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

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Vesuvius India Ltd - Initiating Coverage - A red hot lining :Centrum

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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Vesuvius India: Buy :: Business Line

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Vesuvius India, which produces refractory products used by steel plants, appears to be a smart way to gain exposure to the Indian ferrous metals space. The company has the potential to grow sales and earnings to more than justify its valuation, given its vast product mix, strong financials and a growing domestic steel production base to cater to.

The company's stock (Rs.381) is valued at 14.6 times the trailing 12 month earnings, which is at a premium to peers in the space. The premium is warranted, given the higher operating margins and realisations Vesuvius enjoys compared to peers such as Tata Refractories, IFGL Refractories and OCL India. The company's valuation is also much lower than the 26 times FY11 earnings valuation ascribed to competitor, Tata Refractories, when a majority stake was acquired in it in June 2011 by a Japanese firm.

Vesuvius India produces refractory products which are used in the steel, cement and glass industries. The refractory lining on furnaces and other industrial machinery is required to provide heat and corrosion resistance to machinery operating at high temperatures. It is crucial in improving blast-furnace efficiency. Through two units in Vizag and Kolkata, the company produces a broad range of refractory products for the domestic market. Fifty five per cent of Vesuvius India is owned by Cookson UK. Cookson specialises in supplying products globally (sales in 2010 of $4 billion) to the steel and electronics space. Access to the parent group's product line expertise allows Vesuvius to compete effectively against peers such as Ace Caldersys and Tata Refractories, which have a similar backing.

CLOCK-WORK GROWTH

The last five years have seen prolific domestic steel consumption, which has grown at a compounded 9.5 per cent. Vesuvius capitalised on the growing domestic market. Since CY2006, the company's sales and profits have grown at a compounded rate of 12 and 16 per cent respectively to Rs 440 crore and Rs 49 crore in CY10 (also the company's financial year). With an accelerated pace of capacity additions in steel and the likelihood of shorter replacement cycles for refractory products, the pace of growth may improve, going forward.

In the nine months ended September 2011, Vesuvius has seen sales and net profits rise by 22 and 19 per cent respectively to Rs 392 crore and Rs 42 crore compared to the same period a year ago. Domestic steel production grew by 5.3 per cent during the same period. Steel producers expected to add 35-40 per cent more capacity to the existing base over the next three years.

This gives Vesuvius India a growing market to cater to. Also working in the company's favour is the shortening duration between blast furnace relining. This is necessitated by measures to keep soaring energy and raw material costs under check. The installation of larger blast furnaces may also work in favour of Vesuvius. In a bid to ramp up output, the company recently doubled capacity at its larger Kolkata unit. The company is a zero-debt entity and is using internal accruals to fund its expansion plans. Vesuvius  has enjoyed better realisations on their refractory products compared to peers such as OCL and IFGL, not to mention better operating margins (17-20 per cent) as well.

RISKS

The company's growth prospects are strongly tied to the steel cycle. Increasing domestic capacity could provide more players for Vesuvius to cater to. Any delays in steel capacity additions could hurt Vesuvius' growth. The company's raw material requirements include alumina, bauxite, silicon carbide and cement. Both bauxite and alumina prices have shown signs of cooling off over the last three months as prices are down by roughly 20 per cent over the last few months. Silicon carbide prices have remained stiff through the second quarter. The company has managed to maintain margins , despite volatile raw material costs.

BUY Vesuvius; Target 465 ::Anand Rathi

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BUY Target 465
Investment Arguments
~ Expansion in steel Industry will boost demand of VIL
~ Strong Parent’s Patronage (MNC Player)
~ Competitive edge over Peers
~ Robust historical Performance
~ Debt free player with Consistent track record of Dividend
~ Valuation
Company Description
Vesuvius India Limited is part of UK based Cookson group.
The Cookson group, a leading global materials science
company in the ceramics, electronics and precious metals
markets, acquired the Vesuvius group in 1987. The Cookson
group holds 55.6% stake in VIL India.
It is the manufacturer and trader of refractory and is managed
organizationally as a single unit. The Company is engaged in
designing, engineering, manufacture and delivery of refractory
products, systems and services for high-technology industrial
applications. Its products include Industrial Ceramics for
Continuous Casting & Pouring of Molten Metals Slide Gate
Plates & Nozzles. VESUVIUS Flow-Control and Linings
divisions provide customers with a full range of products,
including Process automation, Lining materials, Tundish
furniture and Slide gate systems and refractories. The
subsidiaries of the Company include Vesuvius South Africa
(Pty) Limited, Vesuvius Crucible Company, Vesuvius Italia
SPA, Vesuvius Japan Inc, Vesuvius UK Limited, Korea
Branch, Vesuvius (Thailand) Co., Limited, Vesuvius Canada
Inc, Foseco International Limited and Vesuvius Foundry
Products (Suzhou) Co. Limited
Vesuvius was established in 1916 as Vesuvius Crucible.
Vesuvius was the originator of the technologies and processes
its solutions incorporate products developed by R&D
engineers in 7 Vesuvius Research Centres worldwide. With
the integration of Foseco in April 2008, Vesuvius is now
present in 30 countries on 5 continents, with 80 manufacturing
units, 7 R&D centres and numerous sales agencies, together
employing over 12,000 people.