DCM Shriram Limited - Anand Rathi

Anand Rathi Research

Time Horizon – 12 Months

February 8, 2018

Source: Company, Anand Rathi Research, Bloomberg

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Analyst: CA Saurabh [email protected]

Relative stock performance (Feb’17=100)

CMP: ₹546

Target: ₹745

Shareholding Pattern (as on Dec’17)

DCM Shriram Limited

Key Data

Ticker (Bloomberg) DCMS IN

NSE Code DCMSHRIRAM

BSE Code 523367

Sector Diversified

Industry Diversified

Face Value (₹) 2.0

BV per share (₹) 156

Dividend Yield (%) 1.07%

52 Week L/H(₹) 269 / 628

Market Cap. (₹ mn.) 88216

Dec-17 Sep-17 Jun-17 Mar-17

Promoter 63.9% 63.9% 63.9% 63.9%

Institutions 13.3% 12.4% 11.8% 11.8%

Others 22.8% 23.7% 24.4% 24.3%

Total 100% 100% 100% 100%

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Nifty 500 DCM Shriram

(In ₹ mn) FY-16 FY-17 FY-18E FY-19E

Net Sales 57,805 57,885 73,579 81,317

EBITDA 5,020 7,690 11,510 13,505

EBITDA Margin 8.7% 13.3% 15.6% 16.6%

EPS (₹) 18.6 34.0 50.7 59.3

EV/Sales 1.6 1.6 1.3 1.1

EV/EBITDA 17.0 11.3 7.8 6.6

P/E (x) 29.4 16.1 10.8 9.2

Price Performance CY15 CY16 CY17 YTD

Absolute -12% 53% 161% -3%

Relative -11% 50% 125% 0%

2 Anand Rathi Research

DCM Shriram Ltd is a spin-off from the trifurcation of the reputed erstwhile DCM Group. The company’s businessportfolio consists of Chloro-Vinyl Business, Agri-Rural Business and other Value-Added Businesses. It is amongst oneof the most cost efficient producers of products and services in all its businesses and has been continuously strivingfor operational efficiency.

DCM Shriram, across its various businesses is strategically diversified yet operationally integrated company. Someof the businesses feed others, thereby lowering operation costs and making DCM Shriram a highly competitiveplayer.

The announced expansion initiatives in Chloro-Vinyl and Sugar businesses amounting to INR 1,200 crores areprogressing well. According to the management, these projects are expected to be commissioned in the next twofiscal years and substantially augment the growth prospects of the company.

The continued focus of the Govt. on agriculture & infrastructure is expected to fuel growth of the agricultural & PVCindustry in India.

Recent increase in import duty on all types of sugar (raw sugar, refined or white sugar) from the present 50 per centto 100 per cent, which is aimed at curbing cheaper import, should help the Indian sugar industry in betterrealisation. We expect company to get benefit from both macro and micro factors in future.

We expect DCM Shriram business to report a revenue CAGR of 18.5 % over the two financial years. The increase inrevenue going ahead to be due to higher capacity utilisation, new capacity expansion and better realisations goingforward.

We initiate our coverage on DCM Shriram Limited with a BUY rating and a target price of ₹745 per share.

