Salasar Techno IPO Note

July 13, 2017

GH/Client Note/11/2017

Background:

Salasar Techno Engineering (Salasar or The Company), a provider of customized steel fabrication and
infrastructure solutions to infra industry, is entering the market with its IPO offering 33.2Lac shares at a
fixed price of Rs.108/Share. The IPO opens on July 12, 2017 and closes on July 17, 2017.

IPO details:

Subscription Dates July 12-17, 2017

Price (fixed) Rs.108 per share
Minimum bid (lot size) 125 shares
Face Value Rs.10 per share
Retail Allocation 50%
Listing On BSE and NSE
Objective of the issue Working capital, general corporate purpose
RHP Link Salasar RHP

The IPO size is just Rs.35Crs, quite small compared to mainstream IPOs these days. The allocation is 50%
for retails and 50% for rest of the categories of shareholders.
Due to its size, Companys shares shall trade in T segment of the market after listing.

Business description
Salasar Techno offers customized steel fabrication and infrastructure solutions for Telecommunication
Towers, Transmission Towers & Substation Structures and Solar Module Mounting Structures. The
Companys products include Telecommunication Towers, Power Transmission Line Towers, Smart Lighting
Poles, Monopoles, Substation Structures, Solar Module Mounting Structures etc. Their services include
providing complete engineering, procurement and control for projects such as Rural Electrification, Power
Transmission Lines, and Solar Power Plants. The company commenced its manufacturing/fabrication
activities in the FY 2006/07 and its second unit became operational in FY2008/09. Its
manufacturing/fabrication capacity stands at 50,000 MT as at FY16, which they have further expanded to
100,000 MT with the installation of new galvanizing plant at Salasar Stainless Limited, a wholly owned
subsidiary.

14, Bhartiya Krida Mandir, Naigaon Cross Road, Wadala (W), Mumbai, MH, 400031
+91 98200 62804, +91 99201 66558 I info@greenhillcapital.in I @GreenHill_Cap
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The Company counts UP Power Transmission Corporation Ltd, Tata Power Delhi Distribution Ltd, Unitech
Power Transmission Ltd, ATC India Tower Corporation Pvt Ltd, Indus Towers Ltd, ATC Telecom
Infrastructure Pvt Ltd, Bharti Infratel Ltd, Reliance Jio Infocomm Ltd, Tower Vision India Pvt Ltd, Viom
Networks Ltd, etc. as their prominent clients.

Financials

Over FY13-FY17 period, Salasars revenue grew at a CAGR of ~16%, while Profit After Tax (PAT) grew even
faster, at ~45% CAGR. The Company had a great FY17, which almost doubled PAT.

INR in Crs. FY17 FY162 FY15 FY14 FY13 CAGR

Revenue 384.6 310.2 330.4 292.6 212.9 15.9%
Op Profit 40.9 29.1 28.2 22.9 17.0 24.5%
Op. margin 10.6% 9.4% 8.5% 7.8% 8.0%

PAT 20.9 9.8 6.2 5.8 4.7 45.3%
PAT margin 5.4% 3.1% 1.9% 2.0% 2.2%

EPS- diluted (Rs/Sh.) 20.83 11.09 6.36 6.02 5.06


RoE 21.8% 13.0% 9.7% 10.2% 9.3%

RoCE (pre-tax) 14.6% 14.8% 11.9% 10.2% 9.6%

Source: Company RHP, GHC research

First thing to notice in the Companys financials is its relatively small size: Closest competitor, Skipper
has annual revenue of more than 1700Crs, 4.4X of Salasars FY17 revenue

Salasar operates in infra space, where margins are not high: ~10% operating margin and ~3 to 5% PAT
margin is not great, and company is vulnerable to any major macro (or micro) economical shock

Except for FY17, return ratios are in low-teens, further indicating low-margin, commoditized market
presence

As of FY17, Salasars D:E ratio stands at 0.72, reasonable for a company in infra-space. The ratio has
reduced over last five years from 1.24X in FY13 to the current number

The business is working capital heavy, and its working capital days (salesX) have ranged from 140days in
FY13 to 109days in FY17. This is in the same range for its closest competitor, Skipper which has 97days
of working capital as at 31.Mar.2017

o High capital days seems to be the reason for increasingly high short term debt, which stands at
90% of the total debt as at end of FY17

Valuation:

The issue is priced at Rs.108 per share.

With diluted EPS of Rs.20.8/Sh as of 31.03.2017, the price to earning (P/E) ratio works out to 5.2X

o Post IPO, with increased number of shares, P/E stands at 6.9X

On Price/ sales basis, the valuation works out to be 0.4X, while on EV/Ebitda basis valuation works out
to 5.2X, all numbers pertaining to FY17 or as at March 31,2017

Based on above, the issue seems to be fairly priced.

Relative valuation:

Skipper limited is the closest peer for the Company, while KEC International and Kalpataru Power are also in
the same kind of business. But before we compare the valuation, we should keep in mind the size of the
opportunity: On revenue basis, other companies are way ahead of Salasar: For FY17, Salasar had revenue of
Rs.385 Crs compared to Rs.1700Crs for Skipper, Rs.8600Crs for KEC and Rs.7650Crs for Kalpataru.

The peers trade in P/E range of 20X to 25X, while 0.7X to 1.3X on Sales basis.

Looking at Salasars size, and peer valuation as above, we feel issue is fairly priced.

Observations:

On positive note, the segments in which Salasar operates: Telecommunication, Transmission and Solar
industry, provide a long runway to the Company. The space becomes attractive in that the Indian
Government has been quite active in encouraging these industries apart from huge domestic market
these industries serve

Salasar has grown the business well over last five years. Sales CAGR of 16% within this tough infra space
is quite an achievement. The Company has posted good margins and reasonable return ratios being an
infrastructure player

Finally, the issue is priced sensibly, keeping in mind small size of the Company and quite competitive
industry Salasar is part of

Looking at the risk factors now:

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o The basic story of this investment is seemingly low valuation, while the Company is posting good
financials and ratios mostly based on its FY17 numbers. Thus its is very imperative to cross-
check or confirm whether suddenly improved margins in FY17 can be sustained or not

o Top five clients of the Company contribute 55% of the revenues for the year ended March 31,
2017. Though the concentration has reduced over last three years (from 63-64%), any loss of
business from one or more of these clients may adversely affect the business

o Finally, Salasar shares will trade in T segment of the market after listing. In this segment, shares
are compulsorily traded on delivery basis only, and hence there will not be much speculative
trading positions in the counter. This will reduce the attractiveness of the counter, at least in the
current short-term minded market trades

In summary, Salasar Techno has been growing its business well and recently achieved better margins and
return ratios. Additionally, the issue is priced fairly. However, these positives are negated by the risks in
terms of small size, trading in the T segment of the market after listing and lack of data to gauge
sustainability of recent, improved performance. We would advise investors to SKIP the issue, and keep
Companys performance under watch for couple of years to gauge its capabilities as a larger and long-
term growth player in the industry.

-------------------------------------------------------------------------------DISCLAIMER-------------------------------------------------------------------------------
The topics discussed in this document are for educational and information purposes only and not a recommendation to trade into
Equity or any other asset class discussed here. For any investment decision, please contact a certified investment advisor.