Electrosteel castings

1QFY2012 Result Update | Steel
July 18, 2011

Electrosteel Castings BUY
CMP `28
Performance Highlights Target Price `35
(` cr) 1QFY12 1QFY11 yoy (%) 4QFY11 qoq (%) Investment Period 12 months
Net sales 419 360 16.4 506 (17.2)
EBITDA 54 67 (18.2) 77 (29.2) Stock Info
% margin 13.0 18.5 (550)bp 15.2 (220)bp Sector Steel
Net profit 28 30 (7.2) 39 (27.5) Market Cap (` cr) 912
Source: Company, Angel Research Beta 0.6
52 Week High / Low 56/27
For 1QFY2012, Electrosteel Castings (ECL) reported modest top-line growth;
however, margins were negatively affected due to higher raw-material cost. Avg. Daily Volume 186614

We continue to maintain our Buy recommendation on the stock. Face Value (`) 1
BSE Sensex 18,507
EBITDA margin impacted by higher raw-material cost: During 1QFY2012, the
Nifty 5,567
company’s net sales increased by 16.4% yoy to `419cr due to higher sales
Reuters Code ELST.BO
volume and realisations. Ductile iron (DI) pipes sales volume for the quarter grew
Bloomberg Code ELSC@IN
to 61,200 tonnes vs. 55,000 tonnes in 1QFY2011. However, EBITDA margin
contracted by 550bp yoy to 13.0% in 1QFY2012, as a result of higher
raw-material cost, which as a percentage of sales increased to 55.1% in Shareholding Pattern (%)
1QFY2012 compared to 45.8% in 1QFY2011. Thus, EBITDA fell by 18.2% yoy to Promoters 48.5
`54cr during the quarter. Interest expense fell by 34.5% yoy to `11cr and tax rate
MF / Banks / Indian Fls 10.0
came in lower at 7.6% vs. 29.4% in 1QFY2011. This led to net profit declining by
FII / NRIs / OCBs 5.3
only 7.2% yoy to `28cr.
Indian Public / Others 36.2
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 allocation Abs. (%) 3m 1yr 3yr
of coking coal mines are expected to result in cost savings from FY2013. The Sensex (3.1) 3.1 35.7
stock is currently trading at 6.5x FY2012E and 5.3x FY2013E EV/EBITDA. On ECL (16.6) (40.4) (10.0)
P/BV basis, it is trading at 0.5x each for FY2012E and FY2013E. We maintain our
Buy recommendation on the stock with an SOTP target price of `35.

Key financials (Consolidated)
Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E
Net sales 1,580 1,873 1,900 1,966
% chg (18.9) 18.5 1.5 3.5
Net profit 234 180 149 198
% chg 73.1 (23.3) (16.9) 32.5
FDEPS (`) 6.8 5.2 4.3 5.7
OPM (%) 20.9 16.2 15.1 17.7
P/E (x) 4.1 5.4 6.5 4.9
Bhavesh Chauhan
P/BV (x) 0.6 0.5 0.5 0.5 Tel: 022- 39357600 Ext: 6821
RoE (%) 15.5 10.7 8.3 10.3 E-mail: Bhaveshu.chauhan@angelbroking.com

RoCE (%) 10.0 7.8 6.5 7.7
Pooja Jain
EV/Sales (x) 1.1 1.0 1.0 0.9
Tel: 022- 39357600 Ext: 6839
EV/EBITDA (x) 5.0 6.5 6.5 5.3 E-mail: pooja.j@angelbroking.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report 1