A leading business conglomerate with diversified business portfolio

DCM Shriram Limited


DCM Shriram Limited

Multiple product portfolio

Source: Company, Anand Rathi Research


Charting a new growth path in a new era

Year History & Milestones

1992 Expansion of Power from 40 MW to 70 MW

1994 Textile Rationalisation

1996 Commissioned Shriram Alkali & Chemicals, Bharuch

1997 Started Sugar Business Ajbapur Plant

1998 Started Energy Services Business

2002 Acquired Majority Control of Bioseed Global

2002 Started Hariyali Kisaan Bazaar

2002 Acquired Rupapur Sugar Plant

2003 Launched Fenesta UPVC Windows

2005 Capacity Expansion of PVC, Carbide, Chlor-Alkali, Cement & Power

2006 Established New Sugar Plants at Loni & Hariawan

2007 100 % Takeover of Bioseed

2007 Divested Swatantra Bharat Mills

2009 Doubled the Capacity of Chlor Alkali Plant, Bharuch

2011 Set up Bioseed Indonesia

2014 Started JV with Axiall, Launched Shriram Axiall Pvt. Ltd.

2016 Introduction of S/4HANA

2017 Doubled Capacity at Bharuch Facility

DCM Shriram Limited



DCM Shriram Limited

Strategically diversified yet operationally integrated

Shriram Fertilisers & ChemicalsKota

Fenesta Building Systems Bhiwadi, Chennai &

Hyderabad


Shriram Alkali & Chemicals Bharuch

SSP Production UnitKapasan & Chittaurgarh

Shriram BioseedHyderabad

( Also Present in Vietnam, Philippines & Indonesia )

Sugar Production UnitsAjbapur, Rupapur, Hariawan & Loni


DCM Shriram Limited

Revenue well distributed over various segments

Segment-Wise Revenue Breakup



Capacity expansion projects in various segments


DCM Shriram Limited

Chloro-Vinyl

Company is undertaking capacity expansion at Kota (84 TPA) and Bharuch (146 TPA). Bharuch expansion is expected to be completed by Q1 FY20 and Kota by Q3 FY20. The company expects to sustain on the 100 % capacity utilization achieved by the end of Q3 FY18 at Bharuch.

Sugar

Distillery plant at Hariawan unit (150 KLD) will be commissioned by the end of Jan 18. The company has also approved expansion of Sugar capacity by 5,000 TCD, which includes a distillery of 100 KLD and power Co-gen (34 MW). These projects are likely to be completed by Q3 FY19 and distillery by Q3 FY20.


Capacity addition in the high margin Chloro Vinyl

will boost margin significantly

Normal Monsoon will have significant impact on the revenue stream of Agri-

Input business

Generation of strong cash flow helping the company to reduce debt gradually in

FY18 and FY19.

New Distillery project at Hariawan to aid growth in

the sugar segment

Divestment of loss making Hariyali Kisan Bazar business will lead to

further improvement in the return ratios

DCM Shriram Limited

Multiple growth levers


DCM Shriram Limited

Source: ACMA, Company, Anand Rathi Research

Higher GDP growth to augment demand in chlor-alkali industry

Chlor-Alkali Industry

The Chlor- Alkali industry in India has 35 operating units with a combined installed capacity of 3.7 million Tons per annum of Caustic Soda.

The domestic demand for Caustic Soda and Chlorine in 2016-17 is estimated to be about 3.6 million TPA and 2.9 million TPA respectively.

The demands of both the products are linked to the Indian GDP growth because these products are considered as the building blocks of various other industries.

As GDP is poised for a higher growth, the demand of these products is also expected to increase.


India's PVC resin installed capacity currently stands at

around 1.4 million TPA.

Domestic demand has been growing steadily and has

reached to 2.95 million TPA in FY 17, up 9.3% over last

year.

The gap in demand and supply, which currently

stands at 54.5% of our total demand, is being met by the import of PVC resin.

The continued focus of the Govt. on building

infrastructure is expected to fuel growth of the PVC industry in India over the

next few years.

Indian PVC demand is expected to grow at a CAGR

of 8 to 10% for the next 5 years.

DCM Shriram Limited

Government focus on building infra to fuel growth of PVC industry


DCM Shriram Limited

Financial Estimates


We expect company to report a revenue CAGR of 18.5 % over the two financial years.

The increase in revenue going ahead to be due to higher capacity utilisation, new capacity expansion and better

realisations going forward.

On profitability front, we expect company to report operating margins around 15.6 % in FY18E and 16.6 % in

FY19E.

Better product mix, improving overall equipment efficiencies and persistence towards cost optimization will

result in delivering good operating margins going forward.


