Skipper Ltd

Buy - SKIPPER

CMP (NSE) 15:59, 23 Sep

83.20 0.91.09%

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Power

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Reco. Price

278

Period

1-Year

Target Price

352

upside

27%

Stop Loss

0

Last updated on

30 Nov, 2017

Attractive play on power transmission investment in India

Skipper derives ~84% of its revenues from engineering products segment, which caters to Power Transmission and Distribution (T&D) sector. Envisaged spends of Rs 2.6 lakh cr over next five years for transmission capex in India augurs well for the company. Its order book to TTM segment sales as on FY17 was 1.7x and inflows of ~Rs 790cr in H1FY18 provide strong revenue visibility in the near term. Additionally, Skipper’s Managements intends to capitalize on opportunities arising from 100% electrification of Indian Railways and ramp up in solar capacities in India, thus driving segment revenue.

Polymer business to accelerate

The polymer products business (high growth, contributed 12% to FY17 revenue) has seen deceleration in recent quarters owing to external factors (demonitisation, GST). Skipper has major presence in Eastern India and has adopted an asset light model to expand footprints in other Indian geographies. New value added products coupled with market share gains from unorganized sector would assist in resuming the high growth trend for the polymer business.

Outlook & Valuation

Considering the key positives, we expect 18.5% revenue CAGR over FY17-20E for engineering products segment. Over FY17-20E, polymer products segment is expected to post revenue CAGR of 23.8% and overall revenue CAGR is estimated at 19.0%. Aided by lower depreciation and interest outgo, we expect PAT to improve to Rs 212cr in FY20E from Rs 111cr in FY17. In order to explore Rs 5,000cr worth opportunities in the Indian drip irrigation industry, Skipper has announced a joint venture with Metzerplas (Israel) to make Drip Irrigation Systems. We have a BUY rating on the stock with target price of Rs 352 based on 17x its FY20E EPS of Rs 20.7.

Financial Summary

Standalone Rs Cr

FY16

FY17

FY18E

FY19E

FY20E

Revenue

1,506

1,703

2,049

2,466

2,873

Growth (%)yoy

14.7

13.1

20.3

20.3

16.5

EBITDA Margin (%)

14.6

14.4

13.4

13.6

13.8

PAT

95

111

129

170

212

EPS

9.3

10.9

12.6

16.6

20.7

Growth (%) yoy

6.7

17.2

15.5

31.6

25.2

P/E (x)

29.9

25.5

22.1

16.8

13.4

EV/EBITDA (x)

14.9

13.2

11.9

9.7

8.1

ROE (%)

27.8

25.5

23.5

25.2

25.5

ROCE (%)

16.9

17.2

16.6

18.6

19.8

Source: Company, IIFL Research

Revenue drivers in place for Skipper

Power Transmission and Distribution (T&D)capex

The sub-transmission network in India has historically seen lower investments vis-à-vis generation sector and national transmission network. According to the 13th Five Year Plan, government is considering investment of Rs 2.6 lakh cr in the overall T&D segment. This presents the sector an opportunity of Rs 1.0-1.3 lakh cr over the period of five years. PGCIL has pegged the value of intra-state transmission work at Rs 1.5 lakh cr and is expected to invest Rs 0.9 lakh cr over the period of three years (as per media reports).

Exhibit 1: Order estimates of PGCIL~Rs 25,000cr for FY18E

(Rs Cr)

Overall Orders

Transmission Orders

% of Overall

FY15

20,287

6,377

31.4

FY16

16,737

4,938

29.5

FY17

28,507

5,134

18.0

YTD FY18

6,410

2,864

44.7

Source: PGCIL, IIFL Research

Railway electrification

Indian Railways intends to achieve 100% electrification of lines, wherein 33,000 route kms need to be electrified, as per PGCIL. At an average cost of Rs 1.0-1.1cr/km, the opportunity for the industry works out to ~Rs 35,000cr over FY18-22E.

Solar structures

Solar structures will provide a good opportunity for companies like Skipper, as the government intends to ramp up solar capacity from 10,000 MW to 1,00,000 MW. Per MW capacity will require 42-45 metric tons (MT) of solar structure. At realizations of ~Rs 70,000/MT, the overall opportunity works out to Rs 26,000-28,000cr for the industry.

Company Background

Skipper Ltd is one of the world's leading and India’s largest manufacturers of Transmission & Distribution Structures (Towers & Poles). It is the largest producer of Plastic Pipes & Fittings in West Bengal, the fastest growing and second largest in Eastern India. Refer exhibit 2 for business segments.

Exhibit 2: Segment highlights – FY17

Engineering Products

Polymer Products

Infra Projects

Capacity (MTPA)

2,30,000

51,000

--

Product Range

  • Power Transmission Tower
  • Power Distribution Poles
  • Monopoles
  • MS & High Tensile Angles
  • Solar Structures
  • Fasteners
  • Tower Accessories
  • UPVC Pipes
  • CPVC Pipes
  • SWR Pipes
  • HDPE Pipes
  • Fittings
  • Transmission Line EPC
  • Underground Utility laying by HDD
  • Water EPC

Revenue Contribution

83.6%

11.6%

4.8%

Source: Company, IIFL Research

Exhibit 4: Segmental assumptions

FY17

FY18E

FY19E

FY20E

FY20E

Revenue (Rs cr)

Engineering Products

1,424

1,714

2,039

2,368

Polymer Products

198

245

320

376

Infra Projects

81

89

107

129

EBITDA (%)

Engineering Products

15.1

13.9

14.2

14.4

Polymer Products

10.2

10.0

10.0

10.0

Infra Projects

13.8

13.8

13.8

13.8

Source: Company, IIFL Research

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