Sunday, November 13, 2016

THYROCARE TECHNOLOGIES LTD: A MUST STOCK IN PORTFOLIO !!!

Scrip Code: 539871 / THYROCARE

CMP: Rs. 616.75; Market Cap: Rs. 3,313.39 Cr; 52 Week High/Low: Rs. 684.80 / Rs. 446.00

Total Shares: 5,37,23,533 shares; Promoters : 3,43,61,745 shares – 63.96 %; Total Public holding : 1,92,27,188 shares – 35.79 %; Book Value: Rs. 69.87; Face Value: Rs. 10.00; EPS: Rs. 12.32; Dividend: 95.55 %; P/E: 50.06 times; Ind. P/E: 57.05; EV/EBITDA: 29.28x

Total Debt: NIL; Enterprise Value: Rs. 3,305.79 Cr.

THYROCARE TECHNOLOGIES LIMITED: The Company was incorporated in 2000. Thyrocare Technologies Ltd is one of the leading pan-India diagnostic chains and conducts an array of medical diagnostic tests and profiles of tests that helps in early detection and management of disorders and diseases. They are India's first fully automated diagnostic laboratory having its strong presence in more than 2000 cities and towns in India and internationally. The company came out with an IPO on April 27, 2016 offering 1,07,44,708 equity shares of Rs. 10 each for Rs. 446 per share raising Rs. 479.21 Cr. The shares of the company got listed on May 9, 2016 at Rs. 662 making a high of Rs. 665.40 and low of Rs. 606.00 on listing day. The object of offer for sale was to achieve the benefits of listing and to provide liquidity to selling shareholders. The company has issued three bonuses prior IPO in the span of 16 years so far in the ratio of 1 for 1 in November 2003, 5 for 2 in March 2006 and 3 for 1 in September 2014. Between the years 2003 to 2006 it issued shares at a price of Rs. 200 per share. It also issued few shares in March 2013 at a price of Rs. 75 per share. Thyrocare is among the leading diagnostic chains. It conducts an array of medical diagnostic tests that centre on early detection and management of disorders and diseases. The company operates its testing services through a fully-automated central processing laboratory (CPL) in Navi Mumbai, which acts as a hub to branches. The company has recently expanded its operations to include a network of five regional processing laboratories (RPLs). Out of these, four RPLs were set up in 2015 one each in New Delhi, Coimbatore, Hyderabad, and Kolkata while it set up one in Bhopal in 2016. The company as of February 29, 2016, had a network of 1,041 authorized service providers (ASPs), comprising of 687 Thyrocare Aggregators (TAGs) and 354 Thyrocare Service Providers (TSPs) spread across 466 cities, 24 states and one union territory. These ASPs operate under a franchise agreement with the company and deliver samples directly to one of the RPLs or to one of the 22 hub locations if the sample is to be processed at the CPL. As of February 29, 2016, it offered 198 tests and 59 profiles of tests to detect a number of disorders. Its profiles of tests include 16 tests administered under its “Aarogyam” brand, which offers patients a suite of wellness and preventive health care tests. Their laboratory processes over 30,000 samples and above 1 lakh investigations every day. Their profiles of tests include 17 profiles of tests administered under their 'Aarogyam' brand. Through wholly owned subsidiary, NHL, they operate a network of molecular imaging centres in New Delhi, Navi Mumbai and Hyderabad, which focuses on early and effective cancer monitoring. Thyrocare Technologies Ltd is locally compared to Dr. Lal Pathlabs Ltd ADS Diagnostic Ltd, Sharon Bio-Medicine Ltd, Secunderabad Health Care Ltd, Keral Ayurveda Ltd, Looks Health Services, Kovai Medical Center, Healthcare Global, SRL Diagnosticcs, Metropolis, Oncquest Laboratories Ltd, Suburban Diagnostics, Medall HealthCare Pvt Ltd, Hitech Diagnostic Centre, Vijaya Diagnostic Centre, Lucid Medical Diagnostics.

