OVERVIEW: Industry: Metal Finishing Sector: Metal finishing is a very critical process in many manufacturing industries. Some of the operations in the same industry include electroless plating, chemical conversion coating, acid anodizing and electroplating. These processes essentially involve the use of various chemical and physical processes in order to either change the surface of a product or to enhance its appearance and at the same time increase its corrosion resistance. Surface finish is also called surface texture, which is an important process for machines, component structures and materials that are exposed to harsh operation conditions and environment like extreme temperatures, corrosive environment, abrasive conditions that tend to damage the surface of the material. Surface treatment is not only limited to treatment of metals and alloys etc, but is also utilized for treatment of printed circuit boards, aluminium etc which are composed of plastic and metal. The number of plastic parts that can be painted and coated is ever increasingly growing with unlimited scope of diversity.

Coating Pretreatment Market: Coating Pretreatment is an essential precursor stage for powder coatings which gives superior finish to a product and increases the (coat) shelf life of the metal surface as well. Globally, the powder coatings market size which was around 2.1 million tons in 2015 is projected to exceed 3.8 million tons by 2024. The same industry (in terms of revenue) which was at nearly USD8.5bn in 2015 is poised to grow to USD15bn by 2024. (Source: Global Market Insights) Some of the factors which will lead to consistent growth for this industry include positive outlook towards construction spending, increasing automotive production, escalated growth in the aerospace industry, increasing global airline passenger traffic and unprecedented requirement of the end user industries including automobiles, furniture, electronics, industrial & household appliances, agricultural etc, where the need to protect the components from corrosion exits.

Surface Treatment Chemicals Market: Asia and North America majorly dominate the surface treatment chemicals market. Among these, India, China, ASEAN and Asia Pacific is expected to witness higher growth in terms of value as well as volumes which will be propelled by increasing demand for surface treatment chemicals in industrial manufacturing, automotives, electronics application etc. In LATAM, Brazil and Mexico are expected to register higher volumes.

Aerospace & Defence industry: New surface treatment processes are always researched by chemical analysts, one of them revolves around Additive Manufacturing (AM). There has been a consistent growth in the demand for AM in every manufacturing sector. This is also poised to be a significant trigger for growth of AM in the Aerospace & Defence industry as well.

Automotive and Electronics: According to the research team of Future Market Insights revenue generated by the electroplating market in the region of APAC excluding Japan while exhibiting an increase of CAGR of 4.6% is projected to exceed USD5bn by 2026. Moreover, there are estimates indicating that nearly one-third of the global electroplating revenues will be procured from electronics and electrical industries and at the same time between 2016 and 2026, automotive end-use of electroplating will be an opportunity of nearly USD2bn.

Shop-entertainment: Businesses related to Malls are generally considered to be uncertain because of high gestation period and huge investment requirements. Moreover, it is difficult to sustain and run a mall because of the charges related to maintenance and rentals. The mall business in many cities and towns in India have started becoming unsustainable, unviable and a very expensive affair. The vogue of online shopping has led to a drop in mall sales over the past few months. Achieving higher footfalls is a difficult task for the owners. Major chunk of revenues are earned only by the food court and the cinemas.

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

46.5 / 25.6 10,168

Face value: 1

BSE Code NSE CODE

505710 NA

Annual Performance

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 3858.6 4170.8 4228.6 4401.4

