1QFY2014 Result Update | Steel

August 19, 2013

Electrosteel Castings
Performance Highlights
Quarterly highlights (Standalone)
(` cr) Net sales EBITDA % margin Adj. net profit

BUY
CMP Target Price
Investment Period
yoy (%)
8.8 236.7 549bp 161.8

`11 `15
12 months

1QFY14
466 38 8.1 45

1QFY13
428 11 2.6 17

4QFY13
495 40 8.1 48

qoq (%)
(5.9) (6.2) (2)bp (5.8)

Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 359 316 0.8 29/10 85,066 1 18,598 5,508 ELST.BO ELSC@IN

Source: Company, Angel Research

For 1QFY2014, Electroste el Castings (ECL) reported an 8.8% yoy jump in topline, while its EBITDA grew by 236.7% yoy. We maintain our Buy recommendation on the stock. Lower costs lead to higher profits: ECLs 1QFY2014 net sales rose by 8.8% yoy to `466cr due to higher realizations in our view. ECL reported an EBITDA of `38cr in 1QFY2014, compared to an EBITDA of `11cr in 1QFY2013, due to lower raw material and power costs and lower other expenditure; the EBITDA margin also increased by 549bp. The companys depreciation costs decreased by 2.7% yoy to `13cr and interest costs declined by 13.0% yoy to `29cr. Therefore, the company posted a PAT of `45cr compared to a PAT of `17cr in 1QFY2013. Other updates: The iron ore mine continues to await stage 2 clearance. The company aims to produce 0.6-0.7mn tonne of coking coal in FY2014. The company has an order backlog of approximately 9 months. Outlook and valuation: We maintain our positive stance on the companys initiatives of venturing into steel making through its associate ESL. Further, the companys 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 from FY2014-15. We maintain our Buy view on the stock with a SOTP target price of `15. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 48.6 9.9 5.5 36.1

Abs. (%) Sensex ELSC

3m (8.1)

1yr 5.3

3yr 3.0 5.3

(35.5) (42.0)

FY2012 2,023 8.0 (27) (0.8) 5.2 0.2 (1.6) 1.5 0.8 15.0

FY2013 2,154 6.5 (24) (0.7) 9.2 0.2 (1.2) 3.6 1.0 10.4

FY2014E 1,976 (8.3) 2 0.1 11.8 172.3 0.1 0.1 3.0 0.9 7.9

FY2015E 2,017 2.1 42 1,792.9 1.2 12.7 9.1 0.1 1.9 3.2 0.9 7.0 Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 E-mail: Bhaveshu.chauhan@angelbroking.com

Source: Company, Angel Research: Note: CMP as of 16, August 2013

Please refer to important disclosures at the end of this report

Electrosteel Castings | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 performance (Standalone)

Y/E March (` cr) Net sales Raw material % of net sales Power & Fuel % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM(%) Other operating income EBIDTA EBITDA margins (%) Interest Depreciation Other income Profit before tax % of net sales Tax % of PBT Profit after tax Adjusted PAT
Source: Company, Angel Research

1QFY14 466 247 52.9 37 7.9 34 7.3 137 29.4 454 97.6 11 2.4 26 38 8.1 29 13 5 1 0.3 1 52.8 1 45

1QFY13 428 232 54.3 35 8.2 31 7.1 137 32.1 436 101.7 (7) (1.7) 19 11 2.6 33 14 9 (27) (6.2) (9) 34.9 (17) 17

yoy % 8.8 6.1 5.2 11.6 (0.5) 4.3 42.1 236.7 (13.0) (2.7) (38.8) (106.7) 161.8

4QFY13 495 282 57.0 37 7.5 37 7.4 118 23.9 474 95.8 21 4.2 19 40 8.1 25 13 57 59 12.0 15 24.9 44 48

qoq % (5.9) (12.5) (0.9) (6.7) 15.7 (4.1) (45.9) 36.8 (6.2) 13.3 4.0 (90.5) (98.0) (95.8) (98.8) (5.8)

FY2013 2,154 1,159 53.8 150 7.0 183 8.5 524 24.3 2,016 93.6 138 6.4 60 198 9.2 126 56 95 112 5.2 24 20.9 (24) (24)