Investment Rationale:

Thyrocare Technologies Ltd is a pan-India diagnostics chain with focus on preventive and wellness health offerings under the Aarogyam brand. The company has a pan India presence with 1,122 authorised service providers (ASPs), comprised of 878 Thyrocare Aggregators (TAGs) and 244 Thyrocare Service Providers (TSPs) spread across 483 cities and 27 states and 1 union territory. The company follows a hub and spoke business model with a fully automated central processing lab (CPL) in Navi Mumbai and 5 regional processing labs (RPL) across India. In terms of revenue, Wellness & Preventive Healthcare tests account for 50 % of the revenue of which thyroid tests account for 20 % and the balance 30 % are accounted by non-thyroid tests. The Indian Diagnostic Industry is a mega industry, which comprises of equipment manufacturers and pathology labs. In India’s healthcare industry, diagnostic services play the role of an information intermediary, providing useful information disease diagnosis. From FY12 to FY16, the industry grew at a CAGR of 16 % to Rs. 37,700 Cr. For the next three fiscal years, it is estimated that the Indian diagnostic industry will grow at a CAGR of 16 % to 18 % to reach Rs. 58,500 Cr to 61,600 Cr in FY18. The diagnostic industry in India can be classified into pathology testing services and imaging diagnostic services. Pathology testing or in-vitro diagnosis involves the collection of samples, in the form of blood, urine, stool, etc., and analysing them using laboratory equipment and technology to arrive at useful clinical information, to assist in treatment of diseases. It also includes testing of biochemistry, immunology haematology, urine analysis, molecular diagnosis and microbiology. Imaging diagnosis or radiology involves imaging procedures such as X-rays and ultrasounds, which help mark anatomical or physiological changes inside a patient’s body, to assist doctors to diagnose patient’s disease. The imaging diagnostic segment also includes more complex tests, such as CT scans and MRIs and highly specialised tests, such as PET-CT scans. Pathology testing is often preferred as a first line of diagnosis for a majority of diseases and, thus, it contributes to a major portion of the diagnostic industry. Given the high volumes of pathology testing conducted in India, pathology testing still accounts for more than half of the revenue of the Indian diagnostic industry, although the cost of imaging diagnostic services is often more expensive compared to pathology testing. The pathology business is highly scalable as blood samples can be shipped to a remote, centralised location to achieve economies of scale. In contrast, imaging business operators have to install diagnostic equipment close to the patient. Imaging services cannot be centralised and, as a result, are difficult to scale up. Diagnostic centres in India can be classified as hospital‐based, diagnostic chains and standalone centres. Standalone centres form the majority share of 48 % followed by hospital based 37 % centres, while diagnostic chains account for the balance 15 %. The absence of stringent regulations and low entry barriers has led to the evolution of standalone centres, while hospitals tend to have their own pathology labs. Within diagnostic chains, large pan‐India chains form 35 % to 40 % and regional chains form 60 % to 65 %. Specialized tests require expensive infrastructure, which has led to the formation of diagnostic chains in India. These follow the hub and spoke model and enables economies of scale. However, the fragmented nature of the industry indicates low pricing power for service providers in the near term. The key drivers for the industry are increase in evidence based treatments, huge demand-supply gap, increase