rs 35.6
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Visaka Industries Ltd
P/ E premium / discount to NIFTY P/ E movement
Note: During 2008, the company had one-year forward P/E of ~300x on account of lower profits, not depicted in the chart above.
Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities
Peer comparisonCompanies M.cap Price/ earnings (x) Price/ book (x) EV/EBITDA RoE (% )
(Rs mn) FY10 FY11E FY1 2E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
Visaka Industries Ltd 1906 3.5 4.0 3.7 0.9 0.7 0.6 2.6 2.8 2.5 28.3 18.6 17.5(CRISIL Equities estimates)Consensus Estimates
Visaka Industries Ltd 1906 3.6 4.4 3.8 0.9 NA NA 2.6 3.2 2.7 27.0 17.9 18.2
Everest Industries Ltd 2906 9.5 7.0 5.2 1.5 1.4 1.1 5.6 4.9 3.9 18.5 21.8 24.6
Ramco Industries Ltd 4843 8.8 NA NA 1.4 NA NA 6.9 NA NA 16.6 NA NA
Hyderabad Industries Ltd 3431 3.8 3.9 3.4 1.6 NA NA 2.2 2.2 1.9 40.1 25.5 24.0
S o u r c e : C R I S I L E q u i t i e s
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Premium/ Discount to NIFTY Median
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
1yr Fwd PE (x) Median PE +1 std dev -1 std dev
+1 std dev
-1 std dev
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Visaka Industries Ltd
Company Overview
Visaka was incorporated in 1981 as a joint venture between the Andhra Pradesh
Industrial Development Corporation (APIDC) and its promoter Dr. G. Vivekanand
to manufacture asbestos cement sheets. In 1984, the company went public and
the plant was commissioned in 1985. In 1989, APIDC divested its stake in the
venture.
Visaka also manufactures textile yarn. In 2009, it developed non-asbestos fibre
board and panel manufacturing.
The company has eight asbestos cement sheet producing units, one synthetic
blended yarn factory and one reinforced building board production facility. Visaka
has a strong dealership network of 6,000 dealers and 28 self-owned depots in
important centers of India for marketing its building products. It has 3,200
employees.
Business segmentContribution to revenues
FY08 FY09 FY10
Building products 78% 81% 81%
Synthetic yarn 22% 19% 19%
Milestones
1981 Visaka Asbestos Cement Products Ltd incorporatedPromoted by Dr. G. Vivekanand and promoters (25%) and APIDC (26%)
1984 Public issue (49%); total capital - 1.54 mn shares, Rs 10 each
1985 Started manufacturing fibre cement products in Hyderabad (36,000tpa)1989 APIDC divested holdings to promoters
1990 Name changed to Visaka Industries Ltd
1991 Issue of 223,000 fully convertible debentures at Rs 300, totaling Rs 66.9mn
1992 Debentures converted into two stages to add 3.85 mn sharesCommenced production of twin air jet spinning plant for synthetic yarn
1995 Rights issue of 2.9 mn sharesGot ISO 9002 certification
1997
2000
Set up fibre cement plant in Tamil Nadu
Acquired Asbestos cement sheet plant at Pune, Maharashtra2001 Export house status
2003 Set up fibre cement unit in Midnapore, West Bengal
2004 Spinning unit expanded by 50% at a cost of Rs 320 mnISO 9001-2000 certification obtained
2005 Set up fibre cement unit in Tumkur, Karnataka
2006
2007
Commenced commercial production in the fibre cement unit in Rae
Bareilly and in the garment unit in Chennai
Set up Asbestos Cement sheet plant at Vijaywada, Andhra Pradesh
2009 The non-asbestos fiber board and panel division was established
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