Electrosteel Castings Ltd - Management Meet Note - SBICAP Securities

Electrosteel Castings Ltd (ECL) a leading player in the ductile iron (DI) pipe industry with an installed capacity of 280,000 tonnes; engaged in business of Cast Iron Pipes (90,000 tonnes), DI fittings and undertake Turnkey projects for water transportation and sewage management. ECL along with its associates company Electrosteel Steel Ltd (39.4%) and Lanco Industries (48.54%) expected to enjoy ~48% of the market share in India. Though company remains a leading player, it is facing stiff competition from existing players like Jindal Saw & Saint Gobain. In current scenario, ductile pipes industry is facing tough time due to increasing input cost and rupee fluctuation. We believe completion of steel projects and commissioning of coking coal and iron ore mine will be the key driver for ECL going ahead.

Commissioning of captive mine a key to growth: ECL is on track to have an integrated business model in place through backward integration and focus on logistics infrastructure to complete entire value chain. ECL has been allotted coking coal and iron ore mine at Jharkhand with an estimated reserve of 231MT and 91MT respectively. Management is expected to save Rs8,700/t and Rs.6,000/t of coking and iron ore post commencement of mines. The company is developing its 231MT coking coal mine; there are 2 pairs of 2 inclined each. One pair is under development and the management expects to start production from 4QF13 and expects 0.5MT production in F14 which is expected to ramp up to 2MT in three years time. For iron ore, company has received Stage I clearance and awaiting Stage II clearance for which company has completed formalities. Company has already spend Rs7.1bn on both these mines and expected to spend additional Rs8bn for its development and commissioning.

Electrosteel Steel (ESL) steady progress, on verge of completion: ESL steel projects have witnessed delays which has resulted into cost overruns. Company has planned to setup 2.51MT integrated steel plant including DI pipes (33,000 tonnes); Billets (33,000 tonnes); Pig Iron (40,000 tonnes); wire rods (60,000 tonnes) and TMT bars (85,000 tonnes) at a capex of ~Rs95.6bn of which company has spend Rs89bn. Company expects to commence production in 1HF14. The group has obtained mining approval (under ECL) for coal and iron ore. ECL has agreed to supply iron ore and coking coal to ESL on a cost plus 20% basis for a period of 20 years from the date of commencement of commercial production. Procurement of these raw materials from ECL enables the company to reduce operating costs and ensure a steady supply of coal and iron ore.

Financial overview: ECL has generated EBITDA of Rs3.58bn / Rs4.04bn /Rs3.17bn/ Rs2.46bn in F09/F10/F11/F12 respectively. EBITDA during last 2 years was impacted on account of increase in cost of raw materials. Even profitability of the company during last 2 years have declined sharply from Rs2.06bn in F10 Rs424mn in F12 as company was impacted to rupee depreciation as company has higher forex borrowings. Management expects to register revenue of Rs19bn in F13 and Rs23bn in F14, incremental revenue in F14 is expected to come from sale of coking coal and iron ore to ESL.

Current debt stands at Rs17.9bn of which majority is in foreign currency. Current order book stands at Rs9bn which is expected to be executed over a period of next 8-9months. Due to the above cost saving the management expects the EBITDA margin to nearly double from 12.8% in F12.

Source : Equity Bulls

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