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HDFC Sec
Industry CMP Recommended Action Averaging Price Band Target Time Horizon
Scrip code
GEIHAME Capital Rs. Buy at CMP and add Rs.159 &
Rs. 116-124 1-2 quarters
Goods 138.20 on dips 175
Company Background
GEI Industrial systems (GIS) was founded in 1970 with its manufacturing facility located in Bhopal (Madhya Pradesh). The company
was incorporated as General Engineering Industries. Later on in 1993 the company was converted in to a joint stock company. In 1997-
98 Hammon industries, France bought a 30% stake in the company (29.95 lakh shares) and hence the name of the company was
changed to GEI Hammon Industries. Hammon sold 25 Lakh shares in August 2008, post disagreements between the two parties. It
continues to hold on 4.95 Lakh shares in GIS. Initially the company was formed as an ancillary unit of BHEL (Bharat Heavy Electricals
Limited). GIS is one of the leading players in the heat transfer industry (cooling media) and primarily caters to the requirements of the
energy sector i.e. oil & gas sector and power sector.
Amongst the institutional shareholders Banyan tree Growth capital LLC owns 8.72% stake in the company (allotted in August 2009 at
Rs 75 per share), while the Compagnie Financiere Hamon owns 2.98% stake, PCA India infrastructure Equity open fund Ltd holds
5.25% stake and Premier investment fund holds 2.08% stake in the company.
Thermal
Power Plant
Retail Research 1
GIS has an installed capacity of ~1000 MW (for power plants) towards the ACSC and ~2000 bundles (for oils and gas) towards ACHE.
GIS commenced the supplies of ACSC by catering to the requirements of smaller power plants in the range of 20MW. Since than it has
augmented its capabilities and currently caters to the requirements of power plants upto 300 MW. GIS is a market leader in the ACSC
segment in India with a market share of 80%. Simultaneously, the company supplies ACHE to the Oil & Gas companies. ACHE used to
cool off a distillation column during the refining process. GIS has a market share of ~55% in ACHE industry. GIS faces competition from
players like Paharpur (water and air based cooling systems), BGR Energy, Jord, GEA, PCT etc in both the segments. The company
supplies its products in the domestic as well as international markets. Following table depicts the client list for the company:
As is evident from the table above the company has an esteemed and a wide client base. Most of the clients are MNC companies,
which own a sizeable market share in their respective areas. This enhances the revenues visibility for GIS going ahead.
GIS classifies its revenues from the sales of heat exchangers as project sales and direct sales. Under the direct sales the company only
sells its equipment to the clients, while in the project sales, GIS does the EPC part for its equipment as well. The share of project-based
revenue is on a rising trend. The following chart depicts the revenue mix for the company:
Revenue Mix
100%
80%
60%
%
40%
20%
0%
FY07 FY08 FY09
The margins from the project business are marginally lower than the direct sales segment. Hence going ahead if the share of revenues
from the project sales segment rises further it will need to be complimented by the higher sales growth.
Some of the key raw materials required for manufacturing the heat exchangers is Aluminium (consumed in the form of strips and
tubes), Mild Steel (MS; consumed in the form of plates, angels and sheets), steel tubes, SS brass plates and other miscellaneous
items. The following tables depicts the raw material cost break up for the past three years:
Retail Research 2
Revenue Mix
100%
21.3%
29.0% 31.7%
80%
6.0%
0.4%
1.1%
60% 16.9%
30.8% 17.0%
%
18.5%
40% 24.3%
17.4%
20% 35.2%
24.4% 25.9%
0%
FY07 FY08 FY09
Aluminium and steel are the key raw materials required for manufacturing the heat exchangers. The company imports ~12% of its total
raw material requirement (by value). The price of these commodities fluctuates a lot and therefore the company is exposed to the risk of
raw material price fluctuation. In order to tide over the situation GIS has a back-to-back arrangement with its suppliers for procurement
of raw materials. The back-to-back arrangement to a certain extent protects the operating margins from raw material price fluctuations.
GIS does not have a price variation / escalation clause in its agreements with its customers.
Investment Rationale:
Strong Position in the ACHE and ACSC segment in the domestic markets
GIS is a leader in heat transfer technology and manufactures ACHE and ACSC primarily for Power and Oil & Gas sector. GIS has a
full-fledged engineering and design department located at Bhopal, which is constantly engaged in the development of new and better
technology for manufacturing the products. Also in the past GIS had a tie up with Birwelco UK to vet its in-house developed
technology. During the initial phases the ACSC were manufactured to cater to the requirements of small power plants with a
generation capacity of 20 MW. Currently the company caters to the power plants with a generation capacity of up to 300 MW. The
company has developed the technology required to manufacture ACSC for a 300 MW plant in house. Furthermore GIS has a market
share of ~55% in the ACHE industry while it commands a markets share of ~80% in the ACSC industry in the domestic market.
Collectively, the in-house technology development centre facilitates consistent introduction of new products and a robust market
share augurs well for the company as it exhibits the company’s strong technology muscle.
GIS was initially promoted as an ancillary unit to BHEL and is currently also a preferred supplier to the company. This suggests that
the company has strong relations with major players in the power sector like BHEL, which have huge order book positions. (For FY10
BHEL had an order inflow of Rs 590 bn). The huge order book of the clients offers a strong revenue visibility for GIS as it is a
preferred supplier. Therefore a full fledged engineering and design department capable of developing advanced technology coupled
with a commanding market share in both the product segments and strong relations with major clients could drive the company’s
revenues in future.