in health insurance coverage, need for greater health coverage as population and life expectancy increase, rising income levels making quality healthcare services affordable, and growing demand for lifestyle related diseases & healthcare services. This growth is likely to be supported by rising awareness towards wellness and a higher tendency among the population to take preventive actions against diseases. Changing lifestyle is perpetuating higher chronic diseases and with rising income levels, demand for diagnostic testing in India is on the rise. Further, the health insurance penetration level in India is currently low with 17 % of the population availing to it. Moreover, 86 % of the healthcare related expenses are borne directly by consumers in case of private healthcare services. Increase in penetration levels of health insurance is expected to indirectly increase demand for diagnostic services. Of the diagnostic market large pan-India chains account for 35 % to 40 % and regional chains cover the balance 60 % to 65 %. Also, they can eat into unorganised sectors market share which stands at 48 %. This leaves a lot of room for organised players like Dr Lal Pathlabs, Thyocare and SRL amongst others to grow faster than the industry. Thyrocare is one of the leading pan‐India diagnostic chains and offers 192 tests and 54 profiles of tests to detect health disorders such as thyroid, growth, metabolism, auto‐immunity, diabetes, anaemia, cardiovascular, infertility, and various infectious diseases. It offers various diagnostic tests under brand names Thyrocare, Aarogyam, Neuclear. It processes more than 10mn blood samples and conducts more than 53mn test annually. Thyrocare started its diagnostic services with low‐value thyroid tests in the year 2000, it is now the fastest growing and has the highest value‐added service offering in the segment of wellness and preventive care, which accounts for 51 % of its diagnostic revenues. Thyrocare is the industry leader in terms of revenue share from wellness and preventive care tests. Incidentally, CRISIL estimates this segment to deliver 25 % CAGR over FY15‐18, higher than the overall diagnostic industry CAGR of 17 %. With the setting up of regional processing laboratories (RPLs) in 2014 as against its only central processing lab in Navi Mumbai, Thyrocare delivered 27 % CAGR in its diagnostic test volume over FY14‐16. Recently, it has set up two RPLs in Kolkata and Bhopal and plans to set‐up 20‐25 RPLs at a capex of Rs. 75 Cr over next two years; this, is supported by a conducive industry scenario will drive growth. Additionally, the visible ramp‐up in its PET‐CT scan services in cancer diagnosis will provide meaningful incremental earnings growth. Thyroid profile is one of the key test offerings of the company and includes total Triiodothyronine, total Thyroxine and thyroid stimulating hormone tests which are collectively referred to as thyroid tests. Thyroid tests comprised 28 % of the total samples that the company processed in FY15 and generated revenue of Rs. 27.2 crore, which constituted 15 % of its total standalone revenue for FY15. They charge Rs. 780 per test Dr lal charges 650. Despite facing disruptive pricing strategy by its rival, Thyrocare is a leader of the domestic diagnostic industry in terms of profitability with an EBITDA margin of 40.7 % in 9MFY16. It is expected that it will maintain its margin leadership with continuous focus on wellness and preventive health‐care tests. Considering strong growth momentum and margin leadership, Thyrocare can post revenue CAGR of 25 % and PAT CAGR of 29 % over FY15‐18. Thyocare has posted a CAGR of 23.0 % over FY2011-2015. Going forward, given the cash rich balance sheet of the company, it can easily grow at 30 % over the medium term.

