electrosteel castings

Please refer to important disclosures at the end of this report 1

(` cr) 1QFY12 1QFY11 yoy (%) 4QFY11 qoq (%)

Net sales 419 360 16.4 506 (17.2)

EBITDA 54 67 (18.2) 77 (29.2)

% margin 13.0 18.5 (550)bp 15.2 (220)bp

Net profit 28 30 (7.2) 39 (27.5)

Source: Company, Angel Research

For 1QFY2012, Electrosteel Castings (ECL) reported modest top-line growth; however, margins were negatively affected due to higher raw-material cost. We continue to maintain our Buy recommendation on the stock.

EBITDA margin impacted by higher raw-material cost: During 1QFY2012, the company’s net sales increased by 16.4% yoy to `419cr due to higher sales volume and realisations. Ductile iron (DI) pipes sales volume for the quarter grew to 61,200 tonnes vs. 55,000 tonnes in 1QFY2011. However, EBITDA margin contracted by 550bp yoy to 13.0% in 1QFY2012, as a result of higher raw-material cost, which as a percentage of sales increased to 55.1% in 1QFY2012 compared to 45.8% in 1QFY2011. Thus, EBITDA fell by 18.2% yoy to `54cr during the quarter. Interest expense fell by 34.5% yoy to `11cr and tax rate came in lower at 7.6% vs. 29.4% in 1QFY2011. This led to net profit declining by only 7.2% yoy to `28cr.

Outlook and valuation: We maintain our positive stance on the company’s initiatives of venturing into steel making through its associate Electrosteel Steels (ESL). Further, the company’s backward integration initiatives through allocation of coking coal mines are expected to result in cost savings from FY2013. The stock is currently trading at 6.5x FY2012E and 5.3x FY2013E EV/EBITDA. On P/BV basis, it is trading at 0.5x each for FY2012E and FY2013E. We maintain our Buy recommendation on the stock with an SOTP target price of `35.

Key financials (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E

Net sales 1,580 1,873 1,900 1,966

% chg (18.9) 18.5 1.5 3.5

Net profit 234 180 149 198

% chg 73.1 (23.3) (16.9) 32.5

FDEPS (`) 6.8 5.2 4.3 5.7

OPM (%) 20.9 16.2 15.1 17.7

P/E (x) 4.1 5.4 6.5 4.9

P/BV (x) 0.6 0.5 0.5 0.5

RoE (%) 15.5 10.7 8.3 10.3

RoCE (%) 10.0 7.8 6.5 7.7

EV/Sales (x) 1.1 1.0 1.0 0.9

EV/EBITDA (x) 5.0 6.5 6.5 5.3 Source: Company, Angel Research

BUY CMP `28 Target Price `35

Investment Period 12 months

Stock Info

Sector

Bloomberg Code ELSC@IN

Shareholding Pattern (%)

Promoters 48.5

MF / Banks / Indian Fls 10.0

FII / NRIs / OCBs 5.3

Indian Public / Others 36.2

Abs. (%) 3m 1yr 3yr

Sensex (3.1) 3.1 35.7

ECL (16.6) (40.4) (10.0)

Face Value (`)

BSE Sensex

Nifty

Reuters Code

Steel

Avg. Daily Volume

Market Cap (` cr)

Beta

52 Week High / Low

1

18,507

5,567

ELST.BO

912

0.6

56/27

186614

Bhavesh Chauhan Tel: 022- 39357600 Ext: 6821

E-mail: [email protected]

Pooja Jain Tel: 022- 39357600 Ext: 6839

E-mail: [email protected]

Electrosteel Castings Performance Highlights

1QFY2012 Result Update | Steel

July 18, 2011

Electrosteel Castings | 1QFY2012 Result Update

July 18, 2011 2

Exhibit 1: 1QFY2012 performance (Standalone) Y/E March (` cr) 1QFY12 1QFY11 yoy % FY2011 FY2010 yoy %

Net sales 419 360 16.4 1,711 1,429 19.8

Raw material 231 165 39.9 857 606 41.5

% of net sales 55.1 45.8

50.1 42.4 Power & Fuel 32 29 9.1 126 105 20.2


7.4 7.4 Staff cost 32 27 15.6 123 106 15.8


7.2 7.4 Other expenditure 81 81 0.4 359 333 7.7


21.0 23.3 Total expenditure 375 302 24.2 1,465 1,150 27.4


85.6 80.5 Operating profit 44 58 (24.1) 247 279 (11.6)

OPM (%) 10.4 16.0

14.4 19.5

Other operating income 11 9 20.1 61 100 (38.6)

EBITDA 54 67 (18.2) 308 379 (18.7)

