UNEXPLORED MULTIBAGGER SMALL CAP STOCKS

EQUITY RESEARCH REPORT

VETO SWITCHGEARS & CABLES LTD. BSE CODE: 539331

NSE CODE: VETO

Industry: Electric Equipment CMP: Rs. 141.55 (19/03/2017)

Market Cap: 259.97 (INR in Crore) Target Price: Rs. 280
Date: March 19, 2017 Time Period: 12 – 24 months

Saral Gyan Capital Services

An Independent Equity Research Firm
www.saralgyan.in | www.saralgyan.com
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TABLE OF CONTENT

S.No Content Page No.

1. Company Background 03

2. Recent Developments 06

3. Financial Performance 08

4. Peer Group Comparison 10

5. Key Concerns / Risks 10

6. Saral Gyan Recommendation 11

7. Disclaimer 13

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1. Company Background

Veto Switchgears & Cables Ltd (An ISO

9001:2008 certified company) is engaged in
manufacturing of wires & cables, electrical
accessories & all type of range of led
lighting, CFL & fans. The company uses latest
production technology and produce latest
and best in class products as per market
demand.

Veto Switchgears is India's first company to produce ISI mark electrical accessories in
India. The company uses high quality raw material to give best products to its customers.
VETO is a brand name registered since 1967, the company has a strong distribution
network of 2500 dealers across the country to provide quality products to its valued
customers.

The company's states of art manufacturing plants in India are located at Haridwar and
Vasai, Mumbai which are continuously manufacturing all the products with excellence
and precision in the electrical industry. The company has a strong team of highly qualified
professionals who strive to innovate the best products with the use of advanced high tech
machinery. The group sustained the position as a leading supplier of electrical goods in
the gulf countries for a time period of more than a decade.

Veto Switchgears is a well-known regional brand in the cables & wires, switchgears and
electrical appliances space with a strong presence in Rajasthan and growing presence in
Gujarat and Maharashtra.

The company is manufacturing all types of housing wires under the brand name Vimal
Power which is a renowned brand in the western region of India. Electrical accessories
are marketed under Veto brand and its sub brands such as Veto Carino, Veto Puf, Veto
FM, Carino etc. As per the management, the company owns all its brands. Other than CFL,
LED & Fans which company outsource and sell under its brand, all other products are
manufactured and assembled by the company at its Haridwar unit. At Vasai (Mumbai)
unit, company manufactures DP switches and button holders. Company strives to set new
benchmarks in providing high quality products at competitive rates.

Apart from domestic business of Veto Switchgears, the group has an associate company
in Dubai, JMTC FZCO which is trading electrical goods. Veto formed a 100% subsidiary in
Dubai on Oct 2015 to take over the business of JMTC FZCO gradually without any equity
dilution. Apart from this, another subsidiary of the domestic business, Veto Electricals Pvt
Ltd is into manufacturing of wires and cables and it is 100% EOU unit. It exports electrical
goods from its new plant in Jaipur (in Mahindra SEZ).

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Veto Switchgears and cables Ltd is promoted by Veto Electropowers India Pvt Ltd (VEIPL),
which is a subsidiary of Gurnani Holding Pvt Ltd and it is owned by the Gurnani family
based in Jaipur, Rajasthan.

The company launched its IPO in market in the year 2012 and became a public listed
company. The company get listed on SME Platform of National Stock Exchange of India
Limited (NSE) Emerge on December 12, 2012. The purpose of the issue was to modernize
existing facility at Haridwar, to finance long term working capital requirement, to enhance
company’s brand through advertising and other activities.

Later the company upgraded to the regular segment on April 29, 2015. Company get listed
its Equity Shares on Bombay Stock Exchange Limited (BSE) on September 9, 2015.

