Electrosteel Casting is the manufacturer of ductile iron (DI) pipes, cast iron pipes, and ductile iron fittings. It is the largest manufacturer of DI pipes in the country. The company is also into water transportation and sewerage management. Apart from supplying pipes it also provides turnkey services, which not only includes manufacturing, supplying, but laying, operating and transferring completed DI pipe projects.
Investment arguments
The company has taken various steps and has subsequently invested in backward integration. This will reduce the dependence on external sources to a large extent, and also lower raw material cost and lower risk of volatile metal prices. The benefit could be from the allotment of Parbatpur coal block to the company at Jharia coalfield. Also, allotment of iron ore mines at Kodolibad, Jharkhand will ensure steady supply of ore plus reduce the operating cost.
Apart from this it will infuse up to Rs 500 crore to set up a 1.3 million tonne per annum integrated steel plant in Jharkhand through an associate company Electrosteel Integrated. The investment will be in a phased manner over a period of 2.5 years.
Financials
In the last five years net sales have grown at a CAGR of around 17% and net profits have shown a healthy growth. In FY2006-07 net sales was Rs 1,124.64 crore, up 17.96% and profit was Rs 106.16 crore, 38.86% higher than the previous year. In FY2005-06, net sales were at Rs 956.34 crore and profit was Rs 76.45 crore. Also, growth was seen in the first quarter of the FY2007-08. Net sales and profit growth was 17.64% and 57.40% respectively.
Operating margins have improved by 1.91% from 17% in FY2005-06 to 18.91% in FY2006-07. Net profit margins grew by 1.42% on converting rupee working capital loan to foreign currency resulting in less interest burden. The interest cost reduced by Rs 5.67 crore from Rs 25.67crore in FY2005-06 and Rs 20.59 crore in FY2006-07.
Majority of the sales is derived from DI pipes. The capacity utilisation was 92% in FY2006-07. Of net sales, DI pipes (including DI fitting and turnkey contracts) contributed 80% in FY2006-07 as compared to 76.61% in FY2005-06. Exports also showed healthy growth of 34% at Rs 447.05 crore in FY2006-07. Exports contributed 39.75% of the net sales.
Valuation
The company?s fully diluted earning per share for the trailing twelve months comes to Rs 56.35. According to this, P/E multiple is at 7.63x. It has been distributing good dividends every year. The concern is that any delay in new project implementation can increase the operational cost. Further, dollar depreciation may affect the bottomline in the near future.