FY2012 2,023 1,091 54.0 144 7.1 159 7.9 603 29.8 1,997 98.7 26 1.3 79 105 5.2 111 57 74 11 0.6 (17) (150.8) (27) (27)

yoy % 6.5 6.2 4.8 14.9 (13.1) 0.9 440.6 (24.4) 89.4 13.4 (1.5) 28.8 889.4 -

Strong operating performance due to lower costs

ECLs 1QFY2014 net sales rose by 8.8% yoy to `466cr due to higher realizations in our view. ECL reported an EBITDA of `38cr in 1QFY2014, compared to an EBITDA of `11cr in 1QFY2013, due to lower raw material and power costs and lower other expenditure; therefore the EBITDA margin also increased by 549bp. The companys depreciation costs decreased by 2.7% yoy to `13cr and interest costs declined by 13.0% yoy to `29cr. Therefore, the company posted a PAT of `45cr compared to a PAT of `17cr in 1QFY2013.

August 19, 2013

Electrosteel Castings | 1QFY2014 Result Update

Exhibit 2: Net sales rise 8.8% yoy in 1QFY2014

520 500 480 479 503 473 10 495 466 428 8 6

(` cr)

440 420 400 380 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 % yoy (RHS) 1QFY14 Net revenue (LHS)

2 0 (2) (4)

Source: Company, Angel Research

Exhibit 3: EBITDA stood at `38cr

90 80 70 60 54 45 50 40 30 20 10 0 (10) 1QFY12 3QFY12 (1) EBITDA (LHS) 1QFY13 3QFY13 5 11 47 40 81 18 16 14 12

Exhibit 4: Net profit stood at `45cr

60 50 40 30 28 19 25 17 33 48 45 12 10 8 6

(` cr)

(%)

38

10

(` cr)

6 4 2 0 1QFY14 (2)

10 (11) 0 (10) (20) 1QFY12 3QFY12 Adj. net profit 6 1QFY13 3QFY13 1QFY14

2 0 (2) (4)

EBITDA margin (RHS)

Adj. net profit margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

August 19, 2013

(%)

20

(%)

460

Electrosteel Castings | 1QFY2014 Result Update

Investment arguments
Backward integration initiatives to aid margin growth
ECL is on track to have an integrated business model in place through a) backward integration initiatives led by the allocation of mines and b) focus on beefing up its logistics infrastructure to further reduce costs. The company was granted mining lease for the Parbatpur coking coal mine in Jharkhand in January 2008. The mine is estimated to have blast furnace grade reserves of 231mn tonne. The company expects to commence meaningful production from FY2014. For its iron ore requirements, ECL had received forest stage-I clearance for its iron ore mines located at Kodolibad, West Singhbhum, Jharkhand, from Ministry of Forests and Environment (MOEF) during February 2012. The mine has reserves of 91mn tonne with 64% Fe content. ECL expects to commence production from this mine during CY2013. However, procedural delays cannot be ruled out in our view.

ECL to turn into a fully integrated player

With the upcoming production of coking coal and iron ore, ECL will turn into a fully integrated steelmaker. Although there is lack of clarity on the timelines for the commencement of meaningful production from its coking coal and iron ore mines, ECLs margins are expected to be significantly higher than its peers once it reaches optimum production capacity at its mines. Moreover, ECLs associate, ESL (39.33% stake) with 2.5mn tonne of steel capacity is expected to benefit the most, as ECL will supply coking coal and iron ore from its mines to ESL at subsidized rates (ECLs COP + 20%).

Outlook and valuation

ECLs production ramp-up from its coking coal mine has faced a few hurdles and its steel capacity expansion via ESL has also been delayed. Nevertheless, the company is now on track to ramp up production of coking coal during FY2014, while its steel project (ESL) is expected to commence meaningful commercial production from FY2014-15. We have a positive stance on ECLs initiatives of gradually venturing into steel making through its associate ESL. Furthermore, the companys 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 from FY2014-15. We recommend Buy on the stock with a SOTP target price of `15.

