For 2QFY2016, Visaka Industries reported a mixed set of numbers. The top-line,
at Rs192cr (8.2% yoy decline), was marginally below our estimate of Rs205cr. The
EBITDA declined by 21.6% yoy to Rs15cr and the EBITDA margin contracted by
135bp yoy to 7.9%, owing to a 109bp yoy increase in raw material cost as a
percentage of sales to 50.2% and 157bp yoy increase in employee expense to
8.0% of sales. Other expenses declined by 131bp yoy to 33.9% of sales. We had
built in an EBITDA margin estimate of 6.4%. Interest expense at Rs5cr was higher
by 19.7% on a yoy basis. Consequently, the net profit declined by 78.9% yoy to
Rs0.8cr, against our estimate of Rs1.5cr.
Near term pressure for Asbestos Cement Products (ACP); Overall long term
prospects intact: The ACP division of the Building Products segment is likely to
face pressure in the near term on account of subdued rural sentiment. However,
the company is a major player with ~17% market share. With the rural economy
expected to improve in the longer run, we expect the division to perform well
going forward. The Building products segment is also supported by strong
performance of its V-boards division which is expected to post a robust
performance on account of growing acceptance and cost advantages against
substitute products and increasing contribution of exports. Additionally, we expect the
Synthetic yarn segment to remain a steady contributor, thus aiding top-line growth.
Outlook and Valuations: We have marginally revised our estimates downwards
for FY2017E to factor in the lower than estimated numbers. At the current market
price of Rs119, the stock is trading at a valuation of 4.1x FY2016E EPS, which
continues to be attractive. We continue to maintain our Buy rating on the stock,
with a revised target price of Rs144, valuing the stock at 5.0x on FY2017E
earnings.
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