gujaratapollo_sushilfinance

8/8/2019 GujaratApollo_SushilFinance

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Opportunities Galore The Government has set in aggressive plans for development of road sector with an outlayof ~US$78,500 mn the 11 th Five Year Plan. For every Rs. 100 crore spent for the roadconstruction projects, the road equipment demand is around Rs. 20 crore. Given theCompany's products, its scope varies around Rs. 5-7 crore of every Rs . 100 crore spent onroad construction projects. This translates into a market opportunity of Rs. 12-16.8 bn perannum considering construction of 10-kms/day.

Market Leader, having the highest market share across product profileGAI is an industry leader of its product category and enjoys robust market share rangingfrom 40-60% across its product profile. The Company has established itself firmly in theindustry with an experience of 37 years. Strong and prolonged presence in the market hasalso helped the Company to act as the major entry barrier.

Diversifying product profileGAI has now diversified its product profile by foraying into a different sector i.e . miningincluding products such as crushing equipment and conveyors. According to theManagement, foray into these products is likely to more than double the market size of theCompany from the current Rs. 10 bn to Rs. 25-30 bn.

Improving FinancialsGujarat Apollo Industries has a deleveraged balance -sheet as its long -term debt stands NIL.As of Q3FY10, its revenue has grown by 43% QoQ and 39% YoY to Rs.602.1 mn, while itsEBITDA has also steadily increased from Q1FY10. In Q3FY10 , its EBITDA grew by 35% QoQ and 69% on a YoY basis to Rs. 137.1 mn.

OUTLOOK & VALUATIONFrom traditional growth of 17% for FY06-09A & lull road construction activity, GAI is set toenter a higher league with Revenue and PAT to grow at CAGR of 26% and 22% respectivelyfor FY10E-12E on the back of the fact that year 2010 is Turnaround year for Ministry of RoadTransport. There has been remarkable recovery in fresh awarding, which eventually will bereflected in heightened investment activities in road construction sector for the comingyears, throwing a big opportunity to the company. GAI is currently trading at a P/E of 6.1x itsFY12 estimates. We believe, stock to be re-rated going forward amidst its transition intohigher growth trajectory, long term debt free balance sheet, higher ROCE & ROE (22% &24%), industry leader status and continuous thrust on expanding addressable market size.Thus taking into account that the stock has traded at a highest multiple of 10x its forwardearnings, we assign it a multiple of 8.5x (a discount of 15%) for its forward earnings to arriveat a target price of Rs.285.

Gujarat Apollo Industries Ltd. March 31, 2010 BUY MEDIUM RISK PRICE Rs.203 TARGET Rs.285

CAPITAL GOODS

SHARE HOLDING (%)

Promoters 49.5FII 2.8FI / MF 7.8Body Corporates 7.9Public & Others 32.0

STOCK DATA

Reuters CodeBloomberg Code

GJAI.BOGAPI.IN

BSE CodeNSE Symbol

522217GUJAPOLLO

MarketCapitalization*

Rs. 3367.2 mnUS$ 74.8 mn

SharesOutstanding*

16.5 mn

52 Weeks (H/L) Rs.224 /55

Avg. DailyVolume (6m)

35,231 Shares

Price Performance (%)

1M 3M 6M7 8 30

200 Days EMA: Rs.165

*On fully diluted equity shares

Part of Bonanza

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435 .Office : 12 Homji Street Fort Mumbai 400 001 Phone: +91 22 40936000 Fax: +91 22 22665758 Email : info@sushilfinance com

KEY FINANCIALSY/E

Mar.

Revenue

(Rs mn)

APAT

(Rs mn)

AEPS

(Rs)

AEPS

(% Ch.)

P/E

(x)

ROCE

(%)

ROE

(%)

P/BV

(x)FY09 2467.8 286.4 18.2 (58.9) 11.2 20.2 25.0 2.5FY10E 2634.9 371.3 22.4 23.2 9.1 22.2 25.2 2.0FY11E 3261.4 457.4 27.6 23.2 7.4 22.3 24.1 1.6FY12E 4162.4 556.2 33.6 21.6 6.1 22.0 23.5 1.3

ANALYST Ishpreet Batra | +91 22 4093 [email protected]

SALES: Devang Shah | +91 22 4093 6060/61

[email protected]

Nishit Shah | +91 22 4093 [email protected]

Initiating Coverage

STRENGTH: Reputed Brand since last 30 years, Market Leader with ~ 50% ProductMarket Share, In-house R&D, Stable Margins, Strong Clientele and Wide DistributionNetwork. OPPORTUNITIES: Huge Spending by Govt. for both NH and State

Highways & Foray into Mining Equipment and Growing Exports Destinations. WEAKNESS: Dependence on Single Industry i.e. Road Construction THREATS: Increasing Competition, Rising Input Cost.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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March 31, 2010 2

Gujarat Apollo Industries Ltd.

COMPANY OVERVIEWGujarat Apollo Industries (GAI) the flagship company of Apollo Group is one of the besthomegrown companies in the road construction equipment sector in India offeringinnovative products and services to the infrastructure sector for over three decades. GAI isa well-known name in Indian bituminous road building industry. From a modest beginningin 1972, the Group today offers almost the entire range of equipment catering to the roadconstruction sector. Its products are divided into two business units, includingmanufacturing Mobile Equipment Products (MEP) like pavers, bitumen sprayers, and curblaying machines contributing 40-45% to revenue and Industrial Plants (IP) , which processraw materials for road, contributing about 55-60% to revenue.

