We are pleased to inform you that our Value Pick stock - Surya Roshni Ltd (BSE Code: 500336, NSE Code: SURYAROSNI) which we recommended on 03 July 2022 at Rs. 355 has already achieved its target price.

Surya Roshni stock made its 52 week high of Rs. 741 recently and today closed at Rs. 725 giving absolute returns of 105% to our Value Picks members in period of 8 months. We have not suggested any profit booking in the stock yet to our members. We expect the company to continue to perform well in coming quarters.

Below is the summary of Surya Roshni Ltd released by our team as Value Pick stock on 03 July 2022, the report was shared with all our Value Picks members.

1. Company Background:

Incorporated in October 1973 as Prakash Tubes Private Limited by Mr. B.D. Aggarwal and his son, Mr. J.P. Aggarwal, Surya Roshni Limited began operations as a steel pipe manufacturing unit from Bahadurgarh (Haryana). In FY1985, the company diversified into manufacturing lighting products and established its facilities at Kashipur (Uttarakhand).

At present, Surya Roshni has two reportable segments - Steel Pipes and Strips and the Lighting and Consumer Durables segments. All the products in steel pipes and strips segment are sold under the brand name ‘Prakash Surya’ and products in lighting and consumer durables segment (including all types of lamps, home appliances, PVC pipes) are sold under the brand name ‘Surya’.

Based on last year financials, the Steel Pipe & Strips segment accounted for around 78 percent of the company’s total revenues, while the Lighting and Consumer Durables segment accounted for the balance 22 percent. The company is operating four manufacturing units in its Steel division in Bahadurgarh (Haryana), Malanpur (Madhya Pradesh), Hindupur (Andhra Pradesh) and Anjar (Gujarat).

The company manufactures cold rolled (CR) strips and electric resistance welding (ERW and spiral pipes of various grades and coated pipes at its newly established 3 LPE coating line at Anjar (Gujarat). Under the Lighting and Consumer Durables division, the company manufactures various types of lamps including light-emitting diode (LED) Lamps, LED street lights, fluorescent tube lights (FTL), general lighting service (GLS) lamps, high-intensity discharge (HID) lamps. At present, the company is one of the major LED Lighting providers in the country with a wide range of LED Lamps, LED tube lights, LED down lighters and LED street lights in its LED product portfolio.

The promoter and Executive Chairman of the company, Mr. J P Agarwal, has a rich experience of over four decades in the industry. Further, the company has separate management teams headed by ED & CEOs of respective businesses, being steel pipes & strips and lighting & consumer durables, who are supported by management teams consisting of experienced professionals in the business of steel pipes & strips and lighting & consumer durables.

2. Recent Developments: (As on 03 July 2022)

i) LED market is estimated to grow at a CAGR of 5.2%

The global lighting fixtures and luminaires market, estimated at USD 79.2bn in 2020, is expected to grow at a CAGR of 5.2% during 2021-2027 to reach a value of ~USD 112.9bn by 2027 (Source: Businesswire). The industry has witnessed a robust evolution from incandescent to LEDs, allowing end-users to choose from a wide range of options like FTLs, CFLs and others. General lighting and automotive sectors consume more than 50% of lighting fixtures produced across the globe.

LED lighting has become one of the most preferred technologies among consumers as it reduces energy consumption, has a better life expectancy and is more affordable. Preference has further skewed towards LEDs as a result of rising environmental concerns and favourable government initiatives. LED penetration in the lighting market has increased from 18% in 2015 to nearly 61% in 2020.

Regionwise, the market is witnessing a rapid expansion in the developing regions – the Asia Pacific, Middle East and Africa – driven by large infrastructure investments, rising population and mega-events. As infrastructure development and consumer behaviour adapt to the changing norms of the lighting industry, LED market penetration is estimated to grow and reach a whopping 87% by 2030.

The Indian lighting industry has seen a strong transformation over the past five years. The rapid transition from traditional bulbs to CFL and now to modern generation LEDs is bringing in a consolidation in the industry. The price of an LED has dropped from Rs310 in 2014 to Rs70, thus increasing affordability and acceptability going ahead. Mordor Intelligence Report forecasts Indian LED lighting market to grow at a CAGR of 24% between 2021-2026 driven by adoption of LED battens, downlighters, tube lights and bulbs.

