Management Meet Update Institutional Equities Electrosteel Castings/Electrosteel Steels 24 December 2012 Gaining Size, But Clearances Remain Key We had a meeting with the managements of Electrosteel Castings (ECL) and Electrosteel Steels (ESL), an associate of ECL with a 39.6% stake. We paid a visit to the plants of both these companies. ESL is setting up a 2.51mt integrated greenfield steel plant. Its management gave guidance of commissioning the integrated steel plant by the end of FY13. However, we believe a very significant portion of ESL s profitability will depend on commencement of operations at its iron ore mine and ramp-up of coking coal production. ECL has commenced production at its coking coal mine through the open-cast route, while work on underground mine is progressing, which the company expects to complete by the end of 1QFY14. The company has obtained forest stage-1 clearance for iron ore mine and it is expecting stage-2 clearance by the end of 1QFY14, but we believe it can take a longer time. Currently, we do not have any rating on ECL and ESL. Steel plant to be commissioned before the end of FY13: ESL has witnessed significant delay in commissioning its 2.51mt steel plant, which was originally scheduled in FY11. Total project costs stood at Rs95,620mn and ECL s equity contribution was at Rs8,876mn as of end-october 2012. The management stated that there was an exodus of almost 95% Chinese workers in September 2010 due to Arunachal Pradesh state s border issue with China. This impacted project work severely and led to a long delay. The company has resolved these issue and it is likely to commission the plant by the end of FY13. Iron ore mine status key to profitability: ECL has been allocated 91mt iron ore mine at Kodolibad, Jharkhand. This is an open-cast mine and the company has obtained stage-1 forest clearance. The management has indicated that it should be able to get stage-2 forest clearance in the next six months, but we believe it may take a longer time. The mine is around 230km away from the plant, but there is a connecting 200-km rail line of Indian Railways, which will result in moderate freight costs. ECL is looking at peak production of 4mt iron ore and after meeting its own requirement, rest of the iron ore would be sold to ESL at cost plus 20% basis. Coking coal mine status: ECL has also been allocated coking coal mine in Parbatpur, Jharkhand, which has mining reserves of 231mt. A significant part of this mine is underground and the company is working on it to start operations. The company has started open-cast mine, but the volume is still insignificant at around 10,000tn/month. ECL is looking at peak production 1.5mt of coking coal from the mine and after fulfilling its own requirement, rest of the coking coal would be sold to ESL at cost plus 20% basis. This mine is around 6km away from the plant site and ECL has also set up a 2mt coal beneficiation unit at the mine. Y/E March (Rsmn)-ECL FY08 FY09 FY10 FY11 FY12 Revenue 14,396 19,482 15,808 18,726 21,018 YoY (%) 16.9 35.3 (18.9) 18.5 12.2 EBITDA 194 2,638 3,000 2,689 1,047 EBITDA margin (%) 1.3 13.5 19.0 14.4 5.0 EBITDA growth (%) (86.9) 1,261.0 13.7 (10.4) (61.1) PAT 553 1,353 2,343 1,796 (270) EPS (Rs) 2.1 4.6 7.2 5.0 0.9 YoY (%) (58.0) 115.1 57.6 (31.1) (82.3) RoE (%) 4.6 9.7 14.5 10.3 (1.6) RoCE (%) (0.9) 5.4 5.6 4.7 3.3 P/E (x) 12.3 5.7 3.6 5.3 29.8 EV/ EBITDA (x) 58.7 5.4 6.2 6.9 21.2 Giriraj Daga giriraj.daga@nirmalbang.com +91-22-3926 8168 Electrosteel Castings- Not Rated Sector: Steel CMP: Rs26 Key Data Current Shares O/S (mn) 346.0 Mkt Cap (Rsbn/US$mn) 9/164 52 Wk H / L (Rs) 29/15 Daily Vol. (3M NSE Avg.) 839,650 Shareholding (%) 4QFY12 1QFY13 2QFY13 Promoter 48.5 48.5 48.6 FII 14.4 14.0 14.0 DII 9.7 9.7 10.0 Corporate 6.9 6.9 6.6 General Public 20.6 20.9 21.0 Price Performance (%) 1 M 6 M 1 Yr ECL 7.6 54.3 63.4 Nifty Index 4.1 13.2 24.6 Source: Bloomberg Electrosteel Steels- Not Rated Sector: Steel CMP: Rs7 Key Data Current Shares O/S (mn) 2,186.7 Mkt Cap (Rsbn/US$mn) 15.2/275.4 52 Wk H / L (Rs) 9/4 Daily Vol. (3M NSE Avg.) 2,489,864 Shareholding (%) 4QFY12 1QFY13 2QFY13 Promoter 34.8 34.8 39.3 FII 34.9 34.8 32.3 DII 1.5 1.5 1.4 Corporate 17.3 17.3 16.2 General Public 11.6 11.7 10.8 Price Performance (%) 1 M 6 M 1 Yr ESL (1.4) 40.4 73.8 Nifty Index 4.1 13.2 24.6 Please refer to the disclaimer towards the end of the document.
