Surya Roshni (SRL) reported a decent set of numbers for 2QFY2016. Its top-line grew by
4.3% yoy to Rs722cr led by a superb performance by the Lighting division. The EBITDA
margin witnessed a slight decline of 36bp yoy to 7.8% on account of higher employee and
other expenses. However, the same was mostly made up by a 244bp yoy decline in raw
material cost to 70.3% of sales. The interest cost declined by 16.3% yoy to Rs24cr and as a
result, the net profit grew by 3.7% yoy to Rs13cr vis-à-vis our estimate of Rs17cr.
Structural shift in the Lighting industry presents new growth opportunity: We expect SRL to
benefit from the structural shift in the lighting industry towards LED lighting, which is
expected to grow at a CAGR of 28% over FY2015E-21E. SRL is the second largest lighting
company in India with a market share of ~ 25%. With demand for LEDs expected to rise,
the company would be a key beneficiary, given that the company’s ”Surya” brand is well
recognized and has superior market reach with its 2 lakh plus retailers.
Higher contribution from Lighting division to boost margins: SRL’s Steel Pipes business,
entails low profitability and has higher debt, thus having resulted in high overall debt/equity
for the company. The Lighting business’ contribution to the overall top-line of the company
has increased from 30% in FY2012 to 40% in FY2015. The Lighting business commands
higher margins (10.7%) vs the steel business (2.9%) and contributes by 70% to the
company’s overall profitability. We expect the Lighting business’ contribution to rise on
account of growth coming in from LEDs, thus enhancing overall profitability. Additionally,
with healthy cash flow generated from the Lighting business and lower interest rate scenario
prevailing, we expect the company to slowly reduce its debt.
Outlook and Valuation: With higher contribution from the Lighting business and entry into
newer businesses, we expect the company to post a top-line CAGR of 6.2% over FY2015E-
17E to Rs3,223cr. The EBITDA margin is estimated to improve from 7.8% in FY2015 to 8.4% in
FY2017. Consequently, the net profit is expected to post a CAGR of 21.6% over FY2015E-17 to
Rs80cr. At the current market price, the stock is trading at a cheap valuation of 6.9x its
FY2017E earnings. We maintain our Buy rating on the company with a target price of
Rs183, based on a target PE of 10.0x for FY2017E.

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