Source: Company

Gujarat Apollo Industry mainly contributes in the second and third phase of roaddevelopment process. The companys wet mix plant is used for the bottom most layer of the road which is of stone mix plus water. For the second layer of the road the companyprovides asphalt mix plants and pavers etc.

Source: Company

Gujarat ApolloIndustries

MobileEquipment

Products

IndustrialPlants

Pavers

Bitumen Sprayers

Curb laying machines

Asphalt Plants

Wet Mix Plants

Drum Plants

Earth Movers Products -

Excavators Bull Dozers

First Layer(Stone Mix + Water)

Products- Wet Mix Plant Pavers

Second Layer(Bitumen) Products-

Asphalt Plant Pavers

Road Development Process Flow

Major Players-L&T Komatsu,JCBVolvoBEMLCaterpillarTelconKobelco

Major Players-Gujarat ApolloSolid India

Major Players-Gujarat ApolloWirtgenUnipaveSolid IndiaVolvo


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March 31, 2010 3


The Company has two subsidiaries namely Apollo Earthmovers (85%) and GujaratIndustrial Products (85%). They are mainly engaged in traditional road constructionequipments, spares & parts and such allied services business.

Sales Mix of the Company:

The Company derives 40-45% of its revenue from the MEP segment while 55-60% fromthe industrial plants. The Company derives 50% of its revenue from organized players likeGammon, IVRCL, Punj Lyod and IRB Infra etc.

Source: Company

It derives 30% of its revenue through exports to Middle East and African countries. TheCompany has better margins from the export business of ~23-24%.

Generous Shareholders Rewarding History:

Year EndDividend

(%)Bonus

2001 252002 202003 302004 402005 40 1:12006 202007 20 1:2

2008 30 1:22009 20Source: Capitaline

As we can see from above table, the company has been very much consistent inrewarding shareholders through regular dividend and declaring 3 times bonus out of lastfive business years.

MEP : 40-45% IP : 55-60%

NHAI : 50% State : 50%

Organized Players : 50% Unorganized : 50%

Domestic : 70% Export : 30%

Equipments/Industrial Plants : 85% Spares: 15%

Sales Mix of GAI


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March 31, 2010 4


INVESTMENT ARGUMENTS

Highest Market Share across Product ProfileGujarat Apollo Industries is an industry leader of its product category and enjoys robustmarket share ranging from 40-60% across its product profile. Its mechanical pavers arethe fastest moving products of the Company.

Source: Company

Its mechanical pavers command a market share of 65%, while the asphalt -mix plant has amarket share of 55%.

Source: Company

The Company has established itself firmly in the industry with an experience of 37 years.It has continuously strived to maintain its higher market share by deploying variousstrategies. The Company s action plan to garner a higher share of the market is given hereunder:

Continued thrust on R&D and technology to offer value for money productsQuicker deliveriesHigh up time of equipmentCustomer-centric approach- setting up offices in Tier-II citiesWide distribution network

65%55%

50%40%

0%

10%

20%

30%

40%

50%

60%

70%

Pavers Asphalt MixPlant

BitumenSprayers

Wet Mix Plant

Market Share (%)

57%

10%

18%

7% 6%2%

0%

10%

20%

30%

40%

50%

60%

GujaratApollo

Wirtgen Unipave Volvo Solid india Caterpillar

Market Share of Companies for Asphalt Pavers (%)


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March 31, 2010 5


As the Company enjoys higher market share across its product profile, it was relativelyless affected by the economic downturn. Further during the economic downturn, theCompany was able to increase its market share, as various unorganized players were notable to stand by the liquidity crunch scenario. Strong and prolonged presence in the

market has also helped the Company to act as the major entry barrier.The market for road construction projects is divided into two segments:

A. Large players catering to excavators, wheel loaders, backo loaders etc . andB. Medium and small players catering to the pavers, conveyors, bitumen sprayers,

asphalt plants etc.

Keeping in mind aggressive investment plans of the government for the road sector,there is growth for both of the above two segments. However , there is a little oversupplyconcern in equipment like excavators, as even the Chinese players have a hand in supplyof these products as it is a bigger market with higher volumes. As products like pavers,bitumen sprayers and conveyors require a customer -centric approach, it is usually nottaken up by both bigger industry players and Chinese players resulting into lowercompetition. Gujarat Apollo is thus likely to continue to command a strong market sharein this industry.

Diversifying Product Profile to Expand Market Size to Rs. 25-30 bnTaking into account the current product profile, the Company has an addressable marketsize of ~ Rs. 10 bn. However, the Company has now diversified its product profile byforaying into a different sector i.e. mining. Foray into this segment will not only reducethe sector -specific risk , but will also increase its addressable market size.

In order to acquire the technological know-how in the crushing and mining equipmentspace , the Company had opted for an inorganic route. It has acquired strong technology

and know-how in crushing and mining equipment space from a German bankrupt firmnamed Giegold GmbH at a cost of Rs. 18-19 crore. Post-acquisition, the Company hasstarted manufacturing these products at its existing plants in India. It has begun thecommercial production of these products from Apr09. These products will be sent toGermany in disassembled form, where it has set up a plant for assembling of thesecomponents post which it be sold under the brand of Apollo, made in Germany. For thedomestic market, GAI has already bid for orders from Coal India and Balco. Consideringthe massive expansion plan in the metal space, we see bright opportunities for thecompany.