The Government has been actively promoting the usage of LEDs. This was done through the Ujala program which led to ~47,000 mn kWh energy savings per year and avoided approximately 9,423 MW of peak demand. Moreover, pandemic has created a good opportunity for nation to expand its share in the world trade. Several global corporations are looking forward for an alternative sourcing destination to lower their dependence on China. India is favourably placed owing to the scale, cost and quality of the organised manufacturers.

ii) The company commissioned Section Pipe DFT Plant

The company has commissioned its Large-dia section pipe facility with Direct Forming Technology (DFT) at Gwalior in April 2022 which has also added a capacity of 36,000 MTPA of the new product categories.

This will enable the company to further improve its presence in domestic as well as export markets. Surya Roshni is the largest exporter of ERW Pipes (GI and Black Pipes) and is exporting to more than 50 countries across the globe including USA, Australia, Canada, Mexico, Middle East, Europe and Africa.

The company is focusing on exporting value added products such as grooved, 30*30 section, blue painted hollow coated pipes.

Surya Roshni is second largest ERW manufacturer (second to APL) in the country with a capacity of 1.2 mn tonnes. While APL is a leader in structural ERW pipes, Surya dominates the galvanized pipes market in India.

3. Financial Performance: (As on 03 July 2022)

Surya Roshni consolidated profit rises 41.46% in the March 2022 quarter

Net profit of Surya Roshni rose 41.46% to Rs 82.81 crore in the quarter ended March 2022 as against Rs 58.54 crore during the previous quarter ended March 2021. Sales rose 33.66% to Rs 2301.38 crore in the quarter ended March 2022 as against Rs 1721.88 crore during the previous quarter ended March 2021.

Surya Roshni consolidated profit declines 27.20% in the Dec 2021 quarter

Net profit of Surya Roshni declined 27.20% to Rs 40.49 crore in the quarter ended December 2021 as against Rs 55.62 crore during the previous quarter ended December 2020. Sales rose 28.65% to Rs 2030.30 crore in the quarter ended December 2021 as against Rs 1578.17 crore during the previous quarter ended December 2020.

4. Investment Rationale: (As on 03 July 2022)

i) Surya Roshni has established brand name of Prakash Surya for its steel pipes and strips business and Surya for its lighting and consumer durables business. The company is one of the leading players in both these segments with around 2,500 dealers/distributors and more than 250,000 retailers spread across the country for the lighting segment and 21,000 dealers and 250 major distributors in the steel pipe segment to augment its market reach.

ii) The company has an in-house capability to manufacture lighting products from scratch including glass, printed circuit boards (PCBs), ballasts, filaments and caps. The company also has in-house research & development (R&D) laboratory in Noida (Uttar Pradesh), accredited by the Department of Scientific and Industrial Research (DSIR), which is involved in the design and development of new products in the lighting segment. This high level of integration helps the company to achieve better control over the entire value chain and thus results in better competitive strengths and profitability margins. The growing demand for LEDs supported by smart cities development and reduced dependence on China for the components is expected to boost the operations of larger domestic players including

iii) The ERW pipes (comprising of galvanised, black and hollow sections) is expected to grow at CAGR of 8-10% over FY21-25E. Its current market size is ~9 mn tonnes per annum. Demand for ERW pipes is driven by construction, building materials, infrastructure, automobile and energy sectors. Earlier, ERW pipes were mainly used in sewage transportation, mile gas distribution and automobiles. However, in the last decade, ERW pipes have found applications in infrastructure, commercial real estate, pre-fabricated structures and furniture due to increased load-bearing capacity. The key players in the industry are APL Apollo Tubes, Surya Roshni, Hi-Tech Pipes and Tata Steel.

iv) Despite being the second largest player, the company’s steel pipes segment margins were weaker until FY20 due to inefficiencies, lack of focus on product mix, etc. Over the last 2 years, the company’s initiatives towards focusing on value added products have led to strong improvement in EBITDA/tonne. Surya has recently added capacity of 72 kt of DFT-based pipes. It does not need to add further capacity in the coming two years as its current capacity of 1.2 million tonnes will be utilized over the next two year.

v) Under lighting business, Surya Roshni has an extensive product portfolio to meet varied consumer requirements. Due to its wide product range which includes Led lamps, Led downlighters, Led Street & floodlights, FTL fittings, Extension board, CFL, FTL and GLS, the company’s product finds a place across the value chain vertically and horizontally. To have a complete umbrella of products to meet end customer needs, the company is planning to add wires and cables in its product portfolio thus increasing its market reach.

vi) Surya Roshni has transitioned its lighting business from a traditional product portfolio (conventional lighting, CFL) to a new, evolved product offering (LED). CFL and conventional lighting together contributed to 65 percent of revenues in 2016, but now account for only 19 percent as the company grew in the LED space.