F inne d T ube s
6.00 120%
4.92 4.92
5.00 102% 100%
4.00 80%
3.00 60%
- 0%
FY07 FY08 FY09
As is clear from the chart above the company has increased its installed capacity for finned tubes so as to cater to the incremental
requirements for the heat exchangers. The current capacity utilisation stands at 36%, leaving further scope to ramp up the
production. Ample headroom to ramp up production augurs well for the company, as the demand for heat exchangers is likely to
remain buoyant, which would result in higher demand for the finned tubes. Internal procurement of this key component would
translate into higher margins for the company. GIS has the largest single location Finntube manufacturing facility in Asia. The
company has a current installed capacity of 15 kms per day for finned tubes and is further in the process of expanding the same. GIS
requires almost the entire portion of the finned tubes for captive consumption except a small portion, which is for external sales to
BHEL.
Retail Research 4
Order Book (Rs mn)
4500
4000
4000
3500
3000 2600
2500 2200
2000
1500
1000
500
0
FY08 FY09 FY10
(Source: Company reports, HDFC Sec)
As is clear from the chart above GIS has a strong and a growing order book position. Of the Rs 4000 mn order book ~65% are from
the power sector while the balance from the oil and gas sector. Hence a strong order book position provides revenue visibility for the
future. Typically Q3 and Q4 quarters witness a higher order inflow during the year
Conclusion:
GIS is a leading manufacturer of heat transfer equipments in India. GIS is a market leader in the ACSC with an 80% market share in
domestic markets and has ~ 55% of market share in the ACHE segment. The company primarily caters to the requirements of the
energy sector. With the end user industries on a good wicket the demand for heat exchangers is expected to remain buoyant going
ahead. In order to support the incremental demand, GIS is also expanding its existing capacities. Furthermore it plans to transfer a part
of its production (towards power sector) to its subsidiary GPL, which could cater to only power sector in the future. Simultaneously the
demand from the oil and gas sector is also expected to be buoyant with the increase in the exploration activities. Therefore cumulatively
the above could drive the revenues for the company in the future.
Retail Research 5
Aluminium and steel are the key raw materials required by GIS. The company has a back-to-back arrangement with its suppliers, which
shields the operating margins from exposure to volatile raw material prices. Also Finned tubes, another key ingredient of the company
is manufactured in house, which results in a lower operating cost, thereby boosting the operating margins for the company and giving
GIS a competitive advantage vis-à-vis its competitors.
GIS is placed in a sweet spot in an era where water is becoming a scarce and a precious commodity.
We feel that the stock can be bought at the CMP and can be added on further dips in the range of Rs 116-124 for sequential price
targets of Rs 159 (10.5x FY11E EPS) and 175 (11.5x FY12E EPS)
Quarterly Financials:
Particulars (Rs mn) Q4 FY10 Q4 FY09 % YoY Q3 FY09 % QoQ H1 FY10 H1 FY09 % YoY
Net Sales 840.1 672.367 24.95 612.928 37.06 983.8 894.77 9.95
Total Income 878.5 712.59 23.28 622.268 41.18 1013.783 912.78 11.07
Operating Expense 767.9 614.87 24.89 528.69 45.25 850.401 770.253 10.41
EBITDA (Inc OI) 110.6 97.72 13.18 93.578 18.19 163.382 142.527 14.63
Depreciation 5.5 5.719 -3.83 5.57 -1.26 9.164 8.124 12.80
Interest 33.2 47.6 -30.25 28.6 16.08 57.38 41.972 36.71
Exceptional Item 0.712 -2.586 -127.53 0.606 17.49 2.745 2.592 5.90
PBT 71.188 46.987 51.51 58.802 21.06 94.093 89.839 4.74
Tax 29.39 34.89 -15.76 19.46 51.03 26.3 25.45 3.34
PAT 41.798 12.097 245.52 39.342 6.24 67.793 64.4 5.29
EPS 2.51 0.85 196.75 2.37 6.24 4.08 4.51 -9.58
OPM (%) 12.39 13.25 14.91 15.80 15.47
NPM (%) 5.0% 1.8% 6.4% 6.9% 7.2%
(Source: Company reports, HDFC Sec)
Annual Financials:
Profit & Loss Account:
P/L (Rs MN) FY08 FY09 FY10-SA FY10-Cons FY11E Cons FY12E Cons
Net Sales 1,867.5 2,134.9 2,507.8 2,507.7 3,425.0 4,590.0
Total Income 1,871.6 2,145.4 2,514.5 2,529.4 3,432.3 4,597.9
Operating Expense 1,589.6 1,842.6 2,147.1 2,112.9 2,931.9 3,965.9
EBITDA (EX OI) 277.9 292.3 360.7 394.9 493.2 624.1
EBITDA (Inc OI) 282.0 302.8 367.4 416.5 500.4 632.0
Depreciation 16.1 18.1 20.2 24.3 36.2 58.0
Interest 68.7 112.7 119.2 137.9 152.0 186.0
PBT 150.6 171.0 223.9 250.0 312.2 388.0
Tax 60.9 67.4 75.2 79.1 109.0 135.0
PAT 89.7 103.7 148.7 170.9 203.2 253.0
EPS 6.3 7.3 8.9 10.3 12.2 15.2
OPM (%) 14.9 13.7 14.4 15.7 14.4 13.6
NPM (%) 4.8 4.9 5.9 6.8 5.9 5.5
Equity Capital (FV Rs.10) 142.7 142.7 166.2 166.2 166.2 166.2
Figures for FY08 & FY09 are standalone. (Source: Company reports, HDFC Sec)
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document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy
any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be
relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only
and not for any other category of clients, including, but not limited to, Institutional Clients
Retail Research 6