Stock market Update on Electrosteel Castings for 1QFY2012

Stock market Update on Electrosteel Castings for 1QFY2012 with a Buy recommendation and a Target Price of `35 (12 months)

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.