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Salzer Electronics Equity Research

HomeCompanySalzer Electronics Equity Research

Date of Research – 29 June, 2016

Price-Rs. 220.00

About the Company

Salzer Electronics Limited (“Salzer Electronics” or the “Company”) manufacture rotary switches. The Company operates in four segments – Switchgear, Building Segment, Wires and Cables, and Energy Management. The Company is the largest manufacturer of CAM operated rotary switch and wire ducts, for FY 2015, with market share of 25% and 20% respectively. The Company caters to a wide range of products with five in-house manufacturing facilities, located in Coimbatore and Himachal Pradesh.

Salzer Electronics has its own state-of-the-art R&D facilities, recognized by the Department of Science and Technology, Government of India and a strong R&D team that focuses on developing and commercializing product technologies and as a result, can offer total customized electrical solutions to customers.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 228.73 244.53 283.30 361.14 384.06
Expenses 200.27 214.31 247.85 318.24 341.59
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 28.46 30.22 35.46 42.89 42.47
Depreciation 8.67 7.52 7.15 8.32 9.81
Finance Costs 11.77 11.94 12.34 13.14 14.59
Other income 1.39 0.93 1.00 2.80 7.20
PBT 9.42 11.69 16.97 24.24 25.28
Tax 2.36 3.25 4.99 7.20 8.18
PAT (before Minority Interest and share of Associates) 7.06 8.44 11.98 17.04 17.09

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 12.44 12.36 12.52 11.88 11.06
Net Profit Margin Ratio 3.09 3.45 4.23 4.72 4.45

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 10.28 10.28 10.28 10.28 13.64
Share application money 0.88 4.22
Reserves & Surplus 74.16 79.78 86.42 96.78 177.62
Net worth (shareholders funds) 84.45 90.07 96.70 107.95 195.48
Long term borrowings 4.65 2.45 4.75 17.57 17.68
Current liabilities 117.24 121.32 124.66 144.34 157.61
Other long term liabilities and provisions 5.66 6.48 5.07 3.34 0.73
Deferred Tax Liabilities 0.71 0.68 0.92 1.94 3.92
Total Liabilities 212.70 221.00 232.10 275.13 375.43
Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 62.09 66.23 68.38 83.37 110.36
Noncurrent Investments 4.84 4.90 4.86 4.86 5.48
Current Asset 144.48 148.50 156.60 185.98 239.39
Long term advances and other noncurrent assets 1.29 1.37 2.26 0.92 20.20
Total Asset 212.70 221.00 232.10 275.13 375.43

Efficiency Analysis

(%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 31.94 32.66 34.95 34.17 20.12
ROE 8.36 9.37 12.39 15.79 8.72

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 228.73 244.53 283.30 361.14 384.06
Growth (%) 2.62 % 6.91 % 15.85 % 27.48 % 6.35 % 
PAT (Rs. Cr.) 7.06 8.44 11.98 17.04 17.09
Growth (%) (13.80 %) 19.55 % 41.94 % 42.24 % 0.32 % 
Earning Per Share – Basic (Rs. ) 6.87 8.21 11.65 13.54 12.35
Earning Per Share – Diluted (Rs. ) 6.87 8.21 10.79 12.87 11.89
Price to Earnings 7.92 7.55 21.67 14.55 15.98

Dividend History

The Company has maintained an average dividend yield of 1.43 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Salzer Electronics’ average current ratio over the last 5 financial years has been 1.25 times which indicates that the company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Salzer Electronics’ average long term debt equity ratio over the 5 financial years has been 0.07 times which indicates that the company operates with low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Salzer Electronics’ average interest coverage ratio over the last 5 financial years has been 2.71 times which indicates that the company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Salzer Electronics reported a promoter holding of 28.68 %.

At the same time, institutional holding in the Company stood at 12.72 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.


Written By: Puneet Singh

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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