1

Surya Roshni Limited

BUY Target price: Rs.104.00 CMP: Rs.86.25 Market Cap. : Rs.2242.50mn.

Date: January 18th

, 2010.

Key Ratios:

Particulars FY09

(12 m)

FY10E

(12 m)

FY11E

(12 m)

OPM (%) 6 5 5

NPM (%) 1 1 1

ROE (%) 11 11 12

ROCE (%) 12 12 13

P/BV(x) 1.14 1.01 0.88

P/E(x) 10.41 8.91 7.23

EV/EBDITA(x) 0.67 2.20 2.20

Debt equity ratio 2.22 2.16 2.09

Key Data:

Sector Steel

Face Value Rs.10.00

52 wk. High/Low Rs.93.70/21.90

Volume (2 wk. Avg.) 226000

BSE Code 500336

SYNOPSIS • We initiated the coverage of Surya Roshni Ltd and

set a target price of Rs.104.00.

• Surya Roshni Ltd has emerged as a vast

conglomerate with the largest ERW pipe

manufacturing plant in India, a large cold rolling

strip mill at Bahadurgarh (Haryana) and two lighting

units one each at Kashipur (UP) and Malanpur (MP).

• Board of directors of the company has approved the

allotment of 64,00,000 optionally convertible

warrants on preferential basis.

• Surya Global Steel Tubes Ltd., a subsidiary of Surya

Roshni, commercial production of their newly set-up

Spiral Pipe Plant at Anjar Gujarat has commenced on

December 02, 2009.

• The company has revealed its intention to infuse

about Rs 550crore towards capacity expansion in its

different plants in the country by March 2010.

• The company has recommended dividend of Rs 1.20

per equity shares for the year 2008-09.

• The company’s Net sales and PAT is expected to

grow at a CAGR of 17% and 15% over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 07

3. Company products 08

4. Peer Group Comparison 09

5. Key Concerns 09

6. Financials 10

7. Charts & Graph 12

8. Outlook and Conclusion 14

9. Industry Overview 15

3

Investment Highlights

• Result Updates (Q2FY10) (standalone):

For the second quarter, the top line of the company increased 6%YoY and stood at

Rs.5315.30mn against Rs.5009.80mn of the same period of the last year. The bottom

line of the company for the quarter stood at Rs.48.30mn from Rs.36.80mn of the

corresponding period of the previous year i.e., an increase of 31%YoY.

EPS of the company for the quarter stood at Rs.1.86 for equity share of Rs.10.00 each.

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Expenditure for the quarter stood at Rs.5052.00mn, which is around 6% higher than the

corresponding period of the previous year. Raw material cost of the company for the

quarter accounts for 73% of the sales of the company and stood at Rs.3900.60mn from

Rs.3786.00mn of the corresponding period of the previous year i.e., an increase of

3%YoY. Employee cost increased 32%YoY to Rs.214.20mn from Rs.162.20mn. and

accounts for 4% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 5% and 1% respectively from 4% and 1%

respectively of the same period of the last year.

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• Segment-Wise revenue for the quarter

Segment Revenue (Rs. million)

Steel Products 3638.50

Lighting Products 1676.80

Total 5315.30

Less: Inter Segment Revenue 0.00

Net sales/income from Operations 5315.30

• Allotment of Optionally Convertible Warrants on Preferential Basis

Board of directors of the company has approved the allotment of 64,00,000 optionally

convertible warrants on preferential basis at Rs 59 per warrant by receiving upfront

payment of Rs 14.75 per warrant.

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• Inauguration of Spiral Pipe Plant

Surya Global Steel Tubes Ltd., a subsidiary of Surya Roshni, commercial production of

their newly set-up Spiral Pipe Plant at Anjar Gujarat has commenced on December 02,

2009.

• Dividend declaration

The company has recommended dividend of Rs 1.20 per equity shares for the year

2008-09.

• Surya Roshni charts Rs.550 cr. expansion plan

The company has revealed its intention to infuse about Rs 550crore towards capacity

expansion in its different plants in the country by March 2010. The company will make

the fund infusion along with some of its subsidiaries.