EBITDA 606.6 750.4 753.0 836.3

EBITDA (%) 15.7 18.0 17.8 19.0

Other Income 34.2 16.9 51.4 51.4

Interest 167.4 130.4 88.3 36.1

Depreciation 114.9 164.4 141.7 173.0

PBT 358.5 472.4 574.4 678.6

PAT 307.9 331.6 390.5 510.5

Equity 226.7 226.7 226.7 226.7

EPS (INR) 1.4 1.5 1.7 2.3

Ratio Analysis

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 17.9 14.1 13.7 12.3

EV/Net Sales (x) 2.8 2.5 2.4 2.3

M Cap/Sales (x) 2.6 2.4 2.4 2.3

M Cap/EBITDA (x) 16.8 13.5 13.5 12.2

Debt/Equity (x) 0.5 0.3 0.2 0.2

ROCE (%) 11.7 13.9 15.0 15.8

Price/Book Value (x) 5.2 4.6 4.0 3.4

P/E (x) 33.0 30.7 26.0 19.9

Share Holding Pattern as on 31st Dec 2016

Parameters No of Shares %

Promoters 156479509 69.0

Institutions 84309 0.04

Public 70141932 30.9

TOTAL 226705750 100

Quarterly Performance

Parameters (Rs mn) Mar 16 Jun 16 Sept 16 Dec 16

Sales (Net) 1,336.7 956.3 1,055.8 1,123.3

EBITDA 231.3 203. 254.9 193.4

EBITDA ( %) 17.3 21.2 24.1 17.2

Other Income 8.3 7.9 4.6 11.2

Interest 18.8 15.8 14.1 13.3

Depreciation 35.1 34.9 33.8 34.6

PAT 102.1 126.2 155.2 122.8

Equity ( Rs mn) 226.7 226.7 226.7 226.7

TM

Note: All the data is calculated as per Market Price on 17 Apr 2017. Please Turn Over

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

Source: Annual Report

OVERVIEW: Industry (contd.) National Capital Goods Policy: The segment of Capital Goods is an important sector which significantly contributes to the manufacturing activity in India. The sub sectors of capital goods include machinery for machine tools, textile, earthmoving, plastic processing, process plant equipment, dies, moulds & press tools, printing, metallurgical, food processing etc. The Heavy Electrical and Power Plant Equipment segment occupies the largest share of aggregate production. The National Capital Goods Policy, approved in May 2016 is first ever policy on capital goods introduced in India as a major step to let loose the potential of this sector, increase the exports from the current 27% to 40% of production, reduce the gap between exports & imports, create jobs from current 8.4 million to nearly 30 million and make India a manufacturing hub. The policy will be a big booster to help heavy engineering industry as it will aid them to take approvals to produce capital goods at a quicker speed. The policy will help realize the vision of building India as the world class hub for Capital Goods. One may also treat the same as an extension to the „Make in India‟ initiative. While the policy will boost Indian GDP by increasing production and exports, implementation of GST is important for the effectiveness of this policy. About the Company: Grauer & Well India Ltd (GWIL) is an established player in the electroplating industry which is related to the field of surface treatment technology, specialised chemicals, engineering plants etc. GWIL is the only company in India and one among the few in the world that offers complete corrosion protection solutions on all types of substrates across various industrial segments. The company is chaired by Mr. Umeshkumar More and family, with an experience of nearly 6 decades have managed to build a modern conglomerate in Indian electroplating market and allied products & services. The company has a centralised R&D centre in Mumbai which is recognised by the Indian Council of Science and Technology. The company has nearly 40 QA laboratories at (24) branch offices and (28) technical service centres which function continuously to monitor and support Indian as well as oversea customers. The company has seven manufacturing plants which are located at Dadra Nagar Haveli (Chemicals, Lubricants and Paints), Barotiwala in H.P (Chemicals, Lubricants and Paints), Vapi (Chemical Intermediates, Lubricants and Paints), Samba in Jammu (Chemicals), Alandi in Pune (Engineering) and a shop-entertainment mall in the suburban area of Kandivali in Mumbai. The products offered by the company are reputed and match International quality standards. Apart from this, the company also has an experienced professional team with immense industrial exposure which helps provide customized solutions to the clients. With a head count of nearly 1,200 employees and over 35 branch offices, depots and technical service centers, the company enjoys a sales network of more than 100 dealers & distributors in more than 50 countries.

GWIL has primarily been in the metal electroplating business. The company also produces surface treatment chemicals, engineering plants, industrial lubricants, protective paints etc. GWIL enjoys more than 40% share in the Indian electroplating market. The major revenue churned by the company are through the business activities of (a) Basic, Electroplating and Intermediate Chemicals which accounts for nearly 69.23% of the total revenue and (b) Paints, Enamels, Varnishes and Oil Bound Distempers which account for 13.44% of the total revenue.

GWIL is one of the very few metal finishing houses in the world and a true one-stop-solution for offerings related to chemicals, plants, effluent treatment systems and waste recovery techniques etc. GWIL caters to a wide range of industries including automotive, electrical and electronics, hardware, plating on plastics; and also caters to marine, infrastructure, oil & gas and other heavy industries. GWIL currently operates under five division i.e. chemicals, engineering, paints and industrial lubricants as also real estate which runs a successfully managed mall (Growel's 101) in the western suburb of Mumbai.

