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Stock_____

TALES

September 28, 2021

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ICIC

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Retail E

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esearch

Stock T

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s

September 28, 2021

CMP: | 1130 Target: | 1445 (28%) Target Period: 12 -18 months

months

Vesuvius India (VESIND)

BUY

Leading player in refractories market…

About the stock: Vesuvius India (VIL) is a subsidiary of the Vesuvius Group, UK. It

is a leading metal flow engineering company. The company supplies high

performance refractory material to the steel industry and other process industries

used for lining vessels such as blast furnaces, ladles and tundishes to enable them

to withstand high temperatures and/or corrosive attack.

Shaped refractories account for ~37% of revenue in CY20 followed by

unshaped refractories (~37%) and services (~ 26%)

It holds ~11% market share in the Indian refractories industry

Key triggers for future price performance:

Focused on capturing domestic market share through faster growth in the

manufactured goods segment through localised manufacturing and new

product launches. Currently, manufactured goods contribute 50-55%

Focusing on margin accretive solution oriented services segment, which

has grown at a CAGR of 34.4% in CY13-20 and now contributes 26% to

revenue compared to 4% in CY13

Higher steel production and technological advancement is expected to drive

refractories demand. India’s crude steel production is expected to grow at

a CAGR of ~5.5% to 121 MT in FY20P-23E backed by higher infrastructure

spend and strong steel capex pipeline

Strength in developing close, collaborative relationships with customers

with an extended global manufacturing alignment with customer locations

backed by global parentage

We expect VIL to rebound to superior margins of ~14-16% over the next

couple of years owing to cost rationalisation, niche product launches

Net debt free b/s, double-digit return ratios & strong cash flows and cash

and investment of ~| 559 crore provide tremendous balance sheet strength

What should investors do? We expect decent earnings in long term led by

operational efficiency, product innovation, R&D and strong steel capex pipeline.

Considering strong cash generation, balance sheet, we initiate coverage

under Stock Tales format with a BUY recommendation

Target Price and Valuation: We value VIL at | 1445 i.e. 24x on CY22E EPS

Particulars

Particular Amount

Market Capitalization (| crore) 2,294

Total Debt (CY20) (| crore) 0

Cash and Inv (CY20) (| crore) 559

EV (CY20) (| crore) 1,735

52 week H/L (|) (BSE) 1364 / 847

Equity capital (| crore) 20.3

Face value (|) 10.0

Shareholding Pattern

(in %) Sep-20 Dec-20 Mar-21 Jun-21

Promoter 55.6 55.6 55.6 55.6

FII 1.7 1.9 1.9 1.8

DII 21.5 21.1 22.5 22.1

Others 21.2 21.4 20.0 20.5

Price Chart

0

5000

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15000

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500

1000

1500

Se

p-18

Mar-1

9

Se

p-19

Mar-2

0

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p-20

Mar-2

1

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p-21

Vesuvius NIfty 500 (R.H.S)

Key risks

Any slowdown in steel, cement capex

to adversely affect the sales

Overdependence on China for raw

material site can disrupt supply chain

Research Analyst

Chirag Shah

[email protected]

Amit Anwani

[email protected]

Key Financial Summary

S

(| Crore) CY18 CY19 CY20 5-Year CAGR

(CY15-CY20)

CY21E CY22E 2-Year CAGR

(CY20-22E)

Net Sales 925.1 887.0 791.5 2.5% 1,050.3 1,162.6 21.2

EBITDA 147.4 120.7 76.8 -9.3% 113.8 167.7 47.7

EBITDA margin (%) 15.9 13.6 9.7 10.8 14.4

Net Profit 92.5 85.6 53.1 -6.3% 81.7 122.1 51.7

EPS (|) 45.6 42.1 26.1 40.2 60.2

P/E (x) 24.8 26.8 43.2 28.1 18.8

P/BV 3.1 2.9 2.7 2.5 2.3

EV/EBITDA (x) 12.7 15.1 22.6 15.0 10.0

RoCE (%) 18.2 14.4 7.9 11.3 15.2

RoE (%) 12.5 10.6 6.3 9.0 12.0

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2

ICICI Direct Research

Stock Tales | Vesuvius India

Industry Background

Refractory is a ceramic material used to provide refractory lining in furnaces,

kilns, incinerators and reactors. These materials have a high melting point

(greater than 1,520° Celsius). Refractory materials are subjected to various

conditions such as high temperature, abrasions & chemical corrosions, slag

attacks & chemical reactions when they are used in refractory linings.