Outlook and Valuation:

Thyrocare Technologies Limited is an India-based diagnostic chain company. The Company offers a range of medical diagnostic tests and profiles of tests that center on early detection and management of disorders and diseases. The Company's business segments include diagnostic testing services activity, manufacturing of radiopharmaceuticals activity and imaging services activity. The diagnostic testing services activity segment includes the provision of laboratory testing services. The manufacturing of radiopharmaceuticals activity segment includes the manufacture and sale of radioactive pharmaceuticals to its customers. The imaging services segment represents positron emission tomography-computerized tomography (PET-CT) scan and sale of radio pharmaceuticals used in imaging services. It offers various profiles of tests under Aarogyam brand that are used to detect a range of patient disorders, including growth disorders, metabolism disorders, autoimmune disorders, diabetes and anemia. Thyrocare’s business model differs from that of its competitors in a couple of ways. One of the striking differences is that unlike other organized players, which mostly follow a B2C model, Thyrocare is more of a B2B player with 85 % of its revenues coming through the channel as against 30 % to 40 % for its peers. This enables the company to keep its other expenditure lower vis-a-vis its peers, which spend higher on promotional expenses. In terms of services, the company is more focused on the preventive & wellness, and the non-preventive segments, while its peers follow a portfolio model of providing a full range of tests and services, which entail higher manpower costs. The company’s operations are relatively more automated in nature, thereby requiring less manpower intervention, unlike its peers which need to employ qualified manpower like Phds and doctors. As a result, employee costs for Thyrocare account for 10 % of sales as against 20 % of sales for its peers. This contributes towards the company enjoying better margins compared to the industry margin of 41 % for Thyrocare’s diagnostic business as against 26 % for Dr Lal Pathlabs. Over the medium term the company would be able to sustain its margins and also scale up its business, given the opportunities in the industry. This coupled with the low capex requirement for the diagnostic segment makes it a high ROIC business. The company’s volumes and strong ties with its vendors have enabled it to develop an equipment leasing model for the CPL that has resulted in minimal capex for its otherwise expensive diagnostic equipment’s. The model entails leasing of equipment’s and instruments for the CPL in exchange for a commitment to purchase reagents and consumables from these vendors for a specified period of time. The RPLs conduct routine tests which do not require complex equipment’s; hence, the capex required for equipment’s is minimal and the same are purchased outright by the company. Additionally, the premises required to set up these RPLs are leased, thus resulting in lower capital outlay to set up these RPLs which requires around Rs. 2 Cr to 3 Cr for set up. As a result, the company has been able to expand its operations without relying on debt. The company as of 9MFY2016 has no debt on its books. Low capex requirements and high asset turnover along with high margins enable the company to generate high ROIC on the core diagnostic business, which is around 40 %. This will enable the company to fund its growth with ease and warrant it to make a high dividend pay-out. In fact it has cash and bank and investments of Rs. 91 Cr as of FY2015 on a consolidated basis. The net cash flow from operating activities is around Rs. 40 Cr to 45 Cr per year and will be used to fund the next phase of growth. Thyrocare's test volumes and strong relationships with vendors have allowed them to develop an equipment leasing model for the CPL that results in minimal capital expenditure for diagnostic equipment. Through this model, the equipments and instruments used in the CPL are generally leased from vendors in exchange for a commitment to purchase reagents and consumables from these vendors for a specified period of time. These reagent and consumable costs are then expensed as costs of materials consumed. Hence, the company benefits financially from this model as it minimises the capital costs typically associated with diagnostic equipment as they are not required to expend capital immediately to procure the necessary instruments and equipments. As the RPLs conduct relatively routine tests, they do not require complex equipments that employ a variety of technologies. The capital outlay to purchase the equipment is therefore minimal in comparison to that required to purchase the equipment in the CPL, and as such, Thyrocare has purchased the necessary equipments outright. Company has demonstrated attractive financial performance over last four years. For FY2011-15, its compounded annual growth rate (CAGR) for sales is 23 %, where the sales grew from Rs. 78 crore to Rs. 180 crore in FY2015. The company's operating profit grew at CAGR of 20 %, from Rs. 35.6 crore to Rs. 73 crore in FY2015. Its profit CAGR has been 18 % from Rs. 25 crore to Rs. 48.5 crore in FY2015. The company has no debt on books. In fact it has cash and bank and investments of Rs. 91 crore as of FY2015 on consolidated basis. The net cash flow from operating activities is around Rs. 40-45 crore per year and will be used to fund the next phase of growth. Thyrocare enjoys premium and its Peers like Dr Lal Pathlabs has Ebitda margin of 28 %, Metropolis Healthcare has Ebitda margin of 29 %, SRL Diagnostics has Ebitda margin of 18 %, and Thyrocare Technologies has Ebitda margin 47 %. At the current market price of Rs. 616.75, the stock is trading at a PE of 44.05 x FY17E and 32.80 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 14.00 in FY17E and Rs. 18.80 in FY18E. After listing, Thyrocare has been trading on premium due to its healthy return ratios and high free cash flows. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also .

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	183.00	241.00	302.00	387.00
NET PROFIT (₹ Cr)	47.00	52.00	75.00	101.00
EPS (₹)	9.20	9.70	14.00	18.80
PE (x)	59.80	55.50	39.80	29.30
P/BV (x)	9.50	8.10	7.40	6.50
EV/EBITDA (x)	41.30	31.50	24.80	19.20
ROE (%)	17.60	15.40	19.40	23.30
ROCE (%)	21.10	21.70	25.70	30.50

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Sunday, October 23, 2016

VETO SWITCHGEARS AND CABLES LTD : VETO POWER !!

