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BUY Target 465
Investment Arguments
~ Expansion in steel Industry will boost demand of VIL
~ Strong Parent’s Patronage (MNC Player)
~ Competitive edge over Peers
~ Robust historical Performance
~ Debt free player with Consistent track record of Dividend
~ Valuation
Company Description
Vesuvius India Limited is part of UK based Cookson group.
The Cookson group, a leading global materials science
company in the ceramics, electronics and precious metals
markets, acquired the Vesuvius group in 1987. The Cookson
group holds 55.6% stake in VIL India.
It is the manufacturer and trader of refractory and is managed
organizationally as a single unit. The Company is engaged in
designing, engineering, manufacture and delivery of refractory
products, systems and services for high-technology industrial
applications. Its products include Industrial Ceramics for
Continuous Casting & Pouring of Molten Metals Slide Gate
Plates & Nozzles. VESUVIUS Flow-Control and Linings
divisions provide customers with a full range of products,
including Process automation, Lining materials, Tundish
furniture and Slide gate systems and refractories. The
subsidiaries of the Company include Vesuvius South Africa
(Pty) Limited, Vesuvius Crucible Company, Vesuvius Italia
SPA, Vesuvius Japan Inc, Vesuvius UK Limited, Korea
Branch, Vesuvius (Thailand) Co., Limited, Vesuvius Canada
Inc, Foseco International Limited and Vesuvius Foundry
Products (Suzhou) Co. Limited
Vesuvius was established in 1916 as Vesuvius Crucible.
Vesuvius was the originator of the technologies and processes
its solutions incorporate products developed by R&D
engineers in 7 Vesuvius Research Centres worldwide. With
the integration of Foseco in April 2008, Vesuvius is now
present in 30 countries on 5 continents, with 80 manufacturing
units, 7 R&D centres and numerous sales agencies, together
employing over 12,000 people.
Expansion in steel Industry will boost demand of VIL
Although the domestic steel industry grew by around 8% in the
calendar year 2010, VIL’s domestic sales rose 21% as it was
able to improve its market share. There were more sales of
high value-added products and penetration into newer markets
and newer product lines. In future, too, VIL would grow better
than the steel industry due to the same reasons.
Almost every large player in the steel industry has set out its
expansion plans. SAIL has expansion plans of around Rs
70000 crore for modernization and expansion of production to
be operational before March 2014. Tata Steel is taking it
Jamshedpur plant capacity from 6.8 mt to 9.7 mt by December
2011. Any Greenfield as well as Brownfield expansion by
major steel companies will lead to additional sales for VIL on a
one-time as well as continuous basis.
All the three plants of VIL are expanding. The Vizag and
Mehsana plant expansion was completed during CY 2010.
Phase 1 of the expansion of the Kolkotta plant is over. The
phase 2 expansion of the Kolkotta plant, which will be over by
end of May 2011, will ensure that VIL will have double the
capacity compared with December 2009. The company is
spending about Rs 90 crore as capex for the entire expansion,
all from internal accruals.
The expanded capacity is firstly targeted at the domestic steel
industry. However, till domestic demand picks up to the
expanded capacity level, VIL is expected to use its surplus
capacity for exports. The parent has closed down nearly eight
of its subsidiaries in the EU and will outsource its client’s
requirements depending on cost efficiencies and capacity
availability from India and China.
~ Strong Parent’s Patronage (MNC Player)
VIL is a subsidiary of the UK-based Cookson Group, which is
the pioneer materials science company that provides
materials, processes and services to customers worldwide.
VIL has full technology backup from its parent. This means
that it can effectively expand its product portfolio and broaden
its market reach.
With the integration of Foseco in April 2008, Vesuvius is now
present in 30 countries on 5 continents, with 80 manufacturing
units, 7 R&D centres and numerous sales agencies, together
employing over 12,000 people.
Foseco has been associated with the metals Industry for over
75 years and today is acknowledged as a world leader in the
supply of consumable products for use in the foundry industry
with a presence in 32 countries and major facilities in
Germany, USA, UK, Brazil, China, India, South Korea and
Japan.
The company was founded by Eric Weiss in 1932 and quickly
became established as a supplier to the Foundry Industry,
from where the name Foundry Service Company was derived.
In April 2008, Foseco was acquired by Cookson Group plc and
is now a part of Vesuvius.
~ Competitive edge over Peers
VIL has a solid reputation for its world-class range of
specialised ceramics (refractories). It gains tremendously from
the strong parentage of the Cookson Group a pioneer in this
field.VIL’s products are often benchmarked by its competitors
for innovation, product quality and service. This gives it the
ability to charge a premium for its products. Despite the stiff
competition from low-cost players, VIL manages to maintain its
leadership position in the industry and enjoys better margins.
~ Robust historical Performance
The company's sales and profits have grown at a compounded
average annual rate of 18% and 32% respectively, from 2006
to 2010. VIL has generated average annual sales of around
Rs 350 crore over the past five years. During the latest
completed fiscal (CY10 or year ended December 2010), it
clocked sales of about Rs 440.1 crores which is over 21% of
CY 09. We expect sales to grow at an average rate of 15-16%
over the next 4 to 5 years. VIL is able to maintain its ROE from
last 5 years and it is hovering around 18-21.
~ Debt free player with Consistent track record of
dividend
In the last 5 years, VIL has been absolutely debt-free. It has
managed all the capex through its internal accruals. VIL was
able to protect its margin both EBITDA and PAT even in 2008
slowdown period. It has been shareholder-friendly in the sense
that it has consistently paid handsome dividends in the last
four years. The dividend payout for the period averages
around 40%.
~ Valuation
The stock of VIL is currently trading at Rs 388. This implies a
multiple of 16 times its trailing 12-months earnings. The stock
is trading at a P/E of 15x and 11x at expected EPS of 26.5 and
34 for CY2011E and CY2012E respectively. The PE assigned
is based on 2 year forward historic multiple of the company
which averaged to 14x that give the target price of Rs. 465.
~ Key Concern
• Fluctuations in raw material and energy cost.
• Delay in capacity addition may result in performance
below our expectation.
• Being directly pegged to Steel sector, any downward
fluctuation in demand will directly impact the refractory
business.
• Pressure from cheaper refractory imports from China
• Fluctuation in exchange rate
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