Projects-wise highlights Exhibit 1: Electrosteel Castings journey so far ECL has grown multi-fold over the past two decades through the organic and inorganic routes. The company started with a 60,000tn plant making ductile iron (DI) pipes in 1994. Over a period of 18 years, it continued to add DI pipe capacity with backward integration in pig iron. ECL currently has a 280,000tn DI pipe plant with pig iron facility of 250,000tn and a 360,000tn sinter plant. The company has also started coke oven plant having a capacity of 295,000tn at Haldia, West Bengal. In 2002, it acquired a 46% stake in Lanco Industries, which has a 195,000tn DI pipe plant and 225,000tn pig iron capacity. ECL currently owns a 48.54% stake in Lanco Industries. The company has taken up a ambitious project to set up 2.51mt integrated steel plant with a capex of Rs95,620mn through one of its associates companies i.e. ESL so as to avoid putting its financial health into risk. 2011 Tied up US$200mn through ECB. 2010 2009 2008 QIP comprising Rs2bn NCD issue and 33.5mn warrants at issue price of Rs3 per warrant convertible at Rs59.58. Modernisation of mini blast furnace for improved output. Commissioned fourth coke oven battery, resulting in additional capacity of 70,000tn of coke, taking the total capacity to 295,000tn at Haldia; DI pipe and blast furnace capacity enhanced to 280,000tn and 250,000tn, respectively. Tied up US$77.50mn through ECB, commissioned a 360,000tn sinter plant at Khardah and commissioned a 75,000tn coke-oven battery at Haldia. 2006 2005 2003 Raised US$75mn through FCCB issue. DI pipes and blast furnace capacity enhanced to 250,000tn and 235,000tn, respectively. Set up a 12MW power plant and second 30,000tn sponge iron plant at Haldia. The company was allotted an iron ore mine at Kodolibad, Jharkhand, and a non-coking coal mine via a joint venture at North Dhadhu. US$40mn raised through GDR issue, commissioned a 150,000tn coke-oven plant and a 30,000tn sponge iron plant at Haldia. The company was allotted a coking coal mine at Parbatpur, Jharkhand. DI pipe capacity expansion from 150,000tn to 200,000tn at Khardah. 2002 Acquired a 46% stake in Lanco Industries (involved in the manufacture of DI pipes, pig iron and cement) 2001 Capacity expansion of pig iron facility from 109,000tn to 200,000tn and of DI pipes from 120,000tn to 150,000tn. 2000 DI pipe capacity expansion from 90,000tn to 120,000tn at Khardah. 1999 DI pipe capacity expansion from 60,000tn to 90,000tn at Khardah. 1996 Pig iron production facility set up at Khardah having a capacity of 109,000tn. 1994 Sets up DI pipe plant facility at Khardah having a capacity of 60,000tn. 2 Electrosteel Castings/Electrosteel Steels
Exhibit 2: Electrosteel Castings group structure Electrosteel Castings Facilities Subsidiaries Associate companies Khardah DI pipe 280,000tn Pig iron 250,000tn Sinter 360,000tn Power plant 3.75MW DI fittings 5,000tn Haldia Coke 295,000tn Sponge iron 60,000tn Power plant 12MW Elavur CI pipe 90,000tn Parbatpur Coking coal mine geological reserves of 231.2mt Coal washery 2mt Kodolibad Iron ore mine (stage-1 forest clearance received) Wide distribution through subsidiaries Electrosteel Europe SA (100%) Marketing of products in Italy, France, Spain, Portugal, Poland & Germany Electrosteel UK (100%) Marketing of products in UK Electrosteel Algerie SPA (100%) Marketing of products in Algeria Electrosteel USA (100%) Marketing of products in USA Singardo Int l Pte (60%) Marketing of products in