Apart from crushing and mining equipment, the Company is also foraying into a newproduct called conveyors. The Company has already acquired the necessary technologyand know-how from an Italian firm at a cost of just Rs.2Crs. The product is currently at aprototype testing stage and is likely to be ready by April10. The production of conveyorsis a strategic move by the Company, as conveyors and pavers are usually sold as apackage together, thereby enabling the company to become a One Stop For All shop.

According to the Company s management, foray into these products- crushingequipments and conveyors is likely to more than double the addressable market size of the Company from the current Rs. 10 bn to Rs. 25-30 bn.


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March 31, 2010 6


Opportunities Galore The government has set in aggressive plans for the development of road sector with anoutlay of ~US$78,500 Mn for the 11th five year plan. For every Rs. 100 crore spent for theroad construction projects, the road equipment demand as per the thumb rule is aroundRs. 20 crore. Given the Company's products, its scope varies around Rs. 5-7 crore of everyRs. 100 crore spent on road construction projects. This translates into a marketopportunity of Rs. 12-16.8 bn per annum considering construction of 10-kms/day.

Source: Sushil Finance, Industry

Road Construction -Opportunities Galore

NHAI State HighwaysRural Roads

Development

Target of 20 km/day from

current 8-10km/day

Considering Capex of Rs.8Cr/km, t ranslatesinto a Market size of Rs.24000 Cr p.a. for

Construction of 10 km a day

Market Opportunity for GAI isRs.1200-1680 Cr

Share of GAI Products: 5-7% of Total Exp

Thumb Rule- Road Equipmentsaccounts for

20% of the total Expense


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March 31, 2010 7


With the ease in liquidity, slew of positive reforms by the government (as discussed onPage 12) and pick up in the economic activities we believe that the road developmentactivity is likely to speed up which will benefit the road developers and equipmentsuppliers like Gujarat Apollo.

Improving FinancialsGujarat Apollo Industries has a deleveraged balance -sheet as its long -term debt standsNIL. Also as GAI has a firm presence in the industry with a strong clientele relationship,the Company was relatively less impacted by the economic downturn. The Company hasseen a steady increase in revenue from Q1FY10, as can be seen from the diagram below:

Source: Company Quarterly Revenue

As of Q3FY10 the Company s revenue has grown by 43% QoQ and 39% YoY toRs. 602.1 mn.

Source: Company Quarterly EBITDA

413.8439.4 432.7

313.9 349.2

420.1

6%

-2%

-27%

11%

20%

43%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600

Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Revenue (Rs.Mn)

Revenue (Rs.Mn) QoQ Growth (%)

Sharp Pick upin the

Revenue.

602.1

75.4

97.1

81.1

66.574.2

101.7

137.1

29%

-16%-18%

12%

37%

35%

-20%

-10%

0%

10%

20%

30%

40%

40

60

80

100

120

140


EBITDA (Rs. Mn)

EBITDA (Rs. Mn) QoQ Growth (%)


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March 31, 2010 8


The Company s EBITDA has also steadily increased from Q 1FY10. In Q3FY10 the Company s EBITDA grew by 35% QoQ and 69% on a YoY basis to Rs.137.1 mn. The Company s margins have also been more or less stable even during the time of economicdownturn.

Source: Company Quarterly EBITDA

Its margins have been stable at operating level as the company is less affected by thevolatility in the raw material prices. Its order-execution cycle is as low as 4-6 weeks forequipment and 6-10 weeks for industrial plants. As a result, volatility in the raw materialprices is well captured in the new orders received by the Company, thereby stabilizing themargins.

The Company therefore has robust financials with no long-term debt, cash surplus andstable margins.

18.2%

21.8%

18.5%20.6% 21.0%

24.0%22.6%

12.1%13.9%

11.7%

15.4%14.2%

15.7%14.7%

8.0%

12.0%

16.0%

20.0%

24.0%

28.0%


Margins (%)

Operat ing Profit Margin (%) Net Profit Margin (%)


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March 31, 2010 9


Power, 32.4

Roads, 15 .3

Telecom,12.6

Railways,12.7

Irrigation,12.3

WaterSupply, 7

Ports, 4.2Airports,

1.5Storage, 1 .1Gas, 0.8

11th plan Infrastructure Outlay- SectorShare (%)

INDUSTRY OVERVIEW Inadequate infrastructure is a major significant constraint for Indias growth potential. Thus inorder to bridge the infrastructure deficit, the Government has chalked out massiveinfrastructure development plans. It plans to increase the investment in physical

infrastructure from the current 6% of GDP to 9% of GDP by the end of 11th Five Year Plan.

Source: Planning Commission Report

Source: Planning Commission Report

Out of the total planned expenditure in the 11 th Five Year Plan, power accounts for a lump -sum32% followed by road sector, which accounts for15.3% of the total investment. The Governmentis allocating huge funds for the development of road transport also.