EBITDA margin (%) 13.0 18.5

18.0 26.5

Interest 11 17 (34.5) 48 44 8.2

Depreciation 14 13 3.6 54 52 4.0

Other income 1 6 (89.7) 9 25 (64.8)

Exceptional items 0 0

0 0 Profit before tax 30 43 (29.1) 215 308 (30.2)


12.6 21.6

Tax 2 12 (81.6) 60 102 (40.7)

% of PBT 7.6 29.4

28.0 33.0

Profit after tax 28 30 (7.2) 155 206 (25.0)


Higher volume and realisation aid top-line growth During 1QFY2012, net sales growth of 16.4% yoy was mainly driven by DI pipes sales volume, which grew to 61,200 tonnes vs. 55,000 tonnes in 1QFY2011. Furthermore, higher realisation across product categories aided net sales growth.

Exhibit 2: Net sales up 16.4% yoy in 1QFY2012


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July 18, 2011 3

EBITDA margin contracts yoy

During the quarter, raw-material cost as a percentage of sales increased to 55.1% in 1QFY2012 compared to 45.8% in 1QFY2011. As a result, EBITDA margin dipped by 550bp yoy to 13.0% in 1QFY2012 and EBITDA fell by 18.2% yoy to `54cr during the quarter.

Interest expense fell by 34.5% yoy to `11cr and tax rate came in lower at 7.6% vs. 29.4% in 1QFY2011. This led to net profit declining by only 7.2% yoy to `28cr.

Exhibit 3: EBITDA margin stood at 13.0%


Exhibit 4: Net profit margin lower at 6.7% yoy


ESL steel project delayed

ESL had commenced operation of pig iron during FY2011. However, it was subsequently shut down for synchronisation with other facilities at the plant. Also, the target completions for other facilities were delayed on account of shortage of Chinese manpower. Nevertheless, the problem of Chinese manpower has now been resolved and work at the site is progressing well.

Coking coal mine to ramp up in FY2013

The company is currently working on developing infrastructure at its Parbatpur coking coal mine. As per management, it will take at least one year to ramp up the production to 0.9mn tonnes per year. Currently, the company produces miniscule quantity from the mine.

Investment arguments

Backward integration initiatives to aid margin growth

Going ahead, ECL is on track to have an integrated business model in place through a) backward integration initiatives led by the allocation of mines and b) focus on beefing up its logistic infrastructure to further reduce costs. The company was granted mining lease for the Parbatpur coking coal mine in Jharkhand in January 2008. The mine is estimated to have reserves of 231.2mn tonnes. The company expects to commence meaningful production from FY2013. For its iron ore requirements, the company is in the process of acquiring mining

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July 18, 2011 4

lease for the iron ore mine at Kodolibad, Jharkhand. However, we have not factored this in our estimates, as the company is yet to receive forest clearance.

Upcoming steel capacity of 2.2mn tonnes

ECL, through its associate ESL, expects to commission commercial production from its 2.2mn tonne integrated greenfield steel plant in Jharkhand by the end of FY2012E. The `7,262cr project is being financed through 3:1 Debt/Equity ratio. ECL holds 34% share in ESL, while Stemcor holds 20% share. Stemcor is the world's largest steel trader with a network of 80 offices. The strategic alliance with Stemcor will enable ESL to leverage on the former’s well-spread distribution channel.

Valuation

We maintain our positive stance on ECL’s initiatives of gradually venturing into steel making through its associate ESL, which is setting up a 2.2mn tonne steel plant expected to commence production by end of FY2012. Furthermore, the company’s backward integration initiatives through allocation of coking coal mines are expected to result in cost savings from FY2013. The stock is currently trading at 6.5x FY2012E and 5.3x FY2013E EV/EBITDA. On P/BV basis, it is trading at 0.5x each for FY2012E and FY2013E. We maintain our Buy recommendation on the stock with an SOTP target price of `35.

Exhibit 5: SOTP valuation

Particulars (`)

Standalone business 5.0x FY2013E EV/EBITDA 13

Stake in ESL 1.0x P/BV 20

Stake in Lanco Ind. 20% discount to CMP 2

Target Price 35

Source: Company, Angel Research We have raised our sales and EBITDA estimates for FY2012 and FY2013 to account for higher realisations across product categories.

