Conference Call      
          Apar Industries
Expects conductor volume and margin to improve in H2FY12


Apar Industries held a conference call on Nov 2, 2011. In the conference Call the company was represented by its top management.

Key takeaways of conference call

Sales for the quarter were higher by 11% to Rs 737.643 crore. But the EBITDA before unrealized exchange loss (gain) stood lower by 12% to Rs 38.497 crore (down from 43.833 crore in Q1FY11), but the EBITDA after unrealized exchange loss/gain stood lower by whopping 94% to Rs 3.209 crore. Unrealized exchange loss stood at Rs 35.288 crore for the quarter compared to a gain of Rs 8.068 crore in the corresponding previous period. Eventually the PAT was lower by 86% to Rs 4.885 crore.

Unprecedented depreciation of Indian Rupee during August and September, 2011 has resulted in the company incurring a Mark to Market ( MTM) Forex loss of Rs 49.930 crore for the quarter/half year ended Sep 2011. It consists of a realized loss of Rs 14.642 crore, and unrealized loss of Rs 35.288 crore. This unrealized loss of Rs 35.288 crore includes Rs 2 crore of unrealized loss from an ECB loan taken by the company with repayment due in 2015.

The company has not changed its foreign exchange (forex) management policy in respect of both of its divisions but only has maintained it. The conductor division has a natural hedge after considering the finished goods inventory against export orders. However, the forex exposures in respect of its Oil division are hedged once the raw material is priced & converted into Rupee receivables. While the oil pricing is on monthly basis, there involves a 45 days of transit time and 45 days of finished goods which impacted this time.

The order book as of October 1, 2011 stood at Rs 1598.3 crore and the orders in pipeline stood at Rs 397.7 crore. The flow of orders has gained momentum in this quarter. Orders worth Rs 873.1 crore were received in this quarter (July to Sept 11). In addition to this, in the month of October 2011, the company has received Orders worth Rs 326.6 crore (which is not reflected in the order book as of October1, 2011).

The month of Sep 2011 has turned into a weak one for all three business of the company i.e. oil, conductors and cables. Oct 2011 is also slow due to diwali. Off take will improve in Nov 2011 and rest of the year.

Conductor Volume in H1FY12 at 40000 tonne was approx 7% lower than its corresponding previous period figure. Expects sales volume to be higher in H2FY12 than the first half with overall sales volume for FY12 increase close to 100000 tonne.

Q2FY12 conductor profits were subdued due to execution of low margin legacy orders. These orders were booked last year when the main customer PGCIL was absent from the market. The reduction in the overall demand created a difficult market condition, and the industry was witnessing reduction in margins. The performance was also further affected on account of delays in off-take by customers since their projects' execution is undergoing delays As a result, there was some idle capacity resulting in under recovery of overheads.

The company earlier expected the execution of profitable orders to start in Q2FY12, but that slipped into third quarter and execution to start from Nov 2011 on wards. So margin in H2FY12 will be higher.

The current backlog that the company carries is with better margins than the legacy orders. With execution of better margin orders, the company expects the EBITDA margin of the conductor business of to go back to earlier 7% level in FY13. The impact of this will be seen from Q4 onwards.

Embarked on expansion of production capacity through debottlenecking at a cost of Rs 150 million for transformer/ specialty oil biz.

PGCIL accounted only 14% of total sales for the quarter compared to 40% in the corresponding previous period.

Of the total OB approx 75% is domestic; 9% deemed exports and balance are physical exports. Of current order book the share of PGCIL is about 40%.

Transformer OEMs are having record oil inventory at their manufacturing unit. Since transformer oil is the last product ordered by the OEM in the value chain the demand continue to be depressed for transformer oil.

For company as a whole - In H2FY12 the sales expected is Rs 1700 crore and EBITDA of Rs 95-100 crore.

Lot of tenders pending was released in Oct 2011 by PGCIL. Essentially the offtake is going to start for PGCIL starting H2FY12.

Cables – Uniflex dispatches were deferred in Q2FY12. Especially the month of Sep 201 has witnessed slowdown in terms of actual shipment on account of delay in getting LC, payment arrangement etc forcing the company to withhold shipment. Uniflex have a order book of Rs 90 crore and the company expects to receive an export order of about Rs 50 crore in Nov 2011. Uniflex expects a sale of Rs 180 crore in H2FY12 and a sale of Rs 300 crore expected for FY12. It expects H2FY12 EBITDA to be positive but at net level it is expected to be a loss of about Rs 8 crore. Demand has picked up in some of specialty cables.

As end of Sep 2011 the company had a conductor inventory of approx Rs 500 crore.

Conductors – Expects the utilisation to improve to 90% by end of the year. Further expansion in Orissa is underway and the company has already ordered for long lead machinery. By Q3FY13 the plant will be up and running.

The company had covered net forex outstanding by the end of August through till end November ( which is approximately 90 days). Any gain in the Re from a level of Rs 49 vs USD from December 2011 onwards will result in a reversal of unrealized loss. The company has partially adjusted prices of finished products from October onwards. If there is increase in price of oil to the extent of 10-11% (earlier increase is just 6.5%) then part of the forex loss on oil can be recovered partly.

When the Re depreciation started in August 2011, the company had forward covers for net foreign exchange payments till 30th November 2011. Should the Re appreciate post Nov 2011, like most of the other currencies strengthened against the USD, the MTM loss to that extent will get reversed. About Rs 1.5 crore, which is on account of conductor biz will be reversed this quarter.

Expects that the pricing of oil is likely to stabilize by the end of Q3FY12.

The company has continued its efforts to increase its sale of High Temperature Conductors, which gives better value addition. The order book for these type of conductors stood at Rs 98.1 crore.

Originally posted by subu76 <Snip>............ Despite this track record i'd say that Apar looks somewhat undervalued.

It is! Think of it this way despite these headwinds it will report ~Rs 25/- as EPS for FY12. Once these issues resolve which they will at some point in time.. the EPS potenitial is Rs ~40 range. And I still think that this will become ~Rs 400/- in 2 years.

Originally posted by subu76 I once bought Apar and Savita since both were suffering from one time issues around inventory losses. Then in a fit of brilliance i sold the Savita shares and doubled the Apar bet since it looked stronger. Apar doubled but Savita did much much better.   Despite this track record i'd say that Apar looks somewhat undervalued.

  

Originally posted by manish_okhade Originally posted by subu76 I once bought Apar and Savita since both were suffering from one time issues around inventory losses. Then in a fit of brilliance i sold the Savita shares and doubled the Apar bet since it looked stronger. Apar doubled but Savita did much much better.   Despite this track record i'd say that Apar looks somewhat undervalued.      Subu,   What do you think about Savita? Its down because Oil bahut mahenga ho gaya hain. But sooner or later either oil price may cool down or Savita will hike the price with some lag effect.   I just checked on Q3 results, observed one -ve that inventory is increasing so not sure why whether it means Savita has bought the RM and hoping to deliver in next 1-2 qtrs or they miscalculated the demand?    Regards, Manish