GWIL is engaged in the manufacture of electroplating & allied chemicals, basic and intermediate chemicals, paints, enamels, varnishes, oil bound distempers, etc. The Chemical segment includes surface treatment chemicals, their intermediates and other specialty chemicals. The Engineering segment is involved in supplying customized turnkey solutions for electroplating plants and their components, effluent and waste water treatment plants and other engineering products. The company also manufactures conventional engineering equipments like filters, agitation units, tanks and exhaust systems, which are used in the electroplating industry.

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

TM

Please Turn Over

Source: Annual Report

*Contemplating closing plant Grauer Weil Shanghai

Source: Company’s Website

About the Company: (contd.) GWIL has three Overseas Subsidiaries i.e. Grauer & Weil (Shanghai) Ltd. in China, Grauer & Weil (UK) Ltd. in United Kingdom and Growel Chemicals Co. Ltd. in Thailand. The company holds 100% stake in all these subsidiaries. Some of the associates companies of GWIL include: GrowelGoema (I) Private Limited held 29.99% GrowelSidasa Industries Private Limited held 48.99% Grauer & Weil (Thailand) Limited held 49.8% Poona Bottling Company Private Limited held 30.89% The company is also associated with many international players and partners like Langbein Pfanhauser Werke, Holmuler, Goema, Veratronics, Nippon Denro Shamrock, Serfilco, Sidasa and such other international renowned manufacturers, the company has established a reputation in the in the metal finishing industry. INVESTMENT RATIONALE (A)Diversified Business: GWL has its wings spread across a number of businesses and has been performing consistently well in segments of chemical, engineering, paints, lubricants and shop-entertainment. A major portion of the turnover i.e. nearly 69.2% is derived from basic electroplating activities, electroplating equipment division, intermediary chemicals, oils and lubricants while nearly 13.4% is contributed by paints, enamels, varnishes, etc. It is quite evident; every business of GWL has a story to tell. a) Chemicals: GWIL is reputed as one of the few companies in India and the world that offers complete corrosion protect ion so lut ion s , sur face t r e a t m e n t c h e m i c a l s , t h e i r inter-mediates and other specialty chemicals which have applications across various industrial segments include pre-treatment, general plating, conversion coating, stripping, electroplating & specialty chemicals, zinc flake coatings, phosphating & anodizing chemicals etc which are used in various sectors including automobiles, hardware, electronics, white goods, PSUs, aeronautics, railways and defence. In order to cater to its clients across the country, the company has it plants located in Dadra (Dadra and Nagar Haveli) and Vapi (Gujarat) in the west while Samba, Jammu, Barot iwala , Himachal Pradesh, in the north. All the plants are certified under IMS and ISO 14000. GWIL has also obtained certification under AS 9100, which is a standard certification for the aviation industry. b) Engineering: The engineering division is located at Alandi, near Pune. This segment is involved in designs and supplies on turnkey basis to all types of plants related to surface coating, surface finishing, electroplating & their components, effluent & waste water treatment plants and other engineering products. Apart from this, the company is also involved in providing designs (on contract basis) to various chemical, engineering, paints, lubricants plants etc. The company has built around 700 plants in different countries. Moreover, the company also provides wastewater process technologies to aluminium processing, printed circuit boards, food & beverages, semiconductor & solar, surface treatment industries and other industries where waste water is generated continuously. If one observes carefully, the sales in the first half of the year FY2016- 17 had declined significantly, which is in line with the industry standards related to the capital goods activity across the country. However, due to implementation of a cost reduction plan, a smart turnaround was witnessed in this segment. There have been many enquiries and the order book at the Engineering Division is appears to be reasonable.

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

TM

Please Turn Over

Source: Company’s Website

INVESTMENT RATIONALE (contd.) (A)Diversified Business: (contd.) (c) Paints: In order to diversify, in 1994 the company took the inorganic route to grow and acquired Bombay Paints Ltd, to produce coatings, varnishes, enamels, putties, ceiling compounds, and polymers etc. However, this segment was not that profitable, hence the Chembur plant was discontinued with effect from 1stMay 2015 and a production capacity was created at Dadra Nagar Haveli, in addition to that in Vapi and Barotiwala. This loss-making division has been smartly turned around due to the efforts of the Management, cost cutting, improved margins, tighter financial control and better operational efficiencies. As a result, this division has registered marginal profits during the year 2015-2016.

