CRISIL Research has come out with its report on Veto Switchgears and Cables. The research firm has assigned a CRISIL SME IER fundamental grade of "SME 4/5" to the company.
CRISIL Research has come out with its report on Veto Switchgears and Cables. The research firm has assigned a CRISIL SME IER fundamental grade of "SME 4/5" to the company. The grade indicates that the company's fundamentals are ‘superior' relative to other SMEs in India. CRISIL Research has assigned a SME valuation grade of 3/5 (based on one-year fair value of Rs 45 per share), indicating that market price is ‘aligned' with the fair value. The SME fundamental grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.
The assigned SME fundamental grade reflects Veto's established position in the electrical products business in Rajasthan (accounts for over 70% of revenues) and its brands Veto and Vimal Power, which are well known in north-western India. The company banks on its expanding dealer network (up from around 1,300 dealers in FY09 to nearly 2,400 at present) and the launch of new products (e.g. recently launched compact fluorescent lamps and fans) for growth. Focus on branding, increasing distribution network and new product launches has led to revenues increasing at 20.8% CAGR over FY09-12. CRISIL Research expects the demand for electrical accessories, wires and cables to increase due to a) GDP growth leading to growth in real estate and construction sectors, b) increasing preference of Indian consumers for branded products, especially in the electrical accessories and consumer appliances segments, and c) government policies focusing on improvement of electricity supply, especially in rural areas. The grade also takes into account the experience of Veto's management – the promoters have nearly three decades of experience in the industry. While the company intends to strengthen its position in other states, it faces intense competition from the organised and unorganised players. Veto's scale of operations is small and its product offerings are limited compared to bigger players in the industry viz., Havells, KEI Industries, Panasonic (Anchor), Polycab Cables and others, which limits its bargaining power with dealers/distributors. To counter competing brands, it has to provide flexible credit terms to its dealers (three to four months), which has led to longer working capital cycles compared to that of the bigger players. The company's parent, Veto Electropowers (India) Pvt. Ltd (VEIPL), exports wires and cables. Veto's operations may be affected in case VEIPL enters the domestic market. The company is exposed to volatility in copper prices (a key raw material) and its margins may get adversely affected in case it is unable to pass on the increase in copper prices to the consumers.
Financial outlook: We expect Veto's revenues to grow to Rs 1,061 mn by FY15 at a three-year CAGR of 15.6%, driven by growth in sales at its existing key market (Rajasthan) and foray into other regions. EBITDA margin is expected to decline to 15.6% in FY13 as the company plans to increase its marketing and manufacturing activities, which in turn will lead to increase in selling expenses and employee costs. Adjusted PAT is expected to grow at 14% CAGR over FY12-14. We expect Veto's RoE to decline from the current levels due increase in equity capital post IPO, moderation in operating margin, higher interest costs and gradual increase in effective tax rate.
Valuation: CRISIL Research has used the discounted cash flow (DCF) method to value Veto and arrived at a fair value of Rs 45 per share. This fair value implies P/E multiples of 7.9x FY14E and 7.1x FY15E EPS and P/B multiples of 1.1x FY13E and 1.0x FY14E book value.
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