The move is in tune with the company’s plan to augment its annual turnover of Rs

1750crore to Rs 5000crore in the coming two to three years. After registering export

figure of Rs 300crore in the previous fiscal, the company is aiming to take this number

higher to Rs 400crore this year.

As of now, the Surya Roshni is in the process of setting up manufacturing units in south

India; however, the company cited that this would materialize in the next financial year.

• Surya Roshni signs MOU with Gujarat government.

The company has signed a memorandum of understanding (MoU) with the Gujarat

government for setting up a cement mill for Rs 1,000crore and a steel pipe plant for Rs

400crore in Gujarat.

The cement project will be executed by Surya Global Cement and the steel pipe project

by Surya Global. Both the companies are 51% subsidiaries of Surya Roshni.

The company is also planning to venture into the high mast and street light segment

with an investment of Rs.100crore.

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Company profile

Surya Roshni incorporated in 1973 with a steel pipe plant located at Bahadurgarh in Haryana.

Presently this plant has emerged as one of the largest in Asia, with a production capacity of

180000 MT of steel pipes annually. Company’s product portfolio comprise of fluorescent tube

lights, GLS lamps, CFL lamps, HPSV Lamps, HPMV Lamps Metal Halide Lamps and ERW pipe.

Company owns two manufacturing units at Malanpur and Kashipur. Company’s Malanpur unit

was set up in 1984 and its Kashipur unit in 1992.These units has received ISO 9001:2000, ISO

14001:1996 and OHSAS18001:1999 certifications for quality management.

Presently it has marketing network of 30 branches, over 1500 authorized dealers and over

1,00,000 retailers in India itself. In India, Surya Roshni is the second largest seller of GLS and

FTL. Currently company has presence in over 48 countries namely Australia, Indonesia, Oman,

Bahrain, Iran, Paraguay, Bangladesh, Jordan, Saudi Arabia, Botswana, Korea, Singapore,

Columbia, Kenya, Sri Lanka, Egypt and many more.

Branch Network

Surya has a strong marketing network throughout the country with 30 branches, over 1500

authorized dealers and more than one lakh retailers. All the branches are well-equipped with

online computer systems and efficient infrastructure for storage of materials.

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Subsidiaries

• Surya Global Steel Tubes Ltd.

• Surya Roshni Inc. (Since Dissolved)

Associates

• Surya Global Steel & Gen Power Limited

• Surya Global Cement Limited

• Surya Global Infrastructure Limited

• Surya Roadlink and Infra Limited

Company products

• General Lighting Service Lamps (GLS lamps)

• Fluorescent Tubes

• Compact Fluorescent Lamp (CFL)

• HID Lamps

• Luminaries

• Lighting Poles

• High Masts

• Miniature Circuit Breakers (MCB)

• Accessories like choke and starters

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• Components like soda lime glass shells, tubular glass shells, aluminum caps, GLS

filament, TL cathodes and CFL cathodes

Peer Group Comparison

Name of the

company

CMP(Rs.)

(As on

January

18th

,2010)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Surya Roshni Ltd 86.25 2242.50 8.88 9.77 1.14 12.00

Jindal saw 206.65 56638.4 20.03 10.33 2.55 50.00

Welspun Gujrat Stahi

Rohren Ltd 278.85 52037.1 20.10 13.86 3.37 30.00

PSL Ltd 171.80 9184.6 15.42 11.14 1.44 50.00

Key Concerns

� Tough competition from multi-national companies

� Unbranded products from the unorganized sector

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Financials Results Update

12 months ended Profit and Loss A/C (Standalone):

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 14851.00 16905.90 20625.20 23718.98

