Refractory Edelweiss

Ref r act or y Ref r act or y
June 24, 2014 June 24, 2014

G a i n i n g g r a v i t a s G a i n i n g g r a v i t a s
Edelweiss Securities Limited
Shradha Sheth
+91 22 6623 3308
shradha.sheth@edelweissfin.com
Manoj Bahety, CFA
+91 22 6623 3362
manoj.bahety@edelweissfin.com

We are delighted to initiate on the Refractory sector under our mid-cap series, Banyan. Banyan signifies Growth Without
Maintenance and under the series we endeavour to present stocks not widely covered owing to low management access
/liquidity, but which possess robust long-term fundamentals and structural drivers. Considering the low management
access and long-term structural drivers, we will not release regular maintenance updates on the said stocks.

Our selection framework is differentiated in this series and not clouded by valuations alone. Some of the important
attributes of stocks under the series are:
1. Good corporate governance history.
2. Healthy balance sheet with robust cash flows.
3. May have low liquidity.
4. Low or no management access.
5. Not widely covered.
6. Low institutional holding.

Our latest initiations under the Banyan Series are Orient Refractories (ORL) and Vesuvius India (VIL). The companies, by
virtue of their dominant positions in the high growth and profitable steel flow control segment, are domestic market
leaders. A vibrant product portfolio in conjunction with technology prowess renders them the preferred suppliers to large
integrated steel players right from the capacity formulation stage.

We perceive humungous growth opportunity in the domestic steel industry predominantly stemming from Indias
aspiration to become the second largest producer globally from the current No.4 and the huge under penetration at mere
one fourth the world average and one tenth Chinas. Also, increasing shift of production towards large integrated steel
producers with customised refractory requirements will favour players like VIL and ORL who are equipped with strong
product portfolios underpinned by illustrious global parentage. Moreover, being leading players in the fast growing steel
flow control segment, these companies are in a sweet spot to reap the benefits therein. Hence, with expected uptick in
steel demand and eventual capacity uptick, we estimate ORL and VIL to clock 20% and 16% earnings CAGR over FY14-16E
and CY13-15E, respectively. These companies are also blessed with robust financial metricshigh return ratios (average
core RoCE of ~45%, RoE of ~26%)and are cash rich with net cash per shareORL and VIL at INR1.5 (2% of current market
cap) as on FY14 and INR52 (8% of current market cap) as on CY13, respectively. We initiate coverage with BUY
recommendations on ORL and VIL with target prices of INR115 and INR870, implying upsides of 55% and 32%, respectively.

As always, we await your valuable feedback.

Regards
Nischal Maheshwari
Co-Head Institutional Equities & Head Research

1

Refractory
Executive Summary

We perceive humungous growth potential in Indias refractory
industry. Our optimism is firmly entrenched in our
expectation of an uptick in cyclical driverssteel consumption
and eventually investment cycleover the medium term.
Further, structural drivers will also work their magic over the
long term as: (a) Indias steel industry is at an inflection point
being the fourth largest and aspiring to be the second largest,
with per capita consumption of 57kg, mere one fourth of
worlds average (217kg) and one tenth of Chinas average (447kg); (b) the
National Steel Policy, which has been devised to spur Indias steel capacity 3x
to 300mtpa by 2025-26E; and (c) shift in steel production favouring primary
steel makers with customised refractory needs bodes well for the industry.
Large scale infrastructure expansion plans and target to raise per capita steel
consumption portend unprecedented growth potential in the Indian steel
industry over the next 10 years. Hence, the expected uptick in steel
consumption and eventually investment cycle are bound to spur the
refractory industry.

Vibrant product portfolios with technology expertise riding global parentage
render companies like Orient Refractories (ORL) and Vesuvius India (VIL), the
preferred suppliers to integrated steel players right from the capacity
formulation stage. ORL and VIL are expected to clock 20% and 16% CAGR in
earnings over FY14-16E and CY13-15E, respectively. We initiate coverage with
BUY recommendations on ORL and VIL with target prices of INR115 and
INR870, implying upsides of 55% and 32%, respectively.

Secular drivers: Infra boost, National Steel Policy to spur demand
China, which contributed a mere 15% to global crude steel production in 2000, currently
contributes 45% led by huge investment scale up in the country over the past 14-15 years.
The Indian steel industry is at a similar juncturecurrently, it contributes a mere 4.8% to
global steel production. However, humungous infrastructure expansion plans under the
Twelfth Five Year Plan (2012-17) at USD1tn (10% of GDP versus 5% of GDP in Tenth Five
Year Plan) and the National Steel Policys target to enhance the countrys steel capacity 3x
to 300mt and raise per capita steel consumption are bound to armour India to become the
worlds second largest steel producer. Moreover, demand for higher quality and customised
refractory requirements with shift in steel production in favour of primary steel makers
provides a structural opportunity to players with established product portfolios. Also, the
thin casting market at 10mtpa, which is ~15% of the refractory industry, has the potential to
grow 50% in absolute terms based on the dynamics of the industry. Additionally, massive
capital outlay in steel is expected to propel huge structural opportunity for the refractory
industry. Global steel majors making India a manufacturing hub offers further
unprecedented growth opportunity.

(Click here for
video clip)

2

Refractory
Cyclical drivers: Booming steel demand a potent growth driver
Uptick in the steel industry is a lynchpin of the refractory industry. Steel demand grew a
modest 0.5% in FY14 compared to 2.0% in FY13. Cumulatively, FY13-14 steel demand surge
was amongst the weakest since FY81. Interestingly, historical data analysis indicates that
India has never faced more than two continuous years of slow steel demand, and more
importantly, there has typically been a sharp double-digit rebound after a period of sharp
slowdown. Though we are currently forecasting 6% demand growth over FY15-16, if
demand follows historical precedents, our demand numbers will be on the lower side. In
fact, progress on stalled/half-completed projects alone would be enough for steel and
thereby refractory demand to surge in years 1 and 2 (FY15-16E). Post that, a new
investment cycle would be necessary for the demand to sustain.

Vibrant product portfolios, tech expertise lend competitive advantage
ORL and VIL have carved a niche with dominant positions in the refractories market,
anchored by their vibrant product portfolios along with technology expertise. VIL commands
a robust ~33% market share in the most profitable steel flow control segment. Strong global
parentage provides expertise and global processes to this company which new players find
difficult to replicate. ORL commands a robust ~33% market share in the overall steel flow
control segment and is a dominant player among smaller domestic steel companies. Global
parent RHI provides it the muscle to approach bigger steel mills to garner higher market
share.

Robust financial metrics
The industry has strong financial metrics: (1) high return ratios (average core RoCE of ~45%,
RoE of ~26%); and (2) strong cash rich companies with net cash per shareORL and VIL at
INR1.5/share (2% of current market cap) as on FY14 and INR52/share (8% of current market
cap) as on CY13, respectively. With robust cash flow generation, we expect ORLs cash per
share to be augmented 4x over FY14-16E to INR6 in CY15E (8% of current market cap) and
VILs 2x over CY13-15E to INR104 in CY15E (16% of current market cap).

Outlook and valuations: Strong investment case; initiating with BUY
ORL and VIL will be strong beneficiaries of the uptick in the investment cycle and thereby
the steel industry in India. This, in conjunction with strong product portfolios, will derive
huge benefits of growing per capita consumption of steel in the country. ORL and VIL are
trading at 12x FY16E and 15x CY15E EPS respectively, at a discount of up to ~25% to VILs
historical higher band valuations of 20x. We initiate coverage with BUY on ORL and VIL
valuing them at P/E of 18x FY16E and 20x CY15E earnings, to arrive at target prices of
INR115 and INR870, implying upside of 55% and 32%, respectively.

3

Refractory
Contents

Executive summary .................................................................................................................. 1
At a glance ............................................................................................................................... 4
Refractory: Structural opportunity - Flow edge ....................................................................... 5
Indian steel sector: Humungous potential to benefit refractory sector ........................... 5
National Steel Policy: Landmark development ................................................................. 7
XII Five Year Plan to spur infrastructure spending............................................................ 7
China could lose steam given overcapacity issues and restructuring ............................... 8
Adoption of advanced technology to boost growth ......................................................... 8
Customised refractory requirements to spur industry ..................................................... 9
Replacement trend in steel industry driving demand ...................................................... 9
Import substitution to drive monolithic manufacturing ................................................. 10
Cyclically, steel consumption in India at historic low ..................................................... 10
Refractory industry: Overview ............................................................................................... 11
Steady long-term financials.................................................................................................... 18

Companies (Initiating Coverage)
Orient Refractories ................................................................................................................ 21
Vesuvius India ........................................................................................................................ 45

4

Refractory

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5

Refractory
Refractory: Structural opportunity - Flow edge

Demand drivers: Structurally and cyclically well poised: The Indian refractory
sector enjoys advantages of: (a) humungous opportunity in the countrys steel
industry, which is at an inflection point as it is the fourth largest producer of
steel globally, harbouring aspirations of becoming the second largest over the
next few years; (b) sizeable growth potential as per capita consumption of
steel at 57kg is a meagre one fourth of worlds average (217kg) and one tenth
of Chinas average (447kg); (c) the National Steel Policy devised to enhance
Indias steel capacity 3x to 300mtpa by 2025-26; and (d) shift of steel
production in favour of primary steel makers with increasing quality, services
and customised refractory needs to ensure maximum safety, quality and
productivity.

Indian steel sector: Humungous potential to benefit refractory sector
The Indian steel industry is estimated at USD57bn as at FY14 and is the fourth largest in the
world in terms of volume, accounting for ~4.8% of global steel production. Drawing on the
East-wards shift of the global steel industry and the countrys growth metrics, the domestic
steel sector is expected to clock 7% CAGR in capacity till FY17E to 124mt. Strongest driving
factor will be the growing per capita consumption of steel, which is currently abysmally low
compared to the global benchmark. Consequently, the refractory industry is bound to be a
big beneficiary of the expected huge uptick in the steel industry. Within sub-segments, the
10mtpa thin cast market, which constitutes ~15% of the industry, is expected to grow at the
fastest clip of ~50%, riding capacity expansion plans of players and dynamics of the steel
industry favouring this segment. This will favour players like Vesuvius India (VIL) and Orient
Refractories (ORL), which are concentrated in the segment in terms of product positioning,
and enable them to outperform steel industry growth.

India is currently the fourth largest producer of crude steel in the world and harbours
aspirations of becoming the second largest by 2015-16. In 2012, the countrys per capita
steel consumption was a meagre 57kg against the world average of 217kg and Chinas 477kg.
This indicates high potential for increase in per capita steel consumption and potential
unprecedented expansion of the steel industry.

Drawing on the East-wards shift of
the global steel industry and the
countrys growth metrics, the
domestic steel sector is expected
to clock 7% CAGR in capacity till
FY17E to 124mt
Indias steel industry at an
inflection point being the fourth
largest producer globally and
aspiring to be the second largest
over the next few years
Continuous casting refractories

6

Refractory
Chart 1: Country-wise per capita consumption of steel

Source: Ministry of Steel (MoS)

India has lagged other major steel producing countries in terms of intensity of steel use in
overall economic activities (i.e., per unit of GDP) or per capita consumption of steel despite
clocking a robust 8% per annum production growth over the past five years. Improvement in
both these factors can further spur growth.

Table 1: India hugely under penetrated in steel despite rising consumption (kg)

Source: MoS

Chinas dominance in steel is apparent from its share in global crude steel output. Today, it
produces ~48% of global steel output compared to 15% in 2000; the jump was led by huge
investment scale up in the country over the past 14-15 years. The Indian steel industry is at
a similar juncturecurrently, it contributes a mere 4.8% to global steel production.
However, humungous infrastructure expansion plans under the Twelfth Five Year Plan
(2012-17) at USD1tn (10% of GDP versus 5% of GDP in Tenth Five Year Plan) and the
National Steel Policys target to enhance the countrys steel capacity 3x to 300mt and raise
per capita steel consumption are bound to armour India to become the worlds largest steel
producer, which will, in turn, be strong drivers of the refractory industry.

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Countries 2005 2006 2007 2008 2009 2010 (P)
CAGR (%)
(2005-10)
Chi na 266 287 320 327 409 427 12.4
S. Korea 982 1,043 1,144 1,211 936 1,077 1.5
Japan 602 620 637 612 416 503 (3.0)
USA 357 401 359 324 193 258 (7.1)
Russi a 205 246 286 252 178 256 5.7
Ukrai ne 118 143 174 150 87 121 (0.1)
Germany 428 476 518 514 343 441 0.0
Indi a 37 41 46 45 48 52 7.8
Worl d (average) 174 188 199 194 181 203 3.7
Indias per capita steel
consumption is at a meagre 57kg,
one-fourth of the world average of
217kg and one-tenth of Chinas
477kg
Huge investment boom in China
has seen its steel output rising to
~48% of global output from a
mere ~15% in 2000;

Indian steel industry is at a
similar juncture - currently
contributes a mere ~4.8% to
global steel production

7

Refractory
Chart 2: Chinas giant leap in global steel industry in past decade and half

Source: MoS

The key ongoing steel projects in India will take its total steel capacity from about 104mtpa
currently to 124mtpa over the next two years.

Table 2: IndiaAbout 20mt capacity will get commissioned over next two years

Source: Companies

National Steel Policy: Landmark development
The National Steel Policy 2012 was devised with an objective of enhancing Indias crude
steel capacity 3x by 2026 to 300mtpa by attracting investments from both domestic and
foreign players, and facilitating speedy implementation of new plants. The basis of this was
~9-10% annual growth. Even assuming slow GDP CAGR of ~6-8% over FY14-26, India will
require ~180-225mt crude steel capacity by that year. This implies that even assuming the
base case of a 7% steel demand CAGR, India will need to set up 75mtpa of additional crude
steel capacity over the next 12 years to be self sufficient. This is over and above the 20mtpa
of projects in progress. Assuming that the cost of setting up a new greenfield plant is about
USD1,000/t, the country will need USD75bn of investments in new steel capacity over the
next 12 years. The Ministry of Steel has been proactive in facilitating the establishment of
new plants and evaluating ideas such as setting up of new capacity as special purpose
vehicles.

XII Five Year Plan to spur infrastructure spending
Infrastructure spending in the XII Five Year Plan at USD1tn is estimated to be 6x that spent
in the X Plan (USD140bn) and twice that in XI Plan (USD400bn). Allocation to infrastructure
China
15%
Japan
12%
India
3%
Other Asia
11%
EU (27)
22%
Other
Europe
2%
CIS
11%
NAFTA
16%
Africa
2%
Middle
East
1%
Central
and South
America
5%
Company Capacity expansion (mt) Status
SAIL 8.0 Expected commi si oni ng over FY15-16
Tata Steel 3.0 Target commi si oni ng over FY15
JSW Steel 1.7 Target commi si oni ng over FY15-16
RINL 3.3 Neari ng compl eti on
Bhushan steel 2.5 Started tri al runs
JSPL 1.6 Started tri al runs
Total 20.1
China
42%
Japan
8%
India
5%
Other Asia
11%
EU (27)
12%
Other
Europe
2%
CIS
7%
NAFTA
8%
Africa
1%
Middle
East
1%
Central
and South
America
3%
National steel policy targets to
enhance the countrys steel
capacity by 3x over FY14-26 to
300mtpa assuming ~9-10% annual
growth

Even assuming slow GDP CAGR of
~6-8% over FY14-26, India will
require ~190-235mt crude steel
capacity by that year

8

Refractory
spending will increase from 5% of GDP in X Five Year Plan to ~10% of GDP in the XII Five Year
Plan. A rough estimate of incremental demand for steel in the country works out
approximately to 40mt in infrastructure alone. Currently, the domestic steel industrys
capacity is at ~100mtpa. The XII Five Year Plan (2012-17) envisages steel sector, which is
considered the backbone of the industrial sector, touching 142.3mt capacity by 2017.

China could lose steam given overcapacity issues and restructuring
China is undoubtedly a lynchpin of the global steel industry. According to the World Steel
Association, global steel production grew 3.5% in 2013 versus 1,607mt in 2012, with China
growing 9.9% to 779mt; global production, excluding China, was flat at 828mt. Growth came
primarily from Asia, the Middle East and India, whilst crude steel production in the
European Union, South America and NAFTA dipped compared to 2012. While steel output
has stagnated at roughly 361mt since 2010 in advanced economies, it has risen by some
175mt to approximately 1.25bt in emerging markets during the same period, primarily
attributable to the ongoing rapid development of steel output in China. The average
increase in volume by approximately 15% in this period has led to overcapacity of ~250mt
across the world.

In China, the new government is trying to restructure the steel industry and shift growth
from infrastructure driven investment (long products) to domestic consumption (flat steel)
driven investments by means of structural reforms. Excess capacities, which are estimated
at roughly 30% for the steel industry, will be reduced and production of higher-grade,
knowledge-based products will be promoted. An action plan was introduced in July 2013 to
restrict production and decommission production capacities in heavy industry and serves as
a signal to Chinese industry to increase its adaptability. Hence, Chinas metrics become
critical to Indias growth and profitability with production rebalance towards India in the
emerging economies.

Adoption of advanced technology to boost growth
While refractories represent a relatively small proportion of the input costs of customers
(e.g., less than 1% for a steel producer), their performance is critical in their production
processes. Therefore, customers demand high quality and consistent products for these
most demanding applications to ensure maximum safety, quality and productivity. This,
along with growing drive for adoption of high technology products by steel companies to be
competitive with global companies, will drive strong growth of refractory players with
established technology. The Ministry of Steel has directed major PSUs to form
collaborations to develop the necessary technology for production of high-grade steel to
meet domestic demand and reduce reliance on imports. Steel Authority of India (SAIL) and
Rashtriya Ispat Nigam (RINL) have been asked to sign memorandums of understanding
(MoU) or joint venture agreements for development of technology for high-grade steel.
Indian steel makers rank relatively low on the special steel front compared to their
counterparts in Japan or South Korea, which is to their disadvantage as India has free trade
pacts with these countries. Hence, to efficiently compete, most players are trying to
improvise their mix.

