Surya Roshni – Backend infrastructure ready as opportunities galore; Buy
Source: IRIS | 08 Sep, 2021, 03.20PM
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| Rating: NAN / 5 stars. |
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 Surya Roshni (Surya) is the second largest manufacturer of steel pipes (contributes 67% to EBITDA) and also the second largest LED manufacturer in India. “We initiate coverage on Surya Roshni with a Buy rating and a target price of Rs 694,” said IDBI Capital Equity Research in its report.
“With focus on improvement in product mix in steel pipes segment, we expect its margins to improve over the next two-three years. In Lighting & Consumer Durables segment, we anticipate strong growth in segment revenue led by rising demand for LED lights in India and also import substitution. Surya has entered home appliances in the past five years – we expect this segment to record strong growth given strong distribution network of Surya,” the broking firm added.
Historically, Surya’s return ratios have been lower due to various reasons such as weaker product mix, falling LED prices, etc. Nevertheless, we expect strong improvement in its return ratios over FY21-FY23, it said.
Key highlights and investment rationaleLargest exporter of GI pipes; focus on high margin API pipes: Over FY16-FY21, Surya has gradually improved its product mix in favor of high margin GI pipes and API pipes. Looking ahead, we expect its margins to improve further led by 1) rising share of API pipes, 2) saving in logistics cost due to decentralized production base and 3) DFT based Large-dia section pipe mill which will lead to cost savings.
LED prices bottomed out; market share gains likely: After falling sharply over the past 7-8 years, LED prices have bottomed out in our view. Moreover, imports from China which persisted during the past decade have now started falling. Surya, being second largest manufacturer of LED lights in India is likely to gain market share with improvement in margins. Further, Surya remains well-poised to benefit from the recently announced PLI scheme for LED lights.
Outlook and valuation: Surya is the largest GI pipe manufacturer in India and second largest players in Lighting with a proven track record. We forecast its EPS to grow at CAGR of 48% over FY21-23E and ROE to improve to 20% in FY23 (average 10% over FY16-FY21). We derive a SOTP-based target price of Rs 694. It is noteworthy that a demerger of its pipes and lighting segment could unlock significant value.
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