Visaka Industries Ltd Initiating Coverage Report By Edelweiss

Aligned to national priorities

Visaka Industries was established in 1985. Visaka has two main divisions; building products division which manufactures cement asbestos sheets and fiber cement boards & panels (CBPs) and the textile division. The building products division accounts for a majority of the revenue – of over 80%. Visaka has 11 manufacturing facilities across India with an aggregate production capacity of 802 KTPA in cement asbestos sheets, 180 KTPA in V-boards and panels and 11,000 MT of yarn production per annum. Burgeoning market share, improved product portfolio and wide distribution reach are bound to aid Visaka clock 28% earnings CAGR over FY17-20E, healthy cash flows and improving return ratios. We initiate coverage with ‘BUY’ recommendation.

Visaka – Prominent rural and semi-urban brand in building materials

Visaka is the second largest player in the domestic cement asbestos market, has a wide distribution network of 6,000+ retailers that garner 85% of sales. Visaka expected to deliver healthy sales on the following counts: government’s initiative in favour of affordable housing, an increase in rural income, lowering of the GST rate supported by two consecutive good monsoons and moderate inflation. Also, Visaka has launched a new roofing product – ‘ATUM’ which is eco-friendly, energy efficient and energy generating roof, which is expected to further enhance sales.

Fiber cement boards and panels: Visaka moving to non-asbestos products

CBPs market is growing at an average rate of 15% (domestic demand at ~20%+), on account of increasing awareness level and its faster nationwide acceptance. Visaka with its enhanced capacity, expected to capitalise the growing demand. Visaka expects to achieve ~50% sales from non-asbestos products, up from 33% currently, over the next three years.

Textiles – Improving realisation and robust offtake

Visaka’s spinning capacity expanded by 26% in FY17; this will increase manufacture of premium yarns with potentially higher realisation and could result in robust offtake. We expect ~7% of sales growth with healthy margin of 12% in this segment.

Ample levers to spur operating margin

We estimate Visaka’s operating margin to catapult 310bps over FY17-20E on four counts: (a) increased contribution of CBPs; (b) improvement in realisation in both building product and yarn segments, c) lower RM prices and d) keen focus on branding and distribution. Ergo, we estimate the company’s EBITDA margin to jump to 15.1% by FY20E.

Outlook and valuation:

On a strong turf; initiate with ‘BUY’ We like Visaka mainly on account of its unique product mix (aligned to national priorities and hence likely to benefit from the government’s growth and social welfare push), significant position in the industry in all the products they make, scope for significant growth in topline/bottomline, strong balance sheet and strong management pedigree. We expect it to deliver, 6%/15%/28% CAGR in sales/EBITDA/PAT respectively over FY17- 20E. We initiate coverage on the stock with a ‘BUY’ recommendation and target price of INR1,075 based on 20x FY20E earning.