Singapore, Indonesia, Brunei & Malaysia Electrosteel Gulf FZE (100%) Electrosteel Steels (39.64%) SPV to set up a 2.51mt integrated steel cum DI pipe plant Total project cost Rs.95,620mn ECL s equity contribution of Rs8,876mn (as of 31 October 2012) Lanco Industries (48.54%) ECL acquired a 46% stake in the company in 2002 Has an installed capacity of: - DI pipe 195,000tn - Pig iron 225,000tn - Cement 90,000tn - Coke 225,000tn - Sinter 500,000tn Marketing of products in the Middle East Electrosteel Doha for Trading LLC (49%) Marketing of products in Qatar Electrosteel Steels business overview ESL is setting up a 2.51mt integrated steel plant, with an investment of Rs95,620mn, including DI pipe and captive facilities like pellet, sinter, coke oven, and power plant at Siyaljori (near Bokaro) in Jharkhand. The company has secured raw material supply through a 20-year agreement with ECL-owned iron ore and coking coal mines, effective from the date of commercial production. The company is also setting up a 120MW captive power plant in order to meet its energy requirement. It has acquired 2,213 acres of land, which would be sufficient for the current project as well as future expansion, and over 89% of the equipment required has already arrived at the site. The company is looking to commission these facilities in a phased manner by the end of FY13. 3 Electrosteel Castings/Electrosteel Steels
Exhibit 3: Project details Location Siyoljori village in Bokaro district of Jharkhand. The site is 22 kms from Bokaro and 52 kms from Dhanbad Land Status The company has 2,213 acres of land under possession. The company would use around 900 acres for the current 2.51mt plant while the rest will be used for future expansion Raw Materials Procurement Iron Ore To be procured from ECL mines in Kodolibad which is 230km away Coking Coal 30% of the requirements to be procured from ECL owned mines situated in Parbatpur which is 6km from site. Limestone Would be procured locally and from Dubai and Thailand Dolomite Would be procured from Birmitrapur region Technology The company has adopted Chinese technology and Shandong Metallurgical Design Institute (SDM) has been entrusted with basic and detail design & engineering. SDM is the associated design company of Laiwu Steel & Jinan Steel, who produces about 20mt steel in China Water Source Damodar River which is 8km from the plant Power Captive 120MW and balance from DVC in Dhanbad which is located 52km from the plant Railway Station Telgharia Station which is 6km away from the plant Exhibit 4: Details of products Capacity (mt) Product 0.60 Wire rods in coil form, 5.5mm-16.0mm in diameter. 0.85 Reinforcement bars in straight lengths and bundled 8mm-32mm, and plain rounds up to 60mm in diameter 0.33 Ductile iron pipes. 0.33 Commercial billets. 0.40 Pig iron. 4 Electrosteel Castings/Electrosteel Steels
Financials (Electrosteel Castings) Exhibit 5: Income statement Revenue 14,396 19,482 15,808 18,726 21,018 YoY growth (%) 16.9 35.3 (18.9) 18.5 12.2 Raw material costs 7,765 9,858 6,461 8,970 10,913 % of sales 53.9 50.6 40.9 47.9 51.9 Power & fuel costs 758 1,020 1,060 1,273 1,435 % of sales 5.3 5.2 6.7 6.8 6.8 Employee costs 898 1,126 1,309 1,486 1,590 % of sales 6.2 5.8 8.3 7.9 7.6 Admin, & other expenses 4,782 4,839 3,978 4,308 6,033 % of sales 33.2 24.8 25.2 23.0 28.7 EBITDA 194 2,638 3,000 2,689 1,047 EBITDA margin (%) 1.3 13.5 19.0 14.4 5.0 Depreciation 378 534 535 559 566 EBIT (184) 2,104 2,465 2,130 481 Interest expenses 369 1,032 522 860 1,108 Other