Restructuring of steel industry by
the Chinese government to lead to
reduction of excess ~30% steel
capacity in turn making it critical to
Indias growth and profitability
Most Indian steel players are trying
to efficiently compete by
improving their product mix

9

Refractory
Customised refractory requirements to spur industry
Domestic steel production has been steadily shifting towards primary producers with large
furnaces and multiple plants. Expected growth rate of primary producers, accounting for
~56% of overall steel production by FY16E, is higher at 9% CAGR over FY13-16E versus 6%
for the entire industry. With customised refractory needs of primary steel producers, we
expect more business in favour of established players like VIL and ORL. Primary producers
generally prefer long-term relationships with large refractory players (compared to smaller
producers) to receive post installation services as well as long-term repairs and maintenance
services in addition to high quality technologically driven products.

We expect players like VIL and ORL to register higher growth due to requirements of bigger
producers:
Adoption of higher priced, more advanced, but lower volume refractories by steel
makers.
Focus on extensive maintenance of furnace by steel producers to extend the life of
their furnace rather than opting for complete realigning. This has built a case for low-
cost forms like gunning mixers by taking business away from higher-cost bricks
manufacturers.
The emphasis is shifting from mere cost cutting and longer lasting goods to custom-
designed solutions for both new installations and for major maintenance-repair
assignments.

Replacement trend in steel industry driving demand
Refractory application and consumption favour replacement dynamics for 70% of the
business, leading to non-cyclical growth. Steel making requires maximum amount of
refractories (10-15kg/tonne) with replacement requirement ranging from 20 minutes to 2
months. Steel industry demands complete refractory management and services driven
solutions from refractory makers. While cement industry is the next big user with annual
replacement requirement, non-ferrous and glass industries have longer replacement cycles.

Table 3: Refractory consumption dynamics across industries

Source: RHI

Key industry Application Replacement Per ton consumption Refractory requirements
BF-BOF, EAF, Casti ng 20 mi nutes to 2 Gl obal avg - 10-15Kgs. Consumabl e product - Systems and sol uti ons for compl ete
Ladl es, Inducti on
Furnaces,
months Indi a avg - 15 Kgs refractory management
Pel l et rotary Ki l ns
Investment goods - Longer repl acement cycl es, Customi zed
sol uti ons based on the speci fi c requi rements of vari ous
i ndustri al
producti on processes, compl ete l i ni ng concepts
Gl ass Gl ass furnace upto 10 years 4kgs
Al umi ni um - 6 Kgs,
Copper - 3 Kgs
Steel
Cement Ki l ns Annual l y 1 kgs
Non ferrous Converter 1-10 years
Steady shift in steel production
towards large integrated producers
with customised refractory
requirements will lead to strong
growth for established players like
VIL and ORL

10

Refractory
Import substitution to drive monolithic manufacturing
The domestic refractory industry faces competition from imports (especially from China).
Imports as a percentage of production stood at ~39% in FY11, thereby keeping domestic
refractory producers capacity utilisation subdued. With sharp depreciation in INR since
FY11, we believe the industry dynamics have turned in favour of domestic producers who
are in a better position to replace imports (as landed costs have increased). We also note
that monolithics and others constitute between 35-50% (2-3 lakh tpa on an average) of
overall imports into India and can be easily replaced by domestic producers like VI who are
focusing increasingly on bolstering production in this segment.

Chart 3: Imports keeping production under check

Source: MoS

Cyclically, steel consumption in India at historic low
FY14 steel demand grew a modest 0.5% after growing 2% in FY13. Cumulatively, FY12-14
steel demand growth was one of the weakest since FY81 (FY90-92 was previous weakest
period). Also, growth has remained extremely low in the refractory industry over the past
two-three years due to pressure on steel consumption and production, lack of growth-
oriented policies and economic slowdown. Historical analysis indicates that after a period of
sharp slowdown, demand bounces back with double-digit growth rates. We are currently
forecasting ~6% demand growth for FY15-16, but if history is repeated, our demand
numbers could turn out to be on the lower side. Also, steel has seen limited capacity
additions and higher demand will have to be met via restart of shut capacities. Thereby,
with a strong pick up in infrastructure requirements, strong capacity will have to be laid.

While the issues triggering weak demand are well documented, there is a general perception
that without restart of the investment cycle, materials sector demand is unlikely to revive.
However, we believe, a sharp pick up in the investment cycle is not necessary for pick up in
steel demand. As per historical trend, after periods of weak steel demand growth, in the
following years of sharp pick-up in demand, overall GDP does not increase much, it is just that
the industrial/construction share of GDP increases and reverts to the long-term average. In our
view, new projects do not need to start for any demand pick up. Progress on stalled/half-
completed projects alone would be enough for spurt in steel demand in years 1 and 2 (FY15-
16E). Post that, a new investment cycle would be required for the demand to sustain.
0.0
18.0
36.0
54.0
72.0
90.0
0
300,000
600,000
900,000
1,200,000
1,500,000
2007-08 2008-09 2009-10 2010-11
(
%
)
(
t
o
n
s
)
Total Production (Tonnes) Import (Tonnes) % of Total Production
Domestic manufacturing by players
like VIL and ORL in monolithics can
lead to import substitution in this
segment which constitutes ~35-
50% of overall refractory imports
FY14 steel demand grew a modest
0.5% after growing 2% in FY13.
Cumulatively, FY12-14 steel
demand growth was one of the
weakest since FY81 (FY90-92 was
previous weakest period).

Progress on stalled/half-completed
projects alone would be enough
for spurt in steel demand in years 1
and 2 (FY15-16E). Post that, a new
investment cycle would be
required for the demand to
sustain.

11

Refractory
Refractory industry: Overview

Global refractory market at ~USD25bn; expected to post ~3.5% CAGR
According to various industry studies, global refractories market size is ~USD25bn with
production of 41.5MT in CY12. According to industry estimates, the global refractories
industry is expected to clock 3.5% CAGR during CY13-16 and grow to 46MT with a market
value of USD29bn. China accounted for ~70% of the market by volume and ~60% by value in
CY12, whereas India accounted for ~3% of the global refractories market by volume.

Chart 4: Global refractory industryOn the rise

Source: Industry, Edelweiss research

Indian refractory industry: Strong growth within process flow
According to various industry studies, Indian refractories market size is INR50bn with
production of 1.28MT in FY12 on an installed base of 2mtpa, ~60% utilisation and
accounting for a mere ~3% of the global refractories market by volume. Although the
average consumption of refractories has fallen from 19kg per tonne of steel about five years
ago to 12-13kg on an average for the steel industry as a whole, the scope for growth is good
in case of established refractory players with strong product portfolios in the steel flow
control segment and catering to customised requirements of steel companies. This will be
led by the thin castings segment, which is at ~15% of the current refractory market and
growing at ~50%, wherein players like VIL, ORL and IFGL have a strong competitive
advantage.

Refractories are non-metallic materials characterised by extremely high melting points,
rendering them suitable to be used as heat-resisting barriers. They are primarily of two
typesshaped and unshaped (monolithics)and are used predominantly by the steel
industry as a consumable product in internal linings of furnaces, kilns, reactors and other
vessels for holding and transporting metal and slag. The steel industry accounts for ~60% of
refractory consumption globally and ~75% in the domestic market.

21.6
23.4
25.2
27.0
28.8
30.6
37.8
39.6
41.4
43.2
45.0
46.8
CY12 CY16E
(
U
S
D

b
n
)
(
M
T
)
Volume (MT) Value (USD bn)
Indian refractory industry with
production of 1.28MT is under
utilised

However thin castings segment,
which is at ~15% of the current
refractory market is growing at
~50%, wherein players like VIL, ORL
and IFGL have a strong competitive
advantage

12

Refractory
Chart 5: GlobalSector-wise refractory demand Chart 6: IndiaSector-wise refractory demand


Steel flow control process chart
Different areas of the steel manufacturing process are exposed to diverse temperatures,
slag and sulphur gases. Refractory selection for the lining of a furnace is invariably built
upon a combination of material qualities and brick size to maximise performance. Steel
industry uses refractory for diverse applications in blast furnaces, coke ovens, torpedo ladles
and secondary refining ladles.

Fig. 1: Consumption of refractories in steel making process

Source: Magnesita

Steel
60%
Non
metallic
(Cement,
Glass)
15%
Non
ferrous
(Aluminiu
m, copper,
zinc, silver)
15%
Others
(paper,
petrochem
icals)
10%
Steel
75%
Cement
12%
Non
ferrous
(Aluminiu
m, copper,
zinc, silver)
6%
Glass
3%
Others
4%

13

Refractory
Fig. 2: Consumption of refractories in steel making process

Source: RHI

Types of refractories
Shaped refractories are characterised by fixed shapes with the most common form being
rectangular brick. Brick shapes may be divided into twostandard shapes and special
shapes. Standard shapes have dimensions that are conformed to by most refractory
manufacturers and are generally applicable to kilns and furnaces of the same type. Special
shapes are specifically made for particular kilns and furnaces. Shaped refractories are almost
always machine-pressed and possess high uniformity in properties. Unshaped refractories
are without a definite form and are only given shape upon application. They form jointless
lining and are better known as monolithic refractories. They are manufactured in powder

14

Refractory
form as granular material and known as plastic refractories, ramming mixes, castables,
gunning mixes, fettling mixes and mortars.

The raw material used to manufacture refractories is broadly classified into clay and non-
clay. Clay refractories consist of naturally occurring alumina silicate like fire clay, flint clay,
flint brick and high alumina and are used to produce bricks and insulating refractories. Non-
clay refractories are made from non-clay material and are further classified into basic (made
in form of bricks from magnesia, dolomite, chrome etc), extra high alumina, mullite (made
from kyanite, bauxite, alumina), silicon carbide and zircon.

There has been a gradual shift from shaped to unshaped refractories for higher
performance and ease of use and from clay to non-clay refractories due to flexibility of
manufacturing from a variety of raw materials and ease of use.

Chart 7: Share of refractories by form Chart 8: Share of refractories by raw materials


Chart 9: Indian refractory market break up


Shaped
55%
Unshaped
45%
Flow
control/special
refractories
15%
Basic bricks
24%
Blast furnace
20%
Balance (Shaped
and others)
41%
Non Clay
35%
Clay
65%

15

Refractory
Global competitive intensity
VIs parent, Vesuvius PLC, is a leading refractory manufacturer with global market share of
~10%. Global refractory industry is highly fragmented and dominated by local players in
each country. Vesuvius PLC and RHI have manufacturing locations around the world and
enjoy leadership in technology and innovation.

Chart 10: Global market share of players

Source: Magnesita

Competitive intensity in India

Chart 11: Indian refractory market share

Note: RHI includes combined sales of ORL, RHI Clasil and RHI Pvt Ltd
IFGL refractorys numbers are standalone numbers

Vesuvius Plc
10%
RHI
9%
Magnesita
5%
Segment players
(Saint Gobain,
Calderys)
10%
Regional players
(Shingawa,
Krosaki,ANH)
16%
Small local
players
13%
Chinese players
37%
RHI India
21%
TRL Krosaki
17%
Vesuvius India
12%
OCL India
8%
IFGL
Refractories
7%
Calderys India
11%
Dalmia Bharat
1%
Balance
23%
Parent Vesuvius Plc is a global
market leader in the overall
refractory industry as well as
enjoys pole position in the critical
molten flow control segment

16

Refractory
Chart 12: IndiaSteel flow control market share

Note: Financials of IFGL are on standalone basis
Financials of OCL India are of the refractory division

VIL (largest player in steel flow control in India): Strongest position in steel flow control in
India as well as globally in steel flow control segment, which is a high margin process for
players.

RHI (No. 2 player globally and recently acquired Orient Refractory in India): is half the size
of VIL in steel flow control business globally. In India, it has a strong foothold in silica bricks
which is a process before steel flow and Chinese compete in this area.

Orient Refractory (acquired by RHI): It caters to small steel plants and has a low cost
advantage in steel flow control and is primarily into recycling materials. Controlling stake of
70% by RHI will help Orient now procure turnkey projects from large steel companies.

IFGL Refractory: It is the No. 3 player in steel flow control in India, but does not have the
entire range of products in comparison to VI and it admits to not being able to compete with
VIL in many areas because of certain patents which give the latter the first mover advantage.
Also, IFGL has almost 50% sales coming from exports.

TRL Krosaki: It is strong in bricks/monolithics.

Sinoref (Chinese player): The company focuses on the bricks space.

Orient
Refractories
33%
Vesuvius India
33%
IFGL
Refractories
20%
OCL India
14%
Vesuvius India and Orient
Refractories are leaders in the high
growth and profitable steel flow
control segment in India

17

Refractory
Fig. 3: Indian refractory industrySWOT analysis


SWOT analysis
Strengths
Increasing preference for
quality, service,
complete solution provider
Global parentage of
established players
Opportunities
Increasing production of
primary producers wih BOF
set up ,
Import substituiton of
monolithics,
Technological advancement
among steel players, steel
underpenetration in India,
National Steel Policy of India
to increase capacity
by 2.5-3x
Threats
Tight working capital during
slowing steel cycle
Competition from Chinese
players
Imports from China
Weaknesses
Declining consumption per
ton of refractory for steel
companies
Low pricing power
Raw material dependence
on China

18

Refractory
Steady long-term financials

Revenue growth: ORL and VIL have posted non-cyclical growth
ORLs revenues posted healthy double-digit revenue growth with 19% CAGR over the longer
tenure (ten year term - FY04-14) outperforming the industry over a long tenure. It has
outperformed VIL by an average 3-4% over across the time periods. It has outperformed
IFGL over 8 year and 10 year time period in revenue growth by 5%. Going forward, with
cyclical uptick in industry, we expect growth to accelerate for both ORL and VIL.

Table 4: Sales CAGR over the years

Source: Company

Table 5: EBIT CAGR over the years

Source: Company
Note: Financials of IFGL are on standalone basis
Financials of OCL India are of the refractory division

As can be seen ORL and VIL have grown profitably over long term cycles. ORL registered
18% CAGR over ten years and VIL registered 14% CAGR over the same time period in EBIT.

Recent industry stake sales
Global refractory producers have been entering the Indian market and three major deals
have been completed in the past five years. We take a closer look at these deals including an
analysis of valuations and premiums. However, we note that Vesuvius PLC has not increased
its stake in VI from current 55.6% for more than 10 years.

Deal 1: Krosaki Harima buys 51% in Tata Refractories (@25x forward P/E, high band
premium)
Krosaki Harima (Japanese refractories producer) bought 51% stake in Tata Refractories
(from Tata Steel) in April 2011 at high premium valuation of INR11.3bn, valuing at ~25x
forward P/E. Tata Refractories was a non-listed company, but valuations ascribed by Krosaki
Harima imply ~32% premium to VIs 10-year high-end multiples.

Deal 2: RHI buys ~70% in Orient Refractories (@14x forward P/E, average band)
CY13/FY14
(INR mn)
1 year
growth
(%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
Vesuvi us Indi a 6,023 6.7 10.7 11.1 13.5 16.2
Ori ent refractori es 4,035 11.5 14.2 13.9 17.9 18.5
IFGL refractori es 3,274 7.0 15.8 14.4 12.2 13.4
OCL Indi a 3,176 4.0 2.7 0.6 5.3 9.0
CY13/FY14
(INR mn)
1 year
growth
(%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
Vesuvi us Indi a 990 20.0 9.8 15.0 10.6 13.5
Ori ent refractori es 750 22.0 20.0 12.5 20.8 18.0
IFGL refractori es 395 34.0 38.0 9.0 6.0 11.0
OCL Indi a 154 (18.2) (5.1) (14.4) (4.4) 6.2
ORL and VIL have posted non-
cyclical sales CAGR of 19% and 16%
over last 10 years and EBIT CAGR
of 18% and 14% respectively over
the same time period

19

Refractory
The RHI Group of Austria, second largest refractory producers in the world, bought a stake
in Orient Refractories in January 2013 at ~14x P/E by offering ~INR43/share (~16% premium
to January 15, 2013, closing price of INR37/share) for 43.6% stake of promoters and later
made an open offer for 26% additional stake at the same price in April 2013, taking its total
stake to ~70% and controlling the company. RHIs stake purchase was at mid band of VIs
15-year average.

Deal 3: Calderys buys out ACE Refractories from ICICI PE fund (@28x forward P/E, high
band premium)
Calderys, part of Imerys of France (one of the largest monolithic refractory producers in the
world), bought full stake in ACE Refractories in August 2007 (earlier part of ACC and bought
by ICICI Venture Capital PE in 2005) at a high valuation of 28x P/E for a market value of
~INR5.5bn.

20

Refractory

C
C
o
o
m
m
p
p
a
a
n
n
i
i
e
e
s
s

Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


Global refractory major RHIs (No.2) strong focus on emerging markets
and profitability was vindicated by its acquisition of 69.6% in Orient
Refractories (ORL), a leading player in Indias profitable steel flow control
segment. ORL clocked strong non-cyclical 19% sales and 18% EBIT CAGR
along with 17% EBIT margin and average RoE of 45% over FY04-14.
Considering 27% gross block expansion, robust fixed asset turnover of
over 6x, ~60% unoccupied land and parents robust portfolio approach
which will expand clientele, the company is well placed to capitalise the
parents target of doubling ORLs sales to tap the emerging markets
opportunity and make it an exports hub. With leading position in steel
flow control segment fortified by parent RHI, we value ORL at 18x FY16E
EPS, 10% discount to Vesuvius India (VIL). Initiate with BUY.

