20110118 Visaka Industries

8/6/2019 20110118 Visaka Industries

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Visaka Industries Ltd

Enhancing investment decisions

Initiating coverage


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISILFundamental Grade

Assessment CRISILValuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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CRISIL EQUITIES | 1

January 18, 2011Fair Value Rs 151CMP Rs 119

Fundamental Grade 4/ 5 (Strong fundamentals)

Valuation Grade 5/ 5 (CMP has strong upside)

Industry Information technology

Polaris Software Limited Business momentum remains intact

Fundamental Grade 3/ 5 (Good fundamentals)

Valuation Grade 5/ 5 (CMP has strong upside)

Indu stry Construction Materials

Visaka Industries LtdP laying the volume game

Visaka Industries Ltd (Visaka) is Indias second largest manufacturer (by

capacity) of asbestos cement sheets (ACS). It also manufactures syntheticyarn. We assign Visaka a fundamental grade of 3/ 5, indicating that itsfundamentals are goodrelative to other listed securities in India.

Second largest ACS player in a concentrated indu stryOf the four industry players comprising 70% of the business, Visaka has a

market share of ~16%. The concentration has helped Visaka earn higher

realisations despite a rise in raw material costs, an indication that players are

collaborating to adjust prices.

Higher volumes to drive growthWe expect Visakas revenues from ACS to grow at a CAGR of 11%, mainly

driven by higher volumes from increased demand for rural housing and a shift

to ACS from other roofing alternatives. Visaka is setting up a 1.1 lakh tonne

capacity in Orissas Sambalpur, expected to be commissioned by H2FY12.

Margins to moderateHigher competition - Capacity addition of ~5 lakh tonnes in the industry,

expected over the next two years, could increase pressure on realisations and

margins.

Higher raw material costs - An increase in the price of asbestos fibre, a key

raw material, will also impact margins till FY13.

Key risks: Higher material cost, restriction on asbestos useOwing to mining restrictions, only a few countries like Canada, Brazil, Russia,

Zimbabwe and Kazakhstan can supply asbestos fibre. Any price control by

producing countries or regulatory directives banning asbestos mining can

affect profitability and disrupt supply. Further, regulations restricting the usage

of asbestos in India, due to perceived ill effects on health, though not animminent threat, will be a key monitorable over the longer term.

Expect three-year revenue CAGR of 10%We expect revenues to register a three-year CAGR of 10% to Rs 8 bn in FY13,

largely driven by 11% growth in the ACS segment and approximately 5%

growth in the synthetic yarn segment. We expect EBITDA margins to fall by

~360 bps and be under pressure at ~14%. We expect EPS to decline from Rs

37.7 in FY10 to Rs 29.7 in FY11 and then move up to Rs 35.6 in FY13.

Valuations the market price h as strong upside from current levelsCRISIL Equities has used the discounted cash flow method to value Visaka and

arrived at a fair value of Rs 151 per share. The stock is currently trading at Rs

119 per share. The fair value implies P/E multiples of 4.7x FY12 EPS of Rs 31.9

and 4.2x FY13 EPS of Rs 35.6. We initiate coverage on Visaka with a valuation

grade of 5/5.

