Vesuvius Destimoney TP 402

7/28/2019 Vesuvius Destimoney TP 402

1/17

VESUVIUS INDIA LTDRevising to Accumulate

Analyst

Rajiv BharatiRajiv BharatiRajiv BharatiRajiv [email protected]

022-6788-5803

July 4, 2013July 4, 2013July 4, 2013July 4, 2013


2/17

Vesuvius India Ltd ACCUMULATE with 10% upside ACCUMULATETARGET :`402

CMP :`365

Key Data

Ticker (Bloomberg) VI

NSE Code VESUVIUS

BSE Code 520113

Sector Refractory

Industry

Face Value (`) 10

Book Value per share (`) 169

Dividend Yield (%) 1.2%

52 Week Range (`)

Market Cap. (` mn.) 7,409

Other Industrial Goods

310-390

(In```mn) CY11 CY12 CY13E CY14E

Net Sales 5,403 5,623 6,143 6,850

EBITDA 887 955 1,063 1,185

EBITDA Margin 16.4% 17.0% 17.3% 17.3%

EPS (`) 25.0 27.5 31.2 34.8

EV/Sales 1.2 1.2 1.1 1.0

EV/EBITDA 7.5 7.0 6.3 5.6

P/E (x) 14.6 13.3 11.7 10.5

Price Performance CY10 CY11 CY12 YTD

Absolute 53.0% -6.5% 7.7% 9.1%

Relative 35.0% 18.2% -20.0% 10.3%

2

Source: Company, Bloomberg, Destimoney Research

Shareholding Pattern as on 31 Mar 2013 Relative Stock Performance (Jul12=100)

80

90

100

110

120

Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jun-13

Vesuvius NIFTY

Mar-13 Dec-12 Sep-12 Jun-12

Promoters 55.6% 55.6% 55.6% 55.6%

FII 10.7% 10.5% 10.4% 10.4%

DII 14.8% 14.8% 15.7% 16.0%

Bodies Corporate 3.3% 3.2% 3.3% 3.2%

Others 15.6% 15.9% 15.0% 14.8%

Total 100% 100% 100% 100%


3/17

Weaker trends on topline and rising raw material cost remains cause ofconcern

Vesuvius India Limited has consistently edged out competition by its technological leadership position in its product and

services portfolio even in the current weak demand scenario. It leverages its parents leadership in flow control systems and

isostatically pressed refractories, filters, feeding systems and fused silica crucibles.

Despite representing a fraction (1%-3%) of the customers total production cost in steel manufacturing, it seem to get

squeezed during slack demand period. The current phase represents a similar period which is further impacted by excess

capacity globally.

Vesuvius recorded fourth consecutive quarter of low single digit YoY growth preceded by robust performance of over 15%

growth in the past. During Q1CY13, its revenue grew by 4.56% to`1,444 mn. On an annual basis the company witnessed

drop (-1%) in volumes in the consistently performing monolithic category.

Cost control measures and lower growth in relatively lower margin unshaped refractory (monolithics) resulted in restoration

3

o marg n pro e ur ng t e preva ng ean per o . n , esuv us recor e smart operat ng marg n o . an net

margin of 12.2%.

Vesuvius dependence on imported raw material has risen in past few years which could be detrimental in the prevailing

sharply depreciating rupee regime. In CY12, imported raw material forms 22.4% of gross sales as against 20.1% in CY11.

Vesuvius is strongly placed against its peer companies based on its better asset utilization (fixed asset turnover of 2.8 vs 1.0

for peers). Strong balance sheet, zero debt and steady cash generation justifies the premium valuation it commands vis--visits peers.

Considering its high dependence on steel industry, we expect the current lean patch to impact its performance for a couple

of more quarters. Recent push by the govt to fast track the pending projects and clearing bottlenecks is a heartening sign for

revival of demand. We remain cautious towards pickup in infrastructure and construction activity in the economy and hence

revise our rating on VESUVIUS LTD to ACCUMULATE and a target price of```402 per share.


4/17

Cost control has been key in maintaining the margin profile

Pa rticulars (` mn)Pa rticulars (` mn)Pa rticulars (` mn)Pa rticulars (` mn) Q1CY13 Q1CY12 % Change Q4CY12 % Change CY12

Net Sales 1,444.4 1,381.4 4.6% 1,535.1 -5.9% 5,623.4

Other Op. Income 1.4 12.6 0.3

Total Income 1,445.8 1,394.0 3.7% 1,535.4 -5.8% 5,623.4

Total Expenditure 1,153.4 1,186.8 -2.8% 1,238.7 -6.9% 4,668.2

Operating Profit 292.4 207.2 41.1% 296.7 -1.4% 955.2

Other Income 9.8 4.2 7.1 38.0% 35.2

EBITDA 302.2 211.4 43.0% 303.8 -0.5% 990.4

Depreciation 41.0 40.2 2.0% 41.1 -0.2% 163.5

EBIT 261.2 171.2 52.6% 262.7 -0.6% 826.9

Interest (0.2) 2.0 5.5 0.6

Quarterly Performance

4

. . . . . .