Electrosteel Castings | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Standalone)
Y/E March (` cr) 1QFY12 1QFY11 yoy % FY2011 FY2010 yoy %
Net sales 419 360 16.4 1,711 1,429 19.8
Raw material 231 165 39.9 857 606 41.5
% of net sales 55.1 45.8 50.1 42.4
Power & Fuel 32 29 9.1 126 105 20.2
% of net sales 7.5 8.0 7.4 7.4
Staff cost 32 27 15.6 123 106 15.8
% of net sales 7.6 7.6 7.2 7.4
Other expenditure 81 81 0.4 359 333 7.7
% of net sales 19.4 22.5 21.0 23.3
Total expenditure 375 302 24.2 1,465 1,150 27.4
% of net sales 89.6 84.0 85.6 80.5
Operating profit 44 58 (24.1) 247 279 (11.6)
OPM (%) 10.4 16.0 14.4 19.5
Other operating income 11 9 20.1 61 100 (38.6)
EBITDA 54 67 (18.2) 308 379 (18.7)
EBITDA margin (%) 13.0 18.5 18.0 26.5
Interest 11 17 (34.5) 48 44 8.2
Depreciation 14 13 3.6 54 52 4.0
Other income 1 6 (89.7) 9 25 (64.8)
Exceptional items 0 0 0 0
Profit before tax 30 43 (29.1) 215 308 (30.2)
% of net sales 7.2 11.8 12.6 21.6
Tax 2 12 (81.6) 60 102 (40.7)
% of PBT 7.6 29.4 28.0 33.0
Profit after tax 28 30 (7.2) 155 206 (25.0)

Higher volume and realisation aid top-line growth

During 1QFY2012, net sales growth of 16.4% yoy was mainly driven by DI pipes
sales volume, which grew to 61,200 tonnes vs. 55,000 tonnes in 1QFY2011.
Furthermore, higher realisation across product categories aided net sales growth.

Exhibit 2: Net sales up 16.4% yoy in 1QFY2012
600 70

60
500
50
400
40
(` cr)

300 30
(%)

20
200
10
100
0

0 (10)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Net revenue (LHS) % yoy (RHS)


July 18, 2011 2


EBITDA margin contracts yoy
During the quarter, raw-material cost as a percentage of sales increased to 55.1%
in 1QFY2012 compared to 45.8% in 1QFY2011. As a result, EBITDA margin
dipped by 550bp yoy to 13.0% in 1QFY2012 and EBITDA fell by 18.2% yoy to
`54cr during the quarter.
Interest expense fell by 34.5% yoy to `11cr and tax rate came in lower at 7.6% vs.
29.4% in 1QFY2011. This led to net profit declining by only 7.2% yoy to `28cr.

Exhibit 3: EBITDA margin stood at 13.0% Exhibit 4: Net profit margin lower at 6.7% yoy
140 35 70 20
18
120 30 60
16
100 25 50 14
80 20 40 12
(` cr)

(` cr)
(%)
10

(%)
60 15 30 8
40 10 20 6
4
20 5 10
2
0 0 0 0
1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12
EBITDA (LHS) EBITDA margin (RHS) Net profit (LHS) Net profit margin (RHS)

Source: Company, Angel Research Source: Company, Angel Research

ESL steel project delayed

ESL had commenced operation of pig iron during FY2011. However, it was
subsequently shut down for synchronisation with other facilities at the plant. Also,
the target completions for other facilities were delayed on account of shortage of
Chinese manpower. Nevertheless, the problem of Chinese manpower has now
been resolved and work at the site is progressing well.

Coking coal mine to ramp up in FY2013

The company is currently working on developing infrastructure at its Parbatpur
coking coal mine. As per management, it will take at least one year to ramp up the
production to 0.9mn tonnes per year. Currently, the company produces miniscule
quantity from the mine.

Investment arguments
Backward integration initiatives to aid margin growth

Going ahead, ECL is on track to have an integrated business model in place
through a) backward integration initiatives led by the allocation of mines and
b) focus on beefing up its logistic infrastructure to further reduce costs.
The company was granted mining lease for the Parbatpur coking coal mine in
Jharkhand in January 2008. The mine is estimated to have reserves of 231.2mn
tonnes. The company expects to commence meaningful production from FY2013.
For its iron ore requirements, the company is in the process of acquiring mining

July 18, 2011 3


lease for the iron ore mine at Kodolibad, Jharkhand. However, we have not
factored this in our estimates, as the company is yet to receive forest clearance.

