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ISMT is one of the leading producers of seamless tubes in India and the only domestic player
to be backward integrated. Though the company faces demand slowdown in the medium
term, both locally and globally, as well as higher competition, the recent commissioning of the
premium quality finishing (PQF) mill and the upcoming power plant are expected to improve
its profitability. We initiate coverage on ISMT with a fundamental grade of 3/5, indicating that
its fundamentals are good relative to other listed securities in India.
Diversification provides better industry positioning
ISMT produces tubes of varying outer diameters (ODs) up to 273 mm which enables it to
cater to the varied industries, securing a diversified revenue portfolio. The diversified industry
mix helps it to negotiate the vagaries of end-user industries better than its peers. However,
ODs above 273 mm not produced by the company have better margins though the end-user
market is mainly Oil and Gas. ISMT’s current capacity utilisation is low at ~40% due to
significant expansion by the company in FY11 and also overcapacity in the industry. We
expect utilisation to improve to 47% in FY14 supported by growth in underlying industries.
Captive power plant + process improvement margin expansion
The commissioning of its captive power plant (CPP) coupled with the improved capacity
utilisation of the PQF mill will result in margin expansion from an expected 14.1% (down from
16.3% in FY11 due to demand slowdown and increased competition) in FY12 to 15.3% in
FY14. The newly added PQF mill will also expand its addressable market and enable cost
savings for the company due to higher efficiency leading to improvement in margins.
Susceptible to industrial cyclicalities and Chinese dumping
ISMT is exposed to cyclicality of the end-user industries. Also, raw material being a
significant part of the cost structure, any upward price movement is bound to result in margin
erosion for the company. Aggressive imports of seamless tubes from China have lowered
profitability for domestic manufacturers. Countries like the US and Europe has already levied
anti- dumping duty on Chinese imports; a similar move in India will benefit the industry.
Expect three-year revenue CAGR of 12.3% and margins of ~15%
We expect revenues to grow at a CAGR of 12.3% to Rs 24.7 bn in FY14 driven by 9.3%
volume CAGR. We believe that-despite challenges in the industry-CPP commissioning and
process improvement will result in margin expansion (though it would be lower compared to
its past performance) over next two years. Adjusted PAT is estimated grow at 12% over the
same period.
Valuations: Current market price has strong upside
CRISIL Research has assigned price to earnings (P/E) of 5x on FY14E EPS of Rs 8.1 to
arrive at a fair value of Rs 40 per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ISMT is one of the leading producers of seamless tubes in India and the only domestic player
to be backward integrated. Though the company faces demand slowdown in the medium
term, both locally and globally, as well as higher competition, the recent commissioning of the
premium quality finishing (PQF) mill and the upcoming power plant are expected to improve
its profitability. We initiate coverage on ISMT with a fundamental grade of 3/5, indicating that
its fundamentals are good relative to other listed securities in India.
Diversification provides better industry positioning
ISMT produces tubes of varying outer diameters (ODs) up to 273 mm which enables it to
cater to the varied industries, securing a diversified revenue portfolio. The diversified industry
mix helps it to negotiate the vagaries of end-user industries better than its peers. However,
ODs above 273 mm not produced by the company have better margins though the end-user
market is mainly Oil and Gas. ISMT’s current capacity utilisation is low at ~40% due to
significant expansion by the company in FY11 and also overcapacity in the industry. We
expect utilisation to improve to 47% in FY14 supported by growth in underlying industries.
Captive power plant + process improvement margin expansion
The commissioning of its captive power plant (CPP) coupled with the improved capacity
utilisation of the PQF mill will result in margin expansion from an expected 14.1% (down from
16.3% in FY11 due to demand slowdown and increased competition) in FY12 to 15.3% in
FY14. The newly added PQF mill will also expand its addressable market and enable cost
savings for the company due to higher efficiency leading to improvement in margins.
Susceptible to industrial cyclicalities and Chinese dumping
ISMT is exposed to cyclicality of the end-user industries. Also, raw material being a
significant part of the cost structure, any upward price movement is bound to result in margin
erosion for the company. Aggressive imports of seamless tubes from China have lowered
profitability for domestic manufacturers. Countries like the US and Europe has already levied
anti- dumping duty on Chinese imports; a similar move in India will benefit the industry.
Expect three-year revenue CAGR of 12.3% and margins of ~15%
We expect revenues to grow at a CAGR of 12.3% to Rs 24.7 bn in FY14 driven by 9.3%
volume CAGR. We believe that-despite challenges in the industry-CPP commissioning and
process improvement will result in margin expansion (though it would be lower compared to
its past performance) over next two years. Adjusted PAT is estimated grow at 12% over the
same period.
Valuations: Current market price has strong upside
CRISIL Research has assigned price to earnings (P/E) of 5x on FY14E EPS of Rs 8.1 to
arrive at a fair value of Rs 40 per share.
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