Tax 84.8 55.6 52.5% 85.5 -0.8% 268.7PAT 176.6 113.6 55.5% 171.7 2.9% 557.6

Margins(%)

OPM 20.2% 14.9% 19.3% 17.0%

NPM (incl. Extraordinaty Items) 12.2% 8.1% 11.2% 9.9%

Low single digit YoY topline growth in the fourth consecutive quarter is worrisome for Vesuvius which

continue to feel the pressure of slowing demand from construction and infrastructure sector and delay in

capex from corporates.

Source: Company


5/17

Vesuvius topline growth shadows GDP particularly industrial metals, reflectingdisappointing performance in the recent past

Vesuvius annual sales growth closely follows GDP

growth rate which implies further stress on topline

0%

3%

6%

9%

12%

0%

11%

22%

33%

44%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-20%

0%

20%

40%

60%

n-0

8

c-0

8

n-0

9

c-0

9

n-1

0

c-1

0

n-1

1

c-1

1

n-1

2

c-1

2

Quarterly growth sales growth is highly correlated

with IIP (metals) growth

5

Vesuvius, which derives 70%-75% of its demand from steel sector, which in turn is dependent on

manufacturing and construction activity in the economy, has been witnessing the slowdown in the

demand and investment driving activities in the economy.

The economy is struggling to get back to its high growth ways amidst challenging global macroeconomic

scenario. This is further accentuated by slow moving clearances in infrastructure projects domestically.

Vesuvius annual sales growth (LHS) India Steel Production Growth (LHS)

India GDP Growth (RHS)

Ju D Ju

D Ju

D Ju

D Ju

D

Vesuvius Quarterly Sales Growth (YoY) IIP (metals) YoY growth

Source: Company, Bloomberg, CSO


6/17

Deteriorated steel sector outlook does not infuse much confidence

Steel industry globally is reeling with overcapacity which was built in response to the growing demand on

the back of the macroeconomic stimulus measures taken by central banks all over. Currently the world

steel capacity stands at 2 bn MT while the consumption stands at 1.45 bn MT. China with over 160 mn

MT capacity surplus is a major overhang on the Asian steel demand-supply scenario.

Pressure on profitability of Steel companies is detrimental to OEMs like Vesuvius. Steel majors are

struggling to manage the high raw material cost domestically due to restriction on mining and limitedability to pass on the higher cost due to subdued demand from end-user industries. The margin pressure is

higher on producers with no captive mining.

Despite softening of Iron ore prices globally, domestic prices are still ruling high due to regulatory

6

intervention in various states, which in long term bode well for the industry but will be deterrent in theshort-to-medium term. Meanwhile, NMDC has shifted to import price parity for selling iron ore to domestic

players thereby acerbating the already challenging scenario.


7/17

as Asian countries continue to produce at reasonable clip as other marketsstem supply by reducing production

1 tonne of steel = 12 kg of Refractories

Geography wise steel production trend

90

120

150

North America(in mn MT) 100

140

180

220

2000 2003 2006 2009 2012

EU (in mn MT)

800

1200

Asia & Oceania(in mn MT)

7

Source: Steel Statistical Yearbook-2012

2000 2003 2006 2009 2012

30

37

44

51

2000 2003 2006 2009 2012

South America(in mn MT)

22

28

34

40

2000 2003 2006 2009 2012

Africa & ME (in mn MT)

0

400

2000 2003 2006 2009 2012

14

39

64

89

2000 2003 2006 2009 2012


8/17

which might put pressure on margins across the value chain

World Steel Association forecasts output to grow by 2.9% in 2013 following 1.2% growth in 2012.

Chinas growing steel output in the face of dwindling demand domestically has resulted in flooding of

Chinese steel in global market, thereby bringing the prices down.

Rank Country YoY growth inJan-May 2013

YoY growth in2012

Production(mn MT) 2012

1 China 9.60% 3.73% 708.8

2 Japan 1.25% -0.33% 107.2

3 Russia 1.12% 2.71% 70.6

-

World crude steel production

675

720

765

World Steel Prices in $ per Tonne(Hot Rolled Coil)

8

. . .

5 India 5.24% 6.25% 76.7

6 South Korea -5.65% 1.24% 69.3

7 Germany -0.64% -3.67% 42.7

8 Ukraine -2.36% -6.85% 32.9

9 Brazil -3.10% -1.37% 34.7

10 Turkey -4.06% 5.22% 35.9

Source: World Steel Association, Steel Statistical Yearbook-2012, Bloomberg

Four of the five top producers by volume has seenpositive growth in first five months of CY13, whichcould further pressurize margins as supply increase

585

Jan-1

2

Feb-1

2

Mar-12

Apr-12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3


9/17

Micro-structural changes in raw material has resulted in lower refractoryconsumption per unit of final product manufacturing over the years

0

12

24

36

1980s 2000s

Steel Industry Glass Industry

Refractory used in Kg per Ton over the

years has come down

Innovation in raw material engineering of

refractories has resulted in creation of moreresistant refractory varieties which requirelower maintenance. It has also reduced in theamount of refractory consumption for eachunit of steel produced.

Vesuvius Plc (Parent) has been in forefront inadopting such technological changes.