Scrip Code: 539331 / VETO

CMP: Rs. 156.45; Market Cap: Rs. 286.72 Cr; 52 Week High/Low: Rs. 161.40 / Rs. 80.60

Total Shares: 1,83,27,100 shares; Promoters: 1,06,64,874 shares – 58.19 %; Total Public holding : 76,62,226 shares – 41.81 %; Book Value: Rs. 46.49; Face Value: Rs. 10.00; EPS: Rs. 7.14; Dividend: 20.00 % ; P/E: 16.96 times; Ind. P/E: 19.94; EV/EBITDA: 11.90 times. Total Debt: Rs. 42.27 Cr; Enterprise Value: Rs. 326.87 Cr.

VETO SWITCHGEAR AND CABLES LTD: The Company was incorporated on 2007. Veto Switch Gears And Cables Limited is an India-based company, which is engaged in the manufacturing of wires and cables, as well as electrical accessories. The Company also deals in various types of light emitting diode (LED) lighting, compact fluorescent lamp (CFL) and fans. The Company's products are focused on households and business groups. Its products include Copper, Polyvinyl chloride (PVC) resin and Aluminum. It supplies products under the brands, VETO and VIMAL POWER. It is also engaged in exporting electrical accessories and goods. The Company's products are marketed in both domestic and international markets. The Company has relationships with approximately 2,000 dealers. The Company has its manufacturing plant at Haridwar. Veto Electricals Private Limited (VEPL) is the subsidiary of the Company. Company is also engaged in the manufacture and sale of wires & cables and electrical accessories in India. Veto Switchgears product portfolio ranges from industrial cables, stand cables to telephone & co-axial wires, from general switches to modular switches, from ceiling fans to rechargeable fans, compact fluorescent lamps and other electrical accessories. The company came with an IPO on December 3, 2012 with an offer of 50,00,000 equity shares of Rs. 10 each at Rs. 50 per share raising Rs. 25 Cr. The shares got listed on NSE EMERGE on December 13, 2012 at Rs. 58 per share. The purpose of the issue was to modernization of existing facility at Hardwar, Uttarakhand to finance incremental long term working capital requirement, to enhance company’s brand through advertising and other activites, general coporate purposes and to meet issue expenses. The company got migrated on NSE main board on April 29, 2015 and got listed on BSE on September 9, 2015. The company gave bonus in September 2013 in ratio of 1:10, and has not given any Split in face value of its shares. VETO SWITCHGEARS LTD is locally compared with Sterile Technologies Ltd, KEI Industries Ltd, Polycab Cables, Havells India Ltd, Finolex Cables Ltd, Rishabhdev Technologies, Aksh Optifibre Ltd, Precision Wires Ltd, Ram Ratan Wires Ltd, Torrent Cables Ltd, B C Power Control, Nicco Corp Ltd, G R Cables Ltd, Birla Cable Ltd, Delton Cables Ltd and globally compared with General Cable Corporation of USA, Belden Inc of USA, Insteel Industries Inc of USA, Encore Wire Corporation of USA, Asia Pacific Wire & Cable Corp of USA, Optical cable Corporation of USA, Southwire of USA, Prysmian Group of Italy, Nexans of France, Sumitomo Electric Industries of Japan, Furukawa Electric of Japan, Fujikura of Japan, LS Cable & Systems of South Korea, Walsin Lihwa of Taiwan, Far East Cable of China, Grupo Condumex of Mexico, Qingdao Hanhe Cable of China.

Investment Rationale:

Veto Switchgear & cables Ltd, established in 2007, is manufacturer of Wires & Cables and Electrical Accessories. The company is promoted by Gurnani group. It produces all type and ranges of Electrical Accessories. It uses latest production technology and also produces latest products as per market demand. Its products are with the brand name "VETO" and "VIMAL POWER" India's first ISI Mark Electrical Accessories. It is engaged in manufacturing and marketing of Wires & Cables , Electrical Accessories , Industrial Cables , Fans , CFL Lamps , Pumps , Modular Switches , LED lights , Immersion Heater , MCB and distribution boards. The electronics market of India is one of the largest in the world and is anticipated to grow at a compound annual growth rate (CAGR) of 24.4 % during 2012-2020. Separately, forecasts say that the electric wire and cable market in India is to grow at a CAGR of 16.18 % over the period 2015-19 as power cables led the revenues of the wires and cables market with more than 50 % contribution to the total market in fiscal year 2014. The Indian wire and cable industry is growing satisfactorily and getting more and more consolidated and becoming largely organized now. The power cable led the industry from front contributing almost 50 % of the industry's emphasis on laying comprehensive power distribution and transmission network in the country. The increasing digitalization has of course catapulted the demand even more. Construction is also one of the core sectors of Indian economy and future of this industry is also based on commodity prices. Construction cables and wire sector anticipated to see steep growth in demands in coming days owing to huge government’s, spending in infrastructure, smart cities, real estate boom, and housing explosion. Increase in Urban Population and Per-Capita Income growing at a steady rate is beneficial for the sectors. The demand of manufacturing of wires & cables and electrical accessories & other allied products in India is also hence likely to increase. De-licensing and removal of tariffs for the industry, low entry barriers, and increased demand for housing & increased growth in the emerging markets are basic growth drivers of the market. At more than 7 % rate of annual GDP growth, India is already amongst the fastest growing economy in the world. Government priority projects such as Housing for All, Smart Cities, Interlinking of rivers, AMRUT, Swacch Bharat, development of inland water ways for transportation, etc. are various initiatives which will help companies like VETO. Power sector reforms being expected to be a top priority for government is playing out well and government will increasingly turn its attention to reforming the power distribution segment and boosting India's energy independence. The year 2015 started off on a good note for the LED industry in India. PM's initiative to launch Notional programme for LED based Home & street lightning as well as a scheme for LED distribution under the domestic Efficient Lighting program is highly valued for the growth of India. The studies showed LEDs were 25 % more efficient than CFL, 23 % more efficient than tube lights and 80 % more efficient than incandescent lamps. The Prime Minister's initiative has accelerated the adoption of LED's in several sectors across the country through the creation of several new policies and financial subsidies undertaken by the Ministry of power, BEE and various state municipalities. This has helped propel the industry to grow five folds in five year from its current size of Rs. 4000 crores according to Electric Lamp and Component Manufacturers Association (ELCOMA). Veto Switchgears enjoys good market share of electrical accessories in Northern region especially in Rajasthan and has pan India market. Veto is a dominant player in Rajasthan with 12-13 % market share. Currently Veto gets 80 % of its revenues from Rajasthan, 10 % from Gujarat and balance 10 % from other states. For Rajasthan and Gujarat the company mainly follows