ORIENT REFACTORIES. Strong synergy with parent. Bhiwadi facility: Strong fixed asset turn. Strong sales growth in a weak quarter for steel industry

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1 VISIT NOTE ORIENT REFACTORIES Strong synergy with parent India Equity Research Miscellaneous Our recent visit to Orient Refractories (ORL) Bhiwadi (Rajasthan) plant reaffirms our positive outlook on its competitive position. The plant is running at ~100% capacity utilisation and manufactures 30,699MT. ORL s strong focus on scrap processing and high labour productivity is continuously improving plant efficiency, which will lead to sustenance of high margins (~18% plus EBIT%) and core fixed asset turn of ~5x plus. The strong positioning within smaller mills will get fortified as ORL leverages on the parent s brand to get turnkey orders from larger steel mills in India, whereas parent RHI is looking at outsourcing of steel flow control production to India, which will be a big exports driver for ORL. With robust 20% earnings CAGR over FY14-16E, we maintain BUY with TP of INR115, valuing it at 18x FY16E EPS. Bhiwadi facility: Strong fixed asset turn The Bhiwadi plant has strong 30,699MT steel flow control refractory capacity and is running at optimum utilisation. With the strategy of scrap processing and 60% unutilised land, the company will sustain high gross block asset turn (5x plus) since all the expansion will happen at no incremental land cost. The company is expanding capacity by ~22% in FY15. The target is to increase production by ~10% to 33,770MT in FY15, with sales growth of ~12.5% and 44bps EBIT margin increase to 18.76%. Strong sales growth in a weak quarter for steel industry ORL registered 13.5% YoY growth in sales in Q1FY15 amid a muted quarter for the steel industry, which recorded mere 1.1% YoY growth in production, while the mini mills growth was only 0.5%. Robust sales growth was led by customer addition, higher capacity utilisation among bigger mills and exports. This is context of Vesuvius India reporting 4% YoY growth for the quarter. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: ORRE.BO, B: ORIENT IN) CMP : INR 81 Target Price : INR week range (INR) : 102 / 23 Share in issue (mn) : M cap (INR bn/usd mn) : 10 / 158 Avg. Daily Vol. BSE/NSE ( 000) : 78.5 SHARE HOLDING PATTERN (%) Current Q4FY14 Q3FY14 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) BSE Midcap Index Stock Stock over Index 1 month (0.9) months months Outlook and valuations: Positive; maintain BUY We are positive on ORL owing to: 1) steel cycle uptick; 2) land in place (60% unutilised); and 3) structural perspective with expanding clientele (larger steel mills) riding parent s support both domestically and strong exports opportunity from parent. Maintain BUY. Financials (Consolidated) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net rev. (INR mn) 1, , ,035 4,691 5,886 EBITDA (INR mn) (1.4) ,141 Adj. PAT (INR mn) (2.1) Adj. Dil. EPS (INR) (2.1) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Shradha Sheth shradha.sheth@edelweissfin.com Manoj Bahety, CFA manoj.bahety@edelweissfin.com August 11, 2014 Edelweiss Securities Limited

2 Miscellaneous Management meet: Key highlights Company enjoys 88% market share among mini steel mills, 65% among mid steel mills, 20% among big integrated PSU undertakings and 8% among the big integrated private steel mills. Refractory is a critical consumable in the steel-making process, contributing ~6% of steel making. ORL produces 30,699MT of refractory products. The company has ~27% contribution from ISO products like ladle shrouds, nozzzles, 29% from slidegate refarctories, 31% from Tundish refractories and 13% from balance products like purging plus and accessories. It reprocesses scrap of 4,680 tonnes, which helps in raw material savings. ORL had savings of Euro 2mn (~INR170mn) last year owing to this mechanism, which helps in clocking better gross block turn (~6x) and profitability (18% plus EBIT margin) in industry. Also, in this financial year, the company plans to increase savings by ~10%. Currently, it majorly caters to JSW (Bellary), Mukand Steel, Sunflag Iron, Monnet Ispat and Usha Martin among the private mills, and SAIL and RINL among public customers. With RHI on board it is targeting bigger mills like TISCO, JSPL (Angul) and Essar Steel among the new clients through RHI India, the private entity of the group. ORL is also targeting 26 new customers, which are in the pipeline. While RHI contributed mere INR40-50mn last year, going forward it is targetting overall ~25-30% contribution in sales from RHI. The parent s (RHI) target is to double sales over the next 5 years. For FY15, the company has guided 12.5% sales growth with 10% organic and 2.5% RHI led by outsourcing from parent. It is targeting to increase EBIT margin from 18.32% in FY14 to 18.76% in FY15 and enhance production by ~10% to 33,770MT. The company is expanding capacity by 22% in ISO by Sep 2014 and in slidegates by Jan Edelweiss Securities Limited