India shinning: RHI tapping local opportunity; exports hub focus
RHI is targeting 70% contribution from emerging markets (57% currently) and aims to
double India revenue over next four years, generating ~20% CAGR. By virtue of being a
leading player in the steel flow control segment in India among smaller steel mills, ORL is
geared to capture bigger turnkey orders, leveraging its global parentage. The ORL
acquisition provides RHI to tap the growing domestic market as well as make India an
exports lynchpin, leading to 21% CAGR in ORLs sales over FY14-16E.

Unutilised land to capitalise on steel opportunity
ORLs plant stands on a 30 acres land parcel, which is 60% unutilised. With 27% gross
block expansion over the past two years, further 74% expansion is estimated over next
two years led by parents plan to capitalise on domestic steel and outsourcing
opportunity. ORL has generated strong core fixed asset turnover at an average 6x.

Outlook and valuations: Robust spurt; initiate with BUY
We expect core RoCE to catapult 940bps over FY14-16E to 76% on improved utilisation
and higher growth in steel flow control segment, leading to 20% earnings CAGR over
the period. Considering unutilised land (60%) available to leverage the steel cycle
uptick and expanding clientele riding parents support, we assign target of 18x P/E on
FY16E EPS and arrive at a target price of INR115. Initiate coverage with BUY.

INITIATING COVERAGE
ORIENT REFRACTORIES
Flow glow: Leveraging India growth
story
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Value

MARKET DATA (R: ORRE.BO, B: ORIENT IN)
CMP : INR 75
Target Price : INR 115
52-week range (INR) : 85 / 22
Share in issue (mn) : 120.1
M cap (INR bn/USD mn) : 9 / 149
Avg. Daily Vol. BSE/NSE (000) : 65.5

SHARE HOLDING PATTERN (%)
Current Q1FY14 Q4FY13
Promoters *

69.6 69.6 69.6
MF's, FI's & BKs
0.0 0.0 0.0
FII's 0.4 0.0 0.2
Others 29.9 30.3 30.2
* Promoters pledged shares
(% of share in issue)
: NIL

PRICE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month 3.3 1.2 (2.1)
3 months 15.4 43.1 27.7
12 months 33.7 155.7 122.0

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

India Equity Research| Refractory
June 24, 2014

(Click on image
to view video)
Financials
Year to December FY13 FY14 FY15E FY16E
Net revenues (INR mn) 3,619 4,035 4,691 5,886
EBITDA (INR mn) 690 792 884 1,141
Core profi t (INR mn) 432 528 584 763
Di l uted shares (mn) 120 120 120 120
EPS (INR) 3.4 4.4 4.9 6.4
P/E (x) 21.8 17.1 15.5 11.8
EV/EBITDA (x) 13.0 11.2 9.7 7.2
ROAE (%) 48.7 44.0 37.2 37.5

Refractory
22


Investment Rationale

Strong, consistent performance outpacing peers
Historically, ORL has registered consistent growth and outpaced peers on revenue and
margin front, drawing on its low-cost model and strong position in the steel flow control
segment. The company has outperformed the steel industry growth in the shaped segment,
which witnessed ~127% (18% CAGR) surge in volumes during FY06-11. This is as compared
to steel industry growth of 52% (9% CAGR) over the same period.

Market leader in ladle and tundish management system coupled with lower costs with
strong positioning among small steel mills have driven the companys growth ahead of
industry. Revenue and earnings growth of the company at 19% and 18% CAGR over past 10
years respectively, also remained non-cyclical in nature in spite of being dependent on the
highly cyclical steel industry. During FY09-14 however, the companys revenue and PAT
growth trajectory was impacted (14% and 11% CAGR respectively) by slowdown in domestic
steel investment cycle. Nevertheless, the ORLs relative outperformance to peers continued.

Table 1: Performance through cycles

Source: Company

Chart 1: ORL has outperformed domestic refractory players on shaped volumes

Note: 2006 figures are rebased to 100

1 year 3 year 5 year 8 year 10 year
Growth (%) CAGR (%) CAGR (%) CAGR (%) CAGR (%)
Sal es 4,035 11.5 22.0 18.0 21.0 19.0
EBIT 796 22.0 20.0 12.5 21.0 18.0
FY14 (INR mn)
0
50
100
150
200
250
FY06 FY07 FY08 FY09 FY10 FY11
Crude Steel Production (mt) VI (Shaped) in pcs
ORL(Shaped) in pcs IFGL(Shaped) in pcs

Outperformed steel industry
with 18% CAGR in shaped sales
volume during FY06-11 versus
9% CAGR logged by the steel
industry led by pole position in
steel flow control segment

Isostatically pressed continuous
casting refractories

23

Orient Refractories
Chart 2: Strong volume trajectory ahead

Source: Company, Edelweiss research

Going forward, strong focus by the parent on India, ORLs portfolio approach and industry
leadership position will help continue its outperformance to steel industry and peers with
overall net manufactured sales CAGR of 21% over FY14-16E.

Strategising for strong inclusive growth

Portfolio approach to drive big client additions
Leveraging parent, RHIs brand: This far, ORL has been successfully sourcing contracts from
the small steel mills and currently derives 70% of revenues from them. Around 70% of the
companys sales are supplied to the medium and small steelmakers including Bhushan Steel,
Sunflag, Mukund and Jai Balaji, among others. The company also caters to big steel players
like SAIL, RINL, etc., which contribute to 20-25% of sales. With RHI acquiring 69.6% stake in
ORL, the latter will be able leverage parents brand in procuring large turnkey orders from
large steel companies, resulting strong volume growth.

Led by unlisted business serving unshaped refractory requirements: RHI AG has unlisted
entities (RHI Clasil and RHI Private Limited) which meet bricks and linings requirement of
clients. This, we believe, will further support ORLs portfolio in seeking large turnkey
projects from steel companies. As such, the steel flow control product and services will be
catered to by ORL, while the unlisted entities would meet requirements of the unshaped
(bricks) refractories of the steel companies.

Going forward, the Indian steel industry will gain from new plant commissioning and better
utilisations. This will bolster ORLs volumes as they get increased business from larger steel
companies with the parent support.

ORL has seen a surge in new orders for its products, post getting acquired by RHI in 2013.
This has also enhanced revenue visibility in the quarters to come. This complementary
approach parent will leverage on ORLs strong product portfolio while ORL will optimise
parents brand and other businesses (bricks in refractories) leading to strong volume
0
8,000
16,000
24,000
32,000
40,000
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
F
Y
1
5
E
F
Y
1
6
E
(
t
o
n
s
)
Shaped Unshaped
Shaped FY06-13:19%CAGR
Unshaped FY06-13:-2%CAGR
Shaped FY14-16E:21%CAGR
Unshaped FY14-16E:16%CAGR
Strong product positioning in
ladle and tundish management
led by lower costs along with
parents portfolio approach will
help in sourcing large turnkey
contracts

Tundish system

Refractory
24

visibility for ORL. Overall, we expect ORL to log revenue CAGR of 21% over FY14-16 with
26% YoY growth in FY16.

Plant concept to beef up exports for ORL
In 2013, weak capacity utilization, low growth rates in Europe, led to RHI resolving with
closure of one of its largest sites in Europe (Duisburg, Germany) to ensure better utilisation
with corresponding reduction in fixed costs. RHI started working on the plant concept
wherein it adjusted production capacities and has been trying to consolidate 33 world-wide
plants in its bid to stay competitive in the long term. The parent is focused on staying
competitive and reduce lead time, owing to which production has been moved to low-cost
countries alongside increasing localisation. Hence, the parent has been outsourcing
manufacturing from low-cost countries. Going by this strategy, we expect India operations
to attract higher attention. Also, the parents strong focus on steel flow control globally with
complementary assets of ORL, is expected to lead to strong exports opportunity for ORL.

With RHI acquiring 69.6% in ORL, as at end April 2013, will enable the latter in attaining its
goal of growth with profitability. On the other hand, RHI will be able to further cement its
number-two position in the flow control business riding on ORLs strong product portfolio
and low-cost manufacturing units. Thus, ORLs exports are expected to receive a strong leg-
up since the parent would use India as a significant hub for exports to Asia and the Middle
East.

ORLs exports have increased at 19% CAGR in the past two years. Going ahead, we expect
the same to register robust 25%CAGR over the next two years, led by strong intent of parent
to outsource global manufacturing.

Emerging markets: Revenue share to rise to 70% by 2020E
Asia currently represents ~65% of global steel production, but accounts for mere 18% of
RHIs revenue.

In the groups global scheme of things, emerging markets are its strong focus areas where it
envisages robust growth and sales over the long term. Hence, the group has set the target of
increasing contribution from 57% of the group sales currently to greater than 70% of its sales
by 2020. With Indias per capita steel consumption less than 57kgs, there exists huge pent-
up demand in India in comparison to China, where per capita consumption is ~477kgs while
the world average is 217kgs. RHI strives to participate in the catching-up process in the high-
growth region of India. In line with this, RHI acquired 69.6% in ORL thereby enabling the
former to consistently implement its growth strategy in the emerging markets and
additionally help strengthen its number-two position in the flow control business. Company
invested Euro 50mn towards acquiring 70% stake in ORL, India.

Focusing on growth regions and expanding the local production in India, Brazil and Russia
are part of the RHI Groups strategy to be cost competitive and leverage on the high growth
in emerging markets. This will help the company continue to surpass market growth.

Strong beneficiary of
consolidation (closure of a big
site in Germany last year) in
manufacturing at parents end
leading to production moving
to lower cost destinations and
strong exports for ORL India
Plans afoot to enhance
emerging markets sales 1.2x
with strong focus to double
sales in India led by ORL
acquisition

25

Orient Refractories
ORLs contribution to increase: ~2% to > 3% of global turnover
With the parents focus on India, it third most important market, will result in strong growth
opportunity for ORL. Currently, ORL India contributes ~2% of the global turnover. However,
owing to a fast expanding manufacturing portfolio, capacity, parents support, portfolio
approach and strong R&D set up, ORLs share will increase by more than 50% to ~3% plus at
the parents end over next four years as the company intends to tap not only the growing
domestic market, but also use India as a significant hub for exports to Asia and Middle East.

Parent has set aside a target of internally doubling turnover of ORL India over next five years
to INR8bn, which itself would be a ~20%CAGR over the next 4 years by tapping synergies on
the sales side.

RHI to leverage ORLs strengths
Parent to leverage strong position of ORL in steel flow control segment
RHI is the second largest player in overall globally (with overall 9% market share) and second
largest in the critical steel flow control segment. While the parent is strong in the steel
segment (63% of overall sales), ~16% and 47% of its overall business constitutes steel flow
control and linings, respectively. The parents sales in the most critical steel flow control is
Euro290mn, representing ~16% of sales. Parent wants to further beef up its No.2 position
in the flow control segment globally and has set the target of achieving 1.4x growth
trajectory to Euro400mn by 2020. Acquisition of ORL in India was a strategic step in that
direction. ORL, with its technology and innovation, enjoys leadership position in ladle and
tundish management system within the steel flow control process; it commands a strong
~30% market share in the critical process of steel flow control.

With strong positioning of ORL in steel flow control segment in India, parent plans to
leverage this asset. Thereby strong focus of the parent in steel control and emerging
markets will lead to strong growth for ORL in both domestic and export sales.

Chart 3: RHIGlobal sales break up

Source: Company

Steel flow
control
17%
Lining
46%
Industrial
division
35%
Raw materials
2%
CY13
RHIs India vision: Double
ORLs sales over next 4 years
leading to 20% CAGR
RHIs target: Increasing sales in
profitable steel flow control
segment by 1.4x to EUR400mn
by 2020
Target of strengthening No. 2
position globally in steel flow
control further fortified by
acquisition of ORL in India

Refractory
26

Capitalise growth with 60% unutilised land, strong fixed asset turn
Following high capacity utilisation of ~99% in FY11 in shaped refractories segment, ORL
undertook capex of INR180mn in the past three years (27% expansion on FY12 gross block)
to gear up for growth. As a result, the company enhanced capacity towards higher-value
shaped refractories. The current plant at Bhiwadi, Rajasthan is a 30 acre land parcel. Even
with the current capacity expansion, this land is still 60% unoccupied. This, because all
expansion happened at the existing plant with low fixed costs and company has generated
strong core fixed asset turnover of ~6x historically. Going forward, in attaining we have
assumed further capex of INR380mn (further 74% expansion) to attain parents target of
doubling revenues.

Going forward, following capacity expansion, we have assumed 22% CAGR in net
manufacturing sales over FY14-16E (versus 15% CAGR during FY08-14) and 13% CAGR in
traded sales over FY14-16E (versus 19% CAGR during FY08-14).

Chart 4: Gross block expansion of 27% over FY12-14; further 74% expected


Strong volume boost to sustain high margin
Industry leading position in steel flow control coupled with low-cost advantage allows ORL
to enjoy superior margin in the refractory industry versus peers. The companys gross
margin stood at ~46.8% in FY14 (average of 45% in past three years). Its manufacturing
margin stood at ~51% (average of 49% over past three years) and traded margin at ~15% in
FY14 (average of 9% over past two years). Within overall sales, 73% were shaped and
balance 12% unshaped sales under manufactured sales. Traded goods contribute 15% to
overall sales. The company generated overall average EBITDA margin of 19% in past two
years.

Going forward, with the portfolio approach of the parent and increasing capacity utilisation
from FY16E, we expect strong 22% net sales CAGR over FY14-16E. As a result we expect
gross and operating margins to be maintained at 46.2% and 19.4% respectively, over FY14-
16E. This is despite strong business from RHI (parents group companies) which may lead to
dilution of margins. Ergo, we expect 20% CAGR in operating profit over FY14-16E.

4.0
4.8
5.6
6.4
7.2
8.0
0
200
400
600
800
1,000
FY12 FY13 FY14E FY15E FY16E
(
X
)
(
I
N
R

m
n
)
Gross block Core Fixed Asset turn
Having increased gross block by
27%, we expect further ~74%
jump with huge unutilised land,
60% unoccupied; generated
strong fixed asset turnover of
6x historically

27

Orient Refractories
Chart 5: Increasing manufacturing sales trajectory to maintian high margins


0.0
5.0
10.0
15.0
20.0
25.0
0
1,200
2,400
3,600
4,800
6,000
FY12 FY13 FY14 FY15E FY16E
(
%
)
(
I
N
R

m
n
)
Manufactured sales (INR mn) EBITDA margin (%)
Strong manufacturing sales
trajectory at 22%CAGR to lead
to high margin sustenance at
19.4% over FY14-16E

Refractory
28

Valuation

ORL, the second largest refractory player globally, is cyclically well positioned with strong
demand drivers available for the steel industry. Structurally also, the company is well poised
owing to emerging markets, integrated portfolio approach of the parent, strengthening
position in the profitable steel flow control process segment and a strong product portfolio
in India. Strong gross block addition (27% over FY12-14), with further ~74% addition
expected, India being a strong focus area of the parent with a target to double turnover for
ORL, will be catalysts allowing the company to post 21% sales and 20% earnings CAGR over
FY14-16E. Strong focus of the parent to tap both domestic and exports growth, along with
focus on growing market share in the steel flow control segment led by the acquisition of
ORL will result in narrowing of discount to the market leader, Vesuvius India (VIL).

We expect the company register free cash flow (FCF) over the next two years of INR1bn
(versus INR820mn in past three years). Hence, we expect net cash to get augmented by 4x to
INR6/share in FY16E (8% of current market cap).

At current market price, ORL is trading at 15.5x FY15E and 11.8x FY16E EPS. The company
has limited history since it was acquired by RHI in FY13 and demerged from Orient Abrasives.

ORL has outperformed its domestic and global peers in terms of growth, margins and return
ratios and has been able to maintain non-cyclical sales CAGR of 19% and EBIT CAGR of 18%
(average 17% EBIT margin) over past 10 years. RoE was an average 46% over FY13-14 due to
high core fixed asset turn and strong profitability ratios. With expected strong sales and
earnings CAGR of ~21% and 20% respectively, over FY14-16E, we expect ORL to trade at
mere ~10% discount to the market leader in steel flow control VIL, going ahead. Hence, we
initiate coverage on the stock with a BUY recommendation and target price of INR115,
based on 18x FY16E EPS and 10% discount to VILs target valuation.

We believe the stock is a re-rating candidate given its consistent track record, beneficiary of
parents strong focus on India, strong returns profile and huge beneficiary of uptick in the
domestic steel industry.

Trading at 11.7x FY16E EPS, we
believe ORL is a re-rating
candidate given its consistent
track record outperforming
industry, lead position in
segment further fortified by
parents strong focus on India
and sturdy returns profile

29

Orient Refractories
Key Risks

Delay in recovery in key segment
Slowdown in steel sales momentum can impact our sales growth projections since its the
biggest driver for ORLs revenues.

Dependent on raw material sourcing through imports
The industry is dependent on imports of key raw materials like high grade alumina, bauxite,
magnesite, silicon carbide, etc. China is a major supplier of imports and has imposed heavy
taxes on export of raw material of refractories. This has resulted in sharp increase in
imported raw material costs. Imports constitute ~11% of net sales. This also includes
currency headwinds on ~25% of raw material costs which are imported. Also, the company
exports ~16% of sales, making it a net exporter.

Increase in royalty rate
Currently, royalty, trademark and service fees, as a percentage of overall sales, stand at
mere INR 1.75lakh, whereas some others have received an average 1.3-1.7% of net sales for
in case of Vesuvius India. Any increase in the same could pose a risk.

Intensifying competition
International players like Vesuvius Plc. which have a strong leadership position in steel flow
control process globally, Krosaki Harima which bought 51% in Tata Refractories, Calderys,
part of Imerys of France which acquired ACE Refractories are all setting up base in India
through the acquisition route. This will heighten competition in the refractories industry
going ahead.