August 19, 2013

Electrosteel Castings | 1QFY2014 Result Update

Exhibit 5: SOTP valuation (FY2015E)

` cr Multiple applied FY2015 EBITDA Implied EV (1) CWIP@ 0.8x (2) Net debt less: debt assumed for ESL Net debt after adjusting for ESL debt (3) Value of standalone equity [(1)+ (2)- (3)] Investment in ESL (4) less: debt assumed for ESL (5) Equity value in ESL [(4)-(5)] Stake in Lanco Industries (20% discount to CMP) Target Price (Standalone +ESL stake+ Lanco stake)
Source: Company, Angel Research

`/ share

3.5 255 893 794 1,438 490 948 249 700 490 210 45 -

7 6 1 15

Note: For our SOTP valuation, we have excluded debt (while calculating net debt) apportioned for funding ESL while valuing Standalone business. Also, while calculating ECLs stake in ESL, we have deducted proportionate debt before we value it using P/BV multiple.

Exhibit 6: Recommendation summary

Companies Prakash Sarda GPIL Electrosteel Cast.
Source: Angel Research

CMP 30 82 69 11

Target 37 98 78 15

Reco. Buy Buy Buy Buy

Mcap Upside (` cr) 385 268 214 359 23 19 13

P/E (x) 2.2 3.2 1.9 2.1 3.0 1.5 9.1

P/BV (x) 0.2 0.3 0.2 0.1 0.2 0.3 0.2 0.1

EV/EBITDA (x) 2.7 3.3 3.4 7.9 2.4 2.8 2.7 7.0

RoE (%) 9.1 9.5 11.6 0.1 8.7 9.5 13.0 1.9

RoCE (%) 8.3 8.9 11.4 3.0 8.2 9.3 12.1 3.2

(`) price (`)

(%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

33 172.3

Company background
ECL is a Kolkata-based manufacturer of DI pipes and fittings and CI pipes used mainly for water supply and sewerage systems. The company has facilities at Khardah and Haldia in West Bengal and Elavur in Tamil Nadu. ECL has all the required clearances to operate a coking coal mine (reserves 231mn tonne) in Parbatpur, Jharkhand. It is also at an advance stage in getting clearance for its iron ore mine (reserves 91mn tonne) in Kodolibad, Jharkhand.

August 19, 2013

August 19, 2013

(`) (` cr)

(` )

20

40

60

80

100

120

140

(40)

(20)

50
Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

1,000

1,500

2,000

2,500

3,000

100

150

200

250

300

350

400

500

0
3x
Apr-09 Jul-09 Oct-09 Jan-10

Oct-07

Jan-08

Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

Apr-08

Exhibit 8: P/E band

Exhibit 9: P/BV band

Jul-08

Exhibit 7: EV/EBITDA

Oct-08

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Jan-09

0.5x
8x
Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

1.0x

Apr-09

Jul-09

Apr-09 Jul-09 Oct-09

Oct-09

Jan-10

2.5x

Jan-10 Apr-10 Jul-10 Oct-10

1.0x
13x 18x
Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Apr-10

Jul-10

Oct-10

4.0x

Jan-11

Jan-11 Apr-11 Jul-11

Apr-11

1.5x

Jul-11

5.5x

Oct-11

Oct-11 Jan-12 Apr-12 Jul-12

Jan-12

Apr-12

2.0x

Jul-12

7.0x

Oct-12

Oct-12 Jan-13 Apr-13 Jul-13

Jan-13

Apr-13

Electrosteel Castings | 1QFY2014 Result Update

Jul-13

Electrosteel Castings | 1QFY2014 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Extraordinary Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 1,580 30 1,610 (18.5) 1,280 646 503 131 330 13.4 20.9 54 276 16.4 17.5 52 87 28.1 312 57.2 312 105.2 33.7 206 28 1 234 234 73.1 14.8 7.3 6.8 59.9 1,871 34 1,905 18.3 1,604 897 558 149 302 (8.6) 16.1 56 246 (11.1) 13.1 86 62 27.9 221 (28.9) 221 61.1 160 18 178 178 (24.0) 9.5 5.4 5.1 (24.0) 2,023 79 2,102 10.3 1,997 1,091 747 159 105 (65.3) 5.2 57 48 (80.5) 2.4 111 74 654.0 11 (94.9) 11 (17.1) 28 (54) 1 (27) (27) (1.3) (0.8) (0.8) 2,154 60 2,214 5.3 2,016 1,159 674 183 198 89.4 9.2 56 142 196.7 6.6 126 95 85.1 112 889.4 112 23.5 20.9 89 (112) 1 (24) (24) (1.1) (0.7) (0.7) 1,976 63 2,038 (7.9) 1,806 967 649 191 232 17.4 11.8 95 137 (3.5) 7.0 173 100 155.5 64 (42.5) 64 19.3 30.0 45 (43) 2 2 0.1 0.1 0.1 2,017 66 2,083 2.2 1,828 965 662 200 255 9.8 12.7 108 148 7.4 7.3 184 105 151.9 69 7.5 69 20.8 30.0 49 (7) 42 42 1,792.9 2.1 1.3 1.2 1,792.9