KEY FORECAST

(Rs mn) FY09 FY10 FY11E FY12E FY13E

Operating income 5,859 6,009 6,385 7,271 7,991

EBITDA 950 1,151 996 1,038 1,124

Adj PAT 359 600 472 508 567

Adj EPS-Rs 22.6 37.7 29.7 31.9 35.6

EPS growth (%) 368.4 59.2 (17.4) 7.6 11.6

Dividend yield 11.5 4.4 5.7 6.2 6.9

RoCE (%) 22.6 26.5 21.4 21.3 21.5

RoE (%) 20.7 28.3 18.6 17.5 17.2

PE (x) 1.8 3.5 4.0 3.7 3.3P/BV (x) 0.3 0.9 0.7 0.6 0.5

NM: Not meaningful; CMP: Current Market Price

S o u r c e : C o m p a n y , CR I S I L E q u i t i e s e s t i m a t e

CFV MATRIX

KEY STOCK STATI STICSNIFTY/ SENSEX 5742 / 19092

NSE ticker/ BSE ticker VISAKAIND /

VISAKA

Face value (Rs per share) 10

Shares outstanding (mn) 16

Market cap (Rs mn)/(US$ mn) 1906 / 41.9

Enterprise value (Rs mn)/(US$ mn) 2783 / 61.13

52-week range (Rs) (H/L) 193/ 113

Beta 1.01

Free float (%) 62.3%

Avg daily volumes (30-days) 8,367

Avg daily value (30-days) (Rs mn) 1.10

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKETReturns

1-m 3-m 6-m 12-mVisaka -6% -23% -33% -20%

NIFTY -5% -8% 5% 8%

ANALY TICAL CONTACTSudhir Nair (Head) [email protected]

Niyati Dave [email protected]

Charulata Gaidhani [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fundam

entalGrade

Poor

Fundamentals

Excellent

Fundamentals

Strong

Downside

Strong

Upside

37.7% 37.7% 37.7% 37.7% 37.7%

2.4% 2.4% 3.1% 3.4% 3.0%4.2% 4.2% 4.0% 1.6% 1.3%

55.7% 55.7% 55.2% 57.2% 58.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others


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CRISIL EQUITIES | 2


Table: 1 Visaka I ndustries: Business environment

Product / Segment Building products Synthetic yarn

Revenue contribution(FY10)

81% 19%

Revenue contribution(FY13)84% 16%

Product / service offering Asbestos cement sheets, non-asbestos flatproducts such as cement boards and panels

Blended yarn, manufactured using polyester

staple fibre and viscose staple fibre

Geographic presence Eight plants across India catering to all majorstates

India, Europe

Market position Second largest player in India One of the smaller players in the highlyfragmented synthetic yarn industry

Industry growthexpectations

10-12% per annum 5% per annum

Sales grow th(FY07-FY10 3-yr CAGR)

21% 7%

Sales forecast(FY10-FY13 3-yr CAGR)

11% 5%

Demand drivers Rising demand for roofing of houses andsmall manufacturing units in rural areas,

supported by the governments thrust on

affordable rural housing

Shift from other roofing alternatives such asthatched roofing to ACS

Manufacturing of synthetic textiles in Indiaand abroad

Key competitors Hyderabad Industries, Everest Industries,

Ramco Industries

Sangam India, Rajasthan Spinning and

Weaving Mills Ltd

Key risks Higher competition Restrictions on mining of asbestos fibre in

key producing countries

Restrictions on usage of asbestos in India Inability to market the non-asbestos panel

and boards

Competition from other yarn manufacturers Drop in synthetic yarn prices

S o u r c e : Co m p a n y , C R I S I L E q u i t i e s


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CRISIL EQUITIES | 3


Grading Rationale

Second largest ACS player with steady grow th

Visaka manufactures building products and synthetic yarn. Its building products

segment largely consists of asbestos cement sheet (ACS) products and a small

portion of non-asbestos flat products like boards and panels. The ACS products

are used for the roofing of rural houses and small industries. Having been in the

industry for over 25 years, Visaka has expanded its reach across India slowly to

become the second largest player in the ACS industry.

ACS indus t ry i s dom ina ted by f our la rge p layers

The Indian ACS industry has 17 players with 63 manufacturing plants. However,

~70% of asbestos manufacturing is controlled by four large players Hyderabad

Industries (a C.K. Birla group company), Everest Industries (earlier a part of the

ACC group of companies), Visaka and Ramco Industries. Visaka has steadily

grown its market share to ~16% in FY10 from 5.2% in FY01.

Figure 1: Top four players accounted for 70% of the market in

FY10

Source: Industry, CRISI L Equities

Except for Everest Industries, the other three players are based out of South

India. Over a period of time, these players have expanded into West and North

India, setting up manufacturing facilities close to the marketplace, in order to

save on freight and minimise breakages during transit (freight cost accounts for

7-10% of sales).