Refractory materials can be made from both natural and synthetic materials

that are generally non-metallic, or combinations of compounds and minerals

like alumina, bauxite, fireclays, dolomite, chromite, silicon carbide,

magnesite and zirconia.

Major consumers of refractories are iron & steel, cement, glass, non-ferrous

metals, petrochemicals and hydrocarbons. Growth of the Indian refractory

market is directly linked to growth of the steel industry, which consumes

~70-75% of refractories in India.

Around 70% of refractories consumed in India are locally produced while

~30% of refractories consumed are imported (of which China accounts for

two-thirds of imports). The primary driver for substantial imports is

abundant availability of key raw materials like magnesite, etc. Indian

refractories industry is estimated at ~| 9000 crore as on FY21, which is ~5%

of the global refractories market (~US$23 billion). Overall installed refractory

capacity in India is estimated at 2.4 MT with 55-60% capacity utilisation i.e.

at ~1.2-1.3 MT refractories production. Refractory production in India is

estimated to grow at a CAGR of ~8.3% in FY21-23E amid low base, in

correlation with India crude steel production, which is estimated to grow

at~9% CAGR to reach 121 MT by FY23E amid low base.

Top five players including TRL Krosaki, RHI Megnesita India (Orient

Refractory merged), Vesuvius India, Dalmia-OCL, IFGL command more

than~60% of the Indian refractories market.

Exhibit 1: Indian refractories industry – Production (MT) and YoY growth (%) trend...

11594671199871

1136289 1135668

1237560

1330800

1310400

1236600

1367680

1449740

-9.7%

3.5%

-5.3%

-0.1%

9.0%

7.5%

-1.5%

-5.6%

10.6%

6.0%

-15%

-10%

-5%

0%

5%

10%

15%

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Production (tonnes) Volume Growth (%) YoY [R.H.S]


Exhibit 2: India refractories industry - turnover & growth (%)...

60766540 6672 6672

7379

8014

7852

7039

8759

9702

6.7%7.6%

2.0% 0.0%

10.6%

8.6%

-2.0%

-10.4%

24.4%

10.8%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

2000

4000

6000

8000

10000

12000

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Sales turnover (crore) YoY Sales Growth (%) [R.H.S.]


Exhibit 3: Value wise market share (%) of top players...

43.4%39.4%

33.6% 33.6% 31.1%

5.6%6.0%

6.0% 6.1% 9.0%

6.8%7.9%

9.5% 10.2% 8.9%

12.3%12.3%

11.5% 11.3% 11.2%

17% 18%

20% 18% 19%

15.0% 16.0%19.9% 21.1% 20.2%

0%

20%

40%

60%

80%

100%

CY16/FY17 CY17/FY18 CY18/FY19 CY19/FY20 CY20/FY21E

Others IFGL Dalmia OCL

Vesuvius India* RHI Megnesita India TRL Krosaki





Company Background

Incorporated in 1991, Vesuvius India (VIL) is a subsidiary of the Vesuvius

Group, UK, which holds 55.6% share in VIL and started commercial

production in its first factory in Kolkata. VIL is a leading metal flow

engineering company principally serving the steel and foundry industries.

At present, the company has four factories: one each at Kolkata, Mehsana,

two at Visakhapatnam and one manufacturing arrangement at Salem.

Another factory at Vishakhapatnam is likely to be set up soon.

The Kolkata factory manufactures continuous casting refractories including

slide gate equipment, porous plugs. The Visakhapatnam factories

manufacture monolithic, pre-cast shapes, taphole clay while the Mehsana

factory manufactures crucibles for non-ferrous industry. The manufacturing

arrangement at Salem supplies basic monolithic for tundish application. It is

also planning 50%+ VISO capacity in Kolkata. VISO is trademarked isostatic

pressing technology of VIL, which is a key enabler of continuous casting.

