Gujarat Apollo Industries
Aiming new products, new markets
Introduction of new products for the road construction industry and entry in to mining and crushing equipment business augur well for the company’s sustained growth
| Buy | Gujarat Apollo Industries |
| BSE Code | 522217 |
| NSE Code | GUJAPOLLO |
| Bloomberg | GAPI@IN |
| Reuter | GJAE.BO |
| 52-week High/Low | Rs 399/ Rs 111 |
| Current Price | Rs 245 (as on 30th Jan’08) |
Gujarat Apollo Industries (GAI), formerly know as Gujarat Apollo Equipments, manufactures and designs various range of road construction equipments. This includes manufacturing asphalt plants, sensor paver finishers, bitumen pressure distributors and Kerb pavers, indirect heating equipment, asphalt batch mix and drum mix plants. GAEL controls more than 60% of the market in the product segments in which it operates, with over 1,400 customers and an equipment population of around 3,500 units. It has technical collaboration with Wheelaborator Clean Water Systems, US for manufacturing pavers.
Encouraging user-industry prospects
The Union government has already embarked upon massive road construction projects, with the National Highway Development Program building the north-south and east-west corridors and the Golden Quadrangle Project connecting major cities. Besides, the government’s decision to throw open the construction of roads, bridges, airports and ports to the private sector and allowing 100% foreign investment in real estate projects has provided a boost to the construction industry.
The Eleventh Plan, entailing an investment of about Rs 2,09,400 crore in road infrastructure projects points to strong order flows. Road construction equipment contributes about 21-23 per cent of the total project cost in road projects, indicating the growth potential of the road equipment sector. The direct beneficiary of the vast investment in building up the national infrastructure of highways, bridges and ports would be the construction equipment manufacturers like GAI.
Further with more and more PPP (public private participation) road development under BOOT, BOO, BOT schemes, the need for more niche products will increase. GAI gets its more than 60% of the domestic sales from organized players like Punj Lloyd, Gammon, HCC etc.
Export market is as large and promising as domestic market
Gujarat Apollo Industries started exports in 2005-06, when the company took a strong strategic decision to focus only on niche products and only on the markets, where quality factor is preferred rather than simply the price and cost factor. Prior to that, GAI was focusing only on domestic market and in markets such as Pakistan, Srilanka, Afghanistan, where competition with Chinese and Korean manufacturers of road construction equipments was severe. Also the cost and final price was given preference, rather than the brand or the quality factor. Now exports account for around 25% of net sales.
There is a big demand in the form of replacement market in EU and US for the road construction equipment products. In fact the overall demand is as big as the demand for new construction equipments in India because of the size of the US/EU market. Today GAI focuses on exports to developed markets like Australia, Saudi Arabia, and European countries where quality is preferred and Indian plant or product is compared with the European standards.. GAI, has capitalised on this opportunity and is able to give the quality and other specifications at price, which is lower than EU plants.
The company’s product delivery cycle is 3 months, where after every three months, new contracts based on prevailing forex and raw material rates are entered into. Since the company’s products and prices are compared with EU products and plants, there is a sufficient gap of price and the company is able to get the advantage of the same.
Further of the total exports, nearly 35% is settled in Euro currency, where rupee is depreciated. Company imports some of the raw materials and pays royalty and other technical fees in US dollar, which provides natural hedge to some extent. For some contracts the company enters Letter of Credit in rupee terms. So, overall the dollar exposure in export is not more than 40% of the total exports. And for that it has been able to revise its prices.
New products, new opportunities and more markets
The company has ventured into new products. It has entered into a technical tie-up and licensing agreement with an EU company for manufacturing compactors (rollers). This equipment is also used in road construction along with pavers. So the company henceforth will sell its pavers along with compactors. No additional marketing or distribution efforts are required for marketing this product, as most of the company’s existing customers will be now procuring compactors also from GAI.
Also the company has entered into technical tie-up with another EU company to manufacture crushing and mining equipments. This EU company is one of the pioneers in mining and machining industry. These crushing and mining equipments are required for crushing big rocks, hard soil and mining of iron ore, coal, diamonds etc. This will be a major new growth driver for the company in the long run once it establishes its products in Indian markets as a major surge in investment is expected in the mining sector and there is good scope for a new player with good technical collaboration. Also there is an opportunity for seeing certain equipments to the technology provider, which is based in EU and deals in EU currency.
The company has laid down a capex of Rs 65 crore in three phases, which is to be completed in span of 30 months. Phase-1 of this plan for a capex of Rs 20 crore will be operative from Feb’08, which includes a new plant at Mehsana to manufacture the crushing and mining equipments as well as the compactors.