Visaka, 16%

HIL, 21%

Everest, 14%Ramco, 14%

Others, 34%

Visakas market share has

grown from 5% to ~16%

over the past decade


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CRISIL EQUITIES | 5


I ndus t r y concen t r a t i on w o r ks i n the company s favou r

Although realisations and margins vary across players, they have been stable over

time, despite a secular uptrend in raw material prices. This we believe indicates a

tendency among the players to adjust production and realisations through

collaboration to maintain margins.

Figure 6: Key players realisations move along the same lines

Source: Company, CRISIL Equities

Moderately placed in terms of margins

Hyderabad Industries is the largest player, with state-wise highest penetration,

which ensures lower freight costs and higher margins. Visaka is moderately placed

in terms of realisation, cost competitiveness and margins.

Comparison of the top four ACS players

Units

EverestIndustries Ltd.

HyderabadIndustries Ltd. Visaka Comments

FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10

Realisation Rs/MT 7,477 8,980 9,804 6,365 7,666 8,494 6,484 8,199 9,010

Realisation net of freight Rs/MT 6,746 8,178 8,957 5,691 7,142 7,948 5,918 7,411 8,177 Moderate realisations net of

freight

Segmental PBIT margin % 8.0% 13.4% 17.0% 5.9% 14.2% 22.2% 8.1% 14.8% 18.3% Moderate levels of PBIT

Margins

Raw material cost Rs/MT 4,408 4,558 5,005 4,072 4,345 5,001 3,901 3,826 4,712 Raw material costs are the

lowest due to lowest cost of

wood pulp and flyash

Power cost Rs/MT 561 462 417 607 622 574 441 443 530 Moderate power cost per

tonne

Distribution expenses

(including freight)

Rs/MT 731 803 847 674 524 546 567 788 833 Distribution expenses for

Visaka are higher due to

higher freight costs.

Hyderabad Industries has

lowest realisations but

highest margins due to

lower freight costs (led by

presence across a larger

market)

S o u r c e : C R I S I L E q u i t i e s

5,0005,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

FY06 FY07 FY08 FY09 FY10

(Rs/ tonne)

Visaka Industries Everest Industries

Hyderabad Industries Ramco Industries

Visaka is on the

favourable side of

supplier collaboration

Visaka ranks second in

terms of profitability


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CRISIL EQUITIES | 6


Visakas growth w ill be driven by higher volumes

Demand fo r ACS expec ted to g row a t ~ 10%

Demand (in volume terms) for ACS in India is expected to grow at a CAGR of 10-

12%. The prime reasons:

Shift from other roofing alternatives to ACS. Thatched roofing accounts for

80-85% of the roofing demand in rural India. However, with the improvement in

economic conditions, there is a shift in demand for the more durable ACS. This

provides a growing market for ACS manufacturers. Galvanised iron sheets,

another widely used roofing material, are not only historically priced 25-30%

higher than ACS but also need to be replaced once in five years as they are

subject to corrosion. Hence, consumers are showing a preference for ACS

compared to galvanised iron sheets due to lower prices, durability and non

corrosive nature of the product.

Governments thrust on rural housing. Schemes like the Indira Awas Yojna

(Rs 88 bn allocated in Budget 2009-10), Rural Housing Fund (Rs 20 bn), Pradhan

Mantri Adarsh Gram Yojana (Rs 1 bn) targeted at providing affordable housing to

the rural poor along with the growing empowerment of self-help groups are also

boosting the demand for ACS; an ACS roof accounts for about 15% of the average

cost of constructing a house in the rural areas.

Com m ission ing o f Samba lpur p lan t to augment v o lumes

In order to increase sales in the untapped eastern markets, Visaka is setting up a

1,10,000 TPA plant in Sambalpur, Orissa. This plant is expected to be

commissioned by Q2FY12 and add 14% to installed capacity. Post expansion,

Visaka will focus more on debottlenecking of existing facilities and efficiency

improvements. Currently, Hyderabad Industries is the only large player in Orissa.

