Everest Industries - Q4FY13 Result Update - Sushil Finance

Everest Industries Ltd. (EIL) has reported yet another disappointing quarter led by high cost inventory, low volumes & high fixed costs. The key highlights of Q4FY13 results is summarized as below:

For Q4FY13, EIL's revenues declined by 2.1% YoY to Rs.2413 mn led by 2.1% dip in both Building products (-9.8% volume & +8.5% Real.) & steel building (-17.2% Volumes & +18.1% Real). The steep volume dip in the building product segment was on account of sluggish demand for asbestos cement sheets resulting in inventory build-up as on March quarter end. For FY13, the revenues grew by 14.4% to Rs.10141 mn led by 15.8% growth in Building products & 10.0% YoY growth in Steel buildings.

In order to combat high chrysotile fiber costs (key raw material), the company undertook a steep price hike in H1FY13 (+20% YoY) which led to significant margin improvement (13.1% in H1FY13 vs. 9.8% in H1FY12). However, as the effect of low cost inventory started waning off, the company's margins declined to 6.1% vs. 8.4% (H2FY12). We expect the effect of high cost inventory to continue to dampen the margins over the next 2 quarters leading to subdued earnings in FY14E.

EIL's Q4FY13 EBITDA dropped by 48.6% YoY to Rs.116.5 mn with margins of 4.8% (-436 bps). Building product margins stood at 6.1% (-501 bps YoY) and Steel Building reported EBIT/ton of Rs.6,879 (+13.4% YoY). For FY13 the EBITDA stood at Rs.978 mn up by 21.1% YoY, with operating margin at 9.6% (+54 bps YoY).

The net profit declined by 69% YoY to Rs.41 mn mainly on account of higher interest & taxes. The interest cost increased by 28.7% YoY to Rs.14 mn led by increased working capital requirements. For FY13, the adjusted PAT grew by 18.2% YoY to Rs.525 mn with margins of 5.2% (5.0%).

EIL started trial production at its Greenfield plant in Balasore in Q4FY13. Post expansion, the total building products capacity will increase to 810,000 MTPA. This plant will help the company to address the demand from the eastern markets, save logistic costs & earn better realizations. The commercial production is expected to start in Q2FY14E.

The company has also envisaged a capex of Rs.500 mn in its PEB segment to set up a Greenfield plant at dahej with a capacity of 30,000 MT and likely to commence operations in Q2FY15E. Post expansion, the capacity in the PEB segment would expand to 60,000 MT.

EIL has a current order book of 26,200 MT (~RS.2200 mn) to be executed over 6-9 months of which it has added ~12500 MT (~Rs.1000 mn) in the last one quarter. Post expansion, the new plant will help the company to cater to the demands from Western & Southern India.

OUTLOOK & VALUATION

EIL reported disappointing set of numbers for Q4FY13 led by higher material costs which is likely to dampen the margins for H1FY14E as well. Given the current sluggishness in demand and the company's inability to raise prices, we believe the company will continue to underperform on the margin front for the following reasons: (1) higher base of H1FY13 - 13.1% (2) high cost inventory - Chrysotile Fiber (+18-20% YoY - ~2.4 months) & Finished Goods (~80,000 MT) (3) Higher depreciation on account of capitalization of Balasore plant & (4) Elevated Interest costs led by high working capital & long term debt ($12 mn ECB). Though the management has indicated downward revision (~5-7%) in chrysotile fiber costs (~45-50% of Building products cost), we believe the real benefit will arise only from H2FY14E. Overall, the current demand scenario suggests us that the near term outlook is CAUTIOUS, however we believe things would improve towards H2FY14E on the back of (i) Lower material cost (ii) stabilization of new plant at Balasore (iii) Likely price increase (iv) likelihood of normal monsoons resulting in improved demand towards peak season (v) pre-election welfare spending to drive rural demand & (vi) commencement of new steel plant at Dahej in FY15E. We strongly believe the stock will underperform the market over the next 1-2 quarters for the reasons explained above. However, with gradual improvement in earnings over FY15E coupled with high dividend yield of 4.4%, we recommend our investors to BUY on dips for a target of Rs.247. We have factored USDINR at Rs.54.4 & Rs.53.0 for FY14E & FY15E. Any adverse currency movement could severely affect our earnings estimate.

Source : Equity Bulls

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