>ELECTROSTEEL CASTINGS LTD: Mining its way ahead

Kolkata-based Electrosteel Castings Ltd (Electrosteel) is a market leader in the ductile iron (DI) pipe industry; these pipes are used for water transportation. Though the industry is facing tough times due to overcapacity and increasing input cost, Electrosteel is better placed than peers owing to product quality and vast clientele especially in export market. With its steel project near completion and mining of coking coal and iron ore making progress, we expect considerable improvement in the earnings. We reaffirm a fundamental grade of 3/5, indicating that company’s fundamentals are good relative to other listed securities in India. Thrust on water infra to boost demand but overcapacity will constrain profitability


Electrosteel is expected to benefit as the new 12th plan is expected to increase allocation for water infrastructure. The demand for DI pipes is likely to increase at a CAGR of 15-17% over FY12-14. The domestic DI pipe industry is reeling under significant capacity additions by existing and new players. The total installed capacity for DI pipes is expected to increase to ~1.8 mn TPA in FY13 (vis-à-vis 1.2-1.3 mn TPA demand). But profitability will remain under pressure. Electrosteel’s strong presence in the export market (~50% of sales during 9MFY12) has helped it perform better compared to its peers.


Captive mines-Coking coal and Iron ore to improve margin in the medium term
Electrosteel’s captive coking coal mine has started production and is expected to ramp up over the next two years following the degassing of its underground reserve. The iron ore mine has received stage one clearance after a long wait and we expect the same to be operational by Q4FY13. Overall, we expect the full benefit of the two mines to accrue from FY14 after which the company’s margin will increase significantly.


Substantial investment in Electrosteel Steel (ESL); stabilisation a key monitorable
With cost overruns and project execution delays, the steel project through ESL has witnessed some hiccups. However, as the project is to be completed by H1FY13, the company’s ability to stabilise such a large capacity and market products in a new business is a key monitorable now.


Standalone revenues to increase at a CAGR of 9% in FY11-14
We expect standalone revenues to increase to Rs 22 bn in FY14 from Rs 17 bn in FY11. EBITDA/tonne declined in FY12 owing to increasing input cost and competition. However, profitability will improve by FY14 due to cost benefits from captive mines and better industry scenario. Also, adj. PAT will increase in FY14 to Rs 2.7 bn. ROE is expected at 13.5% in FY14, up from 2.5% in FY12.




Valuations – the current price has ‘strong upside’
CRISIL Research has used the sum-of-the-parts method to value Electrosteel and arrived at a fair value of Rs 45 per share. At the current market price of Rs 17, our valuation grade is 5/5.
RISH TRADER