Orient Refractories - Resilient In Difficult Times; Result Update Q3FY16 :: Edelweiss

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In a challenging year for steel industry, Orient Refractories’ (ORL) sales and EBIDTA fell mere 2% in 9mFY16. This further reinforces our positive outlook on ORL’s competitive prowess. The Bhiwadi plant, post ~20% capacity hike, is well equipped to cater to additional demand and is estimated to close FY16 with flat production of 33,600MT. ORL’s sharpening focus on scrap processing is further improving plant efficiency, which led to sustenance of OPM at 17.5% in 9mFY16. Its strong positioning among smaller mills will be further fortified as ORL leverages parent’s brand to bag turnkey orders from larger steel mills in India. Moreover, outsourcing steel flow control production to India has begun from parent (RHI), which led to exports to RHI at INR240mn (from mere INR50-60mn in FY15). As we introduce FY18E with 14% earnings growth and strong 38% RoCE.

Flat production, augmented capacity to meet additional demand

Management expects to close FY16 with flat production of 33,600MT. However, the company has 20% higher capacity and is well equipped to cater to additional demand going forward. Also, with sharpening focus on scrap processing, the plant’s efficiency is continuously improving. ORL incurred capex of EUR1.5mn in FY16 for upgrading existing facilities and has earmarked EUR1.5mn for FY17 to improve the hydrant system. Management expects ~6%  sales growth in FY17.

Q3FY16: Revenue down, but EBITDA margin healthy

Revenue fell by mere 1.6% to INR1.2bn despite pressure on mini steel mines in domestic steel industry. However, EBITDA/PAT grew 11%/13% to INR225mn/INR149mn, 16%/19% above our estimates. EBITDA margin increased 222bps YoY to 19.6% on 270bps dip in other expenses, as a % of revenue. For 9mFY16, gross margin expanded by mere 51bps leading to flat EBITDA margin of 17.5%.

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