Refractory
30

Company Description

Fig. 1: ORLEvolution

Source: Company

About ORL
The RHI Group holds about 69.6% of ORL India share capital and is the second largest
player globally in the design, engineering, manufacture and delivery of refractory products,
systems and services for high-technology industrial applications.

ORL is now part of the RHI Group of Austria, globally the number two player in the design,
engineering, manufacture and delivery of refractory products, systems and services for high-
technology industrial applications. The parent clocked revenues of Euro1.75bn and EBIT of
Euro111mn, as of CY13. In India, ORL is the second largest player in the steel flow control
process segment, with market share of ~30%.

ORL's product range includes:
Isostatically pressed continuous casting refractories
Slide gate plates
Nozzles and well blocks
Tundish nozzles
Bottom purging refractories and top purging lances
Slag arresting darts
Basic spray mass for tundish working lining
Castables

Strong technological prowess and rich product portfolio enables the company to partner
with a steel company right from the capacity formulation stage. It has a technology licence
agreement with parent, but pays meager royalty and technical fees of INR1.75lakh.

The company clocked 85% of overall gross sales from manufactured sales in FY14. Within
overall sales, 74% comprise shaped and balance 11% unshaped. ORL also generated 15% of
overall revenue from trading of refractories.

1985
Bhiwadi plant started
commercial production
of refractories
2007
Expanded unshaped
capacity from 17,000 to
23,000 MT
2008
Expanded shaped
capacity from 9,000 to
16,000MT and unshaped
to 28,000MT
Mar-13
RHI aquired 43.6% of
Orient refractories
from the ex-promoters
and further made an
open offer to acquire.
ORL is a leading player in steel
flow segment in refractories
market in India in laddle and
tundish management

31

Orient Refractories
The company also exports 16% of its sales to its customers in Europe, Middle East and South
East Asia.

ORL has just one plant at Bhiwadi with total capacity of 44,000MT, which operated at full
capacity utilisation in FY13. Hence, the company has undertaken 27% capacity expansion. It
also has an outsourced arrangement for its unshaped refractories from Salem.

Chart 6: Shaped refractories and capacity utilisation

Source: Company

ORLs exposure to the steel flow control segment is ~65-70% of sales.

Chart 7: Unshaped refractories and capacity utilisation

Source: Company

0.0
24.0
48.0
72.0
96.0
120.0
0
3,600
7,200
10,800
14,400
18,000
FY08 FY09 FY10 FY11
(
%
)
(
t
o
n
s
)
Installed capacity (in tons) Sales qty (in tons) Capacity utilization (%)
0.0
24.0
48.0
72.0
96.0
120.0
0
6,000
12,000
18,000
24,000
30,000
FY08 FY09 FY10 FY11
(
%
)
(
t
o
n
s
)
Installed capacity (in tons) Sales qty (in tons) Capacity utilization (%)
Shaped refractories account for
major ~73% of gross sales

Refractory
32

Chart 8: ORLBusiness mix

Chart 9: Overall sales mix

Chart 10: Traded sales mix

Manufactured
85%
Traded
15%
FY14
Manufactured
(Shaped)
74%
Manufactured
(Unshaped)
11%
Traded
15%
FY14
Traded
(Shaped)
78%
Traded
(Unshaped)
22%
FY14

33

Orient Refractories
Manufacturing facilities
The company has a well-balanced product portfolio of refractories shaped refractories
capacity is 16,000 tonnes/year and unshaped (monolithics) capacity is 28,000 tonnes/year.
ORLs factory at Bhiwadi houses its manufactured capacity. Shaped segment accounted for
~74% revenue share with ~11% coming from unshaped segment and remaining 15% from
trading activity in FY14.

ORL has ~30 acres of land which is only ~40% occupied and hence additional capex will be
incurred here.

Table 2: Production unit

Source:Company

Diversified product portfolio
ORL has been expanding capacity through organic route. The company enhanced capacity
1.8x in FY08 in shaped refractories in view of the burgeoning demand from 9,000 tonnes in
FY07 to 16,000 tonnes in FY08. Even in unshaped segment, capacity was expanded 1.6x
from 17,200 tonnes in FY06 to 28,000 tonnes in FY08.

Chart 11: Sales break up

Factory Products Capacity Refractory type
Conti nuous
casti ng
refractori es,
sl i de gate
Shaped at 16,000
tonnes/year;
equi pment,
porus pl ugs,
i nner nozzl es,
machi ne parts -
shaped
refractori es
unshaped at 28,000
tonnes/year
Sal em - arrangement Monol i thi cs Unshaped
Bhi wadi Shaped and unshaped
0
1,400
2,800
4,200
5,600
7,000
FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
(
I
N
R

m
n
)
Manufactured Traded
Manufacturing will be on an
uptrend with 22% CAGR in
sales versus 13% CAGR in
traded sales over FY14-16E, led
by capacity addition and high
fixed asset turn

Refractory
34

Over past two years (FY12-14), manufacturing revenues logged CAGR of 16% versus 15%
registered by traded. Going forward, we estimate 22% CAGR in manufacturing and 13%
CAGR in trading over FY14-16, led by 27% gross block expansion in past three years and
further ~63% expected over next two years.

Chart 12: Sales break up


Chart 13: Export sales trend


Exports posted 19% CAGR during FY12-14. Going ahead, we have assumed 25% CAGR in
export sales over FY14-16E. The parent is laying focus on growing exports.

0
1,400
2,800
4,200
5,600
7,000
(
I
N
R

m
n
)
Domestic Exports
14.0
14.7
15.4
16.1
16.8
17.5
0
240
480
720
960
1,200
(
%
)
(
I
N
R

m
n
)
Exports % of revenues
Exports constitute 16% of net
sales; having posted 19% CAGR
over FY12-14, we estimate 25%
CAGR over FY14-16E

35

Orient Refractories
RHI Group (Global)
The RHI group of Austria is the leading global supplier in molten metal flow engineering with
revenue of Euro1.75bn (as of CY13) and operating margin at 14.9%.

The second largest player in the refractory industry, RHI has been in existence since 1834
and produces more than 1.7mn tonnes of refractory products per year. The company has
two main divisions (steel and industrials).

RHI develops refractories under two product segments: steel under Interstop brand for steel
flow control, Didier for lining, and refractories for glass industry under Monofrax and Refel
brands.

Europe is the largest market accounting for 36% of the groups revenues; steel is the major
division, representing 63% of sales. The balance 35% of industrial is broken up into 12%
cement, 11% non-ferrous, and 8% glass.

RHI has 33 production sites, >160 international technical experts at customer locations, and
70 sales and service sites, together employing over 8,000 personnel and serving more than
10,000 customers from the steel, cement, nonferrous metals, glass, energy and chemical
industries in nearly all countries of the world.

Some key customers of steel business include ArcelorMittal, Severstal, etc. Some key
customers of the Industrial division are Cemex, Holcim, Lafarge in cement division, Ardagh
Glass, Corning, Vitro in glass division and Glencore, Bhp Billiton, Rio Tinto in the non-ferrous
division.

Segments
Steel
In a challenging market, sales volume of the division declined by ~5% YoY to 1,187,000
tonnes in CY13 due to weak business in Europe and the Middle East. In contrast, revenues
were maintained nearly constant at 1,097.5mn (1,112.7mn in the previous year) due to
initial consolidation of the 69.6% share in the Indian company, ORL, which was acquired
towards late April, and improvements in product mix.

Industrial
Sales volume of the division dropped by ~7% YoY to 439,000 tons due to a decline in the
number of construction projects in the business unit environment, energy, chemicals and
decreasing volume in the cement business unit. The decline in revenues from 673.9mn in
2012 to 619.0mn in 2013 was primarily attributable to weak demand in the business units
of glass and environment, energy, chemicals and to non-recurrence of delivery of a major
project in the ferrochrome segment in the previous year.

RHI Group of Austria is second
largest global supplier in
refractories with revenue of
EUR1.7bn (as of CY13), 9%
market share and strong 14.9%
operating margin

Refractory
36

Chart 14: RHIs sales by region

Source: RHI

Chart 15: RHIs sales break up

Source: RHI

Innovation: A key success factor
The groups investment in research and development (R&D) during CY13 amounted to
Euro20mn, representing 1% of group revenue.

RHI has ~1,500 patents granted with 25 new filed during the year 2013. The company
has more than 160 international experts in its global R&D team. Banking on a strong
global R&D network, the parent intends to considerably strengthen its innovation
capabilities in Asia Pacific, to cater to the regions customers.

Globally, incremental stress is being laid on R&D. Research focuses on four strategic areas:
substitution of raw materials, energy efficiency, functional products and recycling.
Innovation at RHI extends from the product level to all business processes and involves all
employees. To underline the importance of innovation, the RHI Group has set up a separate
Western europe
29%
USA &Canada
13%
Australia &
Japan
1%
CIS
5%
Eastern europe
7%
Middle east &
Africa
13%
South America
& Mexico
14%
Asia
18%
CY13
Steel flow
control
17%
Lining
46%
Industrial
division
35%
Raw materials
2%
CY13
Parents R&D expenses were at
EUR20mn in CY13 and stood at
1% of sales

37

Orient Refractories
innovation and IP management department in 2013, which reports directly to the CEO of
the group.

Primary objectives of RHI group over medium term include:
Revenue target of the group for 2020 has been set at 3bn from 1.75bn in 2013,
increasing at 8% CAGR/EBIT margin of 12% (throughout the economic cycle) from
6.3% in CY13.
The RHI group has pursued a clearly defined strategy for several years based on
expanding market presence in emerging markets by increasing contribution from
emerging markets from 56% to >70%. To attain this, the company has internally set
a target to double ORLs turnover by next 4 years, increasing at ~20% CAGR. After
USA and Germany, India has become the third most important market for the RHI
Group and will continue to gain importance in ensuing years.
The company wants to grow profitably and strengthen its number two position in
the flow control segment by increasing sales from Euro290mn to >Euro400mn.
The company has set the target to grow profitably and ORLs acquisition is seen by
the group to attain its target. The transaction enables RHI to consistently
implement its growth strategy in emerging markets and additionally strengthen its
number two position in the flow control business.

Refractory
38

Financial Outlook

Revenue to post 21% CAGR over FY14-16E led by parents support
Historically, ORL has outpaced the steel industry in terms of sales growth over the years,
owing to its leading position (second after leader VIL) in the profitable steel flow control
process. As a result, shaped manufacturing volumes have risen at 18% CAGR in the shaped
segment over FY06-11. This is as compared to steel industry growing by 9% CAGR over the
same period.

Increasing capacity, parents focus to grow sales in steel flow control segment, double sales
in India, expanding client portfolio from small steel mills to bigger steel mills will drive
strong sales growth in the shaped sales segment. As a result, we expect 22% CAGR in
manufacturing sales over FY14-16, which will lead to overall net sales CAGR of 21% over the
period versus 17% CAGR during FY12-14. Meanwhile, steel industry production is estimated
to increase at 6% CAGR over the period.

Chart 16: Strong sales trajectory ahead with strong focus by parent


Manufacturing trajectory better than traded
We anticipate the company to post strong growth riding on capacity expansion of INR180mn
(27% expansion of FY12 gross block). Also, led by strong focus of parent to double ORLs
turnover, we expect further capex of ~63% over FY14-16E at INR380mn. The company has
historically generated average core fixed asset turn at over 6x plus, which we expect over
the next two years. We have assumed 22% CAGR in manufacturing sales over FY14-16E. Also,
with growing manufacturing sales, traded sales trajectory will be lower at 13% CAGR over
FY14-16E. Therefore, stronger manufacturing will support higher margins as well going
forward.

0
1,400
2,800
4,200
5,600
7,000
(
I
N
R

m
n
)
Refractories (Shaped) Refractories (Unshaped) Traded
Parents portfolio approach
with increased business from
big steel mills will result in net
sales posting 21% CAGR over
FY14-16E versus 17% CAGR in
past two years
Capex and high core fixed asset
turn to drive manufacturing
sales at 22% CAGR versus 13%
CAGR in traded sales over
FY14-16E

39

Orient Refractories
Chart 17: 22% CAGR in manufactured sales versus 13% CAGR in traded sales


Strong volumes in shaped segment to support margin at ~19%
We believe EBITDA margin is likely to sustain at current levels of ~19%, led by increasing
capacity utilisation, strong volume growth and thrust by management to grow steel flow
control. While the portfolio approach of parent may dilute margin as the company will be
generating sales from parents unlisted entities like RHI Clasil and RHI Pvt Ltd too, we expect
the strong volume uptick to sustain margins. Hence based on our expectation of strong
trajectory in shaped refractories volumes, operating margin would remain at 19.4% (-24bps),
over FY14-16E. Hence, we expect 20% CAGR in operating profit over FY14-16 in line with
sales growth.

Chart 18: Strong operating margin to sustain


0
1,400
2,800
4,200
5,600
7,000
FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
(
I
N
R

m
n
)
Manufactured Traded
0.0
5.0
10.0
15.0
20.0
25.0
40.6
42.0
43.4
44.8
46.2
47.6
(
%
)
(
%
)
Gross margin (%) EBITDA margin (%)
We expect sustenance of high
gross and operating margins at
46.2% and 19.4% respectively,
leading to operating profit
CAGR of 20% over FY14-16E

Refractory
40

Chart 19: Robust PAT CAGR at 20%


We expect ORL to post PAT CAGR of 20% over FY14-16E (versus 31% CAGR during FY12-14)
and 31% YoY growth in FY16E, primarily led by strong sales upsurge.

Higher fixed asset turnover of 6x to bolster return ratios
We expect the core fixed asset turn to improve to its historic average of 6x plus over the
next two years, led by ramp up in production and capacity utilisation. Ergo, with increase in
capacity utilisation, we expect core RoCE to jump 940bps from 66.5% in FY14 to 76% in
FY16E.

Chart 20: RoE, core RoCE to trend up with improving fixed asset turn


Strong cash reserves
ORL is debt free with INR180mn in cash (INR1.5/share) as on FY14, i.e., ~2% of current
market cap. The company has been generating strong operating cash flow over the years.
With improving asset turn, we expect free cash flow over the next two years to be
0
180
360
540
720
900
(
I
N
R

m
n
)
0.0
16.0
32.0
48.0
64.0
80.0
FY13 FY14 FY15E FY16E
(
%
)
RoE (%) Core RoCE (%)
Increasing utilisation and
strong core fixed asset turn at
6x plus to spur RoCE 950bps
over FY14-16E to 76%

41

Orient Refractories
INR960mn (versus INR820mn in past three years). Hence, we expect the companys net
cash to stand augmented by 4x to INR6/share in FY16 (~8% of current market cap).

Chart 21: Healthy cash flow generation


0
160
320
480
640
800
(
I
N
R

m
n
)
Operating cash flow Free cash flow
With strong free cash flow, we
expect net cash per share to
stand augmented by 4x to
INR6/share in FY16E (8% of
current market cap)

Refractory
42

Financial Statements

Key assumptions
Year to December FY13 FY14E FY15E FY16E
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 55 62 58 56
Industry growth assumptions (%)
Steel production growth 5.4 5.1 5.5 7.0
Company growth assumptions (%)
Manufactured sales (%)
Shaped volume growth 22.3 12.4 18.0 23.5
Unshaped volume growth 23.4 (2.0) 11.0 21.0
Export revenue growth 25.8 12.0 20.0 30.0
Traded sales (%)
Spraying/Ramming Mass sales growth 10.5 19.0 12.0 15.0
Others sales growth 29.2 5.0 11.0 10.0
Revenue mix (% of gross sales)
Manufactured 85.1 84.6 85.2 86.7
Traded 14.9 15.4 14.8 13.3
Gross margin
Manufacturing gross margin (%) 48.2 51.3 51.4 51.3
Traded gross margin (%) 10.7 15.2 12.5 12.5
Cost assumptions
Raw mat. cost as % net sales 54.8 53.1 54.1 53.8
Employee cost as % of net sales 7.4 8.3 8.1 7.9
Administrative exp as % of net sales 5.8 6.3 6.2 6.1
Income statement (INR mn)
Net revenues 3,619 4,035 4,691 5,886
Raw material costs 1,983 2,143 2,540 3,164
Gross profit 1,635 1,892 2,151 2,722
Employee expenses 266 336 382 467
Other expenses 680 764 885 1,114
Operating expenses 946 1,100 1,267 1,581
Total expenditure 2,929 3,243 3,807 4,745
EBITDA 690 792 884 1,141
Depreciation & amortisation 38 36 41 57
EBIT 652 756 843 1,084
Interest expense 19 1 0 0
Other income 0 41 29 55
Profit before tax 633 796 872 1,139
Provision for tax 201 267 288 376
Core profit 432 528 584 763
Extraordinary/ Prior period items (18) - - -
Profit after tax 414 528 584 763
Equity shares outstanding (mn) 120.1 120.1 120.1 120.1
Core EPS (INR) basic 3.6 4.4 4.9 6.4
Diluted shares (mn) 120.1 120.1 120.1 120.1
EPS (INR) diluted 3.4 4.4 4.9 6.4
CEPS 3.9 4.7 5.2 6.8
DPS 1.0 1.25 1.4 1.8
Dividend payout (%) 27.8 28.4 28.8 28.8
Common size metrics (% net revenues) 54.8
Gross margin 45.2 46.9 45.9 46.2
Operating expenses 26.1 27.3 27.0 26.9
EBITDA margins 19.1 19.6 18.8 19.4
EBIT margin 18.0 18.7 18.0 18.4
Interest 0.5 0.0 0.0 0.0
Net profit margin 11.9 13.1 12.5 13.0
Growth metrics (%)
Revenues 20.5 11.5 16.3 25.5
EBITDA 42.6 14.8 11.6 29.1
PBT 38.0 25.8 9.6 30.6
Core Net profit 40.2 22.3 10.5 30.6
Core EPS 40.2 22.3 10.5 30.6

