Electrosteel Company update

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					                                                                                                        Company Update | Steel
                                                                                                                 February 17, 2012




 ELECTROSTEEL CASTINGS                                                                  BUY
                                                                                        CMP                                      `24
 Iron ore mines get MOEF clearance                                                      Target Price                             `32

 Electrosteel Castings (ECL) receives forest clearance: We resume coverage on ECL       Investment Period              12 Months
 in view of a positive development (receipt of forest clearance). ECL has received
 forest stage-I clearance for its iron ore mines located at Kodolibad, West            Stock Info
                                                                                       Sector                                     Steel
 Singhbhum, Jharkhand, from Ministry of Forests and Environment (MOEF).
                                                                                       Market Cap (` cr)                          757
 ECL expects to receive stage-II clearance in the coming 2-3 months and then sign
                                                                                       Beta                                        0.7
 mining lease with the state government. After signing the mining lease, ECL can
                                                                                       52 Week High / Low                       35/16
 develop the mine and resume production. The mine has reserves of 91mn tonnes
                                                                                       Avg. Daily Volume                   121,863
 with 64% Fe content. ECL expects to commence production from this mine in
                                                                                       Face Value (`)                                1
 FY2013. However, procedural delays cannot be ruled out in our view.
                                                                                       BSE Sensex                              18,289
 Update on coking coal mine: ECL has a coking coal mine in Parbatpur,                  Nifty                                    5,564
 Jharkhand, with reserves of 231mn tonnes. The mine has received full statutory        Reuters Code                            ELST.BO
 clearances and ECL is currently developing the mine. The company expects              Bloomberg Code                     ELSC@IN
 meaningful production from this mine to commence from 2HFY2013.

 ECL to turn into a fully integrated player: With upcoming production from coking      Shareholding Pattern (%)
 coal and iron ore, ECL will turn into a fully integrated steelmaker. Although there   Promoters                                 48.5
 is lack of clarity on the timelines for commencement of meaningful production         MF / Banks / Indian Fls                   10.1
 from its coking coal and iron ore mines, ECL’s margins are expected to be             FII / NRIs / OCBs                          6.3
 significantly higher than its peers once it reaches optimum production capacity at    Indian Public / Others                    35.1
 its mines. Moreover, ECL’s associate, Electrosteel Steels (34.8% stake) with 2.2mn
 tonnes of steel capacity is expected to benefit the most, as ECL will supply coking
                                                                                       Abs. (%)                 3m      1yr        3yr
 coal and iron ore from its mines to Electrosteel Steels at subsidized rates
                                                                                       Sensex               11.1       (1.2) 102.4
 (cost + 20%).
                                                                                       ECL                      1.7   (26.0)      (1.2)
 Outlook and valuation: We have a positive stance on ECL’s initiatives of gradually
 venturing into steel making through its associate Electrosteel Steels. Furthermore,
 the company’s backward integration initiatives through allocation of coking coal
 and iron ore mines are expected to result in cost savings from FY2013. The stock
 is currently trading at 0.4x each for FY2012E and FY2013E. We recommend Buy
 on the stock with an SOTP target price of `32.


 SOTP valuation
  Particulars                                                                    (`)
  Standalone business                      5.0x FY2013E EV/EBITDA                10
  Stake in Electrosteel Steels             1.0x P/BV                             20
  Stake in Lanco Ind.                      20% discount to CMP                    2
  Target price                                                                  32
 Source: Company, Angel Research


                                                                                       Bhavesh Chauhan
                                                                                       Tel: 022- 39357600 Ext: 6821
                                                                                       bhaveshu.chauhan@angelbroking.com



Please refer to important disclosures at the end of this report                                                                      1
                                                                                              Electrosteel Castings | Company Update