Upcoming steel capacity of 2.2mn tonnes
ECL, through its associate ESL, expects to commission commercial production from
its 2.2mn tonne integrated greenfield steel plant in Jharkhand by the end of
FY2012E. The `7,262cr project is being financed through 3:1 Debt/Equity ratio.
ECL holds 34% share in ESL, while Stemcor holds 20% share. Stemcor is the
world's largest steel trader with a network of 80 offices. The strategic alliance with
Stemcor will enable ESL to leverage on the former’s well-spread distribution
channel.

Valuation
We maintain our positive stance on ECL’s initiatives of gradually venturing into
steel making through its associate ESL, which is setting up a 2.2mn tonne steel
plant expected to commence production by end of FY2012. Furthermore, the
company’s backward integration initiatives through allocation of coking coal mines
are expected to result in cost savings from FY2013. The stock is currently trading at
6.5x FY2012E and 5.3x FY2013E EV/EBITDA. On P/BV basis, it is trading at 0.5x
each for FY2012E and FY2013E. We maintain our Buy recommendation on the
stock with an SOTP target price of `35.

Exhibit 5: SOTP valuation
Particulars (`)
Standalone business 5.0x FY2013E EV/EBITDA 13
Stake in ESL 1.0x P/BV 20
Stake in Lanco Ind. 20% discount to CMP 2
Target Price 35

We have raised our sales and EBITDA estimates for FY2012 and FY2013 to
account for higher realisations across product categories.

Exhibit 6: Key assumptions
Earlier Revised Upgrade/
(` cr)
estimates estimates (downgrade) (%)
FY12E FY13E FY12E FY13E FY12E FY13E
Net sales 1,771 1,845 1,900 1,966 7.3 6.6
EBITDA 272 323 287 348 5.5 7.6
EBITDA margin
(%)
15.4 17.5 15.1 17.7 (25)bp 17bp
PBT 182 225 184 236 1.2 4.9
PAT 142 215 149 198 4.8 (8.2)
PAT margin (%) 8.0 11.7 7.9 10.1 (19)bp (161)bp
Source: Angel Research

July 18, 2011 4


Exhibit 7: Recommendation summary
Companies CMP Target price Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%)
(`) (`) (` cr) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E
SAIL 131 191 Buy 64,083 45.5 10.2 7.9 1.3 1.1 7.3 5.8 13.5 15.2 11.8 14.0
Tata Steel 572 799 Buy 54,881 39.7 7.8 6.3 1.3 1.1 5.1 3.9 18.5 19.6 12.9 14.2
JSW Steel 882 1,024 Buy 19,677 16.1 9.6 7.6 1.0 0.9 5.8 4.6 10.8 12.2 10.4 12.0
Bhushan Steel 455 - Neutral 9,283 - 8.8 8.0 1.5 1.3 9.3 8.1 19.2 17.7 9.4 9.2
Godawari Power 161 225 Buy 512 39.5 3.9 2.9 0.6 0.5 4.0 2.9 17.6 19.4 13.8 17.0
Sarda Energy 212 253 Buy 761 19.4 7.8 6.4 1.0 0.9 6.5 4.9 13.8 14.8 10.2 11.3
Prakash Ind. 72 96 Buy 972 32.8 3.2 2.6 0.5 0.4 3.4 3.1 16.9 17.4 14.5 14.7
Monnet Ispat 500 533 Accumulate 3,214 6.7 12.0 8.8 1.3 1.2 11.9 8.3 11.8 15.3 7.5 10.1
ECL 28 35 Buy 912 25.4 6.5 4.9 0.5 0.5 6.5 5.3 8.3 10.3 6.5 7.7

Source: Angel Research

Exhibit 8: EV/EBITDA band
3,000

2,500

2,000
(` cr)

1,500

1,000

500

0
Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11
1.0x 2.5x 4.0x 5.5x 7.0x

Source: Bloomberg, Angel Research

Exhibit 9: P/E band

140
120
100
80
(` )

