Rating: Buy; Target Price: Rs630; CMP: Rs486; Upside: 29.6%
A red hot lining
We initiate coverage on Vesuvius India Ltd (VIL) with a Buy (~30%
upside). VIL's strong track record unequivocally establishes its
ability to largely transcend the cyclicality of its customer industry
- steel. We are impressed by the company's strong track record in a
technology driven sector that is getting increasingly concentrated,
balanced product portfolio delivering superlative growth, technology
support from global parent, and debt-free balance sheet with
consistent free cash flow. These attributes could buttress continued
outperformance of the stock as in the recent past. The stock currently
has very limited coverage within the institutional sell-side.
$ Balanced product portfolio delivers superlative growth via
expansions: VIL has a well-balanced product portfolio and has
delivered strong volume CAGR of 16.5%/11.7% for unshaped/shaped
segments during CY05-12. The company is increasing its presence in the
fast growing unshaped segment and has hiked its share in revenues to
~33% in CY12 from 26% in CY06. We expect similar trend ahead with
volume CAGR of 12.5%/6.5% for unshaped/shaped segments during
CY12-16E, and estimate the share of unshaped segment rising to 40.8%
by CY16E.
$ Benefits from changing industry dynamics and world leader parent:
Refractory demand is led by steel industry which has seen changing
dynamics with i) steel production shift towards primary steelmakers
who have customized refractory needs, ii) drop in per tonne
consumption of refractories in steel making and iii) weak rupee
allowing for import substitution. These trends have forced some
consolidation, with established players like VIL scoring over small
players, leading to a volume growth of 50% in the past five years for
VIL vis-à-vis 13% for the industry. Strong support for growth through
technology sharing from VIL's global parent Vesuvius plc has provided
the required competitive edge.
$ Best in its peer group with enviable track record and strong
returns: VIL remains at the top end of margins of domestic as well as
global peers (incl. its parent Vesuvius plc). It has shown consistent
growth with EBITDA/PAT CAGR of 13.6%/11.5% during CY03-12, remaining
largely immune to steel cycles. VIL also enjoys highest ROE (16%+) in
the industry at a global level due to its operational efficiency,
despite being debt-free. It has been able to maintain its strong track
record of growth on account of its healthy balance sheet,
technological edge from the parent and efficient working capital
management.
$ Valuation and risks: deserves premium to peers: We expect the
earnings momentum to continue with an EBITDA/PAT CAGR of 13.8%/15.4%
during CY12-15E led by volume growth and operational efficiency. We
believe that VIL deserves the premium which it commands over global
and local peers, and assign (mean+0.5sd) multiples of 7.5x CY15E
EV/EBITDA and 15x CY15E P/E to arrive at our TP of Rs630. High
valuations of recent deals in the sector provide possible re-rating
benchmarks. Key risks are a sharp increase in imported raw material
costs and extreme stress in the steel industry.
Thanks & Regards
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A red hot lining
We initiate coverage on Vesuvius India Ltd (VIL) with a Buy (~30%
upside). VIL's strong track record unequivocally establishes its
ability to largely transcend the cyclicality of its customer industry
- steel. We are impressed by the company's strong track record in a
technology driven sector that is getting increasingly concentrated,
balanced product portfolio delivering superlative growth, technology
support from global parent, and debt-free balance sheet with
consistent free cash flow. These attributes could buttress continued
outperformance of the stock as in the recent past. The stock currently
has very limited coverage within the institutional sell-side.
$ Balanced product portfolio delivers superlative growth via
expansions: VIL has a well-balanced product portfolio and has
delivered strong volume CAGR of 16.5%/11.7% for unshaped/shaped
segments during CY05-12. The company is increasing its presence in the
fast growing unshaped segment and has hiked its share in revenues to
~33% in CY12 from 26% in CY06. We expect similar trend ahead with
volume CAGR of 12.5%/6.5% for unshaped/shaped segments during
CY12-16E, and estimate the share of unshaped segment rising to 40.8%
by CY16E.
$ Benefits from changing industry dynamics and world leader parent:
Refractory demand is led by steel industry which has seen changing
dynamics with i) steel production shift towards primary steelmakers
who have customized refractory needs, ii) drop in per tonne
consumption of refractories in steel making and iii) weak rupee
allowing for import substitution. These trends have forced some
consolidation, with established players like VIL scoring over small
players, leading to a volume growth of 50% in the past five years for
VIL vis-à-vis 13% for the industry. Strong support for growth through
technology sharing from VIL's global parent Vesuvius plc has provided
the required competitive edge.
$ Best in its peer group with enviable track record and strong
returns: VIL remains at the top end of margins of domestic as well as
global peers (incl. its parent Vesuvius plc). It has shown consistent
growth with EBITDA/PAT CAGR of 13.6%/11.5% during CY03-12, remaining
largely immune to steel cycles. VIL also enjoys highest ROE (16%+) in
the industry at a global level due to its operational efficiency,
despite being debt-free. It has been able to maintain its strong track
record of growth on account of its healthy balance sheet,
technological edge from the parent and efficient working capital
management.
$ Valuation and risks: deserves premium to peers: We expect the
earnings momentum to continue with an EBITDA/PAT CAGR of 13.8%/15.4%
during CY12-15E led by volume growth and operational efficiency. We
believe that VIL deserves the premium which it commands over global
and local peers, and assign (mean+0.5sd) multiples of 7.5x CY15E
EV/EBITDA and 15x CY15E P/E to arrive at our TP of Rs630. High
valuations of recent deals in the sector provide possible re-rating
benchmarks. Key risks are a sharp increase in imported raw material
costs and extreme stress in the steel industry.
Thanks & Regards
--
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