Exhibit 1 : Recommendation summary
 Companies          CMP Target Price      Reco.   Mcap Upside      P/E (x)         P/BV (x)       EV/EBITDA (x)     RoE (%)         RoCE (%)
                      (`)           (`)            (` cr)   (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E                FY13E FY12E FY13E
 Tata Steel         478            558     Buy 46,423       17   11.7        8.4   1.0    0.9      7.5     5.3    18.8    10.9      7.0    9.4
 JSW Steel          855              - Neutral 19,068        -   19.1    11.8      1.2    1.1      6.4     5.5     6.7    10.1      9.0   10.8
 SAIL               112              - Neutral 46,157        -   11.7    10.1      1.1    1.0     10.2     8.2    10.0    10.6      7.1    8.4
 Monnet Ispat       490            663     Buy    3,152     35   10.4        7.0   1.3    1.1     10.5     6.3    13.7    18.2      7.4   11.6
 ECL                 24            32      Buy     875      31   13.2        4.7   0.4    0.4     11.0     6.6    3.6         9.8   3.3    6.0
 Source: Company, Angel Research




February 17, 2012                                                                                                                              2
                                                          Electrosteel Castings | Company Update



                    Profit & loss statement (Consolidated)
                    Y/E March (` cr)                         FY08   FY09   FY10   FY11     FY12E    FY13E
                    Net Sales                              1,440 1,948 1,580      1,873    1,988    2,124
                    Other operating income                    23     27     30       34       53      56
                    Total operating income                 1,462 1,975 1,610      1,907    2,041    2,180
                    % chg                                    17.7   35.1 (18.5)    18.4      7.0      6.8
                    Total Expenditure                      1,360 1,684 1,280      1,604    1,871    1,887
                    Net Raw Materials                        777    986    646     897     1,046    1,005
                    Other Mfg costs                          494    586    503     558      646      690
                    Personnel                                 90    113    131     149      179      191
                    Other                                       -      -      -        -        -       -
                    EBITDA                                   102    291    330     303      170      293
                    % chg                                  (35.9) 184.6    13.4    (8.1)   (43.9)    72.4
                    (% of Net Sales)                          7.1   14.9   20.9    16.2      8.5     13.8
                    Depreciation & Amortization               38     53     54       56       57      82
                    EBIT                                      64    238    276     247      113      211
                    % chg                                  (48.3) 268.8    16.4   (10.6)   (54.3)    86.9
                    (% of Net Sales)                          4.5   12.2   17.5    13.2      5.7      9.9
                    Interest & other Charges                  37    103     52       86       73      83
                    Other Income                              78     64     87       62       10      12
                    (% of PBT)                               74.0   32.3   28.1    27.7     19.9      8.5
                    Share in profit of Associates               -      -      -        -        -       -
                    Recurring PBT                            106    198    312     223        50     140
                    % chg                                  (33.1)   87.2   57.2   (28.4)   (77.4)   179.2
                    Extraordinary Inc/(Expense)              (60)      -      -        -        -       -
                    PBT (reported)                            46    198    312     223        50     140
                    Tax                                       1.7   70.4 105.2     61.1      7.5     42.1
                    (% of PBT)                                3.8   35.5   33.7    27.4     15.0     30.0
                    PAT (reported)                            44    128    206     162        43      98
                    Add: Share of earnings of associate       11      9     28       18       22      81
                    Less: Minority interest (MI)               0      1      1        0        1       1
                    Extraordinary Expense/(Inc.)                -      -      -        -        -       -
                    PAT after MI (reported)                   55    135    234     180        63     178
                    ADJ. PAT                                 116    135    234     180        63     178
                    % chg                                    10.3   17.1   73.1   (23.3)   (64.7)   181.6
                    (% of Net Sales)                          8.0    6.9   14.8     9.6      3.2      8.4
                    Basic EPS (`)                             5.0    4.8    7.3     5.5      1.9      5.5
                    Fully Diluted EPS (`)                     4.0    4.2    6.8     5.2      1.8      5.2
                    % chg                                     3.9    7.2   59.9   (23.3)   (64.7)   181.6