Industry Overview

The electronics market of India is one of the largest in the world and is expected to grow
at a compound annual growth rate (CAGR) of 24.4 % during 2012-2020. Separately,
forecasts say that the electric wire and cable market in India is to grow at a CAGR of 16.18
% over the period 2015-19 as power cables led the revenues of the wires and cables
market with more than 50 % contribution to the total market.

The Indian wire and cable industry is growing satisfactorily and getting more and more
consolidated and becoming largely organized now. The power cable led the industry from
front contributing almost 50 % of the industry's emphasis on laying comprehensive power
distribution and transmission network in the country. The increasing digitalization has of
course catapulted the demand even more. Construction is also one of the core sectors of
Indian economy and future of the industry is important for commodities. Construction
cables and wire sector anticipated to see steep growth in demands in coming days owing
to huge govt's, spending in infrastructure, smart cities, real estate boom, and housing
explosion.

PM's initiative to launch National programme for LED based home & street lightning as
well as a scheme for LED distribution under the domestic Efficient Lighting program is
highly valued for the growth of India. LEDs are 25% more efficient than CFL, 23% more
efficient than tube lights and 80 % more efficient than incandescent lamps. The Prime
Minister's initiative has accelerated the adoption of LED's in several sectors across the
country through the creation of several new policies and financial subsidies undertaken
by the Ministry of power, BEE and various state municipalities. This has helped propel the
industry to grow five folds in five year from its current size of Rs. 4000 crores according
to Electric Lamp and Component Manufacturers Association (ELCOMA).

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Product Portfolio:

1. ELECTRICAL ACCESSORIES 2. WIRES & CABLES 3. LED LIGHT 4. FANS 5. CFL AND T5 FITTING
POWER EDGE MODULAR PLATES MULTI STRAND CABLES LED RECESSED DOWNLIGHT CEILING FAN CFL
CARINO MODULAR SWITCHES L.T.INDUSTRIAL CABLES COB DOWNLIGHT EXHAUST FAN T.5 FITTING
POWER MODULAR SWITCHES COPPER CABLES LED STREET LIGHT TABLE FAN
ZAC PC-SERIES SUBMERSIBLE CABLES HYBAY LIGHT WALL FAN
FM MINI MODULAR SWITCHES LED MR-16 LAMP PEDESTAL FAN
PUF GENERAL SWITCHES LED T-8 FITTING
MCB/ ISOLATER / DISTRIBUTION BOXES VOLUX LED SLIM DOWNLIGHT
BELLS & EXTENSION CORD LEEVA LED PANEL
VOLUX LED BULBS
LED FLOOD LIGHT (H.D)
LED SPOT DOWNLIGHTS
VOLUX LED FLOOD LIGHTS

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2. Recent Developments
Veto Switchgears Board declared Interim Dividend – Feb 2017

Board of Directors of the Company at their meeting held on February 13, 2017 declared
Interim Dividend of Re. 1 per share having face value of Rs. 10/- per share (i.e. 10%) for
the Financial Year 2016-17.

The record date for dividend payout was 24th Feb 2017.

Veto Switchgears & Cables secures order worth Rs 19 crore – Jan 2017

Veto Switchgears & Cables informed that the company had participated in the tender with
Energy Efficiency Services (EESL) in respect of the following project "Design, Manufacture,
Supply, of Self-ballasted 9 Watt LED Bulbs on PAN-India basis, with 3 Years warranty and
other Related Works under NIT/Bid Document No. EESL/06/2016-17/Supply-9W LED
Bulbs/1617039 ("The Tender") jointly through execution of a consortium agreement with
Rudai Lighting.

The Company has been awarded an order of Rs. 19 crore for supply of the same.

Update on Subsidiary Company – Veto Overseas F.Z.E – Dec 2016

Veto Switchgears and Cables Ltd has informed BSE that Veto Overseas F.Z.E., wholly
owned subsidiary of the company, has declared an interim dividend of Rs. 2 crore on Dec
29, 2016.

