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Electrosteel Castings (ECL) reported disappointing numbers for 3QFY2011.
Net sales increased by 10.5% yoy to `425cr, while EBITDA decreased by 24.4%
yoy to `88cr. Net profit for the quarter declined by 26.3% yoy to `47cr.
However, owing to the recent decline in the stock price, we continue to maintain
our Buy recommendation on the stock.
Sales improve, but margins under pressure: During 3QFY2011, net sales
increased by 10.5% yoy to `425cr mainly due to higher product prices. ECL’s
sales volumes for DI pipes stood at 68,000, at an average realisation of
`45,750/tonne. However, raw-material costs as a percentage of sales increased
to 45.9% in 3QFY2011, compared to 40.5% in 3QFY2010. EBITDA margin
declined by 954bp yoy to 20.7% in 3QFY2011. Interest expense increased by
61.8% yoy to `12cr. Consequently, net profit fell by 26.3% yoy to `47cr.
Outlook and valuation: We continue to have a positive view on ECL despite its
disappointing performance in 3QFY2011. We like the company’s initiatives of
venturing into steel making through its subsidiary EIL, which is setting up a 2.2mn
tonne steel plant expected to be commissioned by FY2012E. Further, ECL’s
backward integration initiatives through allocation of coking coal mines are
expected to result in cost savings from FY2012. ECL is still awaiting stage 1 MOEF
clearance for its iron ore mine, which will further lower costs; however, we have
not factored this in our estimates. We have lowered our profitability estimates to
factor in higher key input prices. Nevertheless, owing to the recent decline in the
stock price, we continue to maintain our Buy recommendation on the stock with
an SOTP Target Price of `45, valuing the core business at 6.0x FY2012E FDEPS
and its investments in the steel business at 1.0x book value.
ECL’s strong relationship with government to hold it in good stead
Lately, ECL has been facing stiff competition due to the entry of Jindal Saw. Going
ahead, competition is likely to intensify with the upcoming capacity of Jai Balaji
and Tata Metalliks in the same space. However, we believe the risks of ECL losing
market share is minimal, as it has a long-standing relationship with government
agencies.
Valuation
We maintain our positive stance on ECL’s initiatives of gradually venturing into
steel making through its subsidiary EIL, which is setting up a 2.2mn tonne steel
plant expected to be commissioned by FY2012E. Furthermore, the company’s
backward integration initiatives through allocation of coking coal mines are
expected to result in cost savings from FY2012. The company is also awaiting final
environmental clearance for its iron ore mine, which will further lower costs;
however, we have not factored it in our estimates. Owing to the recent decline in
the stock price, we maintain our Buy recommendation on the stock with an SOTP
Target Price of `45, valuing the core business at 6.0x FY2012E FDEPS and its
investments in the steel business at 1.0x book value.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Electrosteel Castings – 3QFY2011 Result Update
Angel Broking maintains a Buy on Electrosteel Castings with a Target Price of Rs. 45.
Electrosteel Castings (ECL) reported disappointing numbers for 3QFY2011.
Net sales increased by 10.5% yoy to `425cr, while EBITDA decreased by 24.4%
yoy to `88cr. Net profit for the quarter declined by 26.3% yoy to `47cr.
However, owing to the recent decline in the stock price, we continue to maintain
our Buy recommendation on the stock.
Sales improve, but margins under pressure: During 3QFY2011, net sales
increased by 10.5% yoy to `425cr mainly due to higher product prices. ECL’s
sales volumes for DI pipes stood at 68,000, at an average realisation of
`45,750/tonne. However, raw-material costs as a percentage of sales increased
to 45.9% in 3QFY2011, compared to 40.5% in 3QFY2010. EBITDA margin
declined by 954bp yoy to 20.7% in 3QFY2011. Interest expense increased by
61.8% yoy to `12cr. Consequently, net profit fell by 26.3% yoy to `47cr.
Outlook and valuation: We continue to have a positive view on ECL despite its
disappointing performance in 3QFY2011. We like the company’s initiatives of
venturing into steel making through its subsidiary EIL, which is setting up a 2.2mn
tonne steel plant expected to be commissioned by FY2012E. Further, ECL’s
backward integration initiatives through allocation of coking coal mines are
expected to result in cost savings from FY2012. ECL is still awaiting stage 1 MOEF
clearance for its iron ore mine, which will further lower costs; however, we have
not factored this in our estimates. We have lowered our profitability estimates to
factor in higher key input prices. Nevertheless, owing to the recent decline in the
stock price, we continue to maintain our Buy recommendation on the stock with
an SOTP Target Price of `45, valuing the core business at 6.0x FY2012E FDEPS
and its investments in the steel business at 1.0x book value.
Investment arguments
Backward integration initiatives to aid margin growth
ECL is on track to have in place an integrated business model going ahead
through a) backward integration initiatives led by the allocation of mines and
b) focus on beefing up its logistic infrastructure to further reduce costs.
The company was granted mining lease for the Parbatpur coking coal mine in
Jharkhand in January 2008 for 30 years. The mine is estimated to have reserves of
231.2mn tonnes. Production at the mine has already commenced and we expect
25% of the company's total coal requirement in FY2012E to be met through this
captive coal mine. For its iron ore requirements, the company is in the process of
acquiring the mining lease for the iron ore mine at Kodolibad, Jharkhand.
Currently, ECL is awaiting stage 1 MOEF clearance for its iron ore mine, which will
further lower costs; however, we have not factored this in our estimates.
Increasing investments in water infrastructure to boost DI pipe demand
Demand for DI pipes is directly linked to investment in water infrastructure as it
facilitates water transport. Currently, domestic demand for DI pipes is estimated to
be 610ktpa and is expected to grow at 15% per year. ECL currently enjoys 60%
market share in the domestic market. The international market for DI pipes is
worth around US $2bn, of which ECL enjoys a market share of about 6%.
ECL’s strong relationship with government to hold it in good stead
Lately, ECL has been facing stiff competition due to the entry of Jindal Saw. Going
ahead, competition is likely to intensify with the upcoming capacity of Jai Balaji
and Tata Metalliks in the same space. However, we believe the risks of ECL losing
market share is minimal, as it has a long-standing relationship with government
agencies.
Valuation
We maintain our positive stance on ECL’s initiatives of gradually venturing into
steel making through its subsidiary EIL, which is setting up a 2.2mn tonne steel
plant expected to be commissioned by FY2012E. Furthermore, the company’s
backward integration initiatives through allocation of coking coal mines are
expected to result in cost savings from FY2012. The company is also awaiting final
environmental clearance for its iron ore mine, which will further lower costs;
however, we have not factored it in our estimates. Owing to the recent decline in
the stock price, we maintain our Buy recommendation on the stock with an SOTP
Target Price of `45, valuing the core business at 6.0x FY2012E FDEPS and its
investments in the steel business at 1.0x book value.
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