VIL supplies high performance refractory material to the steel industry and

other process industries used for lining vessels such as blast furnaces, ladles

and tundishes to enable them to withstand high temperatures and/or

corrosive attack. These refractory lining materials are supplied in the form

of powder mixes, which are spray-applied or cast onto vessels to be lined

(monolithic), or in pre-cast shapes and bricks. Major domestic customers

include JSW, Tata Steel (JSR), JSPL (Angul), which recognised VIL’s major

contribution in continuous improvement in their steel mills.

VIL’s domestic revenue has grown at 8.3% CAGR in CY13-CY19 to | 841

crore while overall revenue registered CAGR of 6.7% in CY13-19.

Exhibit 4: Overall revenue CAGR trend over CY16-22E

821.5911.3 925.1 887.0

791.5

1050.3 1162.6

-20%

-10%

0%

10%

20%

30%

40%

0

200

400

600

800

1,000

1,200

1,400

CY16 CY17 CY18 CY19 CY20 CY21E CY22E

(| c

rore

)

Total revenue ( | crore) YoY Growth (%) [R.H.S.]


Exhibit 5: Domestic and export share...

80.7% 78.9%90.7% 94.9% 94.0% 94.1% 93.3%

19.3% 21.1%9.3% 5.1% 6.0% 5.9% 6.7%

0%

20%

40%

60%

80%

100%


Domestic Revenue Exports Revenue


Exhibit 6: Domestic revenue growth trend over CY16-22E

662.7719.3

838.7 841.5

743.9

988.51085.3

-20%

-10%

0%

10%

20%

30%

40%

0

200

400

600

800

1,000

1,200


(|

crore)

Domestic Revenue ( | crore) YoY Growth (%) [R.H.S.]


Exhibit 7: Exports revenue growth trend in CY16-22E

158.8

192.0

86.4

45.5 47.6

61.9 77.4

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250


(|

crore)

Exports Revenue ( | crore) YoY Growth (%) [R.H.S.]





Investment Rationale

Focus on innovative products to balance growth & margins

VIL has a well-balanced product portfolio of refractories with shaped

refractories capacity of 8.0 lakh pieces per annum and unshaped

(monolithic) refractories capacity of ~100000 tonnes per annum. VIL’s

Kolkata factory accounts for most of the shaped production capacity with

~1700 pieces per day while unshaped (monolithic) are produced at two

units at Vizag. While the Mehsana unit produces crucibles, nozzles, shaped

refractories, VIL has a manufacturing arrangement at Salem, which

produces unshaped (monolithic) refractories. Total installed capacity is

estimated at ~275000 tonnes.

VIL continues to focus on gaining market share in the domestic market

through increased contribution from the manufactured goods segment with

new product launches and enhancing local manufacturing. It contributed 50-

52% in CY20. It is also focusing on margin accretive solution oriented

management services segment that has grown at 34.4% CAGR in CY13-20

and now contributes 26% to revenue vs. 4% in CY13. Type wise, shaped

and unshaped refractories contributed ~37% and 37%, respectively, to

CY20 revenue and are likely to continue in the next two years.

However, VL is likely to focus on the unshaped (monolithic) segment to

capture market share. This is since it is a fast growing segment and it is

replacing the conventional fired refractories in many applications such as

eliminating joints in refractory lining in furnaces, etc.

Overall gross margins in coming years are likely to expand supported by

manufacturing goods driven by more local manufacturing, which are likely

to command superior gross margins in the range of 25-30% compared to

traded goods, which are likely to command gross margins in the range of

20% over the next two years.

Exhibit 8: Vesuvius refractories product portfolio...