3 Orient Refactories Financial snapshot (INR mn) Year to February Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net revenues 1, , ,035 4,691 5,886 Raw material ,143 2,540 3,164 Staff costs Other expenses (3.6) ,114 Total expenditure ,243 3,807 4,745 EBITDA (1.4) ,141 Depreciation Other income (24.3) Interest - - (67.8) - (92.8) Profit before tax (2.7) ,139 Tax (4.0) Core profit (2.1) Extraordinary items Minority interest Profit after tax and min. int (2.1) Net profit (2.1) Equity capital (FV INR 1) No. of shares (mn) Adj. EPS (INR) Raw material Employee cost Other expenses EBITDA Reported net profit Edelweiss Securities Limited

4 Miscellaneous Company Description The RHI Group holds about 69.6% of ORL India s share capital. ORL is now part of the RHI Group of Austria, globally the number two player in the design, engineering, manufacture and delivery of refractory products, systems and services for hightechnology industrial applications. The parent clocked revenues of Euro1.75bn and EBIT of Euro111mn, as of CY13. In India, ORL is the second largest player in the steel flow control process segment, with market share of ~30%. Strong technological prowess and rich product portfolio enables the company to partner with a steel company right from the capacity formulation stage. It has a technology licence agreement with parent, but pays meager royalty and technical fees of INR1.75lakh. The company clocked 85% of overall gross sales from manufactured sales in FY14. Within overall sales, 74% comprise shaped and balance 11% unshaped. ORL also generated 15% of overall revenue from trading of refractories. Investment Theme Global refractory major RHI s (No.2) strong focus on emerging markets and profitability was vindicated by its acquisition of 69.6% in Orient Refractories (ORL), a leading player in India s profitable steel flow control segment. ORL clocked strong non-cyclical 19% sales and 18% EBIT CAGR along with 17% EBIT margin and average RoE of 45% over FY Considering 27% gross block expansion, robust fixed asset turnover of over 6x, ~60% unoccupied land and parent s robust portfolio approach which will expand clientele, the company is well placed to capitalise the parent s target of doubling ORL s sales to tap the emerging markets opportunity and make it an exports hub. With leading position in steel flow control segment fortified by parent RHI, and 20%CAGR in earnings, we value ORL at 18x FY16E EPS, 10% discount to Vesuvius India (VIL). Key Risks Delay in recovery in key segment The industry is dependent on imports of key raw materials like high grade alumina, bauxite, magnesite, silicon carbide, etc. China is a major supplier of imports and has imposed heavy taxes on export of raw material of refractories. This has resulted in sharp increase in imported raw material costs. Imports constitute ~11% of net sales. This also includes currency headwinds on ~25% of raw material costs which are imported. Also, the company exports ~16% of sales, making it a net exporter. Currently, royalty, trademark and service fees, as a percentage of overall sales, stand at mere INR 1.75lakh, whereas some others have received an average % of net sales for in case of Vesuvius India. International players like Vesuvius Plc. which have a strong leadership position in steel flow control process globally, Krosaki Harima which bought 51% in Tata Refractories, Calderys, part of Imerys of France which acquired ACE Refractories are all setting up base in India through the acquisition route. This will heighten competition in the refractories industry going ahead. 4 Edelweiss Securities Limited