Dealer’s Retailer Model for sales which provide higher margins and direct control over the inventory. The industry usually follows Distributor’s Dealer’s Retailer model which has lower margins but gives scalability. Hence Veto has also decided to expand through distributors in various parts of the country to increase the reach. In next three years, the company is targeting 50 % of sales from outside Rajasthan regions. This strategy would provide higher scalability to the company due to lower requirement of funds and would gradually increase the return ratios of the company. Looking at the growth of the Indian market, company is targeting Rs. 270 to Rs. 280 Crores of Revenue this fiscal & Rs. 1000 Crores in the next five years. Further, Veto has installed another manufacturing unit at Mahindra SEZ, Where the construction and erection of the plant for machinery has already been completed which is mainly for wires and cables only and is 100% export oriented unit. Company has set revenue target Rs. 30 Crores from this unit in the current year itself major earning coming from the state of Rajasthan. Veto’s wire rate is equal to Havells & Anchor in this state. Infact, wire sale is more than Anchor in Rajasthan. Veto’s focus this year is to widen and cover more and more states of India. The company has broadened its network and distribution spaces and has dealer network of 2,500 across India compared to 2,314 dealers last year. Veto also had major success in some of the biggest cities of UAE & is working towards making “Veto” a globally established brand. Its products are marketed in both domestic and international markets. Recently Veto launched Cooler Kit (Fan) in the market after the previous launches of Fans, CFL Bulbs and LED. It is planning to launch Geyser in next couple of months. More products under the same brand will enable Veto to capture a larger share of spending by consumers and give retailers a bigger bouquet to offer to their customers. Veto plans to enhance its capacity utilization from its two plants at Haridwar and Vasai going forward. Apart from domestic business of Veto, the group has an associate company in Dubai, JMTC FZCO which is trading electrical goods. Veto formed a 100 % subsidiary in Dubai on Oct 2015, via Dubai Veto Overseas and in 6 months its sale crossed Rs. 64 crores and PAT crossed Rs. 5.4 crores as there is no tax in Dubai and EPS for this company stood at Rs. 2.98. Dubai Veto Overseas took over the business of JMTC FZCO gradually without diluting equity. Apart from this, another subsidiary of the domestic business Veto Electricals Pvt Ltd has to commence the business from June 2016 onwards, by exporting electrical goods from its new plant in Mahindra SEZ, in Jaipur. Due to this consolidation, there could be a notable jump in Revenues and PAT from FY17 onwards. The management has also guided that the domestic business is likely grow at a CAGR of 20 % due to expansion of territories and products. Looking at all the developments the overall business could grow at a CAGR of 52 % (FY16E-FY19E) post consolidation of Dubai based promoter group company and business from SEZ (Jaipur). Strong established brand presence in Rajasthan. Driving growth through innovation and marketing India’s ever growing requirements of energy and capacity addition planned by the Government through various initiatives, gives substantial opportunity for increasing demand for wires & cables and electrical accessories, and Decrease in copper prices, Housing projects of Government and semi-government agencies. Low cost end-to-end business model being adopted by existing or new competitors. Adoption of new strategies by new or Existing players in the market augurs well for Veto Switch gears and cables ltd. VETO on the verge being one of the leader in the industry has very strong footing in the sector and has strong cash flow which thrusts the growth for the company, and strong financials with sustained cashflow makes it attractive for long term investment.

