Buy WS Industries; target Rs 108: Sharekhan

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Sharekhan research has maintained buy rating on WS Industries with target price of Rs 108. Taking WSI's current 59% stake in the realty venture, the research firm arrives at a value of Rs 29 per share, which gives a fair value of Rs 108 per share of WSI.

Sharekhan report on WS Industries:

Result highlights

In Q1FY2008 WS Industries' (WSI) top line grew by 21% to Rs 47.7 crore, which was slightly above our expectation.

The operating profit increased by 52.5% to Rs 7.1 crore, resulting in an expansion in the operating profit margin (OPM) by 310 basis points to 14.9% as against 11.8% in Q1FY2007. The margin improved mainly due to a change in the product mix and a reduction in the power and fuel cost on account of a higher utilisation rate and improved efficiency.

The profit after tax (PAT) increased by 142.4% to Rs 3.95 crore; the PAT growth was higher mainly due to a decrease in both the interest cost, which dropped by 9% year on year (yoy) to Rs 1.72 crore, and the depreciation cost, which fell by 4.6% to Rs 9 crore yoy.

The order book of the company stood at Rs 190 crore at the end of the quarter.

A healthy order book of Rs 190 crore, which is about 1.15x its FY2007 revenues, and increased production capacity indicate the high earnings capability of the company. Thus WSI is sure to benefit from the large investments lined up in the power sector, especially the transmission and distribution segments, during 2007- 2012. We have valued WSI using the sum-of-the-parts (SOTP) method wherein we have valued its core insulator business at 9x its FY2009E earnings per share (EPS). This gives the fair value of Rs 78.7 per share. Further, we have valued WSI's realty subsidiary at the current realisable value of Rs 3,500 per square feet. Taking WSI's current 59% stake in the realty venture, we arrive at a value of Rs 29 per share, which gives us a fair value of Rs 108 per share of WSI. We remain positive on the stock and maintain our Buy recommendation with a revised price target of Rs 108.

Net sales up by 21%, net earnings rise by 142.4%

WSI registered a growth of 21% in its revenues to Rs 47.7 crore in the first quarter of FY2008; the same was slightly above our expectations. The net profit grew by 142.4% to Rs 3.95 crore from Rs 1.6 crore in Q1FY2007. The net profit growth was higher due to the expansion in the OPM and the reduced cost of interest and depreciation.

Operating profit up 52.5%, margin expands by 310 basis points

The operating profit moved up smartly by 52.5% to Rs 7.1 crore in Q1FY2008. The OPM also expanded by 310 basis points to 14.9% as against 11.8% in Q1FY2007. The expansion in the margin was possible due to decreasing power and fuel cost, and improving operating efficiencies. The power and fuel cost as a percentage of sales declined to 15% from 18.8% in Q1FY2007. The employee cost also declined to 10% of net sales from 11% yoy. The management also attributed the improvement in the margin to the change in the product mix and the higher price realisation from Power Grid Corporation. Higher revenues from high-margin products like the hollow insulator also aided the margin expansion. According to the management, the margin would face pressure only in case of an increase in oil prices.

Strong order book of Rs 190 crore

The company has a order backlog of Rs 190 crore where project orders worth Rs 40 crore are outstanding and orders worth Rs 150 crore are for insulators. The execution of the Haryana substation project is on schedule and revenues to the tune of Rs 5 crore have been booked; revenues worth another Rs 25 crore would be booked from the project in the current fiscal. The company is also gearing itself up to capitalise on the increased demand by increasing its capacity from 14,000 metric tonne (MT) to 16,000MT. The increased capacity of 2,000MT would be operational from the third quarter of FY2008.

Real estate venture rolling out by year end

The development of the information technology (IT) special economic zone (SEZ) is on schedule and the SEZ would be ready for roll-out by the end of the year. The roll-out of the first phase of the 300,000 square feet SEZ is scheduled for December 2007 and the management is confident of meeting the deadline. WSI holds 59% stake in the real estate subsidiary which we have valued at a realisable price of Rs 3,500 per square feet.

SEZ plant on schedule, revenues to come from FY2009

With an investment of Rs 110 crore the company is setting up an insulator plant in the upcoming Andhra Pradesh SEZ. The management has informed that the construction of the plant is on schedule and the plant would be commissioned between March and June next year. Therefore, the plant would start generating revenues from FY2009. The new plant would have an advantage of cheaper fuel cost as it would have access to natural gas. WSI will also have access to port facility whereby it can exploit the tremendous growth opportunity presented by the lucrative export markets. By virtue of being located in an SEZ, the plant will also enjoy fiscal benefits.

Introducing our FY2009 estimates

We our introducing our FY2009 earnings estimate for WSI in this report. The same stands at Rs 8.7 per share for its core (insulator) business. For FY2008, we maintain our top line growth estimate. However expecting a lower cost of operation, we have increased our PAT estimate. Subsequently, we have raised our EPS estimate by 17% to Rs 6.8 per share. We have valued WSI using the SOTP method wherein we have valued its core insulator business at 9x its FY2009E EPS. This gives the fair value of Rs 78.7 per share. Further, we have valued WSI's realty subsidiary at the current realisable value of Rs 3,500 per square feet. Taking WSI's current 59% stake in the realty venture, we arrive at a value of Rs 29 per share, which gives us a fair value of Rs 108 per share of WSI. We remain positive on the stock with a revised price target of Rs 108.