Since realisations appear to have hit a ceiling

Although production is concentrated among a few players, affordability constraints

cap realisations since the end user is the rural Indian. ACS capacity additions have

increased competition resulting in a decline in realisations. We believe the

curtailment in production by Visaka is an indication of prices having hit a ceiling in

FY10. In such a scenario, a rise in top line for the company will be driven by an

increase in sales volumes.

Demand for ACS to bedriven by a shift from

other roofing alternatives

to ACS


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CRISIL EQUITIES | 7


Figure 7: In FY 10, Visaka curtailed sales to maintain

realisations


Margins to moderate and stabilise

Margins in Visakas ACS segment are expected to moderate due to:

Higher raw material prices. Reduced ability to pass on price increases due to higher competition from the

new capacity additions in FY12.

Raw mat er ia l p r ices expec ted to go u p

Price of asbestos fibre is controlled by producersAsbestos fibre (composed mainly of magnesium) is a naturally-occurring

reinforcing agent, comprising 50% of the raw material cost of manufacturing ACS.

India imports almost all of its asbestos fibre requirements from Canada, Brazil,

Russia, Zimbabwe and Kazakhstan. Since mining of asbestos is banned in most

developed countries, prices are controlled by the producing countries. India

accounts for only 7% of the global asbestos fibre demand; therefore it is only a

price-taker.

The company tries to minimise the impact from fibre price fluctuations and

potential supply disruptions by entering into year-long contracts for price as well

as supply. We expect prices of fibre to increase by 10-12% each year over the

medium term.

Cement prices to cool off in FY11, to rise in FY12

Cement accounts for 35-40% of the raw material cost of manufacturing ACS.

Cement demand is expected to grow by 10-11% CAGR over the next five years.

However, with nearly 150 mn tonnes expected to be added during the same

period, prices are expected to decline by 2-3% in 2010-11. This is expected to be

followed by a rise of 5% in FY12.

We expect a ~500 bps decline in Visakas EBITDA margins to ~15% in FY11 and

the margins to be maintained thereafter.

334,

068

433,

602

550,

478

584,

892

557,

965

6,3656,825

6,484

8,199

9,010

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

100,000

200,000

300,000

400,000

500,000

600,000

700,000


(MT)

Sales Volume Realisation (Rs/tonne - RHS)

EBITDA margins are

expected to soften and

stabilise at 14-15%

Asbestos fibre prices to

rise by 10-12%


10/24

CRISIL EQUITIES | 8


Com pet i t ion f rom unorgan ised p layers to p ressur ise marg in s

Eight incremental units are expected to be commissioned in FY11 and FY12, with

a combined capacity of 5 lakh tonnes. With Visaka unit coming up in Orissa and

Ramco setting up a unit in Bihar, there will also be capacity additions from the

smaller players, reducing the dominance and control of the big players. This is

expected to put pressure on margins to a large extent. We expect the ACS

segment to grow at a CAGR of ~11% in FY10-13.

Table 1: Capacity reckoner

New capacities coming up State TPA (MT)

Ramco Industries Tamil Nadu 120,000

Hyderabad Industries Surat 240,000 cu mtrs

Haryana 2,400

Punjab 45,000

Everest Industries Orissa 180,000

Gujarat 40,000

Jaypee Cement UP 100,000

Vilsons Roofing Maharashtra 13,833

Premier Building Materials Tamil Nadu 60,000

Visaka Industries Orissa 110,000

Restriction on asbestos use potential long-termthreat

There is a view that asbestos is harmful if inhaled in excess, causing respiratory

illnesses. This is especially true of the low density Amphibole (blue) variety of

asbestos. Although the asbestos cement industry in India uses Chrysotile (white)

fibre (considered less harmful), there are concerns surrounding its usage, due to

which they are under the threat of being banned. The Government of India has

directed ACS manufacturers to track and maintain their workers health records

for a period of 40 years from employment. While Visaka follows a production

process wherein the asbestos fibre does not involve any human contact, any

developments prohibiting the use of asbestos fibre in India remain a key

monitorable.