1.23 1.281.45 1.45 1.44

1.61

2.042.35

2.7

0

0.5

1

1.5

2

2.5

3

1 9 9 9

- 0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3

- 0 4

2 0 0 4

- 0 5

2 0 0 5

- 0 6

2 0 0 6

- 0 7

2 0 0 7

- 0 8

Infrastructure Investment (Rs. Lakh crores)

4.8 4.85.1

4.94.5

4.7

5.3

5.76

4

4.5

5

5.5

6

6.5

1 9 9 9

- 0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3

- 0 4

2 0 0 4

- 0 5

2 0 0 5

- 0 6

2 0 0 6

- 0 7

2 0 0 7

- 0 8

Infrastructure Investment as a per cent of GDP (%)


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March 31, 2010 10


Overview of Road Network in IndiaIndia has the second largest road network in the world of 3.34 mn kilometres. TheNational Highways, which are now under rapid development, constitute just 2% to the

total road network followed by state highways contributing 4%.

Source: Ministry of Road and transport

Imperative Need for Higher Expenditure in Road Development:Though India is the second largest in terms of road network, it ranks 87 th as far asthe quality of roads is concerned. This hampers trading activities, which is evidentfrom the fact that average distance covered by a truck per day in India is less than250 kms as compared to 1 ,000 kms in US.

Poor quality of road is causing loss of over $1 ,310 mn per annum. The need for roaddevelopment is thus imperative.

As per present estimate of NHAI, road network carries nearly 65% of freight trafficand 85% of passenger traffic.

Vehicle population grew at a CAGR of 11%, while passenger and freight trafficcarried by roads grew at a CAGR of 10% between 1951 and 2006. While the totalroad length grew at a CAGR of just 3.9%

Annual growth projected at 12-15% for passenger traffic, and 15-18% for cargotraffic.

National Highways, which constitute just 2% of total road network, accounts for~40% of total vehicle traffic. Also , only 14% of National Highways are 4/6/8 laned.

Also, every Rs. 1 mn investment on the development of roads helps 165 peoplecrossing the poverty line.

According to a World Bank study, every Re. 1 invested in the highway sector yields7x return in economic value. Thus higher investment in the road sector is likely toboost the economy in several ways.

Thus to match the growing economical and social needs, the Government has laidmassive expansion plans for the road development.

Government InitiativesIn the 11 th Five Year Plan, the Government of India has envisaged a total investment of ~US$78,500 mn. The Committee on Infrastructure has adopted an Action Plan fordevelopment of the National Highways network. An ambitious National Highway

Development Programme (NHDP), involving a total investment of Rs. 2,200 bn (US$45.276 bn) has been established. National Highways Development Project includes

Category of Road Length in km

National Highways 65,569

State Highways 130,000

Major Dist. Road, Rural road & Urban road 3.14mn

Total Road Network 3.34mn


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March 31, 2010 11


rehabilitation, upgradation and broadening of National Highways to a higher standard inseven phases as shown in the table.

NHDP Phase ParticularsLength

(in Kms)

Indicative Cost

(Rs.bn)NHDP I&II (Dec 2009) Balance of GQ and NS-EW 13146 524.3

NHDP III (Dec 2012) 4-laning (DT) 12109 652.0

NHDP IV (Dec 2015) 2-laning (DT/Annuity) 20000 278.0

NHDP V (Dec 2012) 6-laning of selected stretches (DT) 6500 412.1

NHDP VI (Dec 2015) Expressways 1000 166.8

NHDP VII (Dec 2014) Ring Roads, Bypasses, service roads 700 166.8

Total 53455 2200

Source: NHAI

Please refer Annexure-1 for detail.

Revival in the projects awarded after a lull period of last two years:The NHAI has been awarding projects under the programme of the National HighwaysDevelopment Project. Global meltdown witnessed in 2009 had resulted into lowerprojects being awarded in FY09. Post-Sept 08, the recession took its toll and around 60projects failed to attract bidders. However , FY10 seems to have taken a lead, particularlysecond half has seen sharp uptick in awarding activities. The NHAI has awarded about 36projects between Jun 09 and Feb 10 covering 3,300 kms , as shown in the figure below,compared to 8 projects spanning 643 kms in FY09. This is the highest since FY08, whenthe Government awarded 14 projects of 1 ,234kms.

Source: Private Participation in Infrastructure

*Up to Feb2010

0

1000

2000

3000

4000

5000

Progress of contracts awarded and length completed

Contract Awarded (kms) Length Completed (kms)


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March 31, 2010 12


FY10; just the 1st step of ladder 54800 Kms

The Union Minister for Road Transport & Highways , Kamal Nath has unveiled a massiveroad development plan last year. The plan had stated the need to have 20,000 kms of

work to achieve the target of 20 -kms/day, or 7,000 -kms in a year. For this, it had plan toaward 125 projects in FY10 totalling ~12 ,000 kms at a cost of Rs. 982 bn; which has nowbeen postponed to Jun 10. Thus a lot of projects are likely to be awarded by Jun 10 considering only 36 projects being allocated till date (Feb10) covering 3 ,300 kms. InJan 10, itself nine projects worth Rs. 80 bn were finalized. Out of the total Rs. 982 bninvestment for the 125 projects ~Rs. 546 bn is likely to come from the private sector andthe balance from the Government.

Moreover, the NHAI had offered a few PPP projects 1 for bidding, which were likely to bereceived by end of Dec 09. These projects are thus the most likely projects to be awardedby the Government in a short time. A total of 5,074 kms is to be awarded by the NHAIentailing an investment of Rs. 511.48 bn. ( List of these projects is shown in Annexure -2)

We therefore believe that recent uptick in awarding of projects in 2nd half of FY10 is justthe beginning of 54,800 kms indicating huge opportunity for road developers &construction equipment suppliers such as Gujarat Apollo.