60
40
20
0
Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

3x 8x 13x 18x


July 18, 2011 5


Exhibit 10: P/BV band

140
120
100
80

(`)
60
40
20
0

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11
0.5x 1.0x 1.5x 2.0x


July 18, 2011 6


Profit & loss statement (Consolidated)
Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales 1,440 1,948 1,580 1,873 1,900 1,966
Other operating income 23 27 30 34 36 38
Total operating income 1,462 1,975 1,610 1,907 1,936 2,004
% chg 17.7 35.1 (18.5) 18.4 1.5 3.5
Total Expenditure 1,360 1,684 1,280 1,604 1,648 1,656
Net Raw Materials 777 986 646 897 919 899
Other Mfg costs 494 586 503 558 560 580
Personnel 90 113 131 149 169 177
Other - - - - - -
EBITDA 102 291 330 303 287 348
% chg (35.9) 184.6 13.4 (8.1) (5.2) 21.0
(% of Net Sales) 7.1 14.9 20.9 16.2 15.1 17.7
Depreciation& Amortisation 38 53 54 56 63 69
EBIT 64 238 276 247 225 279
% chg (48.3) 268.8 16.4 (10.6) (9.2) 24.2
(% of Net Sales) 4.5 12.2 17.5 13.2 11.8 14.2
Interest & other Charges 37 103 52 86 81 83
Other Income 78 64 87 62 40 40
(% of PBT) 74.0 32.3 28.1 27.7 21.8 16.9
Share in profit of Associates - - - - - -
Recurring PBT 106 198 312 223 184 236
% chg (33.1) 87.2 57.2 (28.4) (17.5) 28.5
Extraordinary Inc/(Expense) (60) - - - - -
PBT (reported) 46 198 312 223 184 236
Tax 1.7 70.4 105.2 61.1 55.2 70.9
(% of PBT) 3.8 35.5 33.7 27.4 30.0 30.0
PAT (reported) 44 128 206 162 129 165
Add: Share of earnings of associate 11 9 28 18 22 33
Less: Minority interest (MI) 0 1 1 0 1 1
Extraordinary Expense/(Inc.) - - - - - -
PAT after MI (reported) 55 135 234 180 149 198
ADJ. PAT 116 135 234 180 149 198
% chg 10.3 17.1 73.1 (23.3) (16.9) 32.5
(% of Net Sales) 8.0 6.9 14.8 9.6 7.9 10.1
Basic EPS (`) 5.0 4.8 7.3 5.5 4.6 6.1
Fully Diluted EPS (`) 4.0 4.2 6.8 5.2 4.3 5.7
% chg 3.9 7.2 59.9 (23.3) (16.9) 32.5

July 18, 2011 7


Balance sheet (Consolidated)
SOURCES OF FUNDS
Equity Share Capital 28 29 33 33 33 33
Reserves & Surplus 1,133 1,338 1,588 1,714 1,815 1,962
Share Warrants 34 34 - - - -
Total Loans 844 1,101 1,298 1,587 1,642 1,662
Deferred Tax Liability 20 37 47 44 44 44
Total Liabilities 2,062 2,544 2,971 3,382 3,539 3,705
APPLICATION OF FUNDS
Gross Block 643 798 860 936 1,086 1,186
Less: Acc. Depreciation 226 279 322 382 445 514
Net Block 416 519 538 553 640 671
Capital Work-in-Progress 150 302 397 454 504 529
Goodwill - - - - - -
Investments 179 466 1,067 1,425 1,425 1,425
Current Assets 1,686 1,594 1,300 1,636 1,690 1,795
Cash 184 95 299 205 346 387
Loans & Advances 518 441 208 247 271 298
Other 984 1,057 793 1,185 1,073 1,110
Current liabilities 369 337 332 686 720 715
Net Current Assets 1,316 1,257 969 950 970 1,080
Mis. Exp. not written off - 0.0 0.0 0.0 0.0 0.0
Total Assets 2,062 2,544 2,971 3,382 3,539 3,705