Textiles - steady stateThe textile segment comprises ~20% of Visaka revenues. Visaka operates a

9000-tonne unit to manufacture synthetic yarn of 30s to 76s counts, which are

used in the value-added segment of home textiles. Visaka caters to an established

customer base, both in the domestic and the export markets. Its domestic clients

include Siyaram, Pantaloon, Harrys Collection, RVIVA, Rolson Industries and BK

Lane. Its domestic-exports mix changes in response to relative price

attractiveness. Since FY08, domestic sales have grown faster than exports. In

FY10, the company exported 21% of its yarn output.

Textiles performing

well


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CRISIL EQUITIES | 9


Figure 8: Export vs. domestic mix changes in response to

realisations


Per fo r mance of t he ya r n segmen t a t pa r w i th i ndus t r y s

The performance of Visakas yarn segment is in line with the industrys; its closest

peers are Sangam India Ltd and Rajasthan Spinning & Weaving Ltd.

Peer Comparison

Companies Visaka Sangam Rajasthan Comments

Production (FY10) tonnes 8705 37126 85951

Realisation Rs/kg 135 132 148 Higher exports ensure higher realisation for Rajasthan

PBIT margin % 14.8 NA 9.6 Visaka earns better PBIT margins

R0CE % 19.86 6.58 3.14 Visaka enjoys better RoCE since the plant is old

S o u r c e : P r o w e s s

The companys foray into the yarn segment in 1996 was based on expectations of

robust demand for synthetic yarn, with higher synthetic yarn prices sustaining its

interest in the segment. The capacity for yarn was raised to 1,816 spinning

positions from 1,224 in FY05. Since the outlook on synthetic yarn prices remains

steady (2-3% growth over the medium term), the company is open to

opportunities in this segment. At the same time, its business focus will continue to

be on the ACS and allied products segments. We expect the textiles segments

revenues to grow at a CAGR of ~5% from FY10-13.

735673

524

801

941

165

316

464373

256

-

100

200

300

400

500

600

700

800

900

1,000


(Rs mn)

Domestic Sales Exports


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CRISIL EQUITIES | 10


Figure 9: Yarn segment to grow at a steady rate (revenues and

PBIT)


Panels and boards at a nascent stage

The company has identified non-asbestos based fibre cement sheets to broaden

its range of building products that can be manufactured using a technology similar

to asbestos-based fibre and sold largely through the existing product channels in

urban and semi-urban areas. Accordingly, the company has introduced fibre

cement sheets as an alternative to particle board and plywood used in internal

structures as well as external prefab applications. The company possesses an

installed capacity of 60,000 TPA and is one of three companies in India to

manufacture these emerging products.

V-Boards Introduced in 2008, fibre cement sheets (marketed as V-Boards), are

manufactured using cement, fly ash and cellulose fibre. Of the total sale of 15,000

tonnes (Rs 141 mn in revenues), about 6,000 tonnes was exported to the Middle

East. V-Boards face a tough competition from substitutes like plywood, medium

density fibreboard (MDH) and many more widely accepted materials in use by

architects and interior decorators in India.

V-Panels - Introduced in January 2010, V-Panels are manufactured using

cement, fly ash and polystyrene beads. The company possesses an installed

capacity of 500 panels a day. The product is supplied to GMR, Punj Loyd,

Shapoorji Pallonji, Soma Enterprises, TCS, Gujarat Ambuja Port, Eenadu Group,

Coastal Projects, Uranium Corporation and Larsen & Toubro.