Status of NHDP connotes strong growth ahead

As on Feb10 ~23% of the total development under NHDP of 53,455 kms has beencompleted, while another 12.7% is under implementation. A major chunk of 34 ,381 kmsi.e. 64% of the total planned development is yet to be awarded, thus providing ampleopportunities for road developers and equipment suppliers like Gujarat Apollo.

(in Kms) Phase I PhaseII

PhaseIII

PhaseIV

PhaseV

PhaseVI

PhaseVII

TotalNHDP

Port Others Totalby

NHAI

Total Length 5846 7300 12109 20000 6500 1000 700 53455 380 965 54800

Already Implemented 5766 4863 1478 163 12270 274 899 13443

as % of total 98.6% 66.6% 12.2% 0.0% 2.5% 0.0% 0.0% 23.0% 72.1% 93.2% 24.5%

Under Implementation 80 1689 3926 1068 41 6804 100 46 6950

as % of total 1.4% 23.1% 32.4% 0.0% 16.4% 0.0% 5.9% 12.7% 26.3% 4.8% 12.7%Contracts UnderImplementation

13 113 59 8 9

Balance Length for Award 0 748 6705 20000 5269 1000 659 34381 6 20 34407as % of total 0.0% 10.2% 55.4% 100.0% 81.1% 100.0% 94.1% 64.3% 1.6% 2.1% 62.8%

Source: NHAI

*as on 28th Feb2010

As can be seen in the above table, the Phase IV, VI and VII are yet to be awarded,indicating huge opportunities for the road developers and equipment suppliers. In theFinancing Plan, it is envisaged that the construction of these 34,381 kms shall becompleted by 2017. This envisages that the award of this entire length needs to becompleted in 4-5 years time commencing from the Financing Plan 2009-10.


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March 31, 2010 13


Break-up of yearly proposed length for award as recommended by Chaturvedi Report

Phase II Phase III Phase IVPhase

VPhase VI

PhaseVII

SARDP - NE Total

2009-10 674 8851 - 2403 - - 724 12652

2010-11 - - 9892 1200 - - - 110922011-12 - - 8075 - 436 681 - 9192

2012-13 - - 2033 - 604 - - 2637

2013-14 - - - 1477 - - - 1477Total 674 8851 20000 5080 1040 681 724 37050

Source: B K Chaturvedi Report

The allocation of 12,652 kms, which was to be completed by FY10, has been postponedtill Jun10, w hile the NHAI has plans to award projects totaling 11,092 kms in FY11. Withthe ease in liquidity, slew of positive reforms by the Government (discussed below) andpick up in the economic activities, we believe that the road development activities arelikely to gain momentum creating huge opportunities for players in the road constructionindustry.

Slew of Positive reforms to speed up road development The regulatory framework is being tweaked to improve the risk-return perception.

Clause 2.1.18 of Model Request for Proposal (RFP): With a view to expeditingimplementation of NHDP, the NHAI has laid down some norms. As per the newnorms, a bidder shall not be eligible for bidding if, as on the bid date the bidder isyet to achieve financial closure of three or more projects. This will avoid delays inthe execution of the projects. Moreover , the concessionaire shall engage only such

EPC contractors for execution of the work that have experience of at least one singlecompleted highway work of, value at least 20% of the estimated project cost in thepreceding five years. This will help speed up the execution of the projects.

Viability Gap Funding: The Viability Gap Funding (VGF) is partial financing from thegovernment to make a project viable and helps the developer meet capital cost. Thecurrent regulations allow a private developer to seek VGF up to 40% of the capitalcost of the project in two phases first half during the construction period andsecond half during the operation period. However, now this restriction has beeneased with the entire VGF now available during the construction period .

Tolling policy: In order to attract developers to take traffic risks, the government

has modified the tolling policy to include a 3% (without compounding) fixedescalation plus 40% of change in Wholesale Price Index (WPI). This change results inhigher toll-rates to developers. Moreover , for structures (bridges, bypass ortunnels), the toll fee will be linked to the capital cost instead of length, implying agreater linkage between the cost of construction and toll tariff.

Land acquisition: Land acquisition has been a major impediment for road projectexecution. The Government had proposed transferring 50% of land at the time of the award and the remaining during construction. To facilitate execution further, ithas now planned to hand over 80% of land at the time of the award and theremaining during construction.


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March 31, 2010 14


Change in Project Status: Carrying out the implementation of BOT (toll), BOT(Annuity), EPC (Item Rate Contract) concurrently rather than sequentially. Roadsbelow a certain threshold in terms of traffic do not merit testing on BOT (toll) as itleads to delay in implementation and awards, hence such projects can be

implemented as BOT (Annuity).

Miscellaneous: o 100% FDI under the automatic route in all road development projects.o 100% income tax exemption for a period of 10 yearso Cabinet Committee on Economic Affairs has agreed upon the National Highways

Fee (Determination of Rates & Collection) Rules, 2008 to establish uniformity infee rate for public -funded and private investments projects.

o An increment in the overseas borrowing amount of infrastructure sectors toUS$ 500 mn from US$ 100 mn.