Re f r acto r y typ e s T yp e o f p r o d u cts Main in d u s tr y u s eC Y 19 Re ve n u e

(| cr o r e )

P r o d u ct-w is e

Re ve n u e s h ar e (% )

Shaped (Bricks ) Nos . Bricks , Insulating f irebrick

L ining of blas t furnaces ,

K lins , G lass Tanks ,

incinerators

334 38%

Unshaped (Monolithics ) tonneMorter, cas tables , Plas tics ,

G unning mixes , Ramming mixes

Furnaces & K lins 213 24%

TradingShaped (38% )

Unshaped (62% )

A ll type of furnaces 256 29%

Serv ices - - 81 9%


Exhibit 9: Product-wise revenue share trend….

35% 33%36% 39% 36%

29% 28% 30% 31%

13% 15%14%

16%

12%

13%8%

9% 9%

33% 35% 33%28%

23%

17%22%

20% 21%

15% 14% 14% 14%

19%

16% 15% 15% 15%

4% 4% 3% 3%9%

26% 26% 25% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21E CY22E

Shaped refractories (mfg) Shaped refractories (traded) Unshaped refractories(mfg)

Unshaped refractories(traded) Sale of services





Exhibit 10: Revenue contribution by refractories type….

48% 48%

50%

55%

48%

41%

37%

39% 39%48%

49%

47%

42%42%

32%

37%36% 35%

25%

35%

45%

55%

65%


Shaped refractories Unshaped refractories


Exhibit 11: Revenue contribution: Manufacturing. vs. traded

goods...

68% 67% 69%66%

59%

45%

50% 50%51%

28% 29% 28%30% 31%

28%

23%25%

23%

0%

10%

20%

30%

40%

50%

60%

70%

80%


Manufactured Goods Traded Goods


Exhibit 12: Type-wise gross margin trend….

42.5%

47.1%

33.8%

15.8%

20.8% 21.0%

24.5%

41.1%

35.5%

29.5%

32.3%

16.6% 17.0%18.0%

15%

22%

29%

36%

43%

50%


Manufactured Goods gross margins (%) Traded Goods gross margins (%)

Overall Gross margins (%)


Steel industry capex to drive refractory demand….

Refractory materials are used to provide refractory lining in furnaces, kilns,

incinerators and reactors. These materials have a high melting point (greater

than 1,520° Celsius) and are subjected to various conditions such as high

temperature, abrasions & chemical corrosions, slag attacks & chemical

reactions when they are used in refractory linings. The steel industry is one

of the major end-users of these materials with ~70% consumption and

directly drives refractories demand. In non-metallurgical industries (cement,

glass, lime) refractories are mostly installed on fired heaters, hydrogen

reformers, cracking furnaces, incinerators, utility boilers, air heaters, etc.

Growth of the Indian refractory market is directly linked to growth in these

segments while the impetus that the government is giving to infrastructure

development augurs well for the refractory industry.

Per ton consumption-wise, steel consumes 10-14 kg of refractories per

tonne with replacement required in 20 minutes to two months thereby

driving the refractories market. Steel industry demands complete refractory

management and services driven solutions from refractory makers while the

cement industry is the next biggest user (~ 7%) with annual replacement

cycle while non-ferrous & glass industries have longer replacement cycle.

Demand supply in the domestic refractories industry has been witnessing

muted consumption growth due to a fall in per tonne consumption for

steelmaking due to technological advancement and imports (~25% net

imports, of which two-thirds is from China). We expect the refractories




industry demand to be driven by higher steel production and technological

advancement. India’s crude steel production has grown at a CAGR of 5.0%

in FY14-20P to 109.2 MT. It is expected to grow at a CAGR of ~9% to 121

MT in FY21P-23E backed by higher infrastructure spend, strong steel capex

pipeline and expansion in per capita steel consumption. While India’s

refractory production has grown at a CAGR of ~2.3% in FY14-20P to ~1.30

MT, it is expected to grow at CAGR of ~8.3% to 1.43 MT in FY21P-23E amid

low base. Steel production processes have seen a shift from traditional basic

oxygen furnace to electric arc furnace and induction furnaces, which are

more efficient and less quantity of refractories materials.

Average refractory consumption has gone down from 2.2% of crude steel

production in FY09 to 1.2% in FY20. Consequently, refractory realisation per

kg has gone up from | 25.7 per kg in FY09 to ~ | 60 per kg in FY21 led by

process shifts and technological advancements in production.

