WS Industries

WS Industries
BuyPrice target: Rs108
Current market price: Rs82
High input cost hurts bottom lineResult highlightsFor Q4FY2008 WS Industries (WSI) has reported a 47.9% growth in its revenues to Rs66.3 crore. The revenue growth was led by a robust growth in both project and insulator sales. The operating performance of the company was disappointing with the operating profit margin (OPM) declining by 20 basis points year on year (yoy) on account of a rising input cost. The raw material cost as a percentage of sales increased by 840 basis points to 52.2%. The interest cost declined by 13.5% to Rs1.5 crore whereas the depreciation charge rose by 16.9% to Rs1.0 crore during the quarter. The net profit increased by 36.8% to Rs3.1 crore and was below our expectations on account of the lower than expected operating performance and a higher than expected tax rate. The tax rate in the current quarter came in at 44.9% on account of a high deferred tax provisioning. At the end of FY2008, the unexecuted orders of the company stood at Rs180 crore against Rs150 crore in Q3FY2008. The promoters have subscribed to 925,000 warrants of the company at Rs107 per warrant; the same on conversion would result in a 4.2% dilution of the equity. WSI is in the process of drawing up a concrete plan for the utilisation of the funds raised through this issue. The company's additional capacity in the Andhra special economic zone (SEZ) is expected to come on stream by mid FY2009. In our view this capacity would be the growth driver for the company going forward. A healthy order book of Rs180 crore and increased production capacity provide visibility to the future earnings of the company. We have revised our FY2009 earnings estimate to Rs7.5 per share owing to the higher input cost. We have also introduced our FY2010 earnings estimate in this report--we expect WSI to report compounded annual growth rate (CAGR) of 17.8% and 26.5% in the revenues and profits respectively over FY2008-10. We maintain our positive outlook on the stock and maintain our Buy recommendation on it with a price target of Rs108. We have valued WSI on the basis of the sum-of-the-parts (SOTP) method. We have rolled forward the target multiple for the core business and valued the same at Rs80.2 per share. We have valued the real estate subsidiary at Rs27.9 per share. At the current market price the stock trades at 7.3x and 5.5x our fully diluted earnings per share (FDEPS) estimates for FY2009 and FY2010 respectively.