State highways and Rural Road development- another growth opportunity

Huge investment in NHDP is not the only space where growth is visible. NHDP accounts foronly 47% of the total road sector development in the 11 th Five Year Plan. The state roadsaccount for 37% of the total envisaged investment in the road sector. A financial outlay of Rs. 800 bn has been proposed for the 11 th Five Year Plan for covering about 71,500 kms of such state roads. Under the proposed programme for development of state roads during11 th Five Year Plan, construction of 300 kms of expressways, 4-laning of 5,000 kms, 2-laning of 40,000 kms, strengthening of 25,000 kms, 700 kms missing gaps to link up newSEZs / ports/ ICDs / satellite towns /expressways etc., construction of bypasses/ ROBs/Bridges/ Flyovers have been proposed under the core network.

Not losing sight of rural roads, the Government through the Prime Minister GrameenSadak Yojana plans to spend Rs. 400 bn for the development of rural roads.


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March 31, 2010 15


Gujarat Apollo Set to enter a higher league

From traditional growth of 17% for FY06-09A & lull road construction activity, GujaratApollo is set to enter a higher league with Revenue and PAT to grow at CAGR of 26% and

22% respectively for FY10E-12E on the back of the fact that year 2010 is Turnaround yearfor Ministry of Road Transport. There has been remarkable recovery in fresh awarding leadby serious Govt. efforts and favorable policy changes, which eventually will be reflected inheightened investment activities in road construction sector for the coming years,throwing a big opportunity to the company.

As discussed above, with the changing industry dynamics in the road construction industrycoupled with the Market Leader status being enjoyed by GAI in its products over theyears, we believe that the stock still has a lot of unleashed potential.

Gujarat Apollo is currently trading at a P/E of 6.1x its FY12 estimates. We believe, stock tobe re-rated going forward amidst its transition into higher growth trajectory, long termdebt free balance sheet, higher ROCE & ROE (22% & 24%), industry leader status andcontinuous thrust on expanding addressable market size.

In the absence of close comparable peers, we have tried to compare GAI with companiesfalling into category of equipment supplier to infrastructure segment.

Peer Comparion OPM (%) NPM (%) ROE (%) P/E (x) P/BV (x)Revathi Equipments 19.9 11.4 10.9 16.4TIL 9.4 4.2 17.8 7.9 1.3Action Construction 9.02 5.9 15.2 13.1 1.9Average 12.8 7.2 14.6 12.5 1.6

Gujarat Apollo 22.3 14 24.1 7.3 1.6

Source: Sushil Finance, Bloomberg

As seen in the above table, GAI despite of having better profitability and return ratios istrading at a deep discount.

Source: Sushil Finance, Capitaline

0

70

140

210

280

350P/E Band

Avg. Price 2 4 6 8 10


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Thus taking into account that the stock has traded at a highest multiple of 10x its forwardearnings, we assign it a multiple of 8.5x (a discount of 15%) for its forward earnings toarrive at a target price of Rs.285. At the target price the stock would be trading at aEV/EBITDA of 4.5x

Risk & ConcernsDelay in Govt. Spending The government has laid massive plans for road development; however any delay inawarding of the projects could slower the pace of growth thereby impacting the revenueof the company.

Sharp Rise in Interest RatesIn the case of sharp rise in inflation, there may be a case of sharp rise in Interest rates,which will increase cost of borrowings and may affect private corporate participation inthe sector.

Execution riskGAI is the key beneficiary of this huge investment in the road sector as it is the marketleader; however inability of the management to match the industry pace could affect itsmarket share.

OUTLOOK & VALUATIONFrom traditional growth of 17% for FY06-09A & lull road construction activity, GAI is set toenter a higher league with Revenue and PAT to grow at CAGR of 26% and 22%respectively for FY10E-12E on the back of the fact that year 2010 is Turnaround year for

Ministry of Road Transport. There has been remarkable recovery in fresh awarding, whicheventually will be reflected in heightened investment activities in road constructionsector for the coming years, throwing a big opportunity to the company. GAI is currentlytrading at a P/E of 6.1x its FY12 estimates. We believe, stock to be re-rated going forwardamidst its transition into higher growth trajectory, long term debt free balance sheet,higher ROCE & ROE (22% & 24%), industry leader status and continuous thrust onexpanding addressable market size. Thus taking into account that the stock has traded ata highest multiple of 10x its forward earnings, we assign it a multiple of 8.5x (a discountof 15%) for its forward earnings to arrive at a target price of Rs.285. At the target pricethe stock will be trading at an EV/EBITDA of 4.5x its FY12 estimates.


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PROFIT & LOSS STATEMENT (Rs.mn)

Y/E March FY09 FY10E FY11E FY12E

Net Sales 2467.8 2634.9 3261.4 4162.4

Raw materialConsumption

1541.6 1475.5 1875.3 2435.0

ManufacturingExpenses

147.5 184.4 212.0 270.6

Staff Cost 68.6 79.0 97.8 124.9

Total Expenditure 1997.3 2042.0 2534.1 3275.8

PBIDT 470.5 592.8 727.3 886.6

Interest -0.8 10.5 10.4 10.6

Depreciation 21.0 23.7 29.4 37.5

Other Income 0.0 15.8 19.6 20.8

PBT incl OI 450.3 574.4 707.1 859.3

Tax 151.6 189.6 233.3 283.6

RPAT 297.0 384.9 473.7 575.7

Minority Interest 12.3 13.6 16.3 19.6

APAT 286.4 371.3 457.4 556.2

BALANCE SHEET STATEMENT (Rs.mn)