27.6 (150.8)

August 19, 2013

Electrosteel Castings | 1QFY2014 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability Other long term liabilities Long term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Other non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,067 1,300 299 208 793 332 969 2,971 860 322 538 397 936 382 551 438 2 1,425 72 1 1,578 205 139 1,182 866 713 3,203 1,030 445 586 664 14 1,074 75 11 1,906 169 274 1,462 1,030 876 3,300 1,639 505 1,133 993 14 982 75 11 1,866 346 172 1,255 570 1,297 4,518 2,089 600 1,488 643 14 939 75 11 2,089 659 172 1,165 671 1,418 4,601 2,189 708 1,481 593 14 932 75 11 2,226 754 189 1,189 671 1,555 4,673 33 1,588 1,621 5 1,298 47 2,971 33 1,714 1,747 5 1,393 44 4 9 3,203 33 1,663 1,695 11 1,559 21 4 10 3,300 33 2,193 2,226 9 2,228 34 4 10 4,518 33 2,176 2,209 9 2,328 34 4 10 4,601 33 2,199 2,232 9 2,378 34 4 10 4,673 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

August 19, 2013

Electrosteel Castings | 1QFY2014 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 FY2011 FY2012 312 54 172 (34) (115) 389 (174) (307) 13 (469) 15 359 (41) (50) 283 203 95 299 223 56 (100) 50 (59) 170 (119) (257) (66) (442) 0 277 (41) (96) 140 (132) 215 82 11 57 (399) 101 (25) (255) (238) 333 38 134 4 266 (41) (109) 120 (2) 82 81 FY2013 FY2014E FY2015E 1,112 56 (450) (962) (11) (255) (303) 154 (130) (279) (0) 180 (17) 97 260 (275) 81 278 64 95 192 (19) 332 (100) (100) 100 (19) 81 313 278 591 69 108 (42) (21) 114 (50) (50) 50 (19) 31 95 591 686

August 19, 2013

Electrosteel Castings | 1QFY2014 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.5 2.3 5.3 0.5 2.8 2.9 0.7 11.5 0.4 0.8 8.6 1.1 0.7 6.4 0.8 0.6 5.6 0.8 1.9 115 99 89 212 2.1 117 76 112 115 2.1 135 95 130 110 1.6 130 95 130 137 1.1 120 95 130 160 0.9 120 95 130 151 10.0 13.8 15.5 8.0 11.5 10.6 1.5 2.1 (1.6) 3.6 5.4 (1.2) 3.0 4.5 0.1 3.2 4.7 1.9 17.2 66.3 0.7 7.5 2.9 0.5 9.7 12.9 67.1 0.7 6.2 3.2 0.5 7.7 2.3 85.0 0.7 1.4 3.8 0.7 (0.3) 6.4 82.0 0.6 2.9 5.9 0.8 0.7 6.7 70.0 0.5 2.6 5.3 0.7 0.7 7.1 70.0 0.6 2.8 5.5 0.6 1.0 7.3 6.8 8.3 1.3 49.6 5.4 5.1 6.8 1.3 53.4 (0.8) (0.8) 0.9 1.3 51.9 (0.7) (0.7) 0.9 0.5 68.1 0.1 0.1 2.8 0.5 136.4 1.3 1.2 4.3 0.5 267.9 1.6 1.3 0.2 11.4 0.7 3.4 0.4 2.1 1.6 0.2 11.4 0.7 4.0 0.4 12.9 0.2 11.4 0.8 15.0 0.5 11.9 0.2 4.5 1.0 10.4 0.5 172.3 3.9 0.1 4.5 0.9 7.9 0.4 9.1 2.5 0.1 4.5 0.9 7.0 0.4 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

August 19, 2013

10

Electrosteel Castings | 1QFY2014 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Electrosteel castings No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 19, 2013

11