Anubhav Sahu Moneycontrol Research
Elantas Beck’s Q3 2017 (CY reporting) numbers were below our expectations. Sales growth was uninspiring and the improving sentiments in the power sector are not yet visible. While the company benefits from long-term growth drivers like power sector reforms and the insulation usage in electric vehicles, valuation seems to be fair given the near-term earnings visibility.
Q3 – Sequential margin improvement
Elantas Beck’s Q3 2017 results indicate a sequential recovery in bottom-line numbers guided by EBITDA margin improvement. On a YoY basis, however, net profit has declined by 13 percent wherein near flat sales growth were more than offset by higher employee costs and COGS (cost of goods sold). Overall results appear lackluster.
Having said that investors should note that reported numbers are clouded by the GST accounting provisions due to which we don’t have a like-for-like numbers for comparison.
Higher imports for the electrical insulators (non-ceramic/glass)
Source: Trade Map
Domestic electrical insulation industry has been impacted by an increase in low-cost imports of electrical insulators, particularly from China. In CY Q2 2017, there was a sharp increase in import of electrical insulation products. A part of the higher imports could possibly be due to the GST transition as the India manufacturers resorted to destocking. Still recent pick-up in the import of electrical insulators is a concern for supply-chain participants.
Indian Electrical & Electronics Manufacturers’ Association (IEEMA) in their industry update for period March-June’17 have also underlined concerns over the adverse impact of inexpensive imports for a few of the segments.
Domestic demand rebounds for transformers
However, industry body IEEMA mentioned that domestic electrical equipment industry is gathering pace recording 9.7 percent growth in the second quarter of the calendar year. Domestic growth is led by sectors like transformers which augur well for the companies like Elantas Beck. While growth in power transformers is aided by power generation and exports, demand for distribution transformers is led by rural electrification programme.
Raw material cost declined
Surprisingly, company’s raw material cost has declined on both a sequential and a YoY basis while spot prices for polymer resins like MDI (Methylene diphenyl diisocyanate) have surged in the recent past. Apparently, company benefits from the earlier higher inventory.
Long term drivers – power sector reform and electric vehicles
Government of India’s initiatives for the power sector reforms and the likely improvement in demand for the electrical insulation remains intact. Additional leg for growth for Elantas Beck comes from the usage of electrical insulation in the hybrid and electric vehicles. Insulating materials from Elantas helps EVs from any excessive vibration, thermal shock to its electronics, sensors, and electric motors.
Financial projections
Overall, company’s quarterly results were short of our expectations. While power sector reforms and the demand pick-up for transformers augur well for the company, a healthy improvement in the topline is missing. Though the company remains a dominant provider of electrical insulation solutions in the country, it is adversely impacted by imports. Improved operational efficiency is commendable and, therefore, in the context of surging raw material prices this a key factor to watch for in the near-term.
Given this context, we have slightly reduced our expectations for the topline growth. The stock is currently trading at 26x CY2018e earnings which seems to be fair, in our view.
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