Cash flow statement (Consolidated)
Profit before tax 51 193 312 223 184 236
Depreciation 39 53 54 56 63 69
Change in Working Capital (223) (160) 172 (100) 122 (70)
Less: Other income 69 124 (34) 50 21 32
Direct taxes paid (14) (44) (115) (59) (55) (71)
Cash Flow from Operations (78) 166 389 170 334 197
Inc./ (Dec.) in Fixed Assets (179) (301) (174) (119) (200) (125)
Inc./ (Dec.) in Investments 13 (177) (307) (315) - -
Other income (279) (90) 13 30 - -
Cash Flow from Investing (445) (568) (469) (404) (200) (125)
Issue of Equity 74 121 15 0 - -
Inc./(Dec.) in loans 349 246 359 277 55 20
Dividend Paid (Incl. Tax) (26) (7) (41) (41) (48) (52)
Others (5) (47) (50) (96) - -
Cash Flow from Financing 392 314 283 140 7 (32)
Inc./(Dec.) in Cash (131) (89) 203 (94) 141 40
Opening Cash balances 315 184 95 299 205 346
Closing Cash balances 184 95 299 205 346 387

July 18, 2011 8


Key ratios
Y/E March FY08 FY09 FY10 FY11 FY12E FY13E
Valuation Ratio (x)
P/E (on FDEPS) 7.1 6.6 4.1 5.4 6.5 4.9
P/CEPS 5.3 4.7 3.4 4.1 4.5 3.6
P/BV 0.7 0.6 0.6 0.5 0.5 0.5
Dividend yield (%) 4.5 4.5 4.5 4.5 4.5 4.8
EV/Sales 0.9 0.8 1.1 1.0 1.0 0.9
EV/EBITDA 12.8 5.5 5.0 6.5 6.5 5.3
EV/Total Assets 0.6 0.6 0.6 0.6 0.5 0.5
Per Share Data (`)
EPS (Basic) 5.0 4.8 7.3 5.5 4.6 6.1
EPS (fully diluted) 4.0 4.2 6.8 5.2 4.3 5.7
Cash EPS 5.2 5.9 8.3 6.8 6.1 7.7
DPS 1.3 1.3 1.3 1.3 1.3 1.4
Book Value 42.6 48.8 49.6 53.4 56.6 61.0
Dupont Analysis
EBIT margin 4.4 12.0 17.2 13.0 11.6 13.9
Tax retention ratio (%) 96.2 64.5 66.3 67.1 70.0 70.0
Asset turnover (x) 0.8 0.9 0.7 0.7 0.7 0.7
RoIC (Post-tax) 3.3 6.8 7.5 5.8 5.5 6.5
Cost of Debt (Post Tax) 4.5 6.8 2.9 3.2 3.5 3.5
Leverage (x) 0.6 0.6 0.5 0.6 0.5 0.5
Operating RoE 2.6 6.8 9.7 7.4 6.5 8.0
Returns (%)
RoCE (Pre-tax) 3.5 10.3 10.0 7.8 6.5 7.7
Angel RoIC (Pre-tax) 4.4 12.9 13.8 11.1 9.5 11.6
RoE 5.5 10.4 15.5 10.7 8.3 10.3
Turnover ratios (x)
Asset Turnover (Gross Block) 2.4 2.7 1.9 2.1 1.9 1.7
Inventory / Sales (days) 117 94 115 137 137 137
Receivables (days) 132 104 69 69 69 69
Payables (days) 97 54 95 95 95 95
WC cycle (ex-cash) (days) 182 158 177 156 174 159
Solvency ratios (x)
Net debt to equity 0.6 0.6 0.5 0.6 0.5 0.5
Net debt to EBITDA 6.5 2.8 2.3 3.5 3.4 2.7
Interest Coverage 1.7 2.3 5.3 2.9 2.8 3.4

July 18, 2011 9


Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com

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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
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Disclosure of Interest Statement Electrosteel Castings
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)

July 18, 2011 10

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