The company has made a preferential allotment of 5,50,000 warrants convertible at Rs 180 each aggregating to Rs 9.90 crore to the promoters. As a result the fully diluted equity share capital of the company will stand at Rs 11.05 crore. Further the company has sold its 49% stake in Johnson Screens (India) at Rs 25.80 crore. These funds will ensure sufficient equity for funding its planned expansions.
Excellent first half financial performance
For the quarter ended Sep’07, the sales increased by 38% to Rs 42.61 crore. The OPM further improved by 320 basis points to 22%. After providing tax of Rs 3.10 crore, the PAT stood at Rs 5.98 crore, up by 65%.
For the six months ended Sep’07, the sales grew 25% to Rs 79.21 crore. The OPM stood at 20.4%, up from 17.8%. PAT was up by 46% to Rs 9.95 crore.
Valuation
For FY’08, we expect the company to register net sales and PAT of Rs 185.98 crore and Rs 23.80 crore. For FY’09, we expect the company to register net sales and PAT of Rs 266.77 crore and Rs 30.89 crore.. This gives an EPS of Rs 21.5 for FY’08 and Rs 28 for FY’09 earnings. At current market price of Rs 245, the scrip is available at P/E of just 8.8 times its FY’09 expected earnings. Widening of road construction equipment product range and entry in to mining equipment is likely to lead to strong rerating of the scrip in future.
| | 0503 (12) | 0603 (12) | 0703(12) | 0803(12P) | 0903(12P) |
| Sales | 62.76 | 104.95 | 145.56 | 185.98 | 266.77 |
| OPM (%) | 12.8 | 17.3 | 19.6 | 20.7 | 20.0 |
| OP | 8.05 | 18.16 | 28.53 | 38.56 | 53.35 |
| Other Inc. | 1.36 | 0.47 | 2.92 | 3.87 | 4.00 |
| PBIDT | 9.41 | 18.63 | 31.45 | 42.43 | 57.35 |
| Interest | 0.99 | 1.65 | 2.78 | 4.69 | 6.04 |
| PBDT | 8.42 | 16.98 | 28.67 | 37.74 | 51.31 |
| Dep. | 0.9 | 0.91 | 1.08 | 1.39 | 4.16 |
| PBT | 7.52 | 16.07 | 27.59 | 36.35 | 47.15 |
| Tax | 2.23 | 5.6 | 9.48 | 12.55 | 16.27 |
| PAT | 5.29 | 10.47 | 18.11 | 23.80 | 30.89 |
| EPS* (Rs) | 4.8 | 9.5 | 16.4 | 21.5 | 28.0 |
| *Annualised on diluted equity of Rs 11.05 crore of face value of Rs 10 each | |||||
| Gujarat Apollo Industries: Results |
| | 0709(03) | 0709(03) | Var % | 0709(06) | 0709(06) | Var % | 0703(12) | 0603(12) | Var % |
| Sales | 42.61 | 30.79 | 38 | 79.21 | 63.43 | 25 | 145.56 | 104.95 | 39 |
| OPM % | 22.0 | 18.8 | | 20.4 | 17.8 | | 19.6 | 17.3 | 13 |
| OP | 9.36 | 5.78 | 62 | 16.14 | 11.29 | 43 | 28.53 | 18.16 | 57 |
| Other Income | 0.53 | 0.05 | 960 | 0.97 | 0.14 | 593 | 2.92 | 0.47 | 521 |
| PBIDT | 9.89 | 5.83 | 70 | 17.11 | 11.43 | 50 | 31.45 | 18.63 | 69 |
| Interest | 0.54 | 0.15 | 260 | 1.36 | 0.56 | 143 | 2.78 | 1.65 | 68 |
| PBDT | 9.35 | 5.68 | 65 | 15.75 | 10.87 | 45 | 28.67 | 16.98 | 69 |
| Depreciation | 0.27 | 0.27 | 0 | 0.55 | 0.54 | 2 | 1.08 | 0.91 | 19 |
| PBT | 9.08 | 5.41 | 68 | 15.2 | 10.33 | 47 | 27.59 | 16.07 | 72 |
| Tax | 3.10 | 1.78 | 74 | 5.25 | 3.53 | 49 | 9.48 | 5.6 | 69 |
| PAT | 5.98 | 3.63 | 65 | 9.95 | 6.8 | 46 | 18.11 | 10.47 | 73 |
| EPS* | # | # | | # | # | | 16.4 | 9.5 | |
| *Annualiesed on diluted equity of Rs 11.05 crore of face value of Rs 10 each | |||||||||
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