43

Orient Refractories

Balance sheet (INR mn)
As on 31st December FY13 FY14 FY15E FY16E
Share capital 120 120 120 120
Reserves & surplus 904 1,256 1,644 2,187
Shareholder equity 1,024 1,377 1,764 2,307
Deferred tax liability/asset 13 2 - -
Sources of funds 1,087 1,436 1,764 2,307
Gross fixed assets 502 565 645 895
Accumulated depreciation 209 245 286 344
Tangible assets 292 320 358 551
Intangible assets 1 1 1 1
CWIP (incl. intangible) 5 0 100 50
Total net fixed assets 298 321 460 602
Non current investments 0 0 0 0
Investments 60 0 0 0
Cash and cash equivalents 12 179 470 746
Inventories 570 633 657 774
Sundry debtors 715 994 925 1,107
Loans and advances 26 33 33 33
Other assets 24 16 16 16
Total current assets (ex cash) 1,335 1,676 1,631 1,929
Trade payable 436 509 577 711
Other current liabilities & prov. 182 231 219 260
Total current liabilities & prov. 618 740 796 971
Net current assets (ex cash) 717 936 835 958
Application of funds 1,087 1,436 1,764 2,307
Book value per share (INR) 9 11 15 19
0 0 0 0
Free cash flow (INR mn)
Net profit 414 528 584 763
Add: Depreciation 38 36 41 57
Add: Int & other non-cash items (2) (41) (29) (55)
Gross cash flow 450 524 596 765
Less: Changes in working cap. 72 219 (102) 124
Operating cash flow 377 304 698 642
Less: Capex 65 58 180 200
Free cash flow 313 246 518 442
Peer comparison
Companies Currency CMP O/s Shares Mcap
As on 6/13/14 (In Mn.) (INR bn) CY14/FY15E CY15/FY16E CY14/FY15E CY15/FY16E CY14/FY15E CY15/FY16E
Domestic Players
Vesuvi us Indi a INR 660 20 13.4 34.3 43.3 19.2 15.2 16.3 17.9
Ori ent refractori s INR 75 120 9.0 4.9 6.3 15.5 12.0 37.1 37.5
IFGL refractori es INR 135 35 4.7 19.1 NA 7.1 NA 20.2 NA
Global Players*
Vesuvi us PLC GBP 5 278 133 0.3 0.4 14.2 12.8 9.5 9.9
RHI AG Euro 25 40 81 2.4 2.8 10.4 9.0 17.2 17.5
Ci e de St Gobai n Euro 43 553 1960 2.5 3.2 17.2 13.6 8.0 9.3
Magnesi ta SA BSL 4 289 34 0.4 0.5 12.4 9.1 3.3 4.7
Note: IFGL's estimates and global peers estimates are as per bloomberg
Source: Bloomberg
Core EPS (Rs) P/E (x) ROE (%)
Cash flow metrics
Financing cash flow (258) (138) (227) (165)
Investing cash flow (121) 2 (180) (200)
Net cash flow (1) 168 291 276
Capex (65) (58) (180) (200)
Dividends paid (137) (176) (197) (220)
Profitability ratios
Core ROACE (%) 67.7 66.5 66.1 75.9
ROAE (%) 48.7 44.0 37.2 37.5
ROA (%) 43.0 41.9 36.5 37.5
Current ratio 2.2 2.3 2.0 2.0
Quick ratio 1.2 1.4 1.2 1.2
Cash ratio 0.0 0.2 0.6 0.8
Receivable turnover (x) 5.4 4.7 4.9 5.8
Inventory turnover (x) 3.9 3.6 3.9 4.4
Payables turnover (x) 5.1 4.5 4.7 4.9
Receivables (days) 67 77 75 63
Inventory (days) 94 102 93 83
Payables (days) 72 80 78 74
Cash conversion FYcle (days) 90 99 89 71
Operating ratios (x)
Total asset turnover 3.6 3.2 2.9 2.9
Fixed asset turnover 7.6 7.6 7.8 7.6
Equity turnover 4.1 3.4 3.0 2.9
Core Fixed asset turnover 6.3 6.2 6.4 6.4
Valuation parameters
Diluted EPS (INR) 3.4 4.4 4.9 6.4
Y-o-Y growth (%) 34.3 27.7 10.5 30.6
CEPS (INR) 3.9 4.7 5.2 6.8
Diluted P/E (x) 21.8 17.1 15.5 11.8
P/BV (x) 8.8 6.6 5.1 3.9
EV/Sales (x) 2.5 2.2 1.8 1.4
EV/EBITDA (x) 13.0 11.2 9.7 7.2
Dividend yield(%) 1.3 1.7 1.9 2.4

Refractory
44


*as per last available data

Holding Top -10
Perc. Holding Perc. Holding
Birla Sunlife Asset Asset Management 1.62
Bulk Deals
Deal Date Client Name Deal Type Quantity Price
4-Mar-13 AJAY RAJGARHIA S 3000000 39
4-Mar-13 AMIT GOEL P 3000000 39
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
17-Jun-14 Group Entity Sell 90,400
11-Jun-14 Deepika Sarin Sell 20,000
11-Jun-14 Swaran Sarin Sell 20,000
11-Jun-14 Subhash Chander Sarin Sell 50,400
21-Jun-13 Dutch US Holdings B V Buy 31,233,828
4-Jun-13 Swaran Sarin Buy 77,347
4-Jun-13 Subhash Chander Sarin Buy 98,400
4-Jun-13 Deepika Sarin Buy 80,320
22-Mar-13 Bhavna Rajgarhia Sell 14,723,564
22-Mar-13 Gopal Rajgarhia Sell 11,791,483
22-Mar-13 Anisha Mittal Sell 14,747,510
22-Mar-13 Ashwin Mittal Sell 200,394
11-Mar-13 Orient Abrasives Limited Sell 499,400
8-Mar-13 ROVO Marketing Private Limited Sell 15,580
8-Mar-13 Prabha Rajgarhia Sell 2,960,000
8-Mar-13 R K Rajgarhia Sell 600,766
8-Mar-13 R K R Foundation Trust Sell 231,000
8-Mar-13 Rajgarhia Leasing & Financial Services Pvt. Ltd. Sell 50,000
3-Dec-12 Anisha Mittal Buy 1,515,930
3-Dec-12 Shri Gopal Rajgarhia (HUF) Sell 8,015,930
3-Dec-12 Bhavna Rajgarhia Buy 6,500,000
Additional Data
Directors Data
K.K.Thirani Chairman S G Rajgarhia Vice Chairman
Parmod Sagar Managing Director A K Jain Director
R S Bajoria Director Barbara Postisk Eibensteiner Director
Dr Giorgio Cappelli Director Michael John Williams Company Secretary
S C Sarin Director

Auditors - S R Batliboi & Co.

Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


Vesuvius India (VIL) enjoys strong leadership in the steel flow control
segment (most profitable and fastest growing segment) in India at ~33%
market share. Even globally the parent, Vesuvius Plc enjoys leadership in
this segment. In the past 10 years (CY02-12), has outpaced the steel
industry with non cyclical 16% sales and 12% PAT CAGR, along with
healthy core RoCE of 35% and RoE 19%. VILs customised solutions for
large steel producers with patented products allows it to command
superior pricing power and fetch premium margins. With ramp up in
manufacturing capacity (43% over CY10-13) and utilisation at ~60%, we
expect VIL to register sales and PAT CAGR of 14% and 16% over CY13-15
respectively, driven by the impending capex in the industrial sector and
capacity expansion of steel players company. We initiate coverage with a
BUY and target price of INR870, based on 20x CY15.

Market leader in most profitable segment
Unmatched leadership in the high-growth and profitable steel flow control segment in
refractories in both domestic and global markets and high market share of ~33% will
result in VIL recording strong sales growth going ahead. Technological prowess coupled
with steel industry growth, driven by primary steel companies with customised
refractory needs, will help VIL log sales CAGR of 14% over CY13-15E, ahead of the steel
industry production CAGR of 6% over the same period.

Strong growth in continuous castings segment
Being a leader in the continuous castings process market, which is growing at 50% in
India and with expansion in high-growth portfolio and sound R&D set up alongwith
global parentage, VIL is well-equipped to leverage this opportunity.

Outlook and valuations: Robust flow control; initiate with BUY
Considering capacity is in place for steel industry uptick and equipped with strongest
product portfolio to cater to primary producers, we expect 14% sales CAGR and 16%
PAT CAGR, with 790bps core ROCE increase to 40% over CY13-15E. Hence we have
valued the stock at 20x CY15E EPS with TP of INR870. We initiate with a BUY with a
32% upside.

INITIATING COVERAGE
VESUVIUS INDIA
Molten glory
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth

MARKET DATA (R: VESU.BO, B: VI IN)
CMP : INR 653
Target Price : INR 870
52-week range (INR) : 666 / 287
Share in issue (mn) : 20.3
M cap (INR bn/USD mn) : 13 / 220
Avg. Daily Vol. BSE/NSE (000) : 9.0

SHARE HOLDING PATTERN (%)
Current Q3FY14 Q2FY13
Promoters *

55.6 55.6 55.6
MF's, FI's & BKs
13.8 14.6 14.2
FII's 10.8 10.7 10.7
Others 19.6 19.1 19.5
* Promoters pledged shares
(% of share in issue)
: NIL

RELATIVE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month 3.3 19.0 15.7
3 months 15.4 43.0 27.6
12 months 33.7 81.5 47.8

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

India Equity Research| Refractory
June 24, 2014

(Click on image
to view video)
Financials
Year to December CY12 CY13 CY14E CY15E
Net revenues (INR mn) 5,642 6,023 6,511 7,835
EBITDA (INR mn) 974 1,114 1,172 1,439
Core profi t (INR mn) 558 652 696 880
Di l uted shares (mn) 20 20 20 20
EPS (INR) 27.5 32.1 34.3 43.3
P/E (x) 24.0 20.6 19.3 15.2
EV/EBITDA (x) 12.7 10.8 9.8 7.6
ROAE (%) 17.4 17.6 16.3 17.9

Refractory
46

Investment Rationale

Market leadership in critical process drawing from strong parentage
VIL is the Indian arm of Vesuvius Plc (Vesuvius), a leading refractory manufacturer with
~10% global market share. Vesuvius has technological prowess, is beefed up with
innovations and globally enjoys leadership position in the steel flow control process, a very
critical and profitable segment in the steel-making process. Hence, VIL also commands
leadership position in the domestic market in the critical process of steel flow control with
~35% share. This enables VIL to log superior margins in the refractory industry compared to
peers.

Global R&D support from Vesuvius provides the edge in product innovation and solutions.
The parent generates ~55% of its revenue from developing markets with a clear focus on
leveraging its developing market production facilities to capture growth. As a result, VIL
leverages on latest technology from its parent for which it pays royalty and license &
trademark fees of 1.7% of sales.

Vesuvius remains industry leader in terms of product range, credibility and quality products,
particularly in flow control area of refractory application. Global sales in the most critical
steel flow control for VIL stood at GBP556mn i.e., ~37% of sales (GBP1511mn), in CY13. This
is as compared RHIs global sales for which steel flow control is Euro250mn, i.e., ~17% of its
sales (Euro1755mn) in CY13. In India, VILs sales in this segment stood at INR2.5bn, ~38% of
CY13 sales. As a result, in the flow control process, the companys product premium varies
between 050% and 100% in some segments (thin slab casters). Within steel flow control
process, in the tundish segment, the price premium varies between 1020%. In some other
segments too, VIL has patented products due to its technological acumen which is a
formidable entry barrier for other players.

Chart 1: Vesuvius Plc: Sales break-up

Source: Company

VIL has consistently edged out competition owing to its leadership position in product
technology and services portfolio even amidst the prevailing weak demand scenario.
Steel flow
control
37%
Advanced
refractories
30%
Foundry
33%
CY13
Strong product positioning in
high-margin steel flow control
segment in India with ~33%
market share leading to ~10-20%
premium for its products in key
segment and ~50% in some
products

Globally, No. 1 player in
segment with strong ~37% of
sales from this segment

47
Besides, i
refractories, filters, feeding systems and fused silica crucibles.
ahead of competition in terms of profitability and positioning.

By vi
to post 14% CAGR over CY13
same time. Our optimism is underpinned by the shift in steel production towards primary
produc
refractory ma
customised requirements. D
expansion

Strong performance outpacing steel industry
VIL
CAGR) and unshaped
In compar

Strong private relationships and high exposure to primary producers propelled growth
ahead of industry. Crude steel production grew at 8.2% per annum from 50.8mn tonnes
during 2006
producers like SAIL and RINL accounted for mere 6% (~1.67mn tonnes), growth was
primarily driven by capacity expansion by major producers. This explains the huge
outperformance of
JSW Steel, Essar Steel and Tata steel, which have registered good growth.

VILs focuses on large steel makers with high volume and quality flat products. Within the
same, focus on PSUs like SAIL is not high, especially in areas where there is price bidding
since
industry in terms of production

Revenue and earnings growth
dependent on steel industry
from
CAGR and PAT at
past
slowdown in
profitability


Sal es
EBITDA
PAT
Outperformed steel industry with
12% CAGR in shaped and 17%
CAGR in unshaped sales volumes
over CY07-12 versus steel
industrys 8% CAGR during the
same time period

Strong non-cyclical growth of 16%
and 12% CAGR in sales and PAT
respectively over past 10 years

Edelweiss
Besides, it leverages its parents leadership in flow control systems and isostatically pressed
refractories, filters, feeding systems and fused silica crucibles.
ahead of competition in terms of profitability and positioning.
virtue of the companys strength in steel flow control segment, we expect
to post 14% CAGR over CY13-15E as compared to ~6% crude steel
producers with large furnaces, which meet customised refractory needs. Only
refractory manufacturers with large capacity and technological prowess
customised requirements. Demand pickup from the bottom of the steel cycle
expansion by primary producers and a strong product portfolio will drive this growth
Strong performance outpacing steel industry
outperformed steel industry growth with shaped volumes
CAGR) and unshaped volumes spiking ~192% (17% CAGR) in the
comparison, steel industry grew 69% (8% CAGR) during the period.
during 2006-07 to 78mn tonnes in 2010-11. While share of additional production by the PSU
imarily driven by capacity expansion by major producers. This explains the huge
outperformance of VIL to the steel industry, since it mainly caters to primary producers like
s focuses on large steel makers with high volume and quality flat products. Within the
since VIL will never be the lowest bidder. Besides, SAIL has underperformed
industry in terms of production growth.
Revenue and earnings growth of VIL has also remained non-cyclical in nature despite being
dependent on steel industry, which is highly cyclical. This was
from a sound parent and strong product portfolio. The company has grown its sales at
CAGR and PAT at 12% CAGR in the past 10 years (CY03-13) with
past five years have however been slower with 11% revenue and 16% PAT CAGR
slowdown in the domestic steel investment cycle. But, the company has maintained
profitability levels and capital efficiency.
1 year 3 year 5 year
Growth (%) CAGR (%) CAGR (%)
Sal es 6,023 7.0 10.7 11.1
EBITDA 1,114 14.0 9.4 13.8
PAT 652 17.0 10.1 16.3
CY13 (INR mn)
Vesuvius India
s leadership in flow control systems and isostatically pressed
refractories, filters, feeding systems and fused silica crucibles. This helps VIL in staying

companys strength in steel flow control segment, we expect VILs revenues
compared to ~6% crude steel production CAGR over the
customised refractory needs. Only established
ical prowess like VIL, can cater to
pickup from the bottom of the steel cycle, capacity
a strong product portfolio will drive this growth.
shaped volumes catapulting ~116% (12%
~192% (17% CAGR) in the past seven years (CY05-12).
the period.
11. While share of additional production by the PSU
imarily driven by capacity expansion by major producers. This explains the huge
to the steel industry, since it mainly caters to primary producers like
s focuses on large steel makers with high volume and quality flat products. Within the
will never be the lowest bidder. Besides, SAIL has underperformed the steel
cyclical in nature despite being
which is highly cyclical. This was led by technological support
The company has grown its sales at 16%
with average 18% margins. The
and 16% PAT CAGR, owing to
investment cycle. But, the company has maintained

Source: Company
5 year 8 year 10 year
CAGR (%) CAGR (%) CAGR (%)
11.1 13.4 16.1
13.8 11.4 14.0
16.3 10.8 12.0

Refractory
48

Chart 2: Volume trajectory of VI versus the steel industry

Source: Industry (MoS), Edelweiss research
Note 2006 figures are rebased to 100

Going forward, with industry dynamics favouring players like VIL owing to strong product
portfolio will help it to continue its out performance to steel industry with overall net sales
CAGR of 14% over CY13-15E and strong 20% YoY growth in CY15E.

Increasing utilisation among key primary producers to drive growth
The companys products are targeted largely at the big steelmakers that look at producing
high-volume high-quality steel and want high-quality refractories with longer lifespan than
others. VIL supplies refractories to blast furnace and electric arc furnace steelmakers (~70%
of domestic market), but has no product for induction furnaces (smaller steel mills). The
company supplies almost 100% of refractory requirements of some large steelmakers
including JSW Steel and Essar Steel apart from being a big supplier to Tata Steel as well. VIL
gets premium pricing for its products with the same varying product-wise and availability in
the domestic market. The company enjoys monopoly on some products and fetches
premium pricing for them.

