Stock Market Result Update on Electrosteel Castings for 2QFY2012

Stock Market Result Update on Electrosteel Castings for 2QFY2012 with a Buy recommendation and a Target Price of `33 (12 months).

For 2QFY2012, Electrosteel Castings (ECL) reported modest top-line growth; however, 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.

Modest sales growth: During 2QFY2012, ECL’s net sales grew by 8.3% yoy to `456cr mainly driven by DI pipes sales volume, which grew to 67,800 tonnes vs. 65,000 tonnes in 2QFY2011. Furthermore, higher realization across product categories aided net sales growth.

Higher input costs and interest expense dent 2QFY2012 profits: During the quarter, raw-material cost as a percentage of sales increased to 59.9% in 2QFY2012 compared to 50.0% in 2QFY2011. As a result, EBITDA margin dipped by 829bp yoy to 10.0% in 2QFY2012 and EBITDA fell by 40.8% yoy to `45cr. Interest expense during the quarter grew by 45.9% yoy to `15cr, while tax rate came in lower at 5.0% vs. 32.0% in 2QFY2011. Consequently, net profit decreased by 49.8% yoy to `19cr.

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 of coking coal mines are expected to result in cost savings from FY2013. The stockis currently trading at P/BV of 0.5x each for FY2012E and FY2013E. We maintain our Buy recommendation on the stock with an SOTP target price of `33.