Exhibit 6: Key assumptions

(` cr) Earlier

estimates Revised

estimates Upgrade/

(downgrade) (%)

FY12E FY13E FY12E FY13E FY12E FY13E

Net sales 1,771 1,845 1,900 1,966 7.3 6.6

EBITDA 272 323 287 348 5.5 7.6 EBITDA margin (%) 15.4 17.5 15.1 17.7 (25)bp 17bp

PBT 182 225 184 236 1.2 4.9

PAT 142 215 149 198 4.8 (8.2)

PAT margin (%) 8.0 11.7 7.9 10.1 (19)bp (161)bp

Source: Angel Research


July 18, 2011 5

Exhibit 7: Recommendation summary

Companies CMP Target price Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%)

(`) (`)

(` cr) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

SAIL 131 191 Buy 64,083 45.5 10.2 7.9 1.3 1.1 7.3 5.8 13.5 15.2 11.8 14.0

Tata Steel 572 799 Buy 54,881 39.7 7.8 6.3 1.3 1.1 5.1 3.9 18.5 19.6 12.9 14.2

JSW Steel 882 1,024 Buy 19,677 16.1 9.6 7.6 1.0 0.9 5.8 4.6 10.8 12.2 10.4 12.0

Bhushan Steel 455 - Neutral 9,283 - 8.8 8.0 1.5 1.3 9.3 8.1 19.2 17.7 9.4 9.2

Godawari Power 161 225 Buy 512 39.5 3.9 2.9 0.6 0.5 4.0 2.9 17.6 19.4 13.8 17.0

Sarda Energy 212 253 Buy 761 19.4 7.8 6.4 1.0 0.9 6.5 4.9 13.8 14.8 10.2 11.3

Prakash Ind. 72 96 Buy 972 32.8 3.2 2.6 0.5 0.4 3.4 3.1 16.9 17.4 14.5 14.7

Monnet Ispat 500 533 Accumulate 3,214 6.7 12.0 8.8 1.3 1.2 11.9 8.3 11.8 15.3 7.5 10.1

ECL 28 35 Buy 912 25.4 6.5 4.9 0.5 0.5 6.5 5.3 8.3 10.3 6.5 7.7

Source: Angel Research

Exhibit 8: EV/EBITDA band

Source: Bloomberg, Angel Research

Exhibit 9: P/E band


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July 18, 2011 6

Exhibit 10: P/BV band


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July 18, 2011 7

Profit & loss statement (Consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E

