Electrosteel Castings Ltd Stock Research Report by HDFC Securities
Sector: Metals – Castings/Forgings
CMP Rs. 47.15, Target Rs. 57 (21% upside potential)
Target Period: 12 Months
Electrosteel Castings Ltd Stock Research Report:
Electrosteel Castings Ltd. (ECL) was incorporated in 1955 and is a pioneer in the manufacturing of Ductile Iron Pipes (DI Pipes) in India. The company caters to various government bodies as well as large marquee public companies in India. ECL has established dominant position in the domestic ductile pipes industry with significant backward integration. It also has a strong foothold in the international market catering to customers across Europe, USA, South America, Middle East, South East Asia and Africa. The plants of ECL are located in eastern and southern India, tapping different markets in the country. The company has manufacturing units at the following locations – Khardah, Haldia and Bansberia in West Bengal, Elavur in Tamil Nadu and Srikalahasthi in Andhra Pradesh.
ECL is undertaking a capacity expansion in the DI pipes segment increasing the capacity from ~7 LTPA to ~9 LTPA by March 2024. The company is expected to generate steady cash flows and improved profitability over the medium term, backed by its established market position, high operating efficiency and diversified manufacturing base catering to various customers. Merger of Srikalahasthi Pipes Limited (SPL) with ECL effective from 31st December 2021 has led to economies of scale as well as more than ~24% of the total domestic market share in terms of operational capacity.
Valuation & Recommendation:
There is a strong demand for DI pipes given the government’s focus on public infrastructure and the Jal Jeevan and AMRUT missions. We like the company for its market leadership in the domestic ductile iron pipes industry and robust operating parameters driven by backward integration and healthy cash generating ability. Both ECL and SPL have high level of backward integration in terms of a sinter plant, sponge iron unit, coke oven plant, power plant, ferroalloy plant and cement plant. This high level of backward integration has aided the group in maintaining the high quality of its products, leading to better profitability. With the upcoming capacity expansion, ECL is expected to further consolidate its leadership position in the market. We expect the company to grow its Revenue/EBITDA/PAT at a CAGR of 20%/15%/13% over FY22-25E. Q4FY23 numbers could be better because of lower raw material costs.
We think the base case fair value of the stock is Rs 52.75 (6.25x FY25E EPS) and the bull case fair value is Rs 57 (6.75x FY25E EPS) over the next two-three quarters. Investors can buy the stock in the band of Rs 47 – 48 (5.6x FY25E EPS) and add more on dips in the band of Rs 41.5 – 42.5 (5x FY25E EPS).
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