Other Income 99.40 5.80 10.44 11.48

Total Income 14950.40 16911.70 20635.64 23730.46

Expenditure -14038.90 -15931.40 -19515.56 -22453.81

Operating Profit 911.50 980.30 1120.08 1276.65

Interest -380.70 -464.40 -519.51 -571.46

Gross Profit 530.80 515.90 600.56 705.19

Depreciation -255.90 -236.70 -265.10 -291.61

Profit before Tax 274.90 279.20 335.46 413.58

Tax -70.80 -63.80 -83.86 -103.39

Net Profit 204.10 215.40 251.59 310.18

Equity Capital 260.00 260.00 260.00 260.00

Reserves 1535.30 1714.20 1965.79 2275.98

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 26.00 26.00 26.00 26.00

EPS (Rs) 7.85 8.28 9.68 11.93

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Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Sales 3910.50 4076.70 5315.30 5581.07

Other Income 1.40 1.90 2.30 2.53

Total Income 3911.90 4078.60 5317.60 5583.60

Expenditure -3604.10 -3835.30 -5052.00 -5302.01

Operating Profit 307.80 243.30 265.60 281.58

Interest -158.90 -117.40 -130.60 -137.13

Gross Profit 148.90 125.90 135.00 144.45

Depreciation -32.70 -68.00 -70.00 -72.80

Profit before Tax 116.20 57.90 65.00 71.65

Tax -11.70 -16.00 -16.70 -18.41

Net Profit 104.50 41.90 48.30 53.24

Equity Capital 260.00 260.00 260.00 260.00

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 26.00 26.00 26.00 26.00

EPS (Rs) 4.02 1.61 1.86 2.05

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Charts

• Net sales & PAT

• P/E Ratio (x)

13

• P/BV (X)

• EV/EBITDA(X)

14

1 Year Comparative Graph

Outlook and Conclusion

• At the market price of Rs.86.25, the stock is trading at 8.91 x and 7.23 x for FY10E and

FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 2.20 x for FY10E and 2.20 x for FY11E.

• Price to book value of the company is expected to be at 1.01 x for FY10E and 0.88 x for

FY11E respectively.

• EPS of the company is expected to be at Rs.9.68 and Rs.11.93 for the earnings of FY10E

and FY11E respectively.

• The company’s Net sales and PAT is expected to grow at a CAGR of 17% and 15% over

FY08 to FY11E.

• Board of directors of the company has approved the allotment of 64,00,000 optionally

convertible warrants on preferential basis at Rs 59 per warrant by receiving upfront

payment of Rs 14.75 per warrant.

• Surya Global Steel Tubes Ltd., a subsidiary of Surya Roshni, commercial production of

their newly set-up Spiral Pipe Plant at Anjar Gujarat has commenced on December 02,

2009.

Surya Roshni Ltd BSE SENSEX

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• The company has revealed its intention to infuse about Rs 550crore towards capacity

expansion in its different plants in the country by March 2010. The company will make

the fund infusion along with some of its subsidiaries.

• The company has signed a memorandum of understanding (MoU) with the Gujarat

government for setting up a cement mill for Rs 1,000crore and a steel pipe plant for Rs

400crore in Gujarat.

• We recommend ‘BUY’ with a target price of Rs.104.00 for long term.

Industry overview

Sector structure/Market size

The steel industry in India has been moving from strength to strength and according to the

year-end review by the Press Information Bureau, India has emerged as the fourth largest

producer of steel in the world and the second largest producer of crude steel.

Significantly, state-owned steel maker, Steel Authority of India (SAIL), which reported a net

profit of US$ 571 million in January-June 2009, has become the most profitable steel company

globally, beating steel majors such as ArcelorMittal, Posco, Bao Steel and Nippon in the half

yearly profits.

Production

Steel production reached 28.49 million tonne (MT) in April-September 2009. The National Steel

Policy has a target for taking steel production up to 110 MT by 2019–20. Nonetheless, with the

current rate of ongoing Greenfield and Brownfield projects, the Ministry of Steel has projected

India's steel capacity is expected to touch 124.06 MT by 2011–12. In fact, based on the status of

memoranda of understanding (MoUs) signed by the private producers with the various state

governments, India's steel capacity is likely to be 293 MT by 2020.

Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the

total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels

and retail stores is growing immensely.

India's steel consumption rose by 6.8 per cent during April-November 2009 over the same

period a year ago on account of improved demand from sectors like automobile and consumer

durables. A Credit Suisse Group study states that India's steel consumption will continue to

grow by 16 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1

16

trillion. The scope for raising the total consumption of steel is huge, given that per capita steel

consumption is only 35 kg – compared to 150 kg across the world and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail

outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail

outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at

least 10-15 per cent of their total production to be sold by their retail outlets. Essar Steel which

currently has over 300 retail outlets across the country plans to set up 5,000 outlets of various

formats soon. It expects to sell 3MT of steel through the retail route in two years.

Exports

Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported.

India's iron ore exports more than doubled to 9.3 million tonne in October 2009 as compared to

4.4 million tonne in the same month a year ago on the back of increase in demand from

Chinese steel producers, as per a joint study by a group of iron ore exporters.

Iron ore is a key input in steel making. The country’s iron ore exports during April-October 2009

period grew 20 per cent over the year ago period to 53 million tonne, as per the study.

Investments

A host of steel companies have lined up major investment proposals. Furthermore, with an

expanding consumer market, the Indian steel industry is likely to receive huge domestic and

foreign investments.

The domestic steel sector has attracted a staggering investment of about US$ 236 billion,

according to the Minister of State for Steel A Sai Prathap. This consists of nearly 222 MoUs

signed between the investors and various state governments mostly in the states of Orissa,

Jharkhand, Chhattisgarh and West Bengal.

• According to the Investment Commission of India investments of over US$ 30 billion in

steel are in the pipeline over the next 5 years.

• Tata Steel has raised US$ 500 million by issuing 'global depository receipts' (GDRs)

aiming at expansion of its Jamshedpur plant and overseas mining projects.

• The state-owned Steel Authority of India Ltd (SAIL) will invest US$ 724.12 million to set

up a 4-million tonne per annum steel mill at its Bhilai Steel Plant.

• SAIL is also planning to set up a 12-million tonne plant in Jharkhand.

• Stainless steel manufacturer and exporter, Varun Industries, is setting up a US$ 171.63

million stainless steel-cum-alloy steel plant at Rohat, Jodhpur.

• India’s largest engineering conglomerate Larsen & Toubro (L&T) and state-owned

Nuclear Power Corporation of India Limited (NPCIL) have formed a US$ 370.09 million

joint venture for specialised steel and forging products.

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Government Initiative

Subsequent to the recent fall in international prices of commodities and to protect Indian

producers, the Indian government has announced some changes in customs duty rates, which

were effective from November 2008. The government has removed full exemption of customs

duty on some industrial and agricultural commodities. Iron and steel products like pig iron,

spiegeleisen, semi-finished products, flat products and long products are now subject to a basic

custom duty of 5 per cent ad valorem. The Indian government plans to invest over US$ 350

billion in industries related to infrastructure and construction which will give a fillip to the steel

sector.

Moreover, in the Union Budget 2009-10, the government has made a 23 per cent hike in

allocation for highway development and US$ 1.034 billion increase in budgetary support to

Railways which will further promote the steel industry.

Road ahead

While the demand for steel will continue to grow in traditional sectors such as infrastructure,

construction, housing, automotive, steel tubes and pipes, consumer durables, packaging, and

ground transportation, specialised steel will be increasingly used in hi-tech engineering

industries such as power generation, petrochemicals, fertilizers, etc. The new airports and

railway metro projects will require a large amount of stainless steel.

According to an estimate, with the growing need for oil and gas transportation infrastructure, a

US$ 118 billion opportunity is waiting to be tapped by steel manufacturers in the next five

years. Indian steelmakers are set to make the most of booming global demand for steel pipes

and tubes with the government withdrawing the 10 per cent duty on the exports of these

products. According to a study by ICICI Direct, Indian steel companies are likely to get 19 per

cent of the total global demand in the years to come.

___________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but we do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

18

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