The past three years have been challenging for the steel industry in terms of production
growth due to delays in commissioning of new projects in India. Operationally too it was
tough for VIL as some of its key customers dropped production sharply (Essar Steel and
RINL), leading to higher inventory and debtors. However, going forward, the Indian steel
industry will benefit from new plant commissioning and higher utilisation leading to capacity
expansion. VIL will also benefit from the pick-up in volumes from its key customers like Essar
Steel. Going ahead, Essar Steel plans to double capacity utilisation of its 10mn tonne Hazira
plant, which operated at average ~35% capacity utilisation during FY14. This will be led by
coming on-stream of the slurry pipelines in Odisha (in June 2014) and Vizag (resumption of
iron ore supply through NMDCs slurry pipeline expected to aid capacity utilisations).
Another key trigger would be VILs key customer, JSW Steels sales surging following
increased iron ore availability in Karnataka and higher production at JSW Ispat in the next
few years.

80
138
196
255
313
371
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Crude Steel Production (mt) VIL (Shaped) in pcs VIL (Unshaped) in tons
With improving capacity utilisation
and capex of key players with
overall pick up in steel industry,
which is at historic low, we expect
VILs sales to log 14% CAGR over
CY13-15E versus 11% CAGR during
CY08-13

49

Vesuvius India
Table 2: Crude steel production of major customers

Table 3: Steel industry uptick on increased utilisation from FY16E (%)

Table 4: Capacity expansion and capex plans of key customers


Refractory industry dynamics, strong relationships to drive growth
Dynamics of the steel industry is expected to favour players like VIL due to its strong
business model with competitive advantage. With intensifying competition, steel production
in the domestic market has been witnessing a steady shift towards producers with large
furnaces and multiple plants. Meanwhile, the primary producers have been expanding
capacity rapidly and customised their refractory needs which can be catered to by
established refractory makers with large capacity set-ups and technology like VIL. With the
primary producers preferring long-term relationships with large refractory players (instead
of smaller producers) for post installation services and long-term repairs and maintenance
services in addition to technologically driven products of high quality, VIL stands to benefits
the most being a leader and meeting the various requirement of the primary producers. We
expect key primary producers like Tata Steel, JSW Steel, SAIL, JSPL and RINL to account for
~54% of overall steel production and log production CAGR of 9% over FY13-16E, thereby
resulting in increased business for established players like VIL. This is as compared to 6%
production CAGR for overall industry.

Production growth FY11 FY12 FY13 FY14E FY15E FY16E
Tata Steel (Indi a) 6.9 7.1 8.1 9.2 9.7 10.1
% growth 4.0 14.0 12.6 6.0 4.1
JSW + ISPAT 8.9 10.0 11.2 12.2 12.9 13.6
% growth 12.0 13.0 9.2 5.5 5.4
Essar steel 3.4 4.3 4.2 3.2 4.8 5.0
% growth 28.0 (4.0) (22.0) 47.9 4.2
Capacity Utilisation FY14 FY15 FY16
Essar Steel 33.8 50.0 52.0
Tata Steel 94.4 100.0 104.0
JSW Steel 85.5 90.3 95.3
Capacity (mn tons) FY14 FY15 FY16
Tata Steel 9.7 9.7 12.7
JSW Steel 15.0 15.0 18.0
Essar Steel 9.6 9.6 9.6
Capex (INR bn) FY14 FY15 FY16
Tata Steel 150 133 58
JSW Steel 55 75 45
Essar Steel 9.5 3
Shift in steel production towards
producers with large furnaces and
multiple plants having customised
refractory requirements favours
established players like VIL

Refractory
50

Chart 3: Primary producers versus overall steel industry (FY13-16E)


Emerging markets opportunity; high growth in continuous castings
Asia currently accounts for a high ~65% of global steel production, but Vesuvius accounts for
mere 24% of revenue from this high-growth region, reflecting lower quality of a significant
proportion of current steel in these markets. However, as these markets become more
consumer-savvy alongside infrastructure-focused, demand for higher quality steels will rise.
This will in turn result in strong benefits for VIL in emerging markets like India.

Steel consumption is expected to increase significantly in developing markets (such as BRIC
countries) as per capita GDP increases. Vesuvius believes there exists immense opportunity
for it to tap as higher technology refractory techniques are adopted more widely resulting in
increased addressable market. This trend is being driven by increasing demand for higher
quality castings, and higher metal, energy and labour costs.

Chart 4: Geography-wise sales distribution of Vesuvius Plc

Source: Company

5.50%
9.00%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Overall Steel Production CAGR Primary producers CAGR
(
%
)
FY13-16E
EMEA
44%
Americas
32%
Asia Pacific
revenues
24%
CY13
A mere ~24% of Vesuvius Groups
production is in Asia compared to
65% of world steel production from
this high growth region

Indias per capita steel consumption
only 57kg against world average of
217kg

51

Vesuvius India
India currently accounts for mere ~4% of global turnover
VIL currently contributes ~4% to the global turnover. However, with an expanding
manufacturing portfolio & capacity, parents support, local R&D set up and strong growth in
Indias steel market, this share is expected to rise. Also, with robust share in the high growth
thin castings market, the company is better placed.

The raising intensity of steel consumption in the country measured in terms of steel
consumption per unit of Gross Domestic Product (GDP) will lead to 9%CAGR in steel infustry
capacity growth over the next 2 years. Within the steel industry, the thin cast market which
is around ~15% of the overall market has the potential to grow ~50% in absolute terms
based on the current capacity plans. That is one of the most profitable and key target
markets for players such as VIL, RHI (Orient refractories India) and IFGL. Herein, VIL is a
global market leader and hence will benefit the most as this market grows exponentially.

Strengthening R&D to retain innovation edge: Banking on a strong global R&D network, the
parent intends to considerably strengthen innovation capabilities in India to cater to the
regions customers. VIL will invest close to INR500mn on R&D for the group in India.

Augmenting investments: VIL has been investing in India to capture the growth opportunity.
Investment in a new laboratory in India for advanced refractories has been approved and
construction is expected to begin in early 2014.
Investment has also been made in capabilities for taphole clay production in India.

Rising capacity utilisation to drive growth
VIL has doubled its production capacity of shaped refractory in view of the burgeoning
demand from 4.19lac pieces in CY05 to 7.78lac pieces in CY11. Even in the high growth
monolithics segment, capacity has been expanded 5x from 18,900 tonnes in CY05 to
100,500 tonnes in CY13. The company is also looking to further expand its unshaped
refractory (monolithics) facility.

Led by ~98% capacity utilisation in CY10 in the shaped refractories segment, VIL undertook
huge capex of INR1.08bn over the past three years to gear for growth. As a result, the
company enhanced capacity towards higher value shaped refractories. Also, in 2012, 15
acres of freehold land was acquired in Vizag for the proposed fifth plant. An international
standard R&D center is also proposed at this location.

We anticipate the capacity expansion of INR1.08bn over the past three years (43%
expansion on CY10 gross block) to boost VILs growth. The companys overall capacity
utilisation stands at ~60-70% currently. Having generated fixed asset turnover of 1.9x
historically, we estimate 17% CAGR in manufacturing sales over CY13-15 versus 10% CAGR
over CY08-13.

Significant capital outlay of
INR1.08bn in past three years
increased gross block by ~43%; VIL
has generated core fixed asset
turnover of 1.9x historically

Refractory
52

Chart 5: Gross block expansion of 43% over CY10-13

Chart 6: Shaped refractories (pieces) capacity utilisation

Chart 7: High under utilisation in unshaped refractories (tonnes) capacity

1.0
1.4
1.8
2.2
2.6
3.0
1,287
1,736
2,184
2,633
3,081
3,530
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
x
)
(
I
N
R

m
n
)
Gross block Asset turn
51.0
64.4
77.8
91.2
104.6
118.0
217,293
360,650
504,008
647,365
790,723
934,080
CY05 CY06 CY07 CY08 CY09 CY10 CY11
(
%
)
(
p
c
s
)
Installed capacity Sales qty Capacity utilization (%)
24.0
38.2
52.4
66.6
80.8
95.0
11,936
33,669
55,402
77,134
98,867
120,600
CY05 CY06 CY07 CY08 CY09 CY10 CY11
(
%
)
(
t
o
n
s
)
Installed capacity Sales qty Capacity utilization (%)
Overall capacity utilisation stands
at ~60-70% as on CY13

53

Vesuvius India
High growth in manufactured unshaped at 18% CAGR
The monolithics segment is growing faster and replacing the conventional fired refractories
in many applications on account of the following advantages:
Eliminates joints in refractory lining in furnaces.
Faster application and no requirement of skilled measures, lowering manpower
requirement for installation.
Easier handling and transportation without damage.
Provides scope to reduce inventory and special shapes and reduce cost of raw materials.
Superior properties over pressed bricks including resistance and volume stability.
Ability to be installed in hot standby mode in furnaces, thereby reducing downtime.

VIL has posted robust volumes and has been focusing on capturing market share in the
domestic market through expansion in the unshaped (monolithics) segment. The company
has expanded capacity in this high growth segment by 5x from 18,900 tonnes in CY05 to
100,500 in CY13 and volumes increased 2.7x over the same period to 43,510 tonnes.

Volume CAGR during CY09-12 for unshaped (monolithics) segment stood at 13.7%
compared to 11% for the shaped segment. While monolithics revenue share jumped to
32.6% in CY13 from 18.13% in CY06, it dipped to 42% for shaped refractories from 62.9%
over the same period. VIL also generated ~25.3% of its overall revenue from trading of
refractories and ~57% of trading revenue comes from the monolithics segment, indicating
the company increasing its presence in the high growth unshaped segment, while retaining
its dominance in the shaped segment.

Chart 8: Strong volume growth led by monolithics


Going forward, we expect sales CAGR of 18% for manufactured monolithics during CY13-15E
compared to 16% for shaped refractories. As a result, we estimate overall net manufactured
sales CAGR of 17% during CY13-15E. We note that monolithics constitute 35-50% of overall
refractory imports into India and provide scope to VIL to substitute them through domestic
supplies.
12,000
22,000
32,000
42,000
52,000
62,000
200,000
340,000
480,000
620,000
760,000
900,000
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
C
Y
1
4
E
C
Y
1
5
E
(
t
o
n
s
)
(
p
c
s
)
Shaped Unshaped
Shaped: CY05-12:11.6% CAGR
Unshaped: CY05-12: 16.5% CAGR
Shaped: CY13-15E:12.4% CAGR
Unshaped: CY13-15E:13.9% CAGR
Under utilised capacity in higher
growth unshaped segment to spur
18% CAGR in sales over CY13-15E
versus shaped segments 16%
CAGR

Refractory
54

Strong manufactured sales to maintain high margin
VILs overall gross margin stood at ~44.8% and EBITDA margin stood at 18.5% in CY13.
Currently, the company derives 42% revenue from shaped refractories and 33% from
unshaped refractories. With healthy sales CAGR of 16% in shaped manufactured sales and
18% CAGR in unshaped manufactured sales, we expect 17% CAGR in manufactured sales
over CY13-15E.

Currently, 25% of VILs sales are from the traded segment. 11% of overall gross sales are
traded shaped sales and 14% are traded unshaped sales. Of the unshaped, 66% are sourced
from third party, where the company outsources manufacturing and 34% are imported from
VILs joint venture partner Wuhan Wugang, China.

With currency depreciation and substitution of imports with localisation in the imported
unshaped traded sales, we expect a mere ~11% CAGR in traded sales. With higher growth in
manufactured sales, lower traded sales of unshaped, increasing capacity utilisation from
current ~60-70%, we expect current high operating margin to sustain at 18.4% (-12bps) over
CY13-15E despite growing sales of low margin manufactured unshaped sales. Ergo, we
expect 14% CAGR over CY13-15E and 23% YoY growth in operating profit in CY15E.

Chart 9: Increasing manufacturing unshaped sales trajectory at 18% CAGR


(36.0)
(15.4)
5.2
25.8
46.4
67.0
650
1,380
2,110
2,840
3,570
4,300
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
%
)
(
I
N
R

m
n
)
Manufactured shaped sales Manufactured unshaped sales
% Growth % Growth
Strong 18%CAGR in unshaped
manufactured sales over CY13-15E
to lead to moderating traded
unshaped sales at 9%CAGR over
the same time period

55

Vesuvius India
Chart 10: Trading sales within unshaped to moderate leading to 11% sales CAGR


Chart 11: Superior EBITDA margins to sustain


Import substitution in monolithics to drive margin
Demand-supply analysis of the domestic refractory industry indicates that it faces import
pressure with one fourth of the production being serviced by net imports (primarily cheap
supplies from China, which account for two thirds of refractory imports in India). Until now,
China has been a key market for basic refractories such as monolithics/bricks. But this is
slowly changing since employee costs in the country have been rising and have doubled
over the last six years over 2009 to 2014.

With currency depreciation, refractory producers can replace some imports like monolithics
and others) which constitute between 35% and 50% (2-3 lakh tpa on an average) of overall
imports into India. Domestic producers like VIL, who are focusing increasingly on building
production in monolithics, will benefit from the same as increasing traded sales in unshaped
are substituted with manufactured sales.
(32.0)
(9.0)
14.0
37.0
60.0
83.0
300
500
700
900
1,100
1,300
CY11 CY12 CY13 CY14E CY15E
(
%
)
(
I
N
R

m
n
)
Traded shaped sales Traded unshaped sales % Growth % Growth
10.0
13.0
16.0
19.0
22.0
25.0
29.0
33.0
37.0
41.0
45.0
49.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
%
)
(
%
)
Gross margin EBITDA margin
Overall traded sales over CY13-
15E at 11% CAGR versus 17%
CAGR for manufactured sales
over the same time period

Currency depreciation to replace
some imports of monolithic, which
constitute between 35-50% (2-3
lakh tpa on an average) of overall
imports into India

Refractory
56

Higher technology among steel players to favour VIL
The Steel Ministry has directed major PSUs to set up collaborations to develop the
necessary technology for production of high-grade steel to meet domestic demand and
reduce reliance on imports. The Steel Authority of India (SAIL) and Rashtriya Ispat
Nigam (RINL) have been asked to sign memorandum of understanding (MoU) or joint
venture agreements for development of technology for high-grade steel.
Indian steel makers rank relatively low on the special steel front compared to their
counterparts in Japan or South Korea, which is a disadvantage as India has free trade
pacts with the two countries. Hence, to efficiently compete, most players are trying to
improvise their mix.

In the process of implementing INR720bn expansion programme to raise hot metal
capacity by 70% to 23.5MTPA, SAIL is eyeing to raise share of special steel in its product
basket to 60% from the current 40%. It is also in the process of inking a MoU with a
foreign firm to develop technology for special steels. This will be favourable for
specialised refractory players like VIL. Also, despite the 2x capacity increase by
Rashtriya Ispat (RINL) to 6.3mtpa, it is planning to maintain share of value-added
products at 80% going forward.

Process efficiency: Testimony
Global: Flow controlImproved quality and productivity
A steel plant was looking to increase value of its casting operation (more output, higher
product quality and more operational flexibility). Vesuvius recommended the Shroud
Exchange Mechanism SEM85 with the VPC (Vesuvius Precision Control). This solution
combined system to exchange the tundish shroud without cast interruption and
without raising the tundish, which increased customer productiVILty through increased
sequence length. The yearly caster production rose from 790,000 T to 870,000 T.
Quality improved due to accuracy in mold level control (95% of the time working in
automatic). As a result, there was 56% reduction in diverted slabs on thin plate steel
grades.

Global: Advanced refractories, yield improvement at global level
The 110T ladles at a mini-mill making rail and structural steel have average campaigns
of 70 heats using brick sidewalls and flat precast bottoms. After every heat, the average
amount of steel left in the ladle was approximately 1.18 tonnes. To improve yield in the
ladle, the formation of the draining vortex needed to be controlled and delayed.
VesuVILus took a customised, engineered approach with each ladle to understand the
fluid dynamics impacting operating conditions and to design and supply a customised
precast bottom that held contour, enhanced draining and improve yield.

The ELBY precast ladle bottom system utilises two proprietary technologies to
improve ladle yield which simulate the drainage of an individual ladle and NUMAX
MONOLITHIC REFRACTORY SYSTEMS technology maximises wear resistance to maintain
the profile of the yield enhancing geometry. After running 120 campaigns, the
performance of the ELBY system improved the yield by 55%, reducing the tonnage
lost per heat from 1.18 tonnes to 0.54 tonnes. Assuming 12,000 heats per year, this is
about 7,700 T of molten saved per year, and a substantial cost saVILng for the plant.

Steel Ministry has directed major
PSUs to set up collaborations and
develop technology for
production of high grade steel,
which will lead to benefits for
players like VIL with strong
technology prowess
Increasingly, PSUs like SAIL to
raise their share of specialised
steel in the process of capacity
expansion
Rise in yearly caster production
by 10% led by Vesuvius Shroud
exchange mechanism with
precision control
55% improvement in yield in a
ladle in a mini steel plant led by
VIL patented ELBY precast laddle
bottom resulted in reducing the
tonnage lost per heat from 1.18
tonnes to 0.54 tonnes and 7,700
T of molten saved per year

57

Vesuvius India
India: Total tundish technology provides cost savings
The primary objectives of steelmakers in India were to reduce refractory consumption
and minimise steel skull losses by increasing the length of the casting sequence (i.e.,
longer tundish life). VIL experts did a complete audit of the tundish area and offered a
Vesuvius Tundish Design Package. This proposal was a unique combination of design
solutions and of technical products that included a Turbostop impact pad system,
Tundish Gas Diffuser, newly designed Ladle Shroud, Stopper and Submerged Entry
Nozzle. After implementation, the project not only achieved the main objectives, but
also improved steel quality with further positive consequences. Combined, as per our
estimation, these changes helped the customer save over EUR2mn per year in
operating costs.

New product pipeline to spur growth
In its 95 years history, Vesuvius plc has developed and acquired several innovative
products such as ladle shrouds, automated tundish sliding gate system, tube changer,
systems, gas purging and sensors for continuous monitoring of molten metal
temperature. The company will invest close to INR500mn on R&D for the group in
India. Thereby strong parentage alongside local R&D set up will assist VIL in new
product introductions.

