Small & Midcap Engineering Day Institutional Equity Research

August 26, 2019

We hosted “Small and Midcap Engineering Day” to discuss the opportunities and challenges in Railway and Cable & Wire segment. The conference
was attended by 5 companies - RITES, Salzer, Paramount Comm, Universal Cable and Cords Cable.

Key Takeaways of the Conference

ff Railway capex for FY20 stands at Rs1.6trln, up 14% YoY. The capex focuses on 100% railway electrification by FY22, double-lining, track renewal, traffic facilities
and rolling stocks. Other opportunity in the railway is DFC (Dedicated freight corridors), Mumbai-Ahmedabad High Speed Rail Corridor, Semi-high-speed trains,
Development of suburban systems and Station redevelopment.

ff The corporates are positive on Railway capex in India and expect strong up-tick, going ahead. They believe that new structures, up-gradation of existing infrastructure
and rectification of accident-prone regions/signals are picking up at rapid pace.

ff India has only ~500kms of operational metro network (10 cities including Mumbai, Bengaluru, Chennai, Delhi, Gurgaon, Hyderabad, Kochi, Lucknow, Jaipur and
Kolkata) and another ~650kms of metros are under construction (5 new cities and expansion in existing cities).

ff Over 25 cities are planning to put up a metro, thus another ~1,500kms of network is at various stages of implementation with an estimated investment of ~US70bn.
ff We believe ongoing investments in Railway and Metro to benefit for Cables & Wires companies going ahead.

Research Analysts
Arafat Saiyed
Contact : (022) 43034635
Email : [email protected]

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Small & Midcap Engineering Day Bloomberg Ticker RITE IN Institutional Equity Research
CMP (Rs) 219
Market Cap. (Rs bn) 54.8
RITES August 26, 2019

RITES – a diversified engineering consultancy company having specialisation in the field of transport infrastructure – is set to benefit from ongoing thrust on
infrastructure development including Railway, Metro and Airports. Its current order book stands at Rs61bn (3x of FY19 revenue), which offers a robust visibility. For
FY20, the Company is looking forward to 15-17% revenue growth. During FY16-19, its revenue and PAT clocked 23% and 20% CAGR, respectively with average
margin of 28.5%. Further, with total cash of Rs35bn (including advances from customers), RITES enjoys robust liquidity.

Highlights of the Conference

ff The Company is looking forward to 15-17% revenue growth and 12% operating profit growth for FY20.
ff In FY19, RITES reported revenue of Rs20bn, (+37% YoY) in FY19 led by domestic turnkey segment at Rs5.7 bn (+287% YoY) on low base, while export sales (10% of revenue) declined by
11% YoY due to lack of new orders.
ff The core consultancy business (56% of revenue) grew by 14% YoY to Rs11.5bn in FY19, leasing business (5% of revenue) grew by 12% to Rs1bn. Its Consultancy Services include conducting
techno-economic and feasibility studies and preparation of detailed project reports. The company expects margin of 25-30% in consultancy segment, going forward. In the consultancy
segment – Quality Assurance for Railways contributed ~Rs3bn, while Project management consultancy contributed ~Rs5bn in FY19. Balance revenue was contributed by pre-feasibility
and detailed project review.
ff The leasing segment (contributes 5% of revenue) grew by 12% in FY19 with a margin of 20%. Notably, its domestic locomotive leasing business has grown from a single locomotive in
2009 to 56 currently.
ff The turnkey segment (contributes 28% of sales) jumped 287% in FY19 with a margin of 2.8%. It’s getting fees of ~8% for this segment, after employee cost and other expenses its expects
margin of 2.5-3.5%.
ff EBITDA margin expanded 40bps YoY to 28.1% driven by operating leverage benefits on strong execution (revenue up 37%) and improved gross margin by 144bps to 71%.
ff Order book stood at Rs 61bn (1Q FY20, 3x of FY19 revenue), which offers revenue visibility. Out of total order book, turnkey segment contributes 42% to total order book followed by
consultancy (38%), exports (38%) and leasing (2%). The share of government orders stood at 75% while private orders at 25%.
ff Railway capex for FY20 stands at Rs1.6tr, up 14% YoY. The capex focuses on 100% railway electrification by FY22, double-lining, track renewal, traffic facilities and rolling stocks. Other
opportunity in the railway is DFC (Dedicated freight corridors), Mumbai-Ahmedabad High Speed Rail Corridor, Semi-high-speed trains, Development of suburban systems and Station
redevelopment.