Good products offering tangible benefits over plywood and RC

Advantages of V-Board over plywood Advantages of V-Panel over reinforced concrete

Up to 40% cheaper Since it is thinner, it enhances interior living area and is ideal in locations of high

real estate cost

Termite proof Its weight is lower than bricks

Fire resistant It is quicker to erect and matches wall strength and axle load

Water resistant It is labour efficient as it can be erected by just three individuals

Longer lasting It can be re-used at a different location

Source: Industry

988

1,173 1,1961,327 1,351 1,378

11%

8%

15%

13%

12%11%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

250

500

750

1,000

1,250

1,500

FY08 FY09 FY10 FY11E FY12E FY13E

(Mn)

Revenue(LHS) PBIT Margin(RHS)

Positive outlook for yarn

prices will ensure steady-

state profits


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Marke t accep tance is some w ay o f f

Both products are still unprofitable since the production method is yet to be

perfected (lower breakages and more standardisation required). Further, the

concept of fibre cement needs higher acceptance by architects who will be the

influencers for purchase decisions. The use of V-Boards depends on carpenter

education since they are more difficult to work with than plywood. Although a

widely accepted replacement for interior and exterior walls in the USA, Russia,

China, etc., the acceptance of panels by Indians is still a long way off and remains

a key monitorable for the company.

Figure 10: Allied building products slow and steady growth


152

301

359

417

0

50

100

150

200

250

300

350

400

450

FY10 FY11E FY12E FY13E

(Mn)

Revenue

Too little, too early


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Key risks

Raw material production is concentrated

Any price control by producing countries or regulatory directives banning the

mining of asbestos can cause a threat to profitability and supply disruptions.

Pro fitability is subject to raw material price volatilityAny sudden increase in raw material prices (cement, asbestos fibre and wood

pulp) compounded by an inability to pass on excess costs will put pressure on

Visakas margins.

Industry concentration may weaken

The low capital intensity and simple process of manufacturing make for low entry

barriers in the industry. Further, capacity expansions by the unorganised players

may also lead to margin pressure.

Banning of asbestos in India

Asbestos is believed to cause respiratory diseases, which is why its use has been

banned in most of the developed countries. Any regulation banning the product in

India will be severe for the company, since 80% of its revenues come from this

segment. However, we believe this is not an imminent threat since there is no

comparable alternative at the moment to replace asbestos roofing at the required

scale.

Supplier concentration

and weakening player

collaboration are key risks


15/24



Financial Outlook

Figure 11: Muted ACS growth in FY10 and FY 11, to

improve in FY12

Figure 12: ACS products w ill dominate the revenue

mix in the medium term

Source: Company, CRISI L Equities Source: Company, CRISI L Equities

Figure 13: EBITDA margins to correct in FY11, to be

under pressure thereafter due to compet ition in

asbestos segment

Figure 14: EPS to moderate in FY11 due to subdued

performance of asbestos segment, to recover

thereafter


Figure 15: Gearing to continue to improve from

0.6x to 0.3x

Figure 16: RoCE to moderate post FY 10, but return

to historic levels


5,859 6,0096,385

7,271

7,99136%

3%

6%

14%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY09 FY10 FY11E FY12E FY13E

(% )(Rs mn)

Revenues growth % (RHS)

78% 81% 81% 81%83% 84%

22% 19% 19% 19%17% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY08 FY09 FY10 FY11E FY12E FY13E

Building Products Synthetic Yarn

9501,151

996 1,0381,124

16.2%

19.2%

15.6%14.3%

14.1%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400


(% )(Rs mn)

EBITDA EBITDA margin (RHS)

22.6

37.7

29.731.9

35.6

0

5

10

15

20

25

30

35

40

0

100

200

300

400

500

600

700


(Rs)(RS mn)

Adj PAT Adj EPS (RHS)

0.84

0.63

0.41

0.33

0.28

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Gearing

20% 20%

17%9%

23%

27%21%

21% 22%22%

25%

21%

5%

21%

28%

19% 18% 17%

0%

5%

10%

15%

20%

25%

30%

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

ROCE (%) ROE (%)


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Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance.

Promoter - doctor turned politicianVisaka is promoted by Dr. Vivekanand, a MBBS qualified medical practitioner. In

2009, Dr. Vivekanand was elected as the Member of Parliament from Pedapalli in

Andhra Pradesh. He served as the managing director of Visaka till FY09.