Apart from the products mentioned above, the company also manufactures polyurethanes, isocyanide products, polyester resins, vinyl resins, polymeric emulsions, polyester resins which are used for protective coating by industrial, marine and architectural purposes. The company has also made some strategic tie-ups in this segment to boost the sales and thus the profits earned by this segment. In order to boost the revenues generated by the high-performance paints/coatings segment, the company has tied up with Trans-ocean Coatings (Netherlands) which develops, manufactures and sells anti-foulings, anti-corrosives & coatings for ships, offshore installations and industrial facilities. Moreover, in collaboration with NOF Metal Coatings group (Japan), GWIL offers specialised non-electrolytic zinc and aluminium flake water-based coatings.

d) Shop-entertainment: As indicated in the industry data as well, businesses related to Malls have high investment requirements and high gestation period, hence considered to be uncertain. Moreover, it is difficult to sustain and run a mall because of the charges related to maintenance and rentals. The mall business in many cities and towns in India have started becoming unsustainable, unviable and a very expensive affair. Moreover, the vogue of online shopping too has led to a drop in mall sales over the past few months. In such a turmoil situation, GWL has been successful in achieving higher footfalls due to innovative marketing and promotion strategies. During the previous year 2015-16, the licenses of some of the larger tenants of Growels-101 were renewed which has lead to higher revenues. This segment has been contributing nearly 5.25% to 5.75% of the total revenue over the last few years. The proportion of profits earned by this segment is meager when compared to all the other segments; however, the key is to remain PAT positive despite the odds in the Mall industry. Currently, Growel has undertaken an expansion project to add 0.25mn sq ft area to sum upto a one million sq ft area for the mall. The company must reap profits on completion of this expansion activity in the long run. Land Asset: The company has a total land parcel of 13acres in Mumbai; 10acres in Kandivali and around 3 acres in Chembur. This land parcel is a big asset for the company; which fetches good valuations for the company. Apart from the regular manufacturing activities of GWIL, the company intends to explore and monetize the opportunities in hospitality, retail and IT/office space etc. over the next few years.

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

TM

Please Turn Over

Source: Company’s Website

INVESTMENT RATIONALE (contd.) (A)Diversified Business: (contd.) (e) Lubricants: Industrial lubricants and oils business is a very small and budding segment of the company. The company manufactures rust preventive chemicals, many oils & fluids like cutting oils, hydraulic oils, lubricating oils, MS & steel wire drawing oils, gear oils, varnish & deep draw oils, IDM oils, heat treatment oils, copper tube drawing fluids, copper wire drawing fluids, aluminium wire drawing oils, glass grinding fluids, chain oils, blanking oils, cleaner oils etc. Moreover, the company has started manufacturing specialised lubricants and oils. To assist the same, industrial lubricants are produced at its plants in Vapi (Gujarat) and Barotiwala (Himachal Pradesh). In order to supplement the segment with high quality and standard products, GWIL entered into a technical collaboration with SIDASA (a division of Cromogenia of Spain) and established a joint venture by name Grauel Sidasa Industries Pvt Ltd by acquiring 49.8% stake. Revenues generated by this segment accounts for nearly 2.4 % of the total revenue. (B) Niche Player: GWL offers a wide range of quality products which are backed by strong fundamental and applied research. The state of the art R&D centre at Mumbai is equipped with sophisticated and analytical facilities. Growel‟s R&D centre for the chemicals and paint‟s division has been recognized by the prestigious Indian Council of Science and Technology. The Engineering division comprises of a strong team of engineers where the focus on innovate and tailor made products. The technical collaboration of the company helps assist in maintaining technological leadership in the corrosion protection industry via new cutting edge and futuristic technologies. Thus, the same also accompanies indigenous creativity continuously. A blend of backward integration and Green technologies has been a key driver for the research team. Recently, the company was awarded the AS9100 Aerospace Certification from the BSI group. This certification implies that the user complies with industry-respected best practices and also chooses to work with the organization that developed many of these management standards for the aerospace industry. GWIL has thus become the first chemicals & paints company in India to receive this certification and is now capable to supply its products to the global aerospace industry. The products offered by the Company can be regarded as a proxy play for the Defence aspect (electroplating and surface finishing) of Make in India. Some of the products offered by GWL find application in nuclear, space and defence sector. The company has Indian Space Research Organisation (ISRO), Bhabha Atomic Research Centre (BARC), Hindustan Aeronautics Ltd (HAL) and Defence Research & Development Organisation (DRDO) as some of the esteemed clients. Some of the prestigious projects completed by GWL include: (a) Supplying specialised chemicals and paints to ISRO's Mars Orbit Mission i.e. Mangalyaan, (b) Meeting the surface finishing requirements of DRDO for its supersonic cruise missiles programme i.e. the BrahMos Aerospace programme, (c) Provision of electroplating chemicals and plants for Sukhoi fighter aircraft for Hindustan Aeronautics Limited (HAL) (d) Providing electroplating plant and specialised chemical needed by BARC. The esteemed customer list of GWIL includes Hero Honda, Escorts, Tata Motors, Yamaha, Bajaj Auto, Bosch Chassis Systems, Crompton Greaves, Lakshmi Machines, SKN-Bentex group, Duroshox, Mico, L&T, IOCL, HPCL, GAIL, Godrej Aerospace, Air Costa, BHEL and Space Application Centre. The company exports nearly 10 percent of its products to more 55 countries including the US, the EU, South America, the Middle East and South East Asia. As per some market research reports and magazines, the company has received approval from Rolls Royce and GoAir, while Boeing is carrying out the process of evaluation.

