Strong Demand Visibility for Building Products – ‘Driven by Low Penetration of Pucca Housing’
EIL is primarily present in the manufacturing of AC (Asbestos Cement) roofing sheets and non-asbestos boards and panels which contributes ~75% to the company’s revenues. ~48% of rural India lives in kuccha houses (thatched roofing) providing an opportunity to every player to have a pie of the market which is estimated at ~Rs.250 Bn. EIL has reported an impressive volume CAGR of 10.3% over FY07-12 aided by timely expansion of building product capacity, strong rural demand driven by increasing rural income and increased thrust of Government on rural development through various schemes like Indira Awas Yojana, Bharat Nirman Yojana, NREGA etc. We expect EIL to post a volume CAGR of 5% over FY12-14E to be driven by 100,000 MTPA capacity additions in FY14E, better capacity utilization by way of technological upgradation and rising inclination towards pucca housing. Also, given the increasing thrust on rural housing and rise in income levels of rural people, the company has been able to efficiently pass on the increasing costs in the past (FY07-12 Pricing CAGR of 7.3%). We expect the prices to increase at a CAGR of 7.9% over FY12-14E resulting in Building Products revenue CAGR of 13.2% over the same period.
Pre-Engineered Buildings (PEB) – ‘Gaining Acceptance’
Given cost overruns in traditional concrete building structures due to delays in the construction, PEB is gaining acceptance on account of its speed of construction and quick turnaround time. The other features of PEB are similar to that of concrete structures in terms of strength, earthquake resistance and safety. However it reduces dependence on labor as predominantly the steel structures and panels are manufactured in-house and only the assembly work is carried onsite which significantly reduces the turnaround time. In the current situation where TIME is the king, many infrastructure projects like airports, cargo hubs, schools, metro rails, Indian railways, warehouses, Pharma companies, Automobile Companies etc. are increasingly using PEB. However, given current low acceptance of this structure and weak macroeconomic environment, we are factoring in a low growth of 11.2% over FY12-14E (FY09-12 CAGR– 34%).
Strong Financials, Healthy Return Ratios, Robust Cash flow Generation & Consistent Dividend History
EIL recently took an ECB of $12 mn to be repaid over next 5 years for setting up a Greenfield facility at Balasore in Orissa resulting in its D/E inching up to 0.4 from 0.3 as on March’2012. However given strong operating cash flows over the next 2 years (Rs.777 mn and Rs.972 mn in FY13E & FY14E resp.) and low capex (~Rs.540 mn. for AC Sheet Plant at Balasore and Metal Roofing Plant at Ranchi), we expect the company to become net debt free by FY14E. Also, the company has healthy return ratios with RoE & RoCE pegged at 23.0% and 18.7% respectively (likely to expand). It follows a consistent dividend paying policy (since last 10 years) with ~20% payout in FY12 offering a dividend yield of 3.2%.
OUTLOOK & VALUATION EIL is one of the leading players in the building products segment with a volume market share of 13.2% (Source: ACPMA) and having a strong pan-India presence with 38 sales depots & 6,000 retail outlets. Given the government’s thrust on rural development and the significance of rural India in overall GDP growth, we believe that the Roofing Industry would continue to grow at a decent pace. Also, given the increasing acceptance of urban products & PEB in the Industry, we believe EIL is well positioned to reap the benefits of its de-risking strategy. Based on H1FY13 performance, we have upward revised our earnings estimate by 9.1% & 15% to Rs.43.0 & Rs.47.4 respectively. At the CMP of Rs.219, the stock is trading at 5.1x and 4.6x its FY13E & FY14E EPS. We change our rating from ACCUMULATE to BUY with a revised price target of Rs.284.
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