Angel Broking - Electrosteel Castings - RU4QFY2012 - Buy

For 4QFY2012, Electrosteel Castings (ECL) reported disappointing results; the company's EBITDA and net profit were negatively affected due to higher raw-material and interest costs. We continue to maintain our Buy recommendation on the stock.

Higher input costs and interest expense dent 4QFY2012 profits: During 4QFY2012, ECL's net sales remained flat on a yoy basis at Rs.503cr. ECL's raw-material cost as a percentage of sales increased to 58.5% in 4QFY2012 compared to 56.7% in 4QFY2011. Other expenditure as a percentage of sales increased to 32.2% in 4QFY2012 compared to 21.3% in 4QFY2011. As a result, EBITDA margin dipped by 1,420bp yoy to 1.0% and EBITDA fell by 93.6% yoy to Rs.5cr. During the quarter, the company's interest expense grew by 223.0% yoy to Rs.25cr, while it got a tax rebate of Rs.16cr vs. Rs.15cr of tax paid in 4QFY2011. Consequently, net profit decreased by 84.7% yoy to Rs.6cr.

Update on mining projects: Management expects stage-2 clearance for iron ore mine in coming 2-3 months. Production from coking coal is expected to be ramped up in FY2014.

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 the allocation of iron ore and coking coal mines are expected to result in cost savings from FY2014. We maintain our Buy view on the stock with an SOTP target price of Rs.22.

Source : Equity Bulls

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