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Backward integration initiatives to aid margin growth: Electrosteel
Castings (ECL) is on track to have in place an integrated business
model going ahead through a) backward integration initiatives
and b) focus on beefing up its logistic infrastructure. 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 ECL's (excluding
associates and subsidiaries) 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.
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. Although currently the
orders have slowed down on account of government's slower
spending on infrastructure which may hurt ECL's in the near
term, we believe going forward, ECL remains well-poised to bag
new orders on account of its proven execution capabilities. 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. Nevertheless, we believe the risks of ECL losing
market share is minimal, as it has a long-standing relationship
with government agencies. However, we believe margins will
remain under pressure on account of over-capacity and rising
costs, which we have considered in our estimates.
Thrust on Exports: ECL continues to focus on its export strategy
through its presence in Europe (France, Spain, UK and Portugal),
Algeria in Africa and Asian markets (Singapore, Hong Kong,
Mauritius, Sri Lanka, Bangladesh, Qatar and Bahrain). Currently,
the company is exploring new markets like USA with the
establishment of its American subsidiary. Moreover, with the
investment in water infrastructure expected to increase worldwide
to US $180bn by 2025E from current levels of around US $70bn
as estimated by the World Commission on Water, we believe
that ECL is well poised to benefit from its expanding export
initiatives.
Valuations attractive: 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. 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. We have
not considered ECL’s stake in Lanco Industries in our SOTP valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Backward integration initiatives to aid margin growth: Electrosteel
Castings (ECL) is on track to have in place an integrated business
model going ahead through a) backward integration initiatives
and b) focus on beefing up its logistic infrastructure. 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 ECL's (excluding
associates and subsidiaries) 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.
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. Although currently the
orders have slowed down on account of government's slower
spending on infrastructure which may hurt ECL's in the near
term, we believe going forward, ECL remains well-poised to bag
new orders on account of its proven execution capabilities. 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. Nevertheless, we believe the risks of ECL losing
market share is minimal, as it has a long-standing relationship
with government agencies. However, we believe margins will
remain under pressure on account of over-capacity and rising
costs, which we have considered in our estimates.
Thrust on Exports: ECL continues to focus on its export strategy
through its presence in Europe (France, Spain, UK and Portugal),
Algeria in Africa and Asian markets (Singapore, Hong Kong,
Mauritius, Sri Lanka, Bangladesh, Qatar and Bahrain). Currently,
the company is exploring new markets like USA with the
establishment of its American subsidiary. Moreover, with the
investment in water infrastructure expected to increase worldwide
to US $180bn by 2025E from current levels of around US $70bn
as estimated by the World Commission on Water, we believe
that ECL is well poised to benefit from its expanding export
initiatives.
Valuations attractive: 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. 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. We have
not considered ECL’s stake in Lanco Industries in our SOTP valuations.
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