Exhibit 13: Per tonne consumption of refractories across sectors in India...

C o n s u m p tio n o f r e f r acto r ie s

acr o s s in d u s tr ie s in In d ia

A p p licatio nA vg . r e f r acto r y

co n s u m p tio n p e r to n

Re p lace m e n t C ycle

SteelBlas t Furnace, Electric A rc Furnace, Ladles ,

Pellet, rotary, K lins , Induction Furnace etc

10-12 kgs 20 mins to 2 months

Cement K lins 0.8-0.9 kgs A nnually

G lass G lass Furnace 4-5 kgs Upto 10 years

A luminium Convertors 4-6 K gs 1-10 years

Copper Convertors 3 K gs 1-10 years


Exhibit 14: Sector-wise (%) refractories consumption in India.

70.0%

7.0%

6.0%

4.8%

4.0%3.0%

5.2%

Steel Cement & Lime

Ceramics Glass

Chemicals Non-ferrous metal

Others


Exhibit 15: Steel end use by sector...

52%

16%

12%

10%

3%2%

5%

Building & Infrastructure Mechanical Equipments

Automotive Metal Products

Electrical Equipments Domestic Appliances

Other Transport


Exhibit 16: Refractory as % of steel production vs. realisation.

36.138.6

44.3

52.454.5

58.7 58.7 59.6 60.2 59.956.9

64.0

67.9

1.9% 1.9%

1.6%

1.4%1.3%

1.3%1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

10

20

30

40

50

60

70

80

Refractory realisation per kg

Refractory Production as % of Crude Steel Production [R.H.S.]


Exhibit 17: India crude steel production (MT) trend...

7174

7882

89 90

98103

111 109

103

114

121

12.7%

7.3%

5.1% 5.6%

4.2%

8.9%

0.9%

9.1%

5.3%

7.5%

-1.5%

-5.6%

-10%

-5%

0%

5%

10%

15%

10

20

30

40

50

60

70

80

90

100

110

120

130

India Crude Steel Production (MT)

Crude steel production YoY Growth (%)





Focus on R&D to bring further cost rationalisation…

VIL continues to focus on cost leadership with manufacturing rationalisation

programme bringing improvement in cost base through increasing plant

efficiency and optimising production volumes between plants. It has also

focused on level of automation in production processes to shift patterns,

enabling it to increase productivity.

VIL continued to invest in its global R&D network with expansion of its

research facility at Vishakhapatnam to reinforce its presence in key markets

like India for future growth with increased expertise in robotics and

mechatronics. The R&D laboratory at Vishakhapatnam is being established

for Al-Si monolithic (unshaped) tap-hole clay competency and raw material

qualification for developing new products and business for VIL.

Foreign collaborations: The Kolkata factory of VIL is a highly automated

factory for continuous casting refractories with latest technology imported

from foreign collaborators like Vesuvius Company, US in which Vesuvius Plc

has controlling shares. The Mehsana factory manufactures crucibles,

nozzles, etc, with technology received from Becker & Picante now known as

Vesuvius, Germany. The Vesuvius group also provides latest technology to

monolithic factories at Vishakhapatnam and Mehsana.

Top five raw materials (alumina, silicon carbide, bauxite, zirconia and

graphite) contribute ~62% of total raw material consumed by VIL. Through

R&D and innovation it aims to reduce raw material required per ton of crude

steel production. However, there could be short term supply chain

disruptions of raw magnesia from China owing to pandemic.

Exhibit 18: Material-wise Indian refractory production trend….

20.4%20.2% 22.1% 20.7% 20.2%

11% 11% 10% 11%5.2%

5.0% 4.1%4.0% 4.0%

16.7%

16.4% 16.6% 16.9% 16.7%

23%26% 27% 29% 29%

4.7% 5.5% 5.1%5.0% 5.1%

7.1% 7.1% 7.4% 5.4% 5.6%

0%

50%

100%

FY13 FY14 FY15 FY16 FY17

Others Special products (inc. cc)

Monolithics/ castable/ pre cast blocks Basic bricks & shapes

Silica bricks & shapes High Alumina Bricks & shapes


Exhibit 19: Vesuvius material-wise raw material consumed....