vii) To leverage extensive distribution network, the company enter consumer durables and home appliances. In 2014, Surya started manufacturing fans and gradually launched other home appliances including electrical storage water heaters, room heaters, dry irons, steam irons and immersion heater, mixer grinder, induction cookers, toasters, etc to benefit from its distribution network. Surya’s appliances business contributes around Rs 300 crores which the company aims to scale up to Rs1,000 over next five years.

viii) The company has strengthened its focus on reducing manpower, power and other overhead costs. Captive coating facility, installation of 2MW captive solar power plant and aggressive deleveraging to reduce finance costs are some of the initiatives taken in past to rationalize costs. In FY21, the company achieved a 37% reduction in finance costs driven by deleveraging. Additionally, decentralization of the production base from Bahadurgarh to other locations will continue to reap cost benefits for the company.

ix) Surya is the largest GI pipe manufacturer in India and second largest players in Lighting with a proven track record. A healthy growth in turnover supported by continued growth in volumes and a significant increase in realisations, together with prudent working capital management in FY 2021-22 helped the company generate robust free cash flows. The company used the surplus liquidity to partly prepay its debt obligations, deleveraging its balance sheet. The term debt has reduced considerably from a peak of Rs. 440 crore as on March 2017 to Rs. 61 crore as on March 2022.

x) Surya Roshni diversified into the PVC pipe segment in 2010, it manufactures CPVC/PVC pipes at its Kashipur facility in Uttarakhand. Govt initiative like Swachh Bharat Mission is expected to increase demand for sewage, water supplies and plumbing pipes that use PVC piping systems extensively. Additionally, a consistent increase in budget allocation for irrigation and housing would provide the necessary momentum to the PVC piping industry. Surya Roshni is well placed to cater the emerging demand from this segment.

xi) As on Mar 2022, promoters holding in the company is 62.96% out of which 9.06% shareholding is pledged. Institutions holding in the company is at 2.28% out of which FPI holding is 1.04%. Surya Roshni has achieved sales CAGR of 14%, profit CAGR of 13% with ROE of 20% over the last 5 years. Dividend yield at current market price is at 0.47%.

xii) As per our estimates, Surya Roshni can deliver PAT of 232 crores for FY 2023-24 with estimated EPS of Rs. 43.50. At the current price of Rs. 355.10, stock is attractively valued at price to earnings multiple of 8.2x based on expected earnings of FY 2023-24. Assigning a fair P/E ratio of 13x on estimated EPS for FY23-24 considering the company’s expansion in product portfolio in lighting segment, improving share of value added products in steel pipes business and improvement in margins with higher capacity utilization, we arrive at a price target of Rs. 565.

5. Key Concerns & Risks: (As on 03 July 2022)

i) The company manufactures steel pipes which is a limited value addition business. Therefore, Surya Roshni being a steel convertor, is exposed to the volatility in steel prices. In case of an adverse demand-supply scenario, the inability to pass on the raw material price hike to its buyers could adversely impact profitability.

ii) Beside imports, the domestic lighting and consumer appliance industries have several large and diversified players like Philips and Havells, as well as single-product/segment companies and unorganised players, given the low entry barriers in the form of capital requirements and technological complexity. Stiff competition from several organised and unorganised players limits pricing flexibility and results in moderate profitability.

6. Saral Gyan Recommendation: (As on 03 July 2022)

We expect Surya Roshni to deliver steady growth in coming years considering its strong rural presence and brand visibility in the lighting division, reducing imports from China and rising urbanization with use of more efficient lighting solutions. Under consumer durables portfolio, the company has increased its advertisement spending by taking new branding initiatives for fans and other home appliances. The company has expanded product categories and also entered the fast-moving electrical goods sector (FMEG). Under the steel product segment, Surya Roshni is expected to do well by improving capacity utilization and focus on value-added products like high margin GI (Galvanized Iron) and API (American Petroleum Institute) coated pipes.

Other than just a lighting products based company (as the company name i.e. Surya Roshni indicates), the company generates majority of its business from its steel products segment. There is a high possibility that the company will demerge its pipes and lighting segment in future, any such development may unlock significant value. Considering significant debt reduction by the company, limited capex plan over next 2 years, growth opportunities lies ahead in future and attractive valuations of the company post correction in stock price by 59% from its peak over last 9 months, Saral Gyan team recommends  “Buy” on Surya Roshni Ltd at current market price of Rs 355.10, for a price target of Rs. 565 over a period of 12 - 24 months.

Buying Strategy:

• 80% at current market price of 355.10
• 20% at price range of 260 - 300 (in case of correction in stock price)

Portfolio Allocation: 3% of your equity portfolio.