Vesuvius India - Challenges Persist for Steel Industry; Result Update Q3CY14 :: Edelweiss, PDF link

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Vesuvius India’s (VIL) Q3CY14 sales growth at 11.7% exceeded estimates led by strong exports. EBITDA margin however came in 216bps below our estimates due to pricing pressure on account of weak steel demand. Key positive was sales growth of ~11.7% YoY in a muted quarter for domestic steel industry (production growth of 2.9%). Negative included EBITDA margin dip of 336bps YoY to 14.8% owing to the 339bps YoY decline in gross margin to 40.9%. VIL commands superior pricing power with its patented products, customised solutions to large steel producers. Hence, we expect the company’s margins to pick up following uptick in the steel cycle led by pricing power. The steel industry is also witnessing a shift towards primary producers, which will favour players like VIL with strong business models. Following ramp up in manufacturing capacity (43% over CY10-13) and utilisation at ~60%, we expect VIL to register sales and PAT CAGR of 18% and 29% over CY14-16, respectively, and 380bps RoE expansion over the period, driven by impending capex in the industrial sector and capacity expansion by steel players.

Sales growth better led by exports

VIL reported better-than-expected sales growth of 11.7% YoY (high base of 13.7% YoY growth), 6% above estimates. This is in context of domestic steel industry production growth of 2.9% YoY in the quarter. Underlying growth was mainly led by pick up in exports to a third party, which was rationalising inventory last year.

EBIDTA margin below estimate

Operating profit declined 9% YoY and EBITDA margin came in below estimates by 216bps mainly due to the 339bps fall in gross margin to 40.9% YoY owing to inferior product mix with lower sale of high-margin flow control products and nil price increase. As a result, EBITDA margin dipped by 336bps YoY to 14.8% (10 quarter low) hit by weak steel demand, pricing pressure and higher cost for imported raw materials.

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https://www.edelweiss.in/research/Banyan-Series-Vesuvius-India--Challenges-Persist-for-Steel-Industry;-Result-Update-Q3CY14/27539.html