We recently met the management of Salasar Techno Engineering Ltd (Salasar) and on the basis of our interaction, we have upgraded our target on Salasar by 38% to Rs 366 (FY20E12.5xPE). Our confidence in the company has been bolstered, given its strong Q1FY18 performance with topline and bottomline growth exceeding our expectations. Key takeaways of our interactions is as under:
1. The company delivered a 51% revenue growth YoY at Rs 125.1 crore. EBITDA also increased by 60.9% to Rs 12.2 crore with margin rising by 60 bps to 9.8%. PAT grew by a whopping 76.5% to Rs 6.1 crore and PAT margin moved up by 71 bps to 4.9%. The management attributed healthy numbers to increase in order book execution, higher contribution of tubular towers and higher margin business. However, a portion of the same can be attributed to preponing of order book execution given the fallout of GST. For the same reason, Q2FY18 may be marginally weaker.
2. On the back of management optimism, we have materially upped our revenue forecast to Rs 662.7 crore and consequently the EBITDA & PAT working.
3. The company’s current order book stands at Rs 100 crore for the telecom segment, which is a continuous running order. Transmission lines currently have Rs 300 crore order book, on which billing is left. Rs 250 crore out of the same is expected to be executed within the next 18 months and the remaining will be done 6 months after. The rail order for Rs 49.5 crore will be completed over the next 10 months and currently only 2-3 crores of revenue from the same has been booked.
4. With capex behind us, no new fund injection is required; except for working capital, considering higher revenue forecasts. Accordingly, no material change is expected on the interest outgo.
5. The company has initiated manufacturing of smart poles equipped with varied features, with prototypes installed at its plant for trial run. Ericsson, its competitor in this segment, outsources the smart poles at 3X cost than what Salasar incurs. Hence, we believe Salasar has competitive advantage due to cost and this should ensure higher than average margins from this segment.
6. Company exports to countries like Africa & Nepal currently. Also, it is in the process of signing an agreement with a Malaysian company to export towers to Myanmar, Bangladesh & Sri Lanka, Malaysia and Cambodia, but this segment forms a very small part and the countries to where the company is looking to export are small, with minimal tower demand, so currently the management has no visibility on the same.
7. The management assured of a dividend outgo in the current year, and also is in the process of formulating a formal dividend policy post H1FY18.
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We revise our estimates on Salasar Techno Engineering Ltd. We had earlier assigned a 30% discount to its peers’ (KEC International & Kalpataru Power Transmission) FY20E Adjusted EPS. However, on the back higher revenue growth and strong order book, we assign a multiple of 12.5 to its FY20E EPS of Rs. 29.3, translating into a revised price objective of Rs. 366.1, representing potential upside of 38% from its CMP of Rs. 265.5 over the next 30 months. At the CMP, the stock is trading at 8.7x its FY20E Adjusted EPS of Rs. 29.3.