Biharilal Deora's  Instablog

Industry background

India has a market of approx INR 7000 cr for roofings, which is almost equally divided amongst cement roofing and metal roofing. With an estimated 25 cr dwellings in india, it is estimated that more than 50% have non-permanent structure. Out of the major items that forms part of permanent structure, RCC (21%), bricks (6%), stone (7%) and cement & metal sheets (12%) are the largest. Cement sheets are popular in the rural areas because it cost 1/3rd compared to RCC. Overall the industry is dependent on following factors for a growth:

1. Good monsoon - which provides better harvest and gives purchasing power to the rural class.

2. Minimum support price increase - a bumper crop along with MSP increase provides farmer with higher money to spend.

3. Rural employment schemes - Schemes like NAREGA etc provides minimum support to the rural class. Although it is difficult to mention that these schemes can increase the consumption of fiber sheet products, but they help nonetheless.

The cement sheet industry has witnessed a growth of 10-12% CAGR over the last decade. In 2011, the industry had 17 players in total with capacity of around 5 MT. Top 4 players namely Hyderabad Industries, Everest Industries, Visaka Industries and Ramco Industries forms close to 50% of the overall capacity but more than 65% of the sales.

Overcapacity in the industry has been one of the reason why despite having small number of players forming dominant share of sales, industry finds it difficult to pass on the entire increase in raw material prices. That has also been the reason why no new player has entered in this industry in last 4-5 years.

Company description

A cement asbestos sheet making company which has now diversified into many other forms of building products like roofing, flooring and panels. It is one of the largest company in India with having 14-15% market share in a 5 MT industry. It has 5 plants each one in north, south, east, west and central India. Everest Industries (Bloomberg EVI:IN) has in-total capacity of 7,10,000

During FY06-11, Everest had the highest volume growth of 65% compared to 15% of Visaka, 38% of Hyderabad Industries and 34% of Ramco. During the same period, the average realization has also increased by 33-34% for almost all the players except Hyderabad Industries where it has been around 15%.

Everest has witnessed volume growth of 10-11% during FY07-11 with an average price increase of 7% during the same period. It is expected that this pace of 20% growth will continue with a combination of volume and value.

Everest belongs to the Sekhsaria's, the erstwhile promoters of Gujarat Ambuja.

Steel building division

Everest started this pre-engineered building (PEB) division in FY09 with sales of 91 crs. It closed FY12 with INR 223 crs of sales. In this division, civil construction of a plant (for any company) is replaced with pre-designed steel structure. Advantage is that cost comes down by 25-30% and time reduces by more than 50%. More so, the steel frame can always be dismantled at a later stage, if need be. The same facility is not there in a civil construction. There are 10 companies in this field and Everest has approx 2-3% market share. The company has been able to grow its volumes by approx 35% CAGR during FY09-11. Per ton realization has also grown by approx 10% during the same period.

There are 2 main points about this division:

1. Negative working capital - Since the work is order based, commencement of work happens only post getting an advance. This increases the working float with the company. The same is evident in the cash flows of the company where it has generated almost INR 200 crs of CFO during FY09-12. This negative working capital will only increase going forward as this division of the company is growing at almost double the rate of cement roofing segment.

2. Positive margins - Like any other business where losses are incurred during incubation, the company earned losses during FY09 and FY10. In FY11 it turned profitable, albeit only for last 2 quarters. In FY12, all 4 quarters were PBIT positive and company earned 6.0% margins compared to 3.5% in FY11. These margins will only increase with passage of time. Estimating margins to cross 10% would be impossible, but steady state 8-9% margins are possible.

There are 10 PEB manufacturers in India with top 5 forming 70% of the 1.5 MT capacity. Interarch (1,20,000 tons), Kirby (4,00,000 tons worldwide capacity) and Tiger Steel (UAE based) are some of the largest names. As all the companies mentioned are privately held, I don't have access to their financials. The industry has witnessed growth of 25-30% in last 5 years, thanks to high pace of industrialization.

Financials

From sales of almost INR 280 crs in FY08, FY12 sales was INR 880 crs, a growth of almost 2x. EBIDTA margins during the same period have increased from 6.4% to 8.6%. I don't expect margins to expand dramatically going forward as steel building division is expected to form 40-50% of overall sales in 2-3 years time.

D/E of 0.3x in FY12 compared to 1.1x in FY09, RoE of 23% compared to 10% in FY09, and RoCE of 11% compared to 3% in FY08, the financials have only improved.

FY12 end, company had INR 70 crs of debt and INR 35 crs of cash balance.

From FY07, the company has been paying regular dividends.

Investment rationale

With mcap of around INR 240 crs, in FY12 the company made PAT of INR 53 crs (incl. one time gain of 12 crs). Over next 2-3 years with high growth in the steel building business, I expect overall sales growth of 20-25%. Even with consistent margins and working capital mgmt, the company can make PAT of 60-65 crs in FY14 and CFO of more than 100 crs.

The interesting part in this company is the steel building division. In 2-3 years timeframe as this division starts forming major part of the revenue, we could witness a multiple re-rating to higher multiples. The current cement roofing business is considered to be an environmental unfriendly business leading to single digit valuation for all players.

Risks

With roofing and flooring business dependent more on rural india growth, deficit monsoon can play a big dampner. Also as mentioned that as players in the industry has weak pricing power, any sharp increase in cement prices can put margins under strain.

In the steel building division, the risk is high growth with working capital mismanagement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The Article was Co-authored with my friend Manav Vijay