Veto formed Veto Overseas F.Z.E, a 100% subsidiary in Dubai on Oct 2015 to take over
the business of JMTC FZCO gradually without diluting equity.

Earlier to this, management has also shifted the business of export of electrical items from
the parent company (Veto Electropower Ltd) to Veto Switchgear. Management is working
towards consolidation of various business of the group under the listed company.

Credit Rating Update by ICRA – Aug 2016

Veto Switchgears and Cables informed that ICRA has reaffirmed the long term rating of
BBB+ (pronounced as ICRA triple B plus) assigned to earlier Line of credit, and also
assigned long term rating of BBB+ to additional limit. The outlook of long term rating is
“Stable”.

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3. Financial Performance
Veto Switchgears & Cables reports standalone net profit of Rs 3.17 crore in the Dec 2016
quarter

Net profit of Veto Switchgears & Cables reported to Rs 3.17 crore in the quarter ended
Dec 2016 as against net loss of Rs 0.86 crore during the previous quarter ended Dec 2015.
Sales declined 15.79% to Rs 24.47 crore in the quarter ended Dec 2016 as against Rs 29.06
crore during the previous quarter ended Dec 2015.

On consolidated basis, Veto Switchgears and Cables reported net profit of Rs. 3.11 crore
and sales of Rs. 55.29 crore in Dec 2016 quarter.

Veto Switchgears & Cables standalone net profit rises 21.16% in the Sept 2016 quarter

Net profit of Veto Switchgears & Cables rose 21.16% to Rs 2.92 crore in the quarter ended
Sept 2016 as against Rs 2.41 crore during the previous quarter ended Sept 2015. Sales
rose 10.45% to Rs 31.07 crore in the quarter ended Sept 2016 as against Rs 28.13 crore
during the previous quarter ended Sept 2015.

On consolidated basis, Veto Switchgears and Cables reported net profit of Rs. 5.12 crore
and sales of Rs. 58.38 crore in Sept 2016 quarter.

Last 4 Quarters Consolidated Net Sales & Profit

200
176.59
180
160
140
Rs in Crores

120
100
80
56.9 58.38 55.29
60
40
20 13.09
4.32 5.12 3.11
0
1 2 3 4
Total Sales 176.59 56.9 58.38 55.29
Net Profit 13.09 4.32 5.12 3.11

Mar 16 Jun 16 Sep 16 Dec 16

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Current & Expected Earnings

Quarterly Ended Profit & Loss Account (Consolidated)

Particulars Mar Jun Sep Dec Mar Jun
(Rs in Crores) 2016 2016 2016 2016 2017 E 2017 E
Audited / UnAudited UA UA UA UA UA UA
Net Sales 176.59 56.9 58.38 55.29 194.96 65.84
Other Operating Income 0.15 0.01 0 0 0.2 0
Total Income – Operations 176.74 56.9 58.38 55.29 195.16 65.84
Raw Materials Consumed 48.36 9.77 9.56 9.47 58.43 10.42
Purchase of Traded Goods 85.73 33.21 38.55 32.84 88.31 39.55
Increase/Decrease in Stocks -6.09 2.28 -2.37 2.3 -4.74 2.15
Power & Fuel -- -- -- -- -- --
Employees Cost 7.62 2.46 3.17 3.16 8.35 3.15
Depreciation 1.97 0.4 0.41 0.42 2.01 0.43
Provisions And Contingencies -- -- -- -- -- --
Other Expenses 15.25 2.57 2.35 2.4 16.65 2.54
P/L Before Other Income 23.9 6.21 6.71 4.7 26.15 7.6
Other Income 0.24 0.07 0.23 0.12 0.31 0.22
P/L Before Int., E. Items & Tax 24.14 6.28 6.93 4.82 26.46 7.82
Interest 4.55 1.14 1 1.08 4.75 1.44
P/L Before E. Items & Tax 19.59 5.15 5.94 3.74 21.71 6.38
Exceptional Items -4.21 -- -- -- -4.21 ---
P/L Before Tax 15.38 5.15 5.94 3.74 17.5 6.38
Tax 2.28 0.83 0.82 0.63 2.48 1.05
P/L After Tax – Ord. Activities 13.09 4.32 5.12 3.11 15.02 5.33
Prior Year Adjustments -- -- -- -- -- --
Extra Ordinary Items -- -- -- -- -- --
Net Profit/(Loss) 13.09 4.32 5.12 3.11 15.02 5.33
Equity Share Capital 18.33 18.33 18.33 18.33 18.33 18.33
Reserves 54.33 -- -- -- -- --
Calculated EPS 7.14 2.36 2.79 1.7 8.19 2.91
Calculated EPS (Annualised) 28.56 9.44 11.16 6.8 32.77 11.63
Public Shares Holding 5176226 6062226 7662226 7662226 NA NA
Public Share Holding (%) 28.24 33.08 41.81 41.81 NA NA