Net Sales 1,440 1,948 1,580 1,873 1,900 1,966

Other operating income 23 27 30 34 36 38

Total operating income 1,462 1,975 1,610 1,907 1,936 2,004

% chg 17.7 35.1 (18.5) 18.4 1.5 3.5

Total Expenditure 1,360 1,684 1,280 1,604 1,648 1,656

Net Raw Materials 777 986 646 897 919 899

Other Mfg costs 494 586 503 558 560 580

Personnel 90 113 131 149 169 177

Other - - - - - -

EBITDA 102 291 330 303 287 348

% chg (35.9) 184.6 13.4 (8.1) (5.2) 21.0

(% of Net Sales) 7.1 14.9 20.9 16.2 15.1 17.7

Depreciation& Amortisation 38 53 54 56 63 69

EBIT 64 238 276 247 225 279

% chg (48.3) 268.8 16.4 (10.6) (9.2) 24.2

(% of Net Sales) 4.5 12.2 17.5 13.2 11.8 14.2

Interest & other Charges 37 103 52 86 81 83

Other Income 78 64 87 62 40 40

(% of PBT) 74.0 32.3 28.1 27.7 21.8 16.9

Share in profit of Associates - - - - - -

Recurring PBT 106 198 312 223 184 236

% chg (33.1) 87.2 57.2 (28.4) (17.5) 28.5

Extraordinary Inc/(Expense) (60) - - - - -

PBT (reported) 46 198 312 223 184 236

Tax 1.7 70.4 105.2 61.1 55.2 70.9

(% of PBT) 3.8 35.5 33.7 27.4 30.0 30.0

PAT (reported) 44 128 206 162 129 165

Add: Share of earnings of associate 11 9 28 18 22 33

Less: Minority interest (MI) 0 1 1 0 1 1

Extraordinary Expense/(Inc.) - - - - - -

PAT after MI (reported) 55 135 234 180 149 198

ADJ. PAT 116 135 234 180 149 198

% chg 10.3 17.1 73.1 (23.3) (16.9) 32.5

(% of Net Sales) 8.0 6.9 14.8 9.6 7.9 10.1

Basic EPS (`) 5.0 4.8 7.3 5.5 4.6 6.1

Fully Diluted EPS (`) 4.0 4.2 6.8 5.2 4.3 5.7

% chg 3.9 7.2 59.9 (23.3) (16.9) 32.5


July 18, 2011 8

Balance sheet (Consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E

SOURCES OF FUNDS

Equity Share Capital 28 29 33 33 33 33

Reserves & Surplus 1,133 1,338 1,588 1,714 1,815 1,962

Share Warrants 34 34 - - - -

Total Loans 844 1,101 1,298 1,587 1,642 1,662

Deferred Tax Liability 20 37 47 44 44 44

Total Liabilities 2,062 2,544 2,971 3,382 3,539 3,705

APPLICATION OF FUNDS Gross Block 643 798 860 936 1,086 1,186

Less: Acc. Depreciation 226 279 322 382 445 514

Net Block 416 519 538 553 640 671

Capital Work-in-Progress 150 302 397 454 504 529

Goodwill - - - - - -

Investments 179 466 1,067 1,425 1,425 1,425

Current Assets 1,686 1,594 1,300 1,636 1,690 1,795

Cash 184 95 299 205 346 387

Loans & Advances 518 441 208 247 271 298

Other 984 1,057 793 1,185 1,073 1,110

Current liabilities 369 337 332 686 720 715

Net Current Assets 1,316 1,257 969 950 970 1,080

Mis. Exp. not written off - 0.0 0.0 0.0 0.0 0.0

Total Assets 2,062 2,544 2,971 3,382 3,539 3,705

Cash flow statement (Consolidated) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E

Profit before tax 51 193 312 223 184 236

Depreciation 39 53 54 56 63 69

Change in Working Capital (223) (160) 172 (100) 122 (70)

Less: Other income 69 124 (34) 50 21 32

Direct taxes paid (14) (44) (115) (59) (55) (71)

Cash Flow from Operations (78) 166 389 170 334 197

Inc./ (Dec.) in Fixed Assets (179) (301) (174) (119) (200) (125)

Inc./ (Dec.) in Investments 13 (177) (307) (315) - -

Other income (279) (90) 13 30 - -

Cash Flow from Investing (445) (568) (469) (404) (200) (125)

Issue of Equity 74 121 15 0 - -

Inc./(Dec.) in loans 349 246 359 277 55 20

Dividend Paid (Incl. Tax) (26) (7) (41) (41) (48) (52)

Others (5) (47) (50) (96) - -

Cash Flow from Financing 392 314 283 140 7 (32)

Inc./(Dec.) in Cash (131) (89) 203 (94) 141 40

Opening Cash balances 315 184 95 299 205 346

Closing Cash balances 184 95 299 205 346 387


July 18, 2011 9

Key ratios Y/E March FY08 FY09 FY10 FY11 FY12E FY13E

Valuation Ratio (x)

P/E (on FDEPS) 7.1 6.6 4.1 5.4 6.5 4.9

P/CEPS 5.3 4.7 3.4 4.1 4.5 3.6

P/BV 0.7 0.6 0.6 0.5 0.5 0.5

Dividend yield (%) 4.5 4.5 4.5 4.5 4.5 4.8

EV/Sales 0.9 0.8 1.1 1.0 1.0 0.9

EV/EBITDA 12.8 5.5 5.0 6.5 6.5 5.3

EV/Total Assets 0.6 0.6 0.6 0.6 0.5 0.5

Per Share Data (`)

EPS (Basic) 5.0 4.8 7.3 5.5 4.6 6.1

EPS (fully diluted) 4.0 4.2 6.8 5.2 4.3 5.7

Cash EPS 5.2 5.9 8.3 6.8 6.1 7.7

DPS 1.3 1.3 1.3 1.3 1.3 1.4

Book Value 42.6 48.8 49.6 53.4 56.6 61.0

Dupont Analysis

EBIT margin 4.4 12.0 17.2 13.0 11.6 13.9

Tax retention ratio (%) 96.2 64.5 66.3 67.1 70.0 70.0

Asset turnover (x) 0.8 0.9 0.7 0.7 0.7 0.7

RoIC (Post-tax) 3.3 6.8 7.5 5.8 5.5 6.5

Cost of Debt (Post Tax) 4.5 6.8 2.9 3.2 3.5 3.5

Leverage (x) 0.6 0.6 0.5 0.6 0.5 0.5

Operating RoE 2.6 6.8 9.7 7.4 6.5 8.0

Returns (%)

RoCE (Pre-tax) 3.5 10.3 10.0 7.8 6.5 7.7

Angel RoIC (Pre-tax) 4.4 12.9 13.8 11.1 9.5 11.6

RoE 5.5 10.4 15.5 10.7 8.3 10.3

Turnover ratios (x)

Asset Turnover (Gross Block) 2.4 2.7 1.9 2.1 1.9 1.7

Inventory / Sales (days) 117 94 115 137 137 137

Receivables (days) 132 104 69 69 69 69

Payables (days) 97 54 95 95 95 95

WC cycle (ex-cash) (days) 182 158 177 156 174 159

Solvency ratios (x)

Net debt to equity 0.6 0.6 0.5 0.6 0.5 0.5

Net debt to EBITDA 6.5 2.8 2.3 3.5 3.4 2.7

Interest Coverage 1.7 2.3 5.3 2.9 2.8 3.4


July 18, 2011 10

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com DISCLAIMER

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Disclosure of Interest Statement Electrosteel Castings

1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock Yes 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

electrosteel castings

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