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Recommendations India

Electrosteel Castings 3QFY2014 performance highlights and results update

February 7, 2014, Friday, 19:01 GMT | 14:01 EST | 23:31 IST | 02:01 SGT
Contributed by Angel Broking

For 3QFY2014, Electrosteel Castings (ECL) reported a 3.9% yoy growth in top-line, while its EBITDA increased by 102.5% yoy due to lower raw material costs and higher other operating income. We maintain our Accumulate recommendation on the stock.
Healthy operating performance due to lower costs: ECL’s 3QFY2014 net revenue increased by 3.9% yoy to Rs.491cr while the raw material costs decreased by 7.3% yoy to Rs.236cr, resulting in the EBITDA growing by 102.5% yoy to Rs.95cr. Interest expenses grew by 34.1% yoy to Rs.36cr and other income decreased by 92.3% yoy to Rs.3cr which resulted in the reported net profit growing by only 2.7% yoy to Rs.34cr. Excluding exceptional forex loss of Rs.3cr, the adjusted net profit decreased by 6.2% yoy to Rs.36cr.
Preferential equity issue to promoters: During the quarter, the company issued and allotted 1.7cr shares to promoters on a preferential basis at a price of Rs.13.85/share, which will result in equity infusion of Rs.24cr in the company. In our view, this preference issue has been undertaken to improve ECL’s debt equity position which in turn will enable it to raise additional debt. ECL’s associate, Electrosteel Steels (ESL) is under the CDR process; hence, the board of ESL has approved to issue equity shares worth Rs.223cr to promoters (ECL) on a preferential basis.
Outlook and valuation: We maintain our positive stance on the company’s initiatives of venturing into steel making through its associate ESL. Further, the company’s backward integration initiatives through the allocation of iron ore (although not factored in our estimates currently) and coking coal mines are expected to result in cost savings. We recommend an Accumulate rating on the stock with a SOTP target price of Rs.15.