Company is well positioned to deliver robust revenue growth in coming quarters

considering positive outlook for the sector in the medium to long term.

Veto Switchgears is expected to benefit from increasing penetration in other states and
consumer preferences for branded products, the company has a diversified product
basket with around 20 product categories.

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4. Peer Group Comparison

VETO SWITCHGEARS KEI EON

PEER GROUP & CABLES INDUSTRIES ELECTRIC
CMP 141.55 171.35 66.35
52 W L/H 85.15/175.00 91.50/186.80 47.30/90.00
Market Cap 259.97 1337.73 106.38
Results (in Crores) Dec-16 Dec-16 Dec-16
Net Sales 55.29 709.30 47.38
PAT 3.11 27.18 0.97
Equity 18.33 15.56 8.03
EPS (TTM) 13.99 11.22 2.50
P/E 10.12 15.33 26.50

5. Key Concerns / Risks

 Veto Switchgears scale of operations is small and its product offerings are limited
compared to big players in the industry like Havells, KEI Industries, Anchor, and others,
which limits its bargaining power with dealers/distributors.

 Veto Switchgears is largely Rajasthan based company (accounting for 70% sales in
FY16) and expanding across more regions pan India. High concentration in a single
state could be a concern for the company.

 Being a smaller player, Veto Switchgears needs to offer longer credit period to its
dealers, leading to higher working capital requirements. As manufacturing of
electrical products is highly competitive business with low entry barriers, increase in
competition may adversely impact revenue and operating margin.

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6. Saral Gyan Recommendation

We find Veto Switchgears a good investment opportunity from electric equipment
sector. We believe that B2C (Business to Consumer) companies are better investment
candidates because they are able to provide value-addition and can enjoy higher
margins for their branded products from the ultimate consumer as compared to B2B
(Business to Business) companies such as ancillary companies that supply to other
manufacturers and have limited pricing power.

Veto Switchgears in going through expansion to increase its presence in other states
of the country. Currently, Rajasthan contributes around 70% of total revenue and
remaining 30% contribution is from other states. As per management, the company
is expanding its reach in other states which includes Gujarat, Maharashtra,
Uttarakhand, Uttar Pradesh, Kerala, Himachal Pradesh, NCR, MP and other untapped
areas and aim to increase its revenue contribution from other states to 50% over next
2 to 3 years. The Company is present in 10 states in India and intends to expand its
presence across India. The existing dealer network is 2,500 and it is focusing on
increasing the same to 3500 by the end of 2017.

Veto Switchgears is appointing distributors across India to expand its business across
country. This will not only increases company’s presence in other states but also help
the company to reduce its working capital requirement significantly. The working
capital cycle of the company is of around 6 months as it operates without distributors
in Rajasthan and hence need to manage higher inventory to finance the business. As
per the management, Veto Switchgears plan to appoint 100 distributors across India
over next 2 years. We believe this would help in improving the working capital cycle
of the company going forward.