The new product development center at Vishakhapatnam introduced significant new
products into the market including advanced alumina silicate castables for blast furnace
trough lining and stack gunning.

The new taphole clay facility at Visakhapatnam successfully produced planned
materials for field trials.

The LD3 CSP caster-1 at Tata Steel was commissioned successfully in February 2012; VIL
provided the entire tundish refractory and application for this caster. The entire
refractory job for the new 1.2MTPA plant of BMM Ispat, which was commissioned
during the year, was provided refractories by VIL. Similar turnkey refractory supply and
installation was done at Essar Steel's 6MTPA iron ore pelletisation furnace in Paradip.
The largest boiler gunning repair work was done for JSW Energy at Barmer during the
year.

VIL is currently formulating a strategy to enter new segments in refractory making
where it is currently not present. The land parcel bought at Vizag will be used to set up
a new plant, but the type of products to be made there has still not been finalised.

VIL to invest INR500mn in R&D in
India next year to become self
sufficient
New product development center
at Vishakhapatnam released
significant new products like
advanced castables for blast
furnace trough lining
Savings of EUR2mn per year in
operating costs for a steelmaker in
India led by VesuVILus Tundish
Design Package

Refractory
58

Valuation

VIL, is cyclically well positioned with strong demand drivers for steel industry and
structurally well poised with favourable industry dynamics. Leadership in the profitable steel
flow segment and strong parentage equip it with significant competitive advantage. Strong
gross block addition (43% over CY10-13), demand outlook for steel industry, capacity
expansion by steel players will be catalysts to the company posting 14% sales CAGR and 16%
earnings CAGR over CY13-15E, respectively.

Given the weak macro environment, VIL maintaining its cash flow is commendable and this
could improve in the near future given higher asset turn. We expect free cash flow over the
next two years to be INR1.28bn (versus INR1.4bn in past six years). As a result, we
estimate the companys net cash to stand augmented by 2x to INR104/share in CY15 (16%
of current market cap). Further, the companys EBITDA margin is likely to expand led by
new value-added products and operating leverage. It has a strong earnings growth
trajectory, debt-free balance sheet and robust cash flows with strong expected RoE and pre
tax core RoCE of ~18% and 40% in CY15E, respectively.

At current market price, VIL is trading at P/E of 19.3x CY14 and 15.2x CY15 earnings
estimates. It is trading above mid-end of its past five years historic valuation. However, it is
trading at mid band of its past 13years cycle. We also note that valuations remained at a
premium to long term average till early CY08 supported by strong growth.

VIL has commanded high multiples in the past and traded at its average peak valuations of
~20x P/E and 12x EV/EBITDA during late CY98-99 and CY05, respectively, on account of a
sharp jump in volumes and profitability. This period coincided with strong upcycle period for
the steel industry. The companys earnings remained flat in CY08, before bouncing back to
sharp growth in CY09 and CY10. With strong earnings growth ahead at 16% CAGR over
CY13-15E and 27% YoY growth in CY15E, we expect VIL to trade at premium multiples going
ahead. Comparison of the companys valuations with global peers indicates that VIL has
commanded a premium due to its strong fundamentals. It was able to maintain non-cyclical
sales and earnings growth at 16% and 12%, respectively, over CY03-13. We believe the
company will continue to command a premium due to its strong global brand, positioning
and dynamics of the steel industry which is structurally poised in favour of players like VIL
and strong balance sheet.

Hence, we believe that the company deserves premium valuations and initiate coverage on
the stock with BUY recommendation and target price of INR870 based on 20x CY15E EPS,
at higher band of its long term historic valuations.

Stock to trade at a premium to its
historic valuation of past 13 years
at 20x CY15E with strong pole
position in profitable steel flow
control segment in India as well
as globally and by virtue of being
beneficiary of cyclical and
structural uptick in steel industry
in India with marquee clients
relationships

59

Vesuvius India
Chart 12: One-year forward P/E

Source: Bloomberg, Edelweiss research

0
140
280
420
560
700
A
p
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a
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(
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)
9x
12x
20x
17x
14x

Refractory
60

Key risks

Delay in recovery in key segment
Slowdown in steel sales momentum can impact our sales growth projections since its the
biggest driver for VILs revenues.

Dependent on raw material sourcing through imports
Industry is dependent on import of key raw materials like high grade alumina, bauxite,
magnesite, silicon carbide, etc. China is a major supplier of imports and imposed heavy taxes
on export of raw materials for refractories. This resulted in sharp increase in imported raw
material costs.

For VIL, imports constitute 32% of net sales. This includes currency headwinds of ~69% of
raw material costs which are imported. However, the company has sourcing arrangements
with key suppliers and avails benefits of the parents longstanding relationship with global
raw material suppliers. Netting exports, which are ~10% of sales, the companys overall net
imports constitute 21% of net sales.

Royalty rate increase
Royalty, trademark and service fees, as a percentage of overall sales, stood at 1.5%, with the
average at 1.3-1.7% of net sales during CY05-12. Any increase in the same could pose a risk.
However, with VIL investing INR500mn in its R&D facility in India will reduce the above
threat.

Intensifying competition
International players like RHI, acquired 70% stake in peer, Orient Refractories recently;
Krosaki Harima bought 51% in Tata Refractories; Calderys, part of Imerys, France bought out
full stake in ACE Refractories. All these players are setting up base in India through
acquisitions. This will heighten competition in the refractory industry over the long term.

61

Vesuvius India
Company Description

Fig. 1: Evolution of VIL

Source: Company

About Vesuvius India (VIL)
The Vesuvius Group of UK, which holds ~56% of VILs share capital, is a world leader in the
design, engineering, manufacture and delivery of refractory products, systems and services
for high-technology industrial applications.

The parent, is a global leader in molten metal flow engineering, principally servicing the
steel and foundry industries with customised products, services and technologies that make
demanding applications possible. In India, VIL is the largest player in the steel flow control
segment in the refractory industry with market share of ~35%. The companys business
spans full range of products and systems for refractory products, systems and services
continuous casting of steel.

VILs product range includes:
Isostatically-pressed alumina graphite consumable products
Slide gate systems and refractories
Continuous temperature measurement instruments
Process automation
Lining materials
Pre-cast insulating materials.

Strong technological prowess and rich product portfolio enable VIL to partner with steel
company right from the capacity formulation stage. The company has a technology licence
agreement with the parent and pays royalty and technical fees of ~1.5% of revenues.

It accounts for 75% of manufactures sales (gross). Within manufactured sales, revenue share
of monolithic increased to 32.6% in CY13 from 18.13% in CY06, while it declined to 42% for
shaped refractories from 62.9% during the same period. VIL also generated ~25.3% of
Mar-03
Acquired the crucibles
manufacturing unit at
Mehsana, Gujarat. The
technology has been
sourced from Vesuvius,
Germany.
Jul-94
Kolkata plant
started commercial
production of VISO
products.
Mar-98
Kolkata plant
started manufacture
Slide Gate Refractories
and machine parts.
Feb-99
Technical information
relating to Blast Furnace
Caston and SVP range of
refractoryproducts
purchased from
KSR International.
Jul-00
Acquired Monolithics
Plant at Visakhapatnam
from Carbourundum
Universal Limited.
May-02
Purchased the
Tundish Lining
Business of Foseco
India Limited along
with allied assets.
Jan-06
Doubled the capacity
to manufacture
crucibles at Mehsana
factory.
Dec-06
Doubled the capacity
to manufacture
monolithics at Vizag
plant.
Dec-07
New plant at Vizag to
manufacture taphole
clay and precast.
Mar-12
15 acres freehold
land acquired in Vizag
for proposed third
monolithics plant.
Apr-12
Doubles the capacity
to manufacture
shaped refractory at
Kolkata factory.
VIL is No.1 player in steel flow
control segment in the domestic
refractories market with ~33%
market share

Refractory
62

overall revenue from trading of refractories and ~57% of trading revenue came from
monolithic segment, which points at the companys increasing presence in the high-growth
unshaped segment, while retaining its dominance in shaped segment.

Within overall sales, 42% are shaped manufactured and 33% unshaped manufactured sales.
Traded goods contribute 25% to overall sales ~11% is from shaped trading sales and 14%
from unshaped trading sales. Out of traded unshaped, 66% are sourced from third party
where the company outsources manufacturing and 34% is imported from VILs joint venture
partner, Wuhan Wugang, China. The company also exports 10% of its sales to the Vesuvius
Group.

VIL has shaped refractory plants at Kolkatta and Mehsana with total capacity of 7.7lakh
pieces and operating at 71% utilisation, as on CY11. The company has unshaped refractory
plants at Vizag, with total capacity of 1lakh tonnes and operating at 48% utilisation, as on
CY11. Overall capacity utilisation of the company stood at ~60-70%, as on CY13.

Chart 13: Manufacturing refractories capacity and utilisation
Shaped refractories


In India, VILs exposure to the steel flow control segment is ~35%.

59.0
69.2
79.4
89.6
99.8
110.0
300,000
400,000
500,000
600,000
700,000
800,000
CY08 CY09 CY10 CY11
(
%
)
(
N
o
s
.
)
Installed capacity (in pcs) Production (in Nos' 000)
Sales qty (in Nos' 000) Capacity utilization (%)
VILs overall capacity utilisation
stood at 60-70% in CY13

63

Vesuvius India
Chart 14: Unshaped refractories


VIL currently has four plants and is the process of setting up a fifth plant and one R&D
center. The companys plants are situated at Kolkatta, Vizag and Mehsana. It also has an
outsourced arrangement for its unshaped refractories from Salem, which accounts for 66%
of its traded sales.

Chart 15: Business mix


27.0
33.2
39.4
45.6
51.8
58.0
23,650
43,040
62,430
81,820
101,210
120,600
CY08 CY09 CY10 CY11
(
%
)
(
t
o
n
s
)
Installed capacity (in Nos' 000) Production (in Nos' 000)
Sales qty (in Nos' 000) Capacity utilization (%)
Manufactured
76%
Traded
24%
CY13

Refractory
64
Chart 16: Overall sales mix

Table
VIL
pcs/y
Kolkata accounts for majority of shaped capacity with 1
while monolithics are
accounted for ~4
remaining 2
VIL has already acquired land (~15 acres) for setting up its

Manufactured
Manufactured
(Unshaped)
33%
Traded
24%
CY13
Segment
Steel flow control
Advanced refractories

Purging
Laddle shroud

Chart 17: Traded sales mix

Source:
Table 5: Segment-wise application
Source:

VIL has a well-balanced product portfolio of refractories with shaped capacity of 7.8lakh
pcs/year and unshaped (monolithics) capacity of ~1lakh tpa. The companys
Kolkata accounts for majority of shaped capacity with 1,600pcs
while monolithics are manufactured at the companys two units in
accounted for ~42% revenue share with ~33% coming from unshaped segment and
maining 25% from trading activity (~66% of trading revenue from unshaped).
has already acquired land (~15 acres) for setting up its fifth
Manufactured
(Shaped)
43%
Segment Product
Steel flow control Purge plug
Well nozzle
Laddle tube changer, Laddle shroud
Tundish stopper, tube changer, Slidegate, Shroud,
Gas diffuser
Mould level control
Advanced refractories Lining
Turbostop
Traded
(Unshaped
)
57%
CY13


balanced product portfolio of refractories with shaped capacity of 7.8lakh
The companys first factory in
pcs/day production capability,
at the companys two units in Vizag. Shaped segment
% revenue share with ~33% coming from unshaped segment and
ty (~66% of trading revenue from unshaped).
fifth plant at Vizag.
Laddle tube changer, Laddle shroud
Tundish stopper, tube changer, Slidegate, Shroud,
Traded
(Shaped)
43%
CY13

65

Vesuvius India
Table 6: Production units

Source: Company

Capacity expansion across segments
VIL has been expanding capacity through organic route recently by doubling capacity across
its plants and focusing on increasing capacity in monolithics at its Vizag plants. Shaped
refractory capacity at Kolkata plant has also been expanded to 1,600pcs/day from
800pcs/day earlier. VIL had opted for inorganic expansion in earlier years of its journey
(during 1999-2003) and built further capacity at these acquired plants through the organic
route by leveraging its superior technological skills (imparted by the parent).

Chart 18: Sales break-up


During CY09-12, manufacturing revenues CAGR stood at 17.8% versus 10% for traded sales.
Going forward, we estimate 17% CAGR in manufacturing sales and 11% CAGR in trading
sales over CY13-15E.

Factory Products Capacity Refractory type
Kol katta Conti nuous casti ng
refractori es, sl i de gate
equi pment, purge pl ugs,
i nner nozzl es, machi ne parts
- shaped refractori es
1,600nos/day Shaped
Vi shakhapatnam Monol i thi cs (1 factory), pre-
cast shapes, taphol e cl ay (1
factory) - 2 uni ts
96,500tpa Unshaped
Mehsana Cruci bl es, nozzl es (1 factory)
- shaped refractori es
Shaped
Sal em - arrangement Monol i thi cs Unshaped
0
2,000
4,000
6,000
8,000
10,000
CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
Manufactured Traded
Manufacturing to be on uptrend
with 17% CAGR in sales expected
over CY13-15E versus 11% CAGR
in traded sales

Refractory
66

Chart 19: Sales break-up


Chart 20: Export sales trend


During CY09-12, domestic sales posted 15% CAGR while exports sales posted CAGR of 23%.
Going forward, we have assumed 10% CAGR.

Vesuvius Group (Global)
The Vesuvius Group, UK is the leading global supplier of molten metal flow engineering with
revenue of GBP1.5bn (as of CY13) and ~11% operating margin.

Established as Vesuvius Crucible and in existence since 1916, Vesuvius is the global leader in
the metal flow market. The company has two main divisions (steel and foundry) with top
position in core markets. Vesuvius has a highly diversified base. Around 10-15% of revenues
of the steel division arise from non steel-related process industries supplied by the
advanced refractories product line.
0
1,880
3,760
5,640
7,520
9,400
CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
Domestic Exports
7.0
9.2
11.4
13.6
15.8
18.0
327
446
565
685
804
923
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
%
)
(
I
N
R

m
n
)
Exports % of revenues
Exports constitute 10% of sales;
having posted 23% CAGR over
CY09-12, we have assumed 10%
CAGR in exports over CY13-15E

Vesuvius Group of UK is leading
global supplier of refractories with
revenue of GBP1.5bn (as of CY13),
10% market share and strong ~11%
EBIDTA margin

67

Vesuvius India
Vesuvius develops refractories with two product segments: steel flow control under Viso
brand and advanced refractories under Gard and Elby brands.

Europe, Middle East and Africa (EMEA) are the largest markets accounting for 44% of the
groups revenues; steel is the major division, representing 67% of sales.

Vesuvius is now present in 30 countries across five continents, with 69 manufacturing units,
11 R&D centres, >200 technical experts at customer locations, and 91 sales offices, together
employing over 10,854 personnel (>100PhDs and engineers). The company has reliable just-
in-time supply through lean manufacturing and more than 15-year average customer
relationships.

Within the refractories division (contributes 67% to overall sales), top-10 customers
contribute 18% to refractory sales. Customers of the steel business are principally the steel
producers themselves as well as the manufacturers of steel production equipment, and
include AHMSA, AK Steel, ArcelorMittal, BlueScope, Danieli, Erdemir, Essar, Evraz, Gerdau,
Jindal Group, Nucor, Severstal, Shougang, SSAB, Tata Steel, Techint, ThyssenKrupp,
Usiminas, US Steel, VAI and Vallourec.

The foundry market contributes 33% to overall sales and is highly fragmented as Vesuviuss
20 largest foundry customers represented only 11% of the diVILsions revenue in 2013.
Customers of the foundry business include Caterpillar, Daimler, Fischer, Iveco, Man, Scania,
Teksid, Toyota, Vestas, Volvo, Nippon Electric Glass, REC and First Solar.

Segments
The company has two main product divisions: steel and foundry. The two product lines that
comprise the steel division are steel flow control and advanced refractories.

Steel division

Steel flow control
Flow control products are used in the continuous casting process, which allows steel
manufactured in a blast or electric arc furnace to be cast directly into blooms or slabs
without interruption (i.e. be continuously cast) and remain protected from the atmosphere
between tundish and mould (i.e. be enclosed), thus significantly reducing contamination
levels .

In 2013, the segment contribution was 556mn of sales and up 0.7% adjusted for the
acquisition of Metallurgica in March 2012. This represents a relatively small proportion of
the input cost of customers (e.g., less than 1% for a steel producer), but segment
performance is critical to production processes.

Steel flow control products supplied by Vesuvius Plc include: the Viso product range,
which are isostatically pressed alumina graphite refractories; slide-gate refractories;
temperature measurement and slag level detection; fluxes; and control devices to monitor
and regulate steel flow. Prices for raw materials, particularly graphite and zirconia,
remained relatively stable during 2013.

Boast of reliable just-in-time
supply through lean manufacturing
and has more than 15-year
average customer relationships
Patented brands like Viso in steel
flow control segment and Elby and
Gard brands in advanced
refractories have helped improve
steel players productivity

Refractory
68

Advanced refractories
The Vesuvius advanced refractories product line offers a full range of specialist refractory
materials for lining steelmaking vessels such as blast furnaces, ladles and tundishes and for
applications in other high temperature process industries. Here they exited low-margin and
high-risk businesses associated with labour-only construction projects. The company
generated revenue of 462mn in 2013, up 3.5% reflecting the restructuring undertaken to
divest non-core activities.

Advanced refractories continue to focus on technology leadership with the Gard brand
that has established a best-in-class product offering in each market served and Elby, being
the engineered ladle bottom yield programme, which has rapidly gained acceptance at
major forward-thinking steel plants. When Elby is employed, yield improvement of up to
4% has been identified by many customers.