16% 19% 20% 20%

14%15%

15% 16%

11%11%

10% 11%9%

8% 8% 8%7%7% 6% 6%5%4% 4% 4%4% 3% 2% 3%4% 3% 3% 2%

2% 2% 2% 2%

26% 26% 27% 26%

0%

20%

40%

60%

80%

100%

CY13/FY14 CY14/FY15 CY15/FY16 CY16/FY17

Alumina Silicon Carbide Bauxite

Zirconia Graphite Aluminous Cement

Resin Mulcoa Slide Gate Plates


Exhibit 20: Key raw material (magnesite) price moderates from over two-year peak…

Source: RHI Magnesite PPT, Company, ICICI Direct Research




Strong global parent provides edge in customer relationships…

VIL’s parent Vesuvius PLC is a leading global refractory manufacturer with

global market share of ~10%. Vesuvius plc has manufacturing locations

across the world and enjoys leadership position in technology and

innovation. VIL gets latest technology from its parent by paying nominal

royalty, license & trademark fees to the tune of ~1.5% of revenue. The latest

technology gives VIL the competitive advantage needed to maintain a niche

for itself in the Indian refractories industry. Strong parent support has helped

VIL grow faster than the industry.

Due to specialised products, high volumes are consumed by each customer.

Hence, it is important to have strong customer relationships. VIL has

developed close, collaborative relationships with customers with an

extended global manufacturing alignment with customer locations. The

company focuses on gaining fundamental understanding of customers’

processes, delivering systems and products that are mission critical for

demanding applications in which they are used.

Vesuvius Plc is a world leader in supply of refractory products, systems and

solutions that helps its customers improve efficiency and productivity.

Vesuvius’ advanced refractories business unit supplies specialist refractory

materials for lining steel-making vessels such as blast furnaces, ladles and

tundishes, which are subject to extreme temperatures, corrosion and

abrasion. Its main customers are steel producers and manufacturers of steel

production equipment, where its products accompany the steel-making

process from its early steps to the end of production in the rolling mill.

Exhibit 21: Vesuvius Plc: Segment-wise CY19 revenue break-up….

37%

31%

2%

30%

Steel Flow control (Nozzles,

Tube, Changers)

Steel Advanced refractories

(lining, precast)

Steel Digital services

(Sensors & Probes)

Foundry division (filters,

crucibles)


Exhibit 22: Global market share of major refractory players….

15%

10%

6%

4%

4%

3%

58%

RHI Megnesita (NV)

Vesuvius Plc (UK)

Krosaki Harima (JP)

Imerys (FR)

Shinagawa (FP)

Puyang (CN)

Others





Valuations & Outlook:

VIL has maintained a strong margin profile over the years and across

business cycles leveraging its strong network and parentage of Vesuvius Plc

to build market leadership position despite short-term impact of pandemic.

It has outperformed majority of domestic peers on the margin front.

VIL being debt free, derives its consistent RoE through operating leverage

and strong margin profile over the years and across business cycles

leveraging its strong network and parentage of Vesuvius Plc. We expect the

earnings momentum to continue in the long term led by operational

efficiency, product innovation through R&D, while there could be some short

headwinds amid Covid-19. Overall, the company is expected to further

strengthen its leadership position in key refractory products in steel flow

control and advanced refractories. It commands domestic market share of

~11% and expects to gain further. Further, VIL is currently trading at 19x P/E

on CY22E (vs. forward median P/E band of 24x and 10-year business cycle

average P/E of ~21x). We value VIL at | 1445/share, implying multiple of 24x

on CY22E EPS with a BUY rating on the stock.

EBITDA margin comparison with peers

Exhibit 23: EBITDA margin (%) trend of major refractories players...