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FY-15 FY-16 FY-17 FY-18E FY-19E

Revenue Estimates

Sales (₹ Mn.) Sales growth

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FY-15 FY-16 FY-17 FY-18E FY-19E

EBITDA & EBITDA Margin Estimates

EBITDA (₹ Mn.) EBITDA Margins (RHS)


Company working towards research led expansion of

its crop portfolio and product offerings, which is

expected to provide growth prospects over the

medium-to-long term

New Distillery project at Hariawan to aid growth in the

sugar segment

Government focus on building infra to fuel growth of

PVC industry and higher GDP growth to augment

demand in chlor-alkali industry

We expect company to get benefit from both macro

and micro factors in future.

At CMP the stock is trading at 10.8x times FY18E

earnings and 9.2x times FY19E earnings.

We initiate our coverage on DCM Shriram Limited with

a BUY rating and a target price of ₹745 per share.

Relative stock performance (Feb’17=100)

Valuation and Recommendation:

Source: Bloomberg, Anand Rathi Research


DCM Shriram Limited

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Particulars FY-16 FY-17 FY-18E FY-19E

EPS (₹) 18.6 34.0 50.7 59.3

P/E (x) 29.4 16.1 10.8 9.2

P/B (x) 4.2 3.5 2.6 2.1

ROE 14.4% 21.8% 24.6% 22.3%

ROCE 17.8% 22.6% 26.8% 25.1%

EV/EBIDTA (x) 17.0 11.3 7.8 6.6

EV/Sales (x) 1.6 1.6 1.3 1.1


Consolidated Financials:

DCM Shriram Limited



Net Sales 57,805 57,885 73,579 81,317

Operating Expense 52,785 50,195 62,069 67,812

EBITDA 5,020 7,690 11,510 13,505

Other Income 436 489 441 488

Depreciation 980 1,137 1,425 1,721

EBIT 4,477 7,041 10,527 12,271

Interest 854 714 832 945

Misc. items - - - -

PBT 3,623 6,327 9,694 11,327

Tax 619 804 1,454 1,699

Minority Interest 13 (7) - -

PAT 3,018 5,517 8,240 9,628

Margins FY-16 FY-17 FY-18E FY-19E

Sales Growth % 2.5% 0.1% 27.1% 10.5%

Operating Margin % 8.7% 13.3% 15.6% 16.6%

Net Margin % 5.2% 9.5% 11.2% 11.8%


Liabilities

Equity Share Capital 326 326 326 326

Reserves & Surplus 20,583 24,951 33,191 42,818

Total Shareholder's Funds 20,909 25,277 33,517 43,145

Minority Interest 22 21 21 21

Long-Term Liabilities 2,575 4,722 4,722 4,722

Other Long-term Liabilities 1,720 1,886 1,886 1,886

Deferred Tax Liability (145) (801) (801) (801)

Short-term Liabilities 27,987 27,318 32,737 37,975

Total 53,069 58,422 72,082 86,948

Assets

Net Fixed Assets 17,855 20,793 24,854 28,771

Long-Term L&A 1,060 596 596 596

Non Current Investments 353 380 380 380

Other Non-Current Assets 530 597 597 597

Current Asset 33,272 36,058 45,656 56,605

Total 53,069 58,422 72,082 86,948


As company has a direct impact of rainfall so unseasonal rains could impact Agri-Input Business which would impact the

company’s sales. So timely and normal rainfall is essential for agrochemical companies to post good performance.

Rise in energy costs as a result of rising international and domestic coal prices, freight, duties and levies, will increase

the cost of production which can impact the margin adversely.

Key Risks:

DCM Shriram Limited



Rating and Target Price history:

Date Rating Target Price (₹) Share Price (₹)

8-feb-18 BUY 745 546

DCM Shriram rating detailsDCM Shriram rating history & price chart

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 8th feb 2018 close.

DCM Shriram Limited

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Continued…

DCM Shriram Limited


Disclaimer:

Contd…

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Contd…

DCM Shriram Limited


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Contd.

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DCM Shriram Limited

DCM Shriram Limited - Anand Rathi

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