Currently, the company is manufacturing at 1/3rd of its capacity in single shift. The
company has set up the factory to account of 500 crores sales. With increase in
demand in coming years, the company can manufacture in double shift to increase its
production by six times from current utilization levels. Hence, we believe there will
not be any CAPEX requirement over next 3 to 4 years. Veto Switchgears plans to
enhance its capacity utilization from its two plants at Haridwar and Vasai by expanding
its reach in domestic market and also introducing new products going forward.

The company product portfolio includes switchgears, fans, LED, CFL lights and wires
& cables, all of which have robust demand from consumers. The company has
introduced LED lamps and is receiving good response from consumers. The company
is not manufacturing LED and outsourcing this product under its brand VETO, its
importing this product from China. LED segment is high margin business for the
company (margins ranging from 15% to 30% based on product type), hence it has
increased its focus on LED and target to achieve revenue of Rs. 20 crores in this
financial year compared to Rs. 7.50 crores in FY15-16.

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Veto Switchgears is expected to benefit from introduction of GST as unorganized

sector will lose its benefit. Further the boost to affordable housing provided by the
Government and initiatives like rural electrification will also likely result in better sales
growth for Veto Switchgears over the medium term.

The company has registered sales CAGR of 27.1% and profit CAGR of 28.1% with ROE
of 15.7% over last 5 years. Company has managed to keep its debt low, we expect
company to reduce its working capital days by appointing distributors across country.

Key Financial Parameters Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016
Return on Equity (%) 30.71 13.58 9.73 10.10 21.05
ROCE (%) 20.64 13.62 9.09 9.33 16.78
Operating Profit Margin (%) 16.13 14.64 11.44 15.66 14.75
Net Profit Margin (%) 10.50 7.92 6.44 7.17 9.14
Debt to Equity (%) 0.75 0.08 0.55 0.48 0.52
Working Capital Days 212 244 253 325 205

As of Dec’16, promoter’s shareholding in the company is at 58.19%. Promoters have

not pledged any shares, Institution shareholding in the company is at 5.79%. The
company has paid interim dividend of Rs. 1 per share in Feb’17 and final dividend of
Rs. 1.50 per share in Sept 2016, dividend yield is at 1.48%.

As per our estimates, Veto Switchgears can deliver PAT of 28.50 crores for full financial
year 2018-19, annualized EPS of Rs 15.55 with forward P/E ratio of 9.1X for FY18-19.
Company’s valuation looks attractive considering improvement in business
fundamentals with ongoing expansion and consolidation of group businesses.

On equity of Rs. 18.33 crore, the estimated annualized EPS for FY18-19 works out to
Rs. 15.55 and the Book Value per share is Rs. 52.12. At current market price of Rs.
141.55, stock price to book value is 2.77.

Considering company’s ambitious plan to achieve revenue of more than Rs. 1000 crores
in next 5 years, ongoing expansion into various regions pan India, value addition with
reorganization of businesses of group companies, low capacity utilization with no capital
expenditure (capex) requirement for 3-4 years and expected boost in demand with
Government’s initiatives like rural & mass electrification and higher construction activity,
Saral Gyan team recommends “Buy” on Veto Switchgears & Cables Ltd at current market
price of Rs. 141.55 for target of Rs. 280 over a period of 12 to 24 months.

Buying Strategy:

 70% at current market price of 141.55

 30% at price range of 115 - 125 (in case of correction in stock price in near term)

Portfolio Allocation: 3% of your equity portfolio.

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7. Disclaimer
Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company.

© SARAL GYAN CAPITAL SERVICES

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
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company.
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the time of publication of the research report.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

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GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Saral Gyan or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the investor could consider buying the concerned stock at current market
price keeping in mind the tenure and objective of the recommendation service.
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further update and not buy more of the stock at current market price.
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stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping
in mind the objective of the recommendation service.

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