17.918.3 18.2

15.9

13.6

9.7

12.6

14.1

17.717.3

15.4 15.2

6.5 6.2

9.0

11.010.5

6.0

10.6

13.7

16.9

15.4

14.0

21.0

0

5

10

15

20

25

FY16 FY17 FY18 FY19 FY20 FY21

Vesuvius India* RHI Megnesita India TRL Krosaki IFGL


VIL: One year forward P/E band

Exhibit 24: One year forward rolling P/E band

0

200

400

600

800

1,000

1,200

1,400

1,600

Price 12 16 20 24 28 32 36





Key risk & concerns

Raw material dependence on China…

Overdependence on China is not conducive to India in the long run as it can

disrupt supply chains of critical products needed to make steel and cement.

The Indian refractories industry heavily depends on imports of dead burned

and fused magnesia and alumina from China. Changes in environmental

norms in the past have caused sustained increase in raw material prices for

refractory producers. However, some refractory manufacturers have

magnesia carbon brick manufacturing plants in China -- like Vesuvius, RHI,

Tata Krosaki Refractories, OCL, etc.

Refractory products imported from China…

Imports of refractory products from China are a key issue facing Indian

refractory producers. Around 25-30% of Indian refractories consumption,

including magnesium bricks, are imported from China. Dumping of cheaper

products from China affects the profitability of domestic refractory growth.

High correlation of refractories production to crude steel production….

Approximately 70-75% of refractories are consumed by the steel industry

making it highly dependent on crude steel production. Also, any fall in steel

demand owing to economic slowdown would also affect refractories

production. Any demand slowdown and structural changes in the steel

industry could significantly affect refractories production.

Lower capacity utilisation levels and pricing pressure...

Capacity utilisation in India is ~55-60%, which is lower than the average

utilisation levels in competing markets. Lower capacity utilisation does not

allow operating leverage to translate and affects profitability.

Challenges in refractories installation and management at customer sites

Refractory companies need to interact with customers, provide manpower

for maintaining products at sites. Developing collaborative relationships

with customers, aligning delivery network with customer locations, gaining

fundamental understanding of customer processes and accordingly

delivering products is of critical importance in the refractories industry.




Financial story in charts:

Exhibit 25: Revenue trend...

821.5911.3 925.1 887.0

791.5

1050.3 1162.6

-20%

-10%

0%

10%

20%

30%

40%

0

200

400

600

800

1,000

1,200

1,400


(| c

rore

)

Total revenue ( | crore) YoY Growth (%) [R.H.S.]

Source: ICICI Direct Research, Company

Exhibit 26: EBITDA and EBITDA margin trend

150.5

165.9

147.4

120.7

76.8

113.8

167.7

0

5

10

15

20

0

50

100

150

200


(|

crore)

EBITDA ( | crore) EBITDA Margin (%) [RHS]

Source: ICICI Direct Research, Company

Exhibit 27: PAT and PAT margin (%) trend….

88.991.6 92.5

85.6

53.1

81.7

122.1

0

2

4

6

8

10

12

0

20

40

60

80

100

120

140


(|

crore)

PAT ( | crore) PAT Margin (%) [R.H.S.]


Exhibit 28: RoE & RoCE trend...

15.3

13.9

12.5

10.6

6.3

9.0

12.0

21.821.3

18.2

14.4

7.9

11.3

15.2

0

5

10

15

20

25


(%

)

RoE (%) RoCE (%)





Financial Summary

Exhibit 29: Profit & loss statement (| crore)

(| Crore) CY18 CY20 CY21E CY22E

Net Sales 919 787 1,045 1,157

Total Operating Income 925 792 1,050 1,163

% Growth (Op. Income) (14.4) 32.7 10.7

Other Income 22.8 21.0 23.4 26.3

Total Revenue 948 812 1,074 1,189

Cost of materials consumed 362 314 414 452

Purchase of stock-in-trade 203 153 218 221

Change in inventories (29) 3 7 6

Employee cost 58 65 69 77

Other Expenses 184 181 228 239

Total expenditure 778 715 937 995

EBITDA 147 77 114 168

% Growth (EBITDA) (47.9) 48.1 47.4

Interest - - - -

PBDT 170 98 137 194

Depreciation 28 26 28 31

PBT 142 72 109 163

Tax 50 19 27 41

PAT 93 53 82 122

% Growth (PAT) (42.7) 53.9 49.5

EPS 45.6 26.1 40.2 60.2 v


Exhibit 30: Cash flow statement (| crore) es


Profit after Tax 92.5 53.1 81.7 122.1

Depreciation 27.8 26.2 28.0 30.8

Interest - - - -

Other income (22.8) (21.0) (23.4) (26.3)