5 Orient Refactories Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Shaped volume growth Unshaped volume growth 23.4 (2.0) Export revenue growth Spraying/Ramming Mass sales growth Others sales growth Manufactured Traded Manufacturing gross margin (%) Traded gross margin (%) Raw Material Cost as % Net Revenue Employee as % of net revenues Admin costs (as % of revenues) Income statement (INR mn) Net revenue 3,619 4,035 4,691 5,886 Materials costs 1,983 2,143 2,540 3,164 Gross profit 1,635 1,892 2,151 2,722 Employee costs Other Expenses ,114 Operating expenses 946 1,100 1,267 1,581 Total operating expenses 2,929 3,243 3,807 4,745 EBITDA ,141 Depreciation and amortisation EBIT ,084 Other income Interest expenses Profit before tax ,139 Provision for tax Net profit Extraordinary income/ (loss) (18) Profit After Tax Basic EPS (INR) Shares outstanding (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics Operating expenses Gross margin Interest expenditure EBITDA margins EBIT margins Net profit margins Growth ratios (%) Revenues EBITDA Net profit EPS Edelweiss Securities Limited

6 Miscellaneous Balance sheet (INR mn) As on 28th February FY13 FY14 FY15E FY16E Equity capital Reserves & surplus 904 1,256 1,644 2,187 Shareholders funds 1,024 1,377 1,764 2,307 Short term debt Borrowings Deferred tax liability Sources of funds 1,087 1,436 1,764 2,307 Gross block Accumulated depreciation Tangible assets Intangible assets CWIP (incl. intangible) Total net fixed assets Investments Non current investments Current Investments Cash and equivalents Inventories Sundry debtors ,107 Loans and advances Other current assets Total current assets (ex cash) 1,335 1,676 1,631 1,929 Trade payable Others current liabilities Total current liabilities & Net current assets (ex cash) Uses of funds 1,087 1,436 1,764 2,307 Book value per share (INR) Free cash flow (INR mn) Net profit Depreciation Others (2) (41) (29) (55) Gross cash flow Less: Changes in WC (102) 124 Operating cash flow Less: Capex Free cash flow Cash flow metrics Operating cash flow Investing cash flow (121) 2 (180) (200) Financing cash flow (258) (138) (227) (165) Net cash flow (1) Capex (65) (58) (180) (200) Dividends paid (137) (176) (197) (220) Profitability & efficiency ratios ROAE (%) ROACE (%) ROA Inventory day Debtors days Payable days Cash conversion cycle (days) Current ratio Debt/EBITDA Debt/Equity Adjusted debt/equity Interest coverage , Long term debt / Capital Total debt / Capital employed (%) Operating ratios Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E Orient Refactories Grindwell Norton Ltd NA 14.9 NA 18.4 NA Vesuvius India Median AVERAGE Source: Edelweiss research 6 Edelweiss Securities Limited

7 Orient Refactories Additional Data Directors Data K.K.Thirani Chairman S G Rajgarhia Vice Chairman Parmod Sagar Managing Director A K Jain Director R S Bajoria Director Barbara Postik Eibensteiner Director Dr Giorgio Capelli Director Michael John Williams Director S C Sarin Director Auditors - S R Batliboi & Co Holding Top10 Perc. Holding Perc. Holding Dutch us holding bv Rhi ag 43.6 Mittal anisha Rajgarhia shri gopal 4.99 Orient refractories 2.56 Birla sun life asset 1.88 Hsbc asset mgmt indi 0.19 Sagar parmod 0.01 Rajgarhia bhavna 0 Sarin s c 0 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 02 Jul 2014 Deepika Sarin Sell Jul 2014 Subhash Chander Sarin Sell Jul 2014 Swaran Sarin - Dependent Sell Jun 2014 Group Entity Sell *as per last available data 7 Edelweiss Securities Limited

8 Miscellaneous Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): Miscellaneous AIA Engineering,, Balkrishna Industries,, Orient Refactories, Vesuvius India, VIP Industries Recent Research Date Company Title Price (INR) Recos 05-Aug Aug Jul-14 Balkrishna Industries AIA Engineering Stable volumes; high EBITDA margin sustain; Result Update Margins excel; Result Update VIP Industries Demand blues dent sales; Result Update 745 Buy 770 Buy 112 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 8 Edelweiss Securities Limited

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