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Small & Midcap Engineering Day Bloomberg Ticker SZE IN Institutional Equity Research
CMP (Rs) 108
Market Cap. (Rs bn) 1.7
Salzer Electronics August 26, 2019

Salzer Electronics Ltd. (SZE) offers customised electrical solutions in Switchgears, Wires/Cables and Energy Management segments. It is the largest manufacturer
of CAM-operated rotary switches & wire ducts in India with a market share of 25% & 20%, respectively. It caters to a wide range of clients with 5 in-house
manufacturing facilities located in Tamil Nadu and Himachal Pradesh. It has a wide distribution network locally and globally, exporting to >40 countries. In India,
SZE markets products through its own distributors and >350 local distributors of L&T. The Company has a strong R&D team that focuses on developing and
commercialising the technologies of products, as a result of which it is able to offer total customised electrical solutions to its customers.

Highlights of the Conference

ff Salzer has evolved from a single product manufacturer of CAM operated rotary services to total complete customised electrical solution to its customers. The company is constantly
looking at new opportunities to strengthen its base of product offerings.

ff Its business mode is broadly divided into 4 segments i.e. Industrial Switch Gears, Building segment and Wires & cables and energy management.

ff In FY19, its revenue grew by 26% led by strong growth across segments. Switchgear (41% of sales) business grew by 14%, Wire & Cable (49% of sales) grew by 22% while Building
segment (8% of sales) grew by strong 97%.

ff The company is focussing on adding new high-margin products.

ff Domestic business is driven by increase in demand and good traction for products in Building & Industrial Switchgear segment. It has access to L&T's local network through >350
distributors.

ff It is looking at 15-20% revenue growth for the next few years, while it expects RoCE to improve to 18-20%. The company targets exports in the range of 20-25% of sales, going forward.

ff It expects revenue of Rs6.8bn in FY20 led by switchgear business (~Rs3bn), Wires & Cable (~Rs3.2bn) and building products (~Rs600mn).

ff Recently, it acquired 72.3% stake in Kaycee Industries for Rs237mn, which develops Industrial Switches for >75 years. Acquisition is in line with focus on increasing product offerings and
expanding footprint into newer segments along with access to all India dealer network.

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Small & Midcap Engineering Day Bloomberg Ticker PRMC IN Institutional Equity Research
CMP (Rs) 9
Market Cap. (Rs bn) 1.6
Paramount Communications August 26, 2019

Paramount Communications Ltd, part of the Paramount Cables Group, is one of India’s leading wire & cable manufacturing company. With over six decades of
operations, the group has built up a portfolio spanning a comprehensive range including HV & LV Power Cables, Optical Fiber Cables & other Telecom Cables,
Railway Cables, Specialised Cables and Instrumentation & Data Cables, etc. Paramount Cables has a prestigious clientele that includes government, institutional
and major private sector organizations, both national and international, in the Power, Telecom, Railways, I.T. and Communication, Construction, Defence and
Space Research sectors amongst others. Focused on manufacturing excellence, technological advancement and customer satisfaction, Paramount continuously
strives to meet & exceed global quality benchmarks and to provide total cabling solutions for its customers.

Highlights of the Conference

ff Paramount Communications (PRMC) was established in 1955 by Aggarwal family to manufacture consumer wires. It later entered into B2B segment with and -Power cables Telecom
cables, Railway cables and Consumer wires contributing 53%, 22%, 19% and6% to PRMC’s revenues in FY19.
ff PRMC provides complete range of power cables and undertakes few specialised wire projects too.
ff The Management is positive on business on the back of likely strong up-tick in the Railway segment. It believes that new structures, up-gradation of existing infrastructure and
rectification of accident-prone regions/signals are picking up at rapid pace, which would drive its Railway cable business, going forward. It has clocked Rs1.3bn revenue from Railway
segment in FY19, which it expects to cross Rs2.5bn in FY20E.
ff Its Telecom and Railway businesses are high-margin segment with lower competitive pressure compared Power cable business. The Management expects the former segment to
witness higher ordering activities in the next 2-3 years, as the country expected to see 5G roll-out. Notably, PRMC secured its second largest order in Round-II of Bharat Net project.
ff China sells optical fibre cable at US$4-5/km, while in the domestic prices stand at US$7-8/km. The prices are expected to remain benign due to large capacities in China (~10x size of
India).
ff Overall, current capacity utilisation stands at 80%, while no major capex is planned for the next 2 years. Capacity addition would be made primarily with help of de-bottlenecking along
with minor incremental capex for machineries. Total annual capex requirement is likely to be Rs200-250mn including Rs100-150mn towards maintenance.
ff PRMC works with average debtor’s days of ~70days. Currently, the Company is facing payment delays from few of its PSU customers. Total working capital cycle is expected to remain
at the current levels, going ahead.
ff Led by improved utilisation, the Management expects revenue to reach Rs12bn over next 2-3 years while margin is also expected to improve from the current level. Moreover, its working
capital linked interest would reduce due to internal cash flow and lower working capital debt.
ff PRMC has interest-free debt of Rs1.9bn from the ARC with a scheduled debt repayment over the next 8 years.
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Small & Midcap Engineering Day Bloomberg Ticker UBC IN Institutional Equity Research
CMP (Rs) 147
Market Cap. (Rs bn) 5
Universal Cables August 26, 2019