income 1,010 911 1,173 960 744 PBT 458 1,983 3,117 2,230 117 Provision for tax 17 704 1,052 611 (171) Effective tax rate (%) 3.8 35.5 33.7 27.4 (146.1) PAT 440 1,279 2,065 1,619 287 Minority interest 1 12 7 3 13 Associates profit 114 86 285 180 (544) Profit after MI 553 1,353 2,343 1,796 (270) YoY growth (%) (47.2) 144.6 73.1 (23.3) (115.0) PAT margin (%) 3.6 6.6 13.8 9.1 (1.2) Exhibit 7: Balance sheet Share capital 281 287 327 327 327 Reserves and surplus 11,325 12,414 15,880 17,140 16,628 Equity warrants/application 337 1,309 - - - Shareholders' fund 11,943 14,010 16,207 17,467 16,955 Minority interest 31 43 49 52 107 Long term fund 5,179 9,068 11,304 12,864 15,732 short term fund 3,264 1,946 1,679 2,809 2,480 Total loan funds 8,443 11,013 12,983 15,673 18,212 Deferred tax liability 199 369 469 439 207 Total capital employed 20,616 25,436 29,707 33,631 35,480 Gross block 6,425 7,978 8,602 9,357 10,456 Less: Acc depreciation 2,261 2,793 3,224 3,825 4,446 Net block 4,164 5,185 5,378 5,532 6,010 Capital WIP 1,496 3,017 3,969 4,382 6,642 Net fixed assets 5,660 8,203 9,348 9,915 12,652 Investments 1,792 4,664 10,674 14,251 10,739 Inventories 4,613 4,997 5,071 7,036 7,956 Debtors 5,226 5,574 2,976 4,789 5,755 Cash and bank balances 1,842 954 2,986 2,048 1,694 Other CA and loans & advances 5,176 4,414 2,082 2,647 4,504 Total CA and loans & adv. 16,857 15,939 13,115 16,520 19,909 Creditors 2,070 1,469 1,681 3,840 3,952 Other current liabilities 801 622 563 1,824 2,722 Provisions 822 1,280 1,186 1,390 1,147 Net current assets 13,164 12,569 9,685 9,466 12,088 Total assets 20,616 25,436 29,707 33,631 35,480 Exhibit 6: Cash flow EBIT (184) 2,104 2,465 2,130 481 (Inc.)/dec. in working capital (2,232) (1,604) 1,718 (999) (3,991) Cash flow from operations (2,416) 500 4,183 1,131 (3,509) Other income 1,010 911 1,173 960 744 Depreciation 378 534 535 559 566 Interest paid (-) 369 1,032 522 860 1,108 Tax paid (-) 144 436 1,150 591 249 Dividends paid (-) 265 71 408 408 407 Net cash from operations (1,805) 406 3,812 790 (3,557) Capital expenditure (-) 1,794 3,008 1,739 1,192 2,490 Net cash after capex (3,599) (2,601) 2,073 (401) (6,047) Inc./(dec.) in short term debt (1,352) (1,319) (267) 1,130 (329) Inc./(dec.) in long term debt 4,844 3,782 3,859 1,634 2,986 (Inc.)/dec. in investments 130 (1,773) (3,072) (2,568) 3,332 Equity issue/(buyback) 740 1,214 147 3 41 Cash from financial activities 4,362 1,903 667 200 6,031 Others (2,073) (190) (708) (736) (338) Opening cash 3,152 1,842 954 2,986 2,048 Closing cash 1,842 954 2,986 2,048 1,694 Change in cash (1,310) (888) 2,032 (938) (354) Exhibit 8: Key ratios Y/E March FY08 FY09 FY10 FY11 FY12 Per share (Rs) Basic EPS 2.1 4.6 7.2 5.0 0.9 Book value 40.4 43.2 48.6 52.4 50.9 Valuation (x) P/E 12.3 5.7 3.6 5.3 29.8 P/BV 0.6 0.6 0.5 0.5 0.5 EV/EBITDA 58.7 5.4 6.2 6.9 21.2 EV/sales 0.8 0.7 1.2 1.0 1.1 M-cap/sales 0.5 0.4 0.5 0.5 0.4 Return ratios (%) RoE 4.6 9.7 14.5 10.3 (1.6) RoCE (0.9) 5.4 5.6 4.7 3.3 Margin ratios (%) EBITDA margin 1.3 13.5 19.0 14.4 5.0 PBIT margin (1.3) 10.8 15.6 11.4 2.3 PBT margin 3.0 9.7 18.4 11.3 0.5 PAT margin 3.6 6.6 13.8 9.1 (1.2) Turnover ratios Asset turnover ratio (x) 2.2 2.4 1.8 2.0 2.0 Avg. collection period (days) 132.5 104.4 68.7 93.4 99.9 Avg. payment period (days) 53.2 31.8 47.9 87.4 72.2 Solvency ratios (x) Net debt-equity 0.5 0.6 0.7 0.6 0.8 Interest coverage ratio 0.5 2.6 5.7 3.1 0.9 5 Electrosteel Castings/Electrosteel Steels