9

Source: Industry Data

0

14

28

42

56

2011 2016

0

14

28

42

56

2011 2016

Global Refractory Market (by volume in mn MT) Global Refractory Market (by value in $bn)


10/17


11/17

Although being cash generative across cycles, Vesuvius has been conservative inpaying dividends despite having strong balance sheet

Book value per share has grown smartly ...and so has cash per share

0

50

100

150

200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Book Value Per Share

0

10

20

30

40

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Cash per Share

11

Source: Company, Destimoney Research

1.0%

1.6%

2.2%

2.8%

3.4%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Royalty % of Net Sales

10.0%

18.0%

26.0%

34.0%

42.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dividend Payout %

Royalty payments continue to remain close tohistorical levels while the company has been conservative individend payout


12/17

Firmly placed against competitors hence commands premium valuation

0%

8%

16%

24%

32%

2008 2009 2010 2011 2012

IFGL OCL Orient Abrasives Vesuvius

Operating Margin

0%

13%

25%

38%

50%

2008 2009 2010 2011 2012


ROE

0%

12%

24%

36%

48%

2008 2009 2010 2011 2012


ROCE

12

0.2

0.6

1.0

1.4

1.8

2008 2009 2010 2011 2012


2.0

3.5

5.0

6.5

8.0

2008 2009 2010 2011 2012


0.6

1.3

2.0

2.7

3.4

2008 2009 2010 2011 2012


EV/Sales EV/EBITDAFixed Asset Turnover

Source: Company, Ace Equity, Destimoney Research


13/17

Government efforts to shore up the economy seem a heartening sign for thesector

Fast-tracking 23 projects estimated to generate 23000 MW, stalled on fuel linkage ground

1600 km power transmission line in central India

Dispute Resolution Bill to have fast-track mechanism to resolve PPP disputes

13

n um a me ro ne- pro ec

`8,454 mn iron ore handling project at Vishakhapatnam

`380 bn project under PMGSY to connect 82 naxal affected districts


14/17

We revise our rating to ACCUMULATE with a target price of```402 per share

Considering its high dependence on steel

industry, we expect the current lean patch to

impact its performance for a couple of more

quarters. Recent push by the govt to fast track

the pending projects and clearing bottlenecks is

a heartening sign for revival of demand. The stock is trading at 11.7 and 10.5 times its

CY13E and CY14E earnings.

We revise our rating on VESUVIUS LTD to

Relative Stock Performance (Jul12=100)

80

90

100

110

120

Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jun-13

Vesuvius NIFTY

14

ACCUMULATE and a target price of ```402 pershare.

Source: Destimoney Research, Bloomberg

CY11 CY12 CY13E CY14E

EPS ( ) 25.0 27.5 31.2 34.8

CEPS (`) 32.2 35.5 40.0 44.6

P/E (x) 14.6 13.3 11.7 10.5

P/B (x) 2.5 2.2 1.9 1.6

ROE 17.0% 16.2% 16.1% 15.6%

ROCE 24.3% 22.6% 22.1% 21.5%

EV/EBIDTA (x) 7.5 7.0 6.3 5.6


15/17

Financial Summary

(In ` mn)(In ` mn)(In ` mn)(In ` mn) CY11 CY12 CY13E CY14E

Net Sales 5,403 5,623 6,143 6,850

Operating expense 4,515 4,668 5,081 5,665

EBIDTA 887 955 1,063 1,185

Depreciation 147 164 179 199

EBIT 741 792 884 986

Interest 6 1 - -

EBT 735 791 884 986

Other Income 47 35 61 69

PBT 781 826 946 1,055

Tax 275 269 312 348

(In ` mn)(In ` mn)(In ` mn)(In ` mn) CY11 CY12 CY13E CY14E

Liabilities

Equity Share Capital 203 203 203 203

Reserves & Surplus 2,778 3,230 3,743 4,315

Deferred Tax Liability 64 76 76 76

Current Liabilities (CL) 1,118 1,027 1,126 1,255

Long Term Provisions 62 68 68 68

Total 4,224 4,603 5,215 5,917

Assets

Total Fixed Assets 1,523 1,564 1,384 1,484

15

Source: Company, Destimoney Research

Margins

Sales Growth % 22.8% 4.1% 9.2% 11.5%

Operating Margin % 16.4% 17.0% 17.3% 17.3%

Net Margin % 9.4% 9.9% 10.3% 10.3%

Current Assets (CA) 2,701 3,040 3,831 4,433

Total 4,224 4,603 5,215 5,917


16/17

Key risks & challenges

Fluctuations in raw material and energy cost.

Delay in capacity addition may result in performance below our expectation.

Being directly pegged to Steel sector, any downward fluctuation in demand will directly impact the

refractory business.

Poor negotiation power of the industry as a whole. Refractory makers gets squeezed between raw materialsuppliers and steel makers.

Pressure from cheaper refractory imports from China.

Hiring and retaining skilled manpower

16

Adverse political or regulatory developments Fluctuation in exchange rate.


17/17

Vesuvius Destimoney TP 402

Documents

Transcript of Vesuvius Destimoney TP 402