Prov for Taxation 49.9 18.5 27.5 41.1

Change in Working Capital (3.1) 40.6 (25.3) (32.1)

Taxes Paid (45.7) (12.1) (27.5) (41.1)

Cashflow from Operating Activities 98.7 105.4 61.1 94.5

(Purchase)/Sale of Fixed Assets (23.5) (15.7) (33.2) (64.9)

(Purchase)/Sale of Investments (8.2) (4.1) (11.3) (6.8)

Other Income 22.8 21.0 23.4 26.3

Cashflow from Investing Activities (9.0) 1.2 (21.1) (45.4)

Changes in Networth (1.4) (1.5) 0.0 (0.0)

Interest - - - -

Dividend paid (14.2) (14.2) (14.7) (16.2)

Cashflow from Financing Activities (15.6) (15.7) (14.7) (16.2)

Changes in Cash 74.1 90.8 25.3 32.9

Opening Cash/Cash Equivalent 345.3 468.5 559.3 584.5

Closing Cash/ Cash Equivalent 419.3 559.3 584.5 617.4 v


Exhibit 31: Balance Sheet (| crore)

es


Share Capital 20.3 20.3 20.3 20.3

Reserves & Surplus 717.5 821.5 888.4 994.3

Total Shareholders fund 737.8 841.8 908.7 1,014.6

Goodwill - - - -

Total debt - - - -

Other liabilities 44.2 58.7 58.7 58.7

Total Liabilities 782.0 900.5 967.4 1,073.3

Gross Block 185.9 232.9 254.9 279.9

Acc: Depreciation 66.6 114.4 138.0 136.9

Net Block 119.3 118.5 117.0 143.1

Capital WIP 26.0 21.3 28.0 36.0

Investments 38.3 52.4 63.7 70.6

Inventory 123.1 117.0 128.8 142.6

Sundry debtors 181.4 163.4 178.7 193.2

Cash 419.3 559.3 584.5 617.4

Loans & Advances 0.3 0.4 0.5 0.5

Inv+Other current assets 16.1 24.4 25.2 33.4

CL& Prov. 143.4 157.5 160.3 164.8

Net Current Assets 596.9 706.9 757.4 822.4

Total Assets 782.0 900.5 967.4 1,073.3


Exhibit 32: Key ratios

(Year-end March) CY18 CY20 CY21E CY22E

EPS 45.6 26.1 40.2 60.2

Cash EPS 59.3 39.1 54.0 75.3

BV 363.4 414.7 447.7 499.8

DPS 7.0 7.0 7.3 8.0

Cash Per Share 32.8 56.4 68.0 67.4

EBITDA Margin 15.9 9.7 10.8 14.4

PBT / Net Sales 12.9 6.4 8.2 11.8

PAT Margin 10.0 6.7 7.8 10.5

Inventory days 48.6 53.9 44.8 44.8

Debtor days 71.6 75.3 62.1 60.6

Creditor days 56.6 72.6 55.7 51.7

RoE 12.5 6.3 9.0 12.0

RoCE 18.2 7.9 11.3 15.2

RoIC 42.6 20.9 32.4 43.5

P/E 24.8 43.2 28.1 18.8

EV / EBITDA 12.7 22.6 15.0 10.0

EV / Net Sales 2.0 2.2 1.6 1.4

Market Cap / Sales 2.5 2.9 2.2 2.0

Price to Book Value 3.1 2.7 2.5 2.3

Net Debt / Equity - - - -

Current Ratio 2.1 1.8 1.9 2.0

Quick Ratio 1.3 1.0 1.1 1.2





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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