Lighting up
Surya is set to utilise its capacities better this year as the economy improves. This should translate into an improvement in its financials.
Business Standard (8 November 1999)By Vinay Pandey

Ever since the Delhi-based Surya Roshni embarked on an expansion plan in 1996, it has been a difficult going. The backward integration project for producing ribbon glass for the lighting division and doubling of capacity of cold rolled (CR) sheets, put pressure on its finances. Interest went up from Rs 21.89 crore in 1995-96 to Rs 24.95 crore in 1996-97 and Rs 33.64 crore in 1997-98.

However, trouble is soon to be history now as the company is consolidating its operations to take advantage of its expanded capacity. This will be possible because of the economic recovery just taking off. The Rs 700 crore company has two divisions - lighting and steel. A look at the business.

Steel
The steel division has its plant at Bahadurgarh in Harayana.
The division has two sub-units - one which makes steel pipes, used in various process industries like oil and gas and the other which makes cold-rolled strips which are mostly used by the automobile and consumer durables industry.

This division, contributing about 58 per cent of Surya's turnover, recorded a turnover of Rs 418.99 crore for the year ended March 1999. This was an increase of 12.3 per cent over the turnover of Rs 373.05 crore in 1997-98. Of this turnover of Rs 418.99 crore, tubes and pipes alone accounted for Rs 250.34 crore. The company is the market leader in this segment with a market share of 15 per cent. The steel division achieved a higher turnover despite sluggish demand by selling value added products and an exports thrust. Last year, the total exports of the steel division increased more than eight times to Rs 2.44 crore from Rs 0.30 crore earlier.

The thrust of the division is towards value added higher grades American Petroleum Institute (API) pipes which are used in the oil and gas sector. This sector is expected to grow significantly and the steel division is likely to perform much batter. Also, the price realisation of CR steel is also showing an upward trend and is expected to increase its contribution in second half of the current year.

Lighting
The lighting division of Surya manufactures general lighting system lamps (GLS), fluorescent tube lamps (FTL), auto halogen lamps, luminaries and special lamps. It also has two fully integrated plants at Kashipur (Uttar Pradesh) and Malanpur (Madhya Pradesh). According to the Electrical Lamps and Components Manufacturers Association (ELCOMA) figures , Surya is the second largest player in the lighting industry with a market share of 23 per cent in FTL and 20 per cent in the GLS segment respectively.

The lighting division, which contributes about 42 per cent of the total turnover, notched up a healthy 15.6 per cent growth in sales to Rs 299.52 crore in 1997-98. Within the lighting segment, the GLS lamp sales increased by 20 per cent to Rs 81.1 crore while FTL sales increased by 8.4 per cent to Rs 108.25 over last year. Surya has made minor in-roads into the compact fluorescent lamp segment, where its sales have risen from Rs 1.72 crore last year to Rs 3.28 crore.

In October 1998, the division completed its backward integration ribbon glass project (Rs 130 crore) for manufacture of glass shells for GLS and FTI. The project was delayed by over a year which also led to cost escalation. With the commissioning of the project, the capacity of GLS and FTL shells has increased to 426.9 million units respectively.
The backward integration is a fall-out of the production constraints that the company had suffered in the mid-nineties due to shortage of GLS shells. With this backward integration , the company would not only be meeting its entire requirement of glass shells for both Malanpur and Kashipur unit but would also be in a position to supply its surplus production of 200 million pieces to other lighting companies. Currently, about 30 per cent of the total production of the ribbon glass project is sourced by Philips. With backward integration in place, the lighting division now produces almost all components in-house. This would result in reduced material costs due to internal production of components and would in turn improve margins.
There are no expansion plans for this unit for the next couple of years. But thereafter the company has tentative plans of investing Rs 100 to 150 crore into energy saving lamps which is expected to emerge as a future growth area for lighting companies. The company agrees that it wold be slightly behind others in this emerging segment, but for now its priority is consolidation rather than expansion.

The consolidation plan envisages a major thrust in the rural market which had been neglected by it so far. It is strengthening its distribution network of 35 branches, 5000 dealers, 200-0 distributors and 80,000 retailers to provide this thrust. Overall the company expects the industry to grow at about eight per cent and pegs its growth at 10 to 15 per cent.

Financials
Due to depressed capital market conditions over the last couple of years the expansion and backward integration programmed of the company was funded by debt. This increased the debt-equity ratio to 2.65 as on March 31, 1999. Though, the interest coverage (operating profit/interest) at 2.02 times remains comfortable, high gearing is a cause for concern and could have serious consequences for the company in adverse circumstances. Interest cost has almost doubled to Rs 40.09 crore from Rs 21.89 crore in March 1996 and would always be a drag on the performance of the company. On the operations side the company has been improving its performance its operating margin (OPM) recovering 11.28 per cent for the year ended March 1999 from 10.7 per cent in the earlier year. In the first half of this year, Surya achieved a 7.9 per cent growth in turnover to Rs 354.82 crore. The emphasis on profitability seems to be showing result as net profit has increased by 10.3 per cent to Rs 7.3 crore showing an OPM of 13.5 per cent.

Future
The last three years of expansion and modernisation, funded through debt has put a strain on Surya's finances. As a result, over the next couple of years, the company has decided not to make any fresh investments. Instead, the emphasis would be towards consolidating and realizing full gains from the expansion. To achieve this, Surya would focus on brand building, marketing and increasing market penetration, with a special emphasis on the rural market. Says B D Agarwal, chairman, Surya Roshni, "We are not considering any fresh investments. Instead we are going to maximize benefits from investments made recently".

The company is also looking at reducing its interest burden through swapping high cost loans with low cost funds. To achieve this among other options Surya is exploring the option of going in for a rights issue some time later. The proceeds from the rights issue would be used to retire some of the debt.
Another interesting possibility is that of steel and lighting division being de-merged into separate companies to enhance focus and shareholder value. The separation, it implemented would definitely improve the company's evaluation as there is no real synergy between the two businesses, with lighting being a consumer business and steel being an industrial one. "The company has not taken a decision in this regard but we agree that it is a good idea, one which we are looking into," says Aggarwal.

Valuation
During the current year, Surya's performance has not been spectacular but considering the fact that traditionally the second half has always been better, its turnover is expected to cross Rs 800 crore this year with net profit in the range of Rs 15 crore. The 1998-99 EPS of Rs 5.09 discounts the current share price of Rs 31 by 6.09 times. And the 1999-2000 EPS of Rs 6.5 discounts it by 4.8 times. Investors can invest at this level with a two year perspective over this period. Surya is expected to deliver better operating performances and also clean up its balance sheet to some extent. And if the two divisions of the company are split into separate companies, than the valuation would improve immediately.

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