Universal Cables Ltd. (UVC), an MP Birla group company, is a renowned player in cable segment with wide range of products. Its products range includes:
Low Voltage (1.1kV), Medium Voltage (3.3kV) and Extra High Voltage (6-500kV grade), PVC and Rubber Insulated Power Cables up to 11kV grade, Control and
Instrumentation Cables up to 1.1kV for any number of Cores/Pairs and speciality Rubber Cables for Trailing/Flexible standards to suit to customer requirements. Its
manufacturing units are located at Satna (MP) and Goa. Its Cables and Capacitors are sold under ‘UNISTAR’brand name.

Highlights of the Conference

ff Low Voltage, Medium Voltage power cables are meant for the industries like solar power, cement, petrochemical and wind power etc. However, Extra High Voltage segment caters
only to the EPC segment.

ff EPC segment (Extra High Voltage) contributes 55% to UVC’s revenues, while the rest comes from the supply of cables.

ff The Company is looking for commercial production of 400kV class cables, which is the future demand segment in the Extra High Voltage category.

ff It currently operates mainly in Western region with barely 30-35 dealers or sales channel networks.

ff As it does not operate in distribution model rather mainly caters to institutional clients, its working capital cycle is stretched compared to other cables players.

ff Projects executable up to 6 months carry fixed price contracts, while there are variable clauses for projects above 6 months.

ff Key raw materials like aluminium and copper are sourced domestically.

ff Superior margin in FY19 is primarily attributed to 3-4 high-margin projects, which mainly belonged to Tata Power and Torrent Power etc.

ff The Company expects margin profile to remain healthy in the ensuing years too. Further, 100% capacity utilisation supports overall margin.

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Small & Midcap Engineering Day Bloomberg Ticker CORD IN Institutional Equity Research
CMP (Rs) 38
Market Cap. (Rs bn) 0.5
Cords Cable Industries August 26, 2019

Cords Cable Industries (CORD) is a specialised control and instrumentation cable company having more than 3 decades of experience and a strong brand image
in the B2B segment. It offers a wide range of cable products to multiple industries. CORD designs, develops and manufactures a varied range of Power, Control,
Instrumentation, Thermocouple Extension/Compensating and Communication cables. Its state-of-the-art manufacturing plants are located at Alwar in Rajasthan.
The Company has been catering to the special requirements of several industries i.e. Power, Oil & Gas, Hydrocarbon, Steel, Cement, Water Desalination, Metro
Rail and Airports etc. Its products include wide range of LV Power, Control, Instrumentation and custom designed cables.

Highlights of the Conference

ff It has a capacity of 65,000 KMPA with an utilisation of ~55%. Currently, it derives major chunk of revenue from hydrocarbon sector (41%) and power sector (28%).

ff Its order book stands at Rs1.2bn to be executed in the next 3-4 months. Hydrocarbon sector contributes 43% to the total order book, followed by power sector at 31%

ff CORD derived 80% revenue from Instrumentation & Control cables, while the balance came from Power cables.

ff The demand for cables is expected to grow at a healthy rate in the next few years driven by increased demand from the infrastructure development by the government and fresh
demand from the Indian downstream Oil & Gas companies. High capacity utilisation and better profitability from supply to the refineries are likely to aid margin, going ahead.

ff CORD expects to benefit from the investment in modernisation and up-gradation of infrastructure in Oil & Gas, Hydrocarbon, Smart cities, Metro Rail and DFC space.

ff The demand for speciality cables is likely to benefit from increasing safety measures in Oil & Gas sector, while hydrocarbon is set to benefit from strong demand from refineries to meet
Euro-VI norms.

ff The Government is on track to spend Rs5trln for Metro rail across India. The proposal to implement metro rail systems in 40 cities out of which 520 km of Metro Rail lines under
construction currently.

ff Indian Railways is planning to build 2 freight corridors, electrification and doubling with an investment of Rs2trln in the next few years.

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Small & Midcap Engineering Day Institutional Equity Research

Digitally signed by NAVEEN KULKARNI August 26, 2019

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Date: 2019.08.26 17:46:00 +05'30'

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