Foundry division
The division, trading under the Foseco brand, is a world leader in the supply of consumable
products and services to the global foundry industry, which produces castings used in a wide
variety of engineered components. Revenue of 493mn represented 7.0% reduction. The
impact of mining and construction slowdown in the second half of the year contributed to
lower revenue.

Chart 21: CY13: Vesuvius Plcs sales by region

Source: Vesuvius Plc

EMEA
44%
Americas
32%
Asia Pacific
revenues
24%
CY13

69

Vesuvius India
Chart 22: Vesuvius Plcs sales break-up

Source: Vesuvius Plc

Innovation: A key success factor
The groups investment in research and development (R&D) during CY13 amounted to
26.7mn (representing 1.8% of group revenues (2012:1.6%). They have expanded their
R&D budget by over 20% in the past three years, and have already begun to see
benefits.

VIL has approximately 1,400 patents granted with further approximately 550 pending
patent applications, which have been registered in several countries around the world
and which cover over 150 separate inventions.

They were granted 182 patents worldwide during 2013 and filed 27 new invention and
150 new patent applications, during the year. To maintain technology leadership, they
highlighted spend of ~2% of their annual revenue in R&D over the long term.

They have more than 200 field application engineers supported by local development
teams on all continents. These local technical teams are constantly updated with
practical information on latest technologies developed in their six global research
centres.

Primary objectives for Vesuvius Plc over medium term include:

Improve margins further. This is after underlying margins increased by 100bps in 2013 to 9.3%;
Maintain technology leadership through higher investment in R&D;
Long-term revenue growth, ahead of end markets;
Sustain global leadership in core businesses;
Improve cost leadership; inventory reduction from 85 to 77 days (12-month average);
Further presence in China
Steel flow
control
37%
Advanced
refractories
30%
Foundry
33%
CY13
Parents R&D expenses grew 20%
in past three years with
GBP27mn in CY13 and
contributed 1.8% to sales

Refractory
70

Financial Outlook

Outperformance to steel industry with 14% sales CAGR over CY13-15E
Historically, VIL has outpaced the domestic steel industry in terms of sales growth, owing to
its leadership position in the profitable steel flow control process and high growth in thin
castings. As a result, shaped manufacturing volumes have risen at 12% CAGR while the
unshaped segment posted 17% CAGR in the past seven years (CY05-12). This is as compared
to steel industry logging 8% CAGR over the same period.

VIL meets almost 100% refractory requirements of some large steelmakers including JSW
Steel and Essar Steel, apart from being a large supplier to TISCO as well. The past three
years have been challenging for the domestic steel industry in terms of production growth
due to delays in commissioning of new projects. Operationally, it was challenging for VIL too
as production at some of its key customers dropped sharply (Essar Steel and Rashtriya Ispat
Nigam). Going forward, the Indian steel industry stands to benefit from new plant
commissioning and higher utilisations leading to capacity expansion. Thus, VIL is well placed
with higher volumes expected to flow from key customers like Essar Steel, which is expected
to double its capacity utilisation from the current 35%. Key trigger for another key customer,
JSW Steels sales, would be higher iron ore availability in Karnataka, which will bolster VILs
production.

Shift in steel production towards primary producers with large furnaces, which have
customised refractory needs, will lead to strong sales growth for VIL going ahead. Major
primary producers are expected to log production CAGR of 9% versus 6% CAGR for the
overall steel industry over FY14-16E.

With capacity in place, utilisation is currently at ~60-70%. Going ahead, along with pick up in
volumes of its key customers, we expect VIL to register 12% CAGR in manufacturing shaped
volumes and 14% CAGR in unshaped volumes over CY13-15. Hence, we expect VIL to
register 17% CAGR in manufactured sales, 11% CAGR in traded sales and 14% CAGR in
overall sales over CY13-15E.

Strong exposure to primary
producers and expected uptick
and capacity expansion by key
players will lead to 14% sales CAGR
over CY13-15E versus 13% CAGR
logged during CY05-13

71

Vesuvius India
Chart 23: Revenue growth trajectory


Better manufacturing trajectory to sustain high margins
We anticipate VIL to post strong growth riding high capacity expansion of INR858mn (43%
expansion of CY10 gross block). The companys historic core fixed asset turn is 1.9x, which
we expect the company to trend over the next two years as well. We have assumed 17%
CAGR in manufacturing sales over CY13-15 versus 12.4% CAGR over CY07-12. Also, higher
sales growth in unshaped refractories led by localisation of imported unshaped refractories
will lead to lower overall traded sales trajectory at 11% CAGR over CY13-15E.

Chart 24: 17% CAGR in manufactured versus 11% CAGR in traded sales over CY13-15E


We believe high EBITDA margin of 18.4% will be maintained on increasing capacity
utilisation, led by higher volume growth in shaped and unshaped sales and gradual shift
from trading to manufacturing in unshaped sales. Hence, we expect 14% CAGR in operating
profit over CY13-15 and 23% YoY growth in CY15.

0
1,800
3,600
5,400
7,200
9,000
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
I
N
R

m
n
)
Refractories (Shaped) Refractories (Unshaped) Traded
0
2,000
4,000
6,000
8,000
10,000
CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
Manufactured Traded
Strong capex will drive 17%
manufacturing sales CAGR versus
11% traded sales CAGR over
CY13-15E

Refractory
72

Chart 25: Strong operating margins to be maintained


Chart 26: Robust PAT growth trajectory of 16%


We expect VIL to post 16% CAGR over CY13-15 (13% CAGR during CY07-13) and PAT growth
of 27% in CY15E, primarily led by surge in manufacturing volumes.

Strong fixed asset turnover at 2x in CY15 to boost return ratios
While overall core gross fixed asset turn has dipped to 1.7x (from historic average of 1.9x in
past three years), we expect asset turn to improve to 2x over the next two years, leading to
17% CAGR in manufactured sales over CY13-15E. Ergo, with increase in capacity utilization
and sustenance of high operating margins, we expect RoE and core RoCE to jump from
17.6% and 32.4% in CY13 to 18% and 40.4% in CY15, respectively.

15.0
16.0
17.0
18.0
19.0
20.0
42.0
43.0
44.0
45.0
46.0
47.0
(
%
)
(
%
)
Gross margin (LHS) EBITDA margins (RHS)
0.0
200.0
400.0
600.0
800.0
1,000.0
(
I
N
R

m
n
)

73

Vesuvius India
Chart 27: RoE, core RoCE (%) to trend up with improving fixed asset turn


Strong cash with FCF at 16% of current market cap over CY13-15E
VIL is debt free with INR1.06bn in cash (INR52/share) as on CY13, ~8% of current market
cap. The company has been generating strong operating cash flow over the years. Working
capital has also been low. It also incurred significant capex (INR858mn) over the past three
years. With improving asset turn, we expect free cash flow (FCF) over the next two years to
be INR1.28bn (versus INR1.4bn in past six years). Hence, we expect the companys net cash
will stand augmented by 2x to INR104/share in CY15 (~16% of current market cap) from
INR52/share currently.

Chart 28: Strong cash flow generation


13.0
15.4
17.8
20.2
22.6
25.0
24.0
29.0
34.0
39.0
44.0
49.0
(
%
)
(
%
)
Core RoCE (LHS) RoE (RHS)
57
255
452
650
847
1,045
(
I
N
R

m
n
)
Operating cash flow Free cash flow
With strong FCF we expect net
cash per share to stand
augmented by 2x to
INR104/share in CY15E (16% of
current market cap)
With improving core fixed asset
turn to historic 2x, we expect RoE
to jump 30bps to 17.9% and core
RoCE to catapult 790bps to
40.4% over CY13-15E

Refractory
74

Financial Statements

Key assumptions
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.8 7.3
USD/INR (Avg) 55 62 58 56
Industry growth assumptions (%)
Steel production growth 5.4 5.1 5.5 7.0
Company growth assumptions (%)
Manufactured sales (%)
Shaped volume growth 6.5 4.5 8.0 17.0
Unshaped volume growth 6.5 4.5 10.0 18.0
Export revenue growth 4.8 (21.4) 10.0 10.0
Traded sales (%)
Shaped sales growth (25.9) 68.5 15.0 20.0
Unshaped sales growth 17.7 9.9 15.0 15.0
Revenue mix (% of gross sales)
Manufactured 80.3 76.3 76.7 78.2
Traded 19.7 23.7 23.3 21.8
Gross margin
Manufacturing gross margin (%) 46.5 42.5 44.7 45.0
Traded gross margin (%) 22.3 35.4 28.0 28.0
Cost assumptions
Raw mat. cost as % net sales 56.1 55.2 55.8 55.5
Employee cost as % of net sales 6.4 6.3 6.2 6.1
Administrative exp as % of net sales 11.6 10.3 10.2 10.1
Income statement (INR mn)
Net revenues 5,642 6,023 6,511 7,835
Raw material costs 3,167 3,325 3,631 4,351
Gross profit 2,476 2,698 2,879 3,484
Employee expenses 341 380 401 474
Other expenses 1,160 1,204 1,307 1,571
Operating expenses 1,501 1,584 1,707 2,045
Total expenditure 4,668 4,909 5,339 6,396
EBITDA 974 1,114 1,172 1,439
Depreciation & amortisation 164 176 186 200
EBIT 811 938 986 1,239
Interest expense 1 1 0 0
Other income 16 52 53 74
Profit before tax 826 989 1,038 1,313
Provision for tax 269 338 343 433
Core profit 558 652 696 880
Extraordinary/ Prior period items - - - -
Profit after tax 558 652 696 880
Equity shares outstanding (mn) 20.3 20.3 20.3 20.3
Core EPS (INR) basic 27.5 32.1 34.3 43.3
Diluted shares (mn) 20.3 20.3 20.3 20.3
EPS (INR) diluted 27.5 32.1 34.3 43.3
CEPS 3.6 4.1 4.3 5.3
DPS 4.5 4.7 5.0 6.5
Dividend payout (%) 16.4 14.8 14.6 15.0
Common size metrics (% net revenues)
Gross margin 43.9 44.8 44.2 44.5
Operating expenses 26.6 26.3 26.2 26.1
EBITDA margins 17.3 18.5 18.0 18.4
EBIT margin 14.4 15.6 15.1 15.8
Interest 0.0 0.0 0.0 0.0
Net profit margin 9.9 10.8 10.7 11.2
Growth metrics (%)
Revenues 3.8 6.7 8.1 20.3
EBITDA 0.7 14.4 5.2 22.8
PBT (0.1) 19.7 5.0 26.5
Core Net profit 1.0 16.9 6.8 26.5
Core EPS 1.0 16.9 6.8 26.5

75

Vesuvius India

Balance sheet (INR mn)
As on 31st December CY12 CY13 CY14E CY15E
Share capital 203 203 203 203
Reserves & surplus 3,229 3,768 4,345 5,071
Shareholder equity 3,432 3,971 4,548 5,274
Deferred tax liability/asset 76 89 - -
Sources of funds 3,508 4,060 4,548 5,274
Gross fixed assets 2,287 2,587 2,741 2,941
Accumulated depreciation 1,113 1,252 1,438 1,638
Tangible assets 1,170 1,332 1,303 1,303
Intangible assets 4 3 3 3
CWIP (incl. intangible) 221 54 100 150
Total net fixed assets 1,395 1,389 1,406 1,456
Non current investments 0 0 0 0
Investments 0 0 0 0
Cash and cash equivalents 721 1,063 1,575 2,108
Inventories 513 588 619 700
Sundry debtors 1,661 1,789 1,768 2,008
Loans and advances 307 342 342 342
Other assets 6 5 5 5
Total current assets (ex cash) 2,487 2,724 2,735 3,054
Trade payable 759 751 810 940
Other current liabilities & prov. 335 364 357 405
Total current liabilities & prov. 1,095 1,116 1,167 1,345
Net current assets (ex cash) 1,392 1,608 1,567 1,709
Application of funds 3,508 4,060 4,548 5,274
Book value per share (INR) 169 196 224 260
0 0 0 0
Free cash flow (INR mn)
Net profit 558 652 696 880
Add: Depreciation 164 176 186 200
Add: Int & other non-cash items (6) (61) (53) (74)
Gross cash flow 715 766 829 1,006
Less: Changes in working cap. 214 126 (41) 142
Less: Capex 236 240 200 250
Free cash flow 266 400 670 614
Peer comparison
Companies Currency CMP O/s Shares Mcap
As on 6/13/14 (In Mn.) (INR bn) CY14/FY15E CY15/FY16E CY14/FY15E CY15/FY16E CY14/FY15E CY15/FY16E
Domestic Players
Vesuvi us Indi a INR 660 20 13.4 34.3 43.3 19.2 15.2 16.3 17.9
Ori ent refractori s INR 75 120 9.0 4.9 6.3 15.5 12.0 37.1 37.5
IFGL refractori es INR 135 35 4.7 19.1 NA 7.1 NA 20.2 NA
Global Players*
Vesuvi us PLC GBP 5 278 133 0.3 0.4 14.2 12.8 9.5 9.9
RHI AG Euro 25 40 81 2.4 2.8 10.4 9.0 17.2 17.5
Ci e de St Gobai n Euro 43 553 1960 2.5 3.2 17.2 13.6 8.0 9.3
Magnesi ta SA BSL 4 289 34 0.4 0.5 12.4 9.1 3.3 4.7
Note: IFGL's estimates and global peers estimates are as per bloomberg
Source: Bloomberg
Core EPS (Rs) P/E (x) ROE (%)
Cash flow metrics
Financing cash flow (101) (107) (155) (81)
Investing cash flow (200) (528) (200) (250)
Net cash flow 200 5 515 534
Capex (236) (240) (200) (250)
Dividends paid (100) (106) (119) (154)
Profitability ratios
Core ROACE (%) 30.6 32.4 33.0 40.4
ROAE (%) 17.4 17.6 16.3 17.9
ROA (%) 17.0 17.2 16.2 17.9
Current ratio 2.3 2.4 2.3 2.3
Quick ratio 1.8 1.9 1.8 1.8
Cash ratio 0.7 1.0 1.3 1.6
Receivable turnover (x) 3.6 3.5 3.7 4.2
Inventory turnover (x) 6.3 6.0 6.0 6.6
Payables turnover (x) 3.9 4.4 4.7 5.0
Receivables (days) 102 105 100 88
Inventory (days) 57 60 61 55
Payables (days) 93 83 78 73
Cash conversion cycle (days) 66 82 82 70
Operating ratios (x)
Total asset turnover 1.7 1.6 1.5 1.6
Fixed asset turnover 2.6 2.5 2.4 2.8
Equity turnover 1.8 1.6 1.5 1.6
Core Fixed asset turnover 1.9 1.7 1.7 2.0
Valuation parameters
Diluted EPS (INR) 27.5 32.1 34.3 43.3
Y-o-Y growth (%) 1.0 16.9 6.8 26.5
CEPS (INR) 3.6 4.1 4.3 5.3
Diluted P/E (x) 24.0 20.6 19.3 15.2
P/BV (x) 3.9 3.4 2.9 2.5
EV/Sales (x) 2.2 2.0 1.8 1.4
EV/EBITDA (x) 12.7 10.8 9.8 7.6
Dividend yield(%) 0.7 0.7 0.8 1.0

Refractory
76



Holding Top -10
Perc. Holding Perc. Holding
HDFC Asset Management Co Ltd 8.99 UTI Asset Management 1.38
Reliance Capital Management 4.05 ACACIAConservation Fund 1.19
ACACIA Institutional Partners 3.67 ACACIA Banyan Partners 1.14
ACACIA Partners LP 3.61 AXIS Asset Management 0.25
ACACIA Conservation Fund 1.19 ING Investment Management 0.1
Bulk Deals
Deal Date Client Name Deal Type Quantity Price
5-Jul-12 ACACIA BANYAN PARTNERS P 271600 372
5-Jul-12 ACACIA PARTNERS L.P S 271600 372
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
18-Nov-13 Tanmay Ganguly Sell 20000
18-Nov-13 Tanmay Ganguly Sell 37096
23-Sep-13 Tanmay Ganguly Sell 50
27-Aug-12 Tanmay Ganguly Buy 4500
27-Aug-12 Tanmay Ganguly Buy 500
18-Mar-11 Tanmay Ganguly Buy 6000
Additional Data
Directors Data
Biswadip Gupta Chairman Tanmay Kumar Ganguly Managing Director
Dr Claude Dumazeau Director Yves M.C.M.G Nokerman Director
Sudipto Sarkar Director Francois Clement Wanecq Director

Auditors - BSR & Co.

77

Vesuvius India

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Miscellaneous
AIA Engineering, Balkrishna Industries, Fag Bearings, SKF India, VIP Industries

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe

Rating Distribution* 149 40 12 202
* 1 stocks under review

Market Cap (INR) 139 57 6
Date Company Title Price (INR) Recos

Recent Research
22-May-14 VIP Industries Strong sales growth;
Result Update
111 Buy
21-May-14 AIA
Engineering
Strong volumes and margins;
Result Update
652 Buy
20-May-14 Balkrishna
Industries
Improving volumes; strong
margins;
Result Update
568 Buy

> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation

Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to

Refractory
78


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79

Vesuvius India

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in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an
agreement with a U.S. registered broker-dealer, Enclave Capital, LLC ("Enclave").
Transactions in securities discussed in this research report should be effected through Enclave Capital, LLC.
Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial
Services and Markets Act 2000 ("FSMA").
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional
experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the
Order); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being
referred to as relevant persons).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment
activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant
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Disclaimer for Canadian Persons
This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have
prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not
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a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario
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Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research
analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103"))
who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an
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service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098
Tel: +91 22 4009 4400. Email: research@edelweissfin.com

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