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

TM

Source: Company’s Website

Please Turn Over

INVESTMENT RATIONALE (contd.) (C) Collaborations: The company has been constantly striving to improve their product profile and innovate its process & services. In pursuit of the same, the company has indulged into valuable collaborations with some of the industry experts across the globe. (i) HERBERT SCHMIDT GMBH & CO. KG (HSO), GERMANY GWIL has signed a technology transfer & license agreement with Herbert Schmidt GmbH & Co. KG (HSO) Germany. This enables the company to manufacture and sell its entire range of products (for plating on plastics) on an exclusive basis in India and other neighbouring countries whereas, on a non-exclusive basis in the rest of the world (except Europe and Turkey). This agreement will help GWIL maintain its leadership in the business of providing solutions for surface treatment on a large variety of substrates. As per some research reports and articles, the company has expanded through one of its subsidiaries which is related to scale, aerobatic, fun fly, trainer‟‟ aeroplanes etc. moreover, the company through its subsidiaries, Digikore Design Pvt Ltd and Digikore Studios Pvt Ltd, is working with South Korean, Belgian and European studios to co-produce 2D, 3D cartoon style animation programs. (ii) NOF METAL COATINGS GROUP, JAPAN This is technology cum distributorship collaboration to sub-license the process of dacrotizing and supply related chemicals in the territory of India between GWIL and NOF Metal Coatings Group. (iii) SIDASA This is a technical collaboration with SIDASA to offer a wide range of specialised lubricants and oils for varied industrial applications. Thus, the collaboration makes sure that the stringent standards of SIDASA are maintained while providing the highest quality products. (iv) TRANSOCEAN COATINGS, THE NETHERLANDS This association develops, manufactures and sells anti-foulings, anti-corrosives, coatings for ships, offshore installations, industrial facilities, yachts etc. this also enables, brand recognition, increase of customer base and network and thus boost the sales in the marine segment. Financials: There has been a smart improvement in the performance of the company in recent past and this has enabled them to repay the long term loans and bringing it to almost debt free status and thereby improving its Debt-Equity ratio. As a result of this Return on Capital Employed (ROCE), Return on Assets (ROA) and Return on Equity (ROE) have seen consistent improvement in last 4-5 years.

Risks and concerns: The company is exposed to foreign exchange fluctuations due to its overseas presence. Moreover, the company faces stiff competition from other peers in the same industry. e-retailing business and continued uncertainty on FDI in multi brand retail segment pose potential threats. Rising environmental concerns related with metal finishing is key factor hindering the pre-treatment coatings market growth.

Outlook and valuations: The company has seen its promoters gradually adding their stake in the company. Though the stock currently appears to be a little overpriced but still an exposure is warranted as the long term outlook is bright. GWIL is geared up to maintain its leadership position in the market in the entire value chain of surface finishing goods. We initiate a BUY on the stock with a target price of Rs 65 from a 12 months perspective.

Apr 18, 2017 PICK OF THE MONTH VOL-3, NO-7

Grauer & Weil (India) Limited BUY

CMP: Rs. 45 TARGET PRICE: Rs. 65 TIME : 12 months

TM

TM

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