As on 31 st March FY09 FY10E FY11E FY12E

Share Capital 157.5 165.8 165.8 165.8

Reserves & Surplus 1097.0 1520.3 1938.9 2456.3Net Worth 1264.4 1686.0 2104.7 2622.0Secured Loans 178.2 100.0 100.0 100.0Unsecured Loans 94.9 94.9 94.9 94.9Total Loan funds 273.1 194.9 194.9 194.9Minority Interest 48.2 61.8 78.1 97.7Capital Employed 1585.7 1942.7 2377.7 2914.6Net Block 333.2 409.5 480.1 542.7Cap. WIP 86.9 76.0 87.0 88.0Investments 118.1 229.1 386.0 497.0Sundry Debtors 343.6 368.2 446.8 570.2Cash & Bank Bal 109.4 296.6 390.0 449.1Loans & Advances 567.4 577.5 625.5 798.3Inventory 387.5 383.3 432.5 561.1Curr Liab & Prov 336.4 375.4 446.8 570.2Net Current Assets 1071.5 1250.2 1447.9 1808.4Deferred Tax Assets (24.0) (22.1) (23.4) (21.5)Total Assets 1585.7 1942.7 2377.7 2914.6

FINANCIAL RATIO STATEMENT


Growth (%)Net Sales (8.7) 6.8 23.8 27.6EBITDA (33.0) 26.0 22.7 21.9Adjusted Net Profit (38.4) 29.6 23.2 21.6Profitability (%)EBIDTA Margin (%) 19.1 22.5 22.3 21.3Net Profit Margin (%) 11.6 14.1 14.0 13.4ROCE (%) 20.2 22.2 22.3 22.0ROE (%) 25.0 25.2 24.1 23.5Per Share Data (Rs.)EPS (Rs.) 18.2 22.4 27.6 33.6CEPS (Rs.) 19.4 23.8 29.4 35.8BVPS (Rs) 80.3 101.7 127.0 158.2ValuationPER (x) 11.2 9.1 7.4 6.1PEG (x) - 0.4 0.3 0.3P/BV (x) 2.5 2.0 1.6 1.3EV/EBITDA (x) 6.9 5.1 3.8 3.0EV/Net Sales (x) 1.3 1.2 0.9 0.6TurnoverDebtor Days 51 51 50 50Creditor Days 43 42 42 42Gearing Ratio

D/E 0.2 0.1 0.1 0.1

Source : Company, Sushil Finance Research Estimates

CASH FLOW STATEMENT (Rs.mn)


Profit before tax &Extraordinary Items 450.3 574.4 707.1 859.3Depreciation &Amortization

18.9 23.7 29.4 37.5

Chg. in WorkingCapital (329.5) 8.5 (104.3) (301.4)

Cash Flow fromOperating

(13.5) 415.2 400.1 309.9

Chg in Fixed Assets (87.3) (100.0) (100.0) (100.0)

Chg in Investments 86.2 (111.0) (156.9) (111.0)

Cash Flow fromInvesting (29.5) (200.1) (267.9) (212.0)

Chg in Debt (43.4) (78.2) 0.0 0.0

Chg in Share Capital 52.5 8.3 0.0 0.0

Dividend (36.9) (38.8) (38.8) (38.8)

Cash Flow fromFinancing

(80.2) (27.9) (38.8) (38.8)

Cash at the End of

the Year109.4 296.6 390.0 449.1


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ANNEXURE-1Details of the phases:

Four-laning of the Golden Quadrilateral & NS-EW Corridors (NHDP I & II)

The NHDP Phase I and Phase II comprise of the Golden Quadrilateral (GQ) linking the fourmetropolitan cities in India i.e. Delhi-Mumbai-Chennai-Kolkata, the North-South corridorconnecting Srinagar to Kanyakumari and the East-West Corridor connecting Silchar toPorbandar besides port connectivity and some other projects on National Highways.Four-laning of the Golden Quadrilateral is nearing completion. The contracts for projectsforming part of NS-EW corridors are being awarded rapidly for completion.

Four-laning of 10,000 kms (NHDP-III)

The Union Cabinet has approved the four-laning of 10,000 kms of high density nationalhighways, through the Build, Operation & Transfer (BOT) mode. The programme consistsof stretches of National Highways carrying high volume of traffic, connecting statecapitals with the NHDP Phases I and II network and providing connectivity to places of economic, commercial and tourist importance.

Two-laning of 20,000 kms (NHDP-IV)

With a view to provide balanced and equitable distribution of the improved/widenedhighways network throughout the country, NHDP-IV envisages up gradation of 20,000-kms of such highways into two-lane highways, at an indicative cost of over Rs. 250 bn.

Six-laning of 6,500 kms (NHDP-V)

Under NHDP-V, the Committee on Infrastructure has approved the six-laning of the four-lane highways comprising the Golden Quadrilateral and certain other high density

stretches, through PPPs on BOT basis. These corridors have been four-laned under thefirst phase of NHDP.

Development of 1000 kms of Expressways (NHDP-VI)

Committee on Infrastructure has approved 1,000 kms of expressways to be developed ona BOT basis, at an indicative cost of over Rs. 150 bn. These expressways would beconstructed on new alignments.

Other Highway Projects (NHDP-VII)

The development of ring roads, bypasses, grade separators and service roads isconsidered necessary for full utilization of highway capacity as well as for enhancedsafety and efficiency. For this, a programme for development of such features at anindicative cost of Rs. 150 bn has been mandated.


