Ess Dee Aluminium - Lack of earnings visibility - Elara Capital

Topline grew 15%; margin improved but far below stable level

After six quarters of weak growth, Ess Dee reported a relatively better quarter with 15% revenue growth. EBITDA margin saw a 270bps improvement sequentially to 20.2%, but far off the stable state 25-27% margins done by the company in previous periods. While there have been demand constraints as well as supply side concerns from IFL over the past 2 years, the improvement in the current quarter is a positive surprise.

The account receivable has remained sticky at 195 days since the last two fiscal and management guidance of getting it down to about four months has not been met. Though bad debts and provisioning of debtors has been low, we may not be able to rule out the link between high debtors and future margin cut, owing to either debtors provisioning or price cuts taken to shorten receivable days.

Expect modest 11% revenue growth, 280bps EBITDA margin drop in FY13E

The Daman capacity is running at peak levels of 90%, but the FY09 acquired IFL facility, which holds 50% capacity has been the stumbling block taking time to ramp up and curtailing growth. Management is vouching IFL utilizations to scale up from 50% in FY12 to nearly 80-90% in FY13E. However, IFL restructuring has taken longer than expected and thus we factor a moderate 11% and 16% growth in FY13E and FY14E. We expect EBITDA margin to remain weak at 19.6% and 20.2% far from the previous 25% plus margin, owing to the slow recovery in IFL plant and absence of operating leverage.

Low earnings visibility, stretched balance sheet suppress valuations

On FY13E basis, the stock is valued at EV/EBITDA and P/E of 7.1x and 16.2x respectively, despite below par ROC of 10%, weak earnings growth visibility and high working capital cycle. This may keep the stock under pressure until we see earning visibility. We have kept an under review rating, until we see clarity of business outlook.

Source : Equity Bulls

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