Currently, his wife Mrs Saroja Vivekanand is the MD of the company. His son has

also been recently inducted into the company and is expected to eventually

occupy a key management position.

Strong second line ensures smooth operations

While the top management has undergone a change, Dr. Vivekanand continues to

be involved in all strategic decisions with inputs from the board. Visakas strong

and professional second line of management, with more than two decades of

association with the company, is successful in running the day to day operations.

Top management has

recently undergone a

change but the second

line continues to run

the show smoothly


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Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of

corporate governance and management quality, apart from other key factors such

as industry and business prospects, and financial performance. In this context,

CRISIL Equities analyses the shareholding structure, board composition, typical

board processes, disclosure standards and related-party transactions. Any

qualifications by regulators or auditors also serve as useful inputs while assessing

a companys corporate governance.

Overall, corporate governance at Visaka meets the minimum levels supported by

reasonably good board practices and an independent board.

Board composition

Visakas board comprises eight members, of whom five are independent directors,

which is more than the requirement under Clause 49 of SEBIs listing guidelines.

The directors have strong industry experience and have been with the company

for more than 10 years. Given the background of directors, we believe the board

is experienced. The independent directors have a fairly good understanding of the

companys business and its processes.

Boards processes

The companys quality of disclosure can be considered good judged by the level of

information and details furnished in the annual report, websites and other publicly

available data. The company has all the necessary committees audit,

remuneration and investor grievance - in place to support corporate governance

practices. The audit committee consists of four independent directors apart from

the managing director.

Corporate Governance

practices at Visaka are

good


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Valuation Grade: 5/ 5

We have used the discounted cash flow (DCF) method to value Visaka and arrived

at a fair value of Rs 151 per share. The stock is currently trading at Rs 119 per

share. Consequently, we initiate coverage on Visaka with a valuation grade of

5/ 5, indicating that the market price has strong upside from the current

levels.

Key DCF assumptions

We have considered the discounted value of the firms estimated free cash flow

from FY13 to FY17.

We have included capital expenditure of Rs 315 mn in FY11 and FY12 for the

Sambalpur plant in Orissa and a maintenance capex of Rs 100 mn per annum

thereafter.

We have assumed a terminal growth rate of 3% beyond the explicit forecast

period until FY17.

WACC computation

FY13-17 Terminal value

Cost of equity 17.5% 17.5%

Cost of debt (post tax) 7.04% 7.04%

WACC 14.45% 15.78%Terminal growth rate 3.00%

Sensitivity analysis to terminal WACC and terminal grow th rate

Terminal growth rate

TerminalWACC

1.0% 2.0% 3.0% 4.0% 5.0%

13.8% 158 167 177 190 206

14.8% 147 154 163 174 186

15.8% 138 144 151 160 170

16.8% 130 135 142 149 157

17.8% 124 128 133 139 146

S o u r c e : C R I S I L E q u i t i e s e s t i m a t e s

One-year forward P/ E band One-year forward EV/ EBITDA band

Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities

0

50

100

150

200

250

300

350

400

450

Apr-04

A

ug-04

D

ec-04

Apr-05

A

ug-05

D

ec-05

Apr-06

A

ug-06

D

ec-06

Apr-07

A

ug-07

D

ec-07

Apr-08

A

ug-08

D

ec-08

Apr-09

A

ug-09

D

ec-09

Apr-10

A

ug-10

D

ec-10

(Rs)

Visaka 5x 7x 9x 10x 11x

0

1000

2000

3000

4000

5000

6000

7000

8000

A

pr-04

A

ug-04

D

ec-04

A

pr-05

A

ug-05

D

ec-05

A

pr-06

A

ug-06

D

ec-06

A

pr-07

A

ug-07

D

ec-07

A

pr-08

A

ug-08

D

ec-08

A

pr-09

A

ug-09

D

ec-09

A

pr-10

A

ug-10

D

ec-10

(Rs mn)

EV 3x 4x 5x 6x

We assign a fair value of

Rs 151 per share to Visaka

and initiate coverage w ith a

valuation grade of 5/ 5

The fair value implies P/ E

multiples of 4.7x FY12 EPS

of Rs 31.9 and 4.2x FY13

EPS of Rs 35.6


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P/ E premium / discount to NIFTY P/ E movement

Note: During 2008, the company had one-year forward P/E of ~300x on account of lower profits, not depicted in the chart above.

Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities

Peer comparisonCompanies M.cap Price/ earnings (x) Price/ book (x) EV/EBITDA RoE (% )

(Rs mn) FY10 FY11E FY1 2E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Visaka Industries Ltd 1906 3.5 4.0 3.7 0.9 0.7 0.6 2.6 2.8 2.5 28.3 18.6 17.5(CRISIL Equities estimates)Consensus Estimates

Visaka Industries Ltd 1906 3.6 4.4 3.8 0.9 NA NA 2.6 3.2 2.7 27.0 17.9 18.2

Everest Industries Ltd 2906 9.5 7.0 5.2 1.5 1.4 1.1 5.6 4.9 3.9 18.5 21.8 24.6

Ramco Industries Ltd 4843 8.8 NA NA 1.4 NA NA 6.9 NA NA 16.6 NA NA

Hyderabad Industries Ltd 3431 3.8 3.9 3.4 1.6 NA NA 2.2 2.2 1.9 40.1 25.5 24.0

S o u r c e : C R I S I L E q u i t i e s

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Premium/ Discount to NIFTY Median

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

1yr Fwd PE (x) Median PE +1 std dev -1 std dev

+1 std dev

-1 std dev


20/24



Company Overview

Visaka was incorporated in 1981 as a joint venture between the Andhra Pradesh

Industrial Development Corporation (APIDC) and its promoter Dr. G. Vivekanand

to manufacture asbestos cement sheets. In 1984, the company went public and

the plant was commissioned in 1985. In 1989, APIDC divested its stake in the

venture.

Visaka also manufactures textile yarn. In 2009, it developed non-asbestos fibre

board and panel manufacturing.

The company has eight asbestos cement sheet producing units, one synthetic

blended yarn factory and one reinforced building board production facility. Visaka

has a strong dealership network of 6,000 dealers and 28 self-owned depots in

important centers of India for marketing its building products. It has 3,200

employees.

Business segmentContribution to revenues

FY08 FY09 FY10

Building products 78% 81% 81%

Synthetic yarn 22% 19% 19%

Milestones

1981 Visaka Asbestos Cement Products Ltd incorporatedPromoted by Dr. G. Vivekanand and promoters (25%) and APIDC (26%)

1984 Public issue (49%); total capital - 1.54 mn shares, Rs 10 each

1985 Started manufacturing fibre cement products in Hyderabad (36,000tpa)1989 APIDC divested holdings to promoters

1990 Name changed to Visaka Industries Ltd

1991 Issue of 223,000 fully convertible debentures at Rs 300, totaling Rs 66.9mn

1992 Debentures converted into two stages to add 3.85 mn sharesCommenced production of twin air jet spinning plant for synthetic yarn

1995 Rights issue of 2.9 mn sharesGot ISO 9002 certification

1997

2000

Set up fibre cement plant in Tamil Nadu

Acquired Asbestos cement sheet plant at Pune, Maharashtra2001 Export house status

2003 Set up fibre cement unit in Midnapore, West Bengal

2004 Spinning unit expanded by 50% at a cost of Rs 320 mnISO 9001-2000 certification obtained

2005 Set up fibre cement unit in Tumkur, Karnataka

2006

2007

Commenced commercial production in the fibre cement unit in Rae

Bareilly and in the garment unit in Chennai

Set up Asbestos Cement sheet plant at Vijaywada, Andhra Pradesh

2009 The non-asbestos fiber board and panel division was established


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20110118 Visaka Industries

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