Financials (Electrosteel Steels) Exhibit 9: Income statement Revenue 0 0 0 74 607 YoY growth (%) - - - - 716.8 Raw material costs 0 0 0 96 752 % of sales - - - 129.7 123.9 Power & fuel costs 0 0 0 4 55 % of sales - - - 5.8 9.1 Employee costs 0 0 0 1 75 % of sales - - - 1.9 12.4 Admin, & other expenses 0 0 0 10 185 % of sales - - - 12.9 30.5 Total expenditure 0 0 0 112 1,067 EBITDA 0 0 0 (37) (460) EBITDA margin (%) - - - (50.3) (75.8) Depreciation 0 0 0 10 240 EBIT 0 0 0 (48) (700) Interest expenses 0 0 0 16 802 Other income 0 0 0 2 4 Exceptional loss (gain) 0 0 0 0 0 PBT 0 0 0 (61) (1,498) Provision for tax 0 0 0 0 0 Effective tax rate (%) - - - - (0.0) PAT 0 0 0 (61) (1,498) YoY growth (%) - - - - 2,344.0 PAT margin (%) - - - (80.1) (245.2) Exhibit 11: Balance sheet Share capital 1 3,386 16,658 20,347 20,347 Reserves and surplus 0 0 0 338 (1,160) Equity application money 3,100 3,107 0 0 0 Shareholders' fund 3,101 6,493 16,658 20,685 19,187 Long term loan funds 1,331 17,285 24,694 41,098 61,410 Short term loan funds 0 0 0 0 0 Total loan funds 1,331 17,285 24,694 41,098 61,410 Total capital employed 4,431 23,778 41,351 61,783 80,597 Gross block 476 1,277 2,032 6,742 15,393 Less: Acc depreciation 1 3 15 53 347 Net block 475 1,274 2,016 6,689 15,045 Capital WIP 2,195 19,951 36,856 52,434 67,300 Net fixed assets 2,670 21,225 38,872 59,123 82,345 Investments 0 1,764 1,606 671 225 Inventories 0 0 0 369 1,949 Debtors 0 0 0 5 9 Cash and bank balances 1,660 556 943 834 791 Other CA and loans & advances 164 412 793 5,859 5,047 Total CA and loans & adv. 1,825 968 1,736 7,067 7,796 Creditors 62 172 845 45 1,213 Other current liabilities 0 0 0 5,028 8,551 Provisions 2 7 18 6 5 Net current assets 1,761 788 873 1,989 (1,974) Total assets 4,431 23,778 41,351 61,783 80,597 Exhibit 10: Cash flow EBIT 0 0 0 (48) (700) (Inc.)/dec. in working capital 0 0 0 (675) 4,740 Cash flow from operations 0 0 0 (722) 4,040 Other income 0 0 0 2 4 Depreciation 0 0 0 10 240 Interest paid (-) 6 872 2,199 3,347 802 Tax paid (-) 0 0 0 0 1 Dividends paid (-) 0 0 0 0 0 Net cash from operations (6) (872) (2,199) (4,057) 3,481 Capital expenditure (-) 2,637 17,666 14,893 17,480 23,462 Net cash after capex (2,643) (18,538) (17,092) (21,537) (19,982) Inc./(dec.) in short term debt 0 0 0 0 0 Inc./(dec.) in long term debt 1,331 15,955 7,408 16,404 19,492 (Inc.)/dec. in investments 0 (1,764) 158 937 446 Equity issue/(buyback) 3,101 3,392 10,165 4,089 0 Cash from financial activities 4,431 17,583 17,731 21,430 19,938 Others (128) (149) (252) (2) 0 Opening cash 0 1,660 556 943 834 Closing cash 1,660 556 943 834 791 Change in cash 1,660 (1,104) 387 (109) (44) Exhibit 12: Key ratios Y/E March FY08 FY09 FY10 FY11 FY12 Per share (Rs) Basic EPS 0.0 0.0 0.0 (0.0) (0.7) Book value 10.0 10.0 10.0 10.2 9.4 Valuation (x) P/E 0.0 0.0 0.0 (232.4) (9.5) P/BV 0.0 0.0 0.0 0.7 0.7 EV/EBITDA 0.0 0.0 0.0 (1,457.4) (162.6) EV/sales 0.0 0.0 0.0 733.6 123.4 M-cap/sales 0.0 0.0 0.0 191.7 23.5 Return ratios (%) RoCE 0.0 0.0 0.0 (0.3) (7.8) RoE 0.0 0.0 0.0 (0.1) (0.9) Margin ratios (%) EBITDA margin 0.0 0.0 0.0 (50.3) (75.8) PBIT margin 0.0 0.0 0.0 (64.3) (115.3) PBT margin 0.0 0.0 0.0 (80.1) (245.1) PAT margin 0.0 0.0 0.0 (80.1) (245.2) Turnover ratios Asset turnover ratio (x) 0.0 0.0 0.0 0.0 0.0 Avg. collection period (days) 0.0 0.0 0.0 25.1 5.7 Avg. payment period (days) 0.0 0.0 0.0 147.7 415.0 Solvency ratios (x) Net debt-equity 0.0 0.0 0.0 1.9 3.2 Interest coverage ratio 0.0 0.0 0.0 (0.4) (1.7) 6 Electrosteel Castings/Electrosteel Steels
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