Electrosteel: Waiting in the wings - Views on News from Equitymaster

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Electrosteel: Waiting in the wings

Jan 10, 2001

Electrosteel Castings Limited (ECL) is the only Indian company manufacturing Ductile-Iron (DI) spun pipes. These are mainly used for the transportation of water and sewage. The company also manufactures cast iron spun pipes. Its plants are located at Khardah in Calcutta and Elavur in Chennai. Electrosteel has a large customer base both in India and abroad (Europe, Gulf countries, South-East Asian countries and Africa). This reasonably profitable company’s stock price has come off by nearly 70% in the past one year. Let’s take a look.

Ductile Iron retains all the good qualities of cast iron but has more than double the tensile strength. The high tensile strength not only eliminates the brittle nature of cast iron but also results in a lot of saving in the material used.

In India so far only Electrosteel has been successful in mastering the technology of manufacturing international quality ductile iron pipes. Internationally renowned inspection agencies from abroad have accepted ECL’s DI pipes at par with international quality DI pipes. Earlier, in India, special foundry grade pig iron suitable for ductile iron was not available. Moreover, Indian coke has high ash and phosphorous. To take care of this, ECL has integrated backward and put up a mini blast furnace that is producing required quality pig iron at the rate of 130,000 tonnes per annum. ECL however, is importing its coke.

Electrosteel has an installed capacity of 90,000 tpa of ductile iron spun pipes and 150,600 tpa of cast iron spun pipes. Earlier, the company also used to manufacture alloy steel grinding media at Ghaziabad. However, since the operation was not viable, the plant was shut down in September 1999. Electrosteel plans to increase the DI pipe production capacity of its Kharad plant to 175,000 tonnes per annum. It is also planning a foray into the information technology business.

Slowing down?
(Rs m)1HFY001HFY01Change
Sales2,1442,3429.2%
Other Income406970.8%
Expenditure1,4581,68415.5%
Operating Profit (EBDIT)686658-4.1%
Operating Profit Margin (%)32.0%28.1% 
Interest 739326.3%
Depreciation647924.1%
Profit before Tax589555-5.8%
Tax158148-6.3%
Profit after Tax/(Loss)432407-5.6%
Net profit margin (%)20.1%17.4% 
No. of Shares (eoy) (m)8.116.2 
Diluted number of shares16.216.2 
Diluted Earnings per share*53.350.3 
PER (x) 3.5 
*(annualised)   

Given the niche area it operates in, Electrosteel earns attractive operating margins. Infact, its margins have risen continuously over the past three years (from 20% in FY98 to 26% in FY00). The company’s turnover has grown at a CAGR of 22% to Rs 5.3 bn over the last three years. Its profits too have grown at a CAGR of 52% during the same period. However, in 1HFY01 Electrosteel has shown a marginal 9% growth in turnover and its profits have declined 6% over the corresponding period in FY00.

Attractive valuations
Current price (Rs)178
P/e multiple (X)3.5
Price to book value (X)1.2
Return on capital (%)34.3
Return on equity (%)35.5
Return on assets (%)20.0

The slowdown in 1HFY01 and the dominance of TMT stocks on the bourses took its toll on Electrosteel’s valuations. The company’s bonus issue of 1:1 in September 2000 also could not perk up the company’s fortunes. At the current price of Rs 178, Electrosteel trades at a P/e multiple of 3.5 times its 1HFY01 annualised earnings. The company’s book value per share (post bonus) stands at Rs 154. The price to book value works out to be an attractive 1.2 times. If the company reverses the trend of the first half in 3QFY01, then it could see a re-rating in its fortunes.

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