Outlook and Valuation:

Veto Switchgear Limited (Veto) started its operations as small retail shop in Jaipur in 1968 and gradually it became the leading dealer in the market. Later the promoted felt the need to backward integrate and hence set up a manufacturing plant for Wire and Electrical accessories in Jaipur, Rajasthan in 1975 and over the years it has become one of the largest players in Rajasthan with market share of 12-13 %. The company has strong network of more than 2500 dealers across India compared to 2,314 dealers in Q3FY16. However, company plans to expand its dealer network across India and increase its network count to 5,000 in next 2-3 years. Apart from Rajasthan, Veto has decent presence in Gujarat, Haryana, Punjab, Uttarakhand, J&K, Jharkhand, MP, Assam, Kerala are some other states where it has made some inroads. The management has guided at bringing the proportion of Rajasthan to 50 % in the next 2-3 years by expanding Veto’s presence across, Gujarat, Maharashtra, Uttarakhand, UP, Kerala, Himachal Pradesh, NCR, MP, J&K and other unrepresented areas. Company is also in the manufacturing of electrical accessories, wires and cables at manufacturing facilities in Haridwar and Vasai Mumbai. Company also deals in electrical accessories like switch socket, MCB, bell and all electrical accessories which is used for household purposes and manufacturing wires and cables. Cable starts from 0.75 mm to 10 mm. Veto is looking to expand its business across India and follow the industry standard by appointing distributors across India. This will help Veto increase the scale of the business and lower the working capital requirement. Veto plans to appoint 100 distributors across India in the next two years from the current 6. This will help to reduce its working capital cycle going forward. Currently Veto has a working capital cycle of six months, which is high compared to Crompton Greaves which has of three months, V-Guard has two months and Havells has one month. Further, consolidating its Dubai subsidiary numbers could also lead to lower working capital cycle as that subsidiary works on tighter working capital cycle. The group has Wire and Electrical accessories business in different companies and apart from India it has operations in Dubai as well. In India the holding company of Veto Switchgear has an old manufacturing plant at Jaipur which manufactures Wire and Electrical accessories and in-turn supply to Dubai Company. The company has revenues of Rs. 30 cr. This plant has become inefficient and group set up new plant in listed company Veto Switchgear at Mahindra SEZ, Jaipur with an investment of Rs. 11 cr. The production from this plant has commenced from April 2016 and sales to Dubai Company will shift to this plant. The plant is likely to do sales of Rs 40 Cr in FY17 which will add up in company’s revenue. Also, the group has an associate company in Dubai - JMTC which has revenues of Rs. 350 Cr and EBITDA of Rs. 60 cr. JMTC market electrical accessories, wire and appliances in Middle East and African market. Veto Switchgear has floated 100 % subsidiary in Dubai to partial transfer the business of associate company. It commenced operations from 2HFY16 and likely to do around Rs. 20 Cr of sales in 2HFY16 and Rs 80 cr in FY17E. However, the company does all above restructuring, the company will need lot of funds or Bank borrowing as working capital cycle both in India and in Dubai is very high. In India the Working capital cycle is 6 months and in Dubai it is 7.5 months. For example, with an investment of Rs. 25 Cr in 100 % subsidiary in Dubai, the company will be able to do revenues of Rs. 40 Cr. Company is not looking to dilute equity. Veto expects to benefit from introduction of GST as unorganized sector will lose its benefit. Further the boost to affordable housing provided by the Govt will also likely result in better sales growth for Veto over the medium term. Q4 is generally a good quarter for Veto in domestic market. Veto could also distribute 20 % to 25 % of its PAT by way of dividend it has already paid out 5 % interim dividend in 28th Jan 2016. Dividend could also increase the attractiveness of the stock. Veto's FY 15-16 sale in India include sale of Rs. 112 crores constituting Rs. 50 crores wires and cables, Rs. 62 crores from electrical accessories. Manufacturing sale of the company is Rs. 37.5 crores and trading sale includes sale of LED fan and CFL. LED is Rs. 7.5 crores, fan is Rs. 3.5 crores and CFL is Rs. 13.5 crores. Company enjoys advantage with respect to receivable days over its peers. In the Electrical business in India receivable days is normally 120 days for all; however for the company it is reduced to 86 days just because of Dubai operation where it is only 30 days. The company has grown at a CAGR of 12.4 % between FY12-15 and EBITDA has grown 11 % during the same period. The base business of the company is expected to grow at CAGR of 20 % for next 2-3 years based on outside Rajasthan expansion. The company has high working capital cycle (which is expected to improve on back of addition of distribution level). Due to this, it has negative cash flow from operations in last 2 out of 4 years. In FY15 the operating cash flow was positive as sales growth was nominal. In FY16 and FY17 the operating cash flow is again likely to be negative on account of addition of international operations which has high working capital cycle. The group is trying to consolidate its business in listed company which may face hurdle on account of ownership structure of three brothers in Indian and Dubai operation. The group is consolidating the business. Considering high working capital cycle and lower ROCE, VETO will not be able to get multiple like V-Guard or Bajaj Electrical. However, it can still get multiple of 12x easily and success in the planned strategy would further re-rate the stock. With positive outlook for the sector in the medium to long term, Veto Switchgear could post 52 % CAGR of sales growth for FY15-FY19E going by the expectations of the management, the recent restructuring of Dubai business and contribution from its new Jaipur SEZ subsidiary. Considering its expected growth in revenue, margin expansion and healthy return ratios going forward, this stock can perform better. At the current market price of Rs. 156.45, the stock is trading at a PE of 15.53 x FY17E and 12.28 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 10.07 in FY17E and Rs. 12.73 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	97.03	176.59	270.05	328.24
NET PROFIT (₹ Cr)	7.16	16.67	18.45	23.34
EPS (₹)	3.91	7.14	10.07	12.73
PE (x)	17.63	12.55	9.63	6.69
P/BV (x)	1.73	2.13	1.90	1.65
EV/EBITDA (x)	10.44	12.18	7.83	6.44
ROE (%)	19.71	21.71	20.90	22.13
ROCE (%)	30.88	22.05	25.38	26.46

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) -

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*As the author of this blog I disclose that I do not hold VETO SWITCHGEARS AND CABLES LTD in my any of the portfolios.