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ANNEXURE-2List of PPP Projects to be awarded

State Name of project NH No. Length(km)

TPC(Rs in Crore)

Madhya Pradesh Indore-Gujarat/MP border 59 155 1175Rajasthan Kishangarh-Udaipur 79A, 79 & 76 315 2534Andhra Pradesh Hyderabad-Yadgiri 202 36 388Uttar Pradesh Bareilly - Sitapur 24 152 1046UttarPradesh/Uttarakhan

Muzaffarnagar-Haridwar 58 80 754

Haryana Rohtak-Panipat 71A 81 807Gujarat Samakhiyali-Gandhidham 8A 56 805Uttar Pradesh Muradabad-Bareilly 24 121 1267Maharashtra Pune-Satara 4 140 1725West Bengal Krishnagar-Bahrampore 34 78 672West Bengal Bahrampore -Farakka 34 102 999West Bengal Farakka-Raiganj 34 103 1079West Bengal Raiganj-Dalkhola 34 50 580Gujarat Kandla- - Mundra Port 8A 72 954Himachal Pradesh Parwanoo-Solan 22 40 536Gujarat Ahmedabad-Godhra 59 118 1009Haryana Rohtak - Bawal 71 83 650Uttarakhand Haridwar-Dehradoon 58 & 72 37 490Gujarat Godhra-Gujarat/MP Border 59 84 717Jharkhand Ranchi-Jamshedpur 33 164 1636Tamil Nadu Chengapalli-Walayar 47 55 852Karnataka Bijapur-Hungud 13 97 748Karnataka Hungud-Hospet 13 98 946Andhra Pradesh Nellore-Chilakaluripet 5 184 1465Goa Maharashtra/Goa -Goa/KNT

Border

17 123 1872

Jammu & Kashmir Srinagar-Banihal (Pkg I) 1A 68 1166Jammu & Kashmir Quazigund-Banihal (Pkg II) 1A 15 1987Jammu & Kashmir Ramban-Banihal (Pkg III) 1A 36 986Jammu & Kashmir Udhampur-Ramban (Pkg IV) 1A 43 971Jammu & Kashmir Chenani-Nashri (Pkg V) 1A 12 2519Jammu & Kashmir Jammu-Udhampur (Pkg VI) 1A 65 1939Karnataka Tumkur-Chitradurga 4 114 839Karnataka Devihalli- Hassan 48 76 266Karnataka Belgaum - Dharwad 4 80 480Kerala Kuttipuram-Edapally 17 112 910Kerala Trivendrum -Kerala /TN Border 47 43 519Tamil Nadu Tirupati Tiruthani Chennai 205 125 571West Bengal Barasat -Krishnagar 34 84 859Haryana Panchkula - Yamuna Nagar -UP

border73 104 667

Karnataka Balgaum-Goa/KNT Border 4A 82 655Rajasthan Udaipur-Ahmedabad 8 243 1750Haryana/ UttarPradesh

Delhi - Agra 2 180 2158

Andhra Pradesh Vijayawada-Machlipatnam 9 65 538Maharashtra Satara-Kagal 4 133 1103Orissa/ West Bengal Dankuni-Baleshwar 6 & 60 240 2400Tamil Nadu Tindivanam-Krishnagiri 66 200 787Tamil Nadu Trichy-Karaikudi 210 120 407Tamil Nadu Karaikudi- Ramanathapuram 210 80 490Tamil Nadu Dindigul-Perigulam-Theni -Kumili 45 & 220 130 475

Total 5074 51148Source: NHAI


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Rating ScaleThis is a guide to the rating system used by our Equity Research Team. Our rating systemcomprises of six rating categories, with a corresponding risk rating.

Risk Rating

Risk Description Predictability of Earnings / Dividends; Price VolatilityLow Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%Accumulate 10 % to 15 % 15% to 20% 20% to 25%Hold 0% to 10 % 0% to 15% 0% to 20%Sell Negative Negative NegativeNeutral Not Applicable Not Applicable Not ApplicableNot Rated Not Applicable Not Applicable Not Applicable

Please Note

Recommendations with Neutral Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses).

Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, wehave enhanced our return criteria for such stocks by five percentage points.

Desk Research Call is based on the publicly available information on the companies we find interesting andare quoting at attractive valuations. While we do not claim that we have compiled information based on ourmeeting with the management, we have taken enough care to ensure that the content of the report isreliable. Although we have christened the report as Desk Research Calls (DRC), we intend to release regularupdates on the company as is done in our other rated calls.

Additional information with respect to any securities referred to herein will be available upon request.This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole,without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use,disclosure or public dissemination of information contained herein is prohibited. This report is to be used onlyby the original recipient to whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell anysecurities mentioned herein. While utmost care has been taken in preparing the above, we claim noresponsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the usethereof and the investors are requested to use the information contained herein at their own risk.

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sellany security. It does not purport to be a complete description of the securities, markets or developmentsreferred to in the material. The information, on which the report is based, has been obtained from sources,which we believe to be reliable, but we have not independently verified such information and we do notguarantee that it is accurate or complete. All expressions of opinion are subject to change without notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officersand employees (to be collectively known as SFSPL), may, from time to time, have a long or short position inthe securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of informationcontained herein prior to the publication thereof.

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