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October 14, 2015

Veto Switchgear & Cables

View: Positive

The growth connection

CMP: Rs75

Key points
Spreading its wings: Veto Switchgear & Cables (VSC) is a well established regional brand in the electrical product
space (including cables & wires, switchgears and electrical appliances) with a visible presence in Rajasthan and
Gujarat, and a partial presence in Maharashtra. However, the company is now chalking out plans to expand its
presence in other regions by enhancing its existing distribution network of 2,500 dealers across the country which
would drive the growth in its core business in the coming years.
Simplifying and restructuring corporate structure: In line with its pan-India growth aspirations, VSC aims to
simplify the organisational structure by transferring related manufacturing business (revenues of Rs35-40 crore)
housed in its unlisted holding company into the listed entity. Also, the management indicated its intentions to
leverage on the groups overseas presence (through unlisted group companies) to build the overseas and export
business of the listed entity. A more simplified transparent structure could not only boost its financials but also
result in a re-rating of the stock.
Multi-pronged growth strategy: The company has drafted a multi-pronged growth strategy that includes: (1)
growth of the existing business by expanding its distribution reach; (2) transfer of the related manufacturing
business to a listed entity; and (3) leverage on the groups overseas presence. With this strategy in place the
company could see an exponential growth over the next few years.
Key risk: During FY2015, VSC recognised an insurance claim amounting to Rs17 crore on account of fire but has not
been collected from the insurance company till date. In case the claim is not collected fully, there could be an
adverse adjustment of its financials. Also, its growth is dependent on the managements intended restructuring of
the groups structure in a transparent and time-bound manner.
Valuation: VSC trades at close to its initial public offer price of Rs70 and does not appear cheap on historical
financials. However, the intended growth strategy and the simplification of the corporate structure could result in
a healthy growth over the next few years along with the potential for the re-rating of its valuation multiple.
Investors with higher risk appetite and longer-term investment horizon can look at the stock for handsome gains.
In the near term, announcements related to corporate restructuring and improving financial performance could
provide a fillip of 20-25% from the current levels.
Valuations
Particulars
Net sales (Rs cr)
Operating Profit
Net profit (Rs cr)
Growth (%)
Adj PAT (Rs cr)*
Adj EPS (Rs)
PER (x)
P/B (x)
EV/EBIDTA (x)
RoCE (%)
RoE (%)

2012
68.7
11.2
7.2
7.2
3.9
19.0
5.1
13.9
24.0
26.7

*the insurance claim not received yet been adjusted

#Rough estimates

2013
74.4
11.4
5.9
-19
5.9
3.2
23.4
2.3
11.7
17.8
9.9

2014
95.4
11.7
6.1
4
6.1
3.3
22.6
2.1
13.7
11.6
9.3

2015
97.8
15.7
7.1
17
-6.9
-3.8
-19.9
1.9
10.8
14.7
-9.5

2016E#
137.0
21.2
9.4
31
9.4
5.1
14.7
1.7
8.9
15.5
11.4

2017E#
191.8
28.8
12.6
34
12.6
6.9
10.9
1.5
7.3
17.0
13.3

sharekhan

Viewpoint

established regional brand in the electrical product space

(including cables & wires, switchgears and electrical
appliances) with a visible presence in Rajasthan and
Gujarat, and a partial presence in Maharashtra. However,
the company is now chalking out plans for pan-India
presence and beefing up its existing distribution network
of 2,500 dealers across the country. At the same time,
VSC is setting up manufacturing facilities for wires and
cables in the Mahindra Special Economic Zone (SEZ),
Jaipur to support the expansion plan with a better cost
structure (the SEZ unit will get tax benefits).

Company background
VSC manufactures and sells wires & cables and electrical
accessories in India. Its product portfolio has a wide range
of products including industrial cables, electricals cables,
telephone and co-axial wires, general switches, modular
switches, ceiling fans, rechargeable fans, compact
fluorescent (CFL) lamps and other electrical accessories.
VSC supplies its products under the brands Veto and
Vimal Power through its large distribution network of
2,500 dealers in India and select customers abroad. The
company has a state-of-art-the-manufacturing unit in
Haridwar, Uttarakhand and Mumbai, Maharashtra.
However, CFLs and fans are outsourced and not produced
in-house.

Apart from pan-India growth aspirations, VSC plans to

build the overseas and export business by leveraging the
groups overseas presence and rich experience in the Gulf
region. It also plans to incorporate a subsidiary in Dubai
under the name, Veto Overseas Pvt Ltd. Veto Overseas
Pvt Ltd would be involved in manufacturing and sourcing
from China and selling in the Gulf and the other
international markets.

VSC is promoted by Veto Electropowers India Pvt Ltd

(VEIPL), which is a subsidiary of Gurnani Holding Pvt Ltd
that is owned by the Gurnani family based in Jaipur,
Rajasthan. VEIPL manufactures and exports wires and PVC
cables to mainly the Gulf countries. The group has a
diversified presence in the business of construction of
residential, commercial projects and development of
hotel properties. Among others, the group has developed
a 5-star hotel named Radisson Blu, which is owned by
the group and managed by Carlson Group of Hotels.

Earnings growth along with restructuring to result in

re-rating: The ambitious pan-India expansion plan along
with an enhanced manufacturing base will drive the
domestic business of the company. Whats more, its
overseas endeavour could propel the overall earnings to
a higher growth trajectory. Apart from a strong earnings
trajectory, a simplified structure under the listed entity
could result in a re-rating of the stock and add value to
the shareholders.

Simplification of corporate structure on cards: The group

has a strong presence in the Gulf region in dealing with
electrical wires, cables and equipment. However, now
the management intends to simplify the structure under
the listed entity. Initially, the management plans to
transfer related manufacturing business (accounting for
revenues of Rs35-40 crore) under its unlisted holding
company in the Gulf region to the overseas arm of the
listed entity. Recently, the board approved a proposal to
incorporate a subsidiary in Dubai under the name Veto
Overseas Pvt Ltd. We believe that gradually Veto Overseas
Pvt Ltd would become a major operating entity in the
overseas market for the group and may gain a substantial
scale soon.

Valuation: VSC trades at close to its initial public offer

price of Rs70 and does not appear cheap on historical
financials. However, the intended growth strategy and
the simplification of the corporate structure could result
in a healthy growth over the next few years along with
the potential for the re-rating of its valuation multiple.
Investors with higher risk appetite and longer-term
investment horizon can look at the stock for handsome
gains. In the near term, announcements related to
corporate restructuring and improving financial
performance could provide a fillip of 20-25% from the
current levels.

Overseas endeavour along with ambition for pan-India

presence: Veto Switchgear & Cables (VSC) is a well

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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October 14, 2015

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October 14, 2015