February 17, 2012                                                                                       3
                                                    Electrosteel Castings | Company Update



                    Balance sheet (Consolidated)
                    Y/E March (` cr)               FY08   FY09    FY10    FY11    FY12E   FY13E
                    SOURCES OF FUNDS
                    Equity Share Capital            28      29      33      33      33      33
                    Reserves & Surplus          1,133     1,338   1,588   1,714   1,730   1,856
                    Shareholders’ funds         1,161     1,367   1,621   1,747   1,762   1,889
                    Share Warrants                  34      34        -       -       -       -
                    Minority Interest                3       4       5       5       5       5
                    Total Loans                    844    1,101   1,298   1,587   1,642   1,662
                    Deferred Tax Liability          20      37      47      44      44      44
                    Total Liabilities           2,062     2,544   2,971   3,382   3,453   3,600
                    APPLICATION OF FUNDS
                    Gross Block                    643     798     860     936    1,301   1,626
                    Less: Acc. Depreciation        226     279     322     382     439     521
                    Net Block                      416     519     538     553     861    1,104
                    Capital Work-in-Progress       150     302     397     454     289     114
                    Goodwill
                    Investments                    179     466    1,067   1,425   1,425   1,425
                    Current Assets              1,686     1,594   1,300   1,636   1,631   1,699
                    Cash                           184      95     299     205     238     202
                    Loans & Advances               518     441     208     247     271     298
                    Other                          984    1,057    793    1,185   1,122   1,199
                    Current liabilities            369     337     332     686     753     743
                    Net Current Assets          1,316     1,257    969     950     878     957
                    Mis. Exp. not written off         -       -       -       -       -       -
                    Total Assets                2,062     2,544   2,971   3,382   3,453   3,600




February 17, 2012                                                                             4
                                                      Electrosteel Castings | Company Update



                    Cash flow statement (Consolidated)
                    Y/E March (` cr)               FY08     FY09     FY10     FY11     FY12E       FY13E
                    Profit before tax                 51      193      312      223       50         140
                    Depreciation                      39       53       54       56       57          82
                    Change in Working Capital       (223)    (160)     172     (100)     105        (115)
                    Less: Other income                69      124      (34)      50       21          80
                    Direct taxes paid                (14)     (44)    (115)     (59)      (8)        (42)
                    Cash Flow from Operations        (78)     166      389      170      226         146
                    Inc./ (Dec.) in Fixed Assets    (179)    (301)    (174)    (119)    (200)       (150)
                    Inc./ (Dec.) in Investments       13     (177)    (307)    (315)           -        -
                    Other income                    (279)     (90)      13       30            -        -
                    Cash Flow from Investing        (445)    (568)    (469)    (404)    (200)       (150)
                    Issue of Equity                   74      121       15      0.3            -        -
                    Inc./(Dec.) in loans             349      246      359      277       55          20
                    Dividend Paid (Incl. Tax)        (26)      (7)     (41)     (41)     (48)        (52)
                    Others                            (5)     (47)     (50)     (96)           -        -
                    Cash Flow from Financing         392      314      283      140        7         (32)
                    Inc./(Dec.) in Cash             (131)     (89)     203      (94)      33         (36)
                    Opening Cash balances            315      184       95      299      205         238
                    Closing Cash balances            184       95      299      205      238         202




February 17, 2012                                                                                      5
                                                      Electrosteel Castings | Company Update



                    Key ratios
                    Y/E March                      FY08   FY09   FY10    FY11   FY12E   FY13E
                    Valuation Ratio (x)
                    P/E (on FDEPS)                  6.1    5.7    3.6     4.7    13.2     4.7
                    P/CEPS                          4.6    4.1    2.9     3.6     6.9     3.2
                    P/BV                            0.6    0.5    0.5     0.5     0.4     0.4
                    Dividend yield (%)              5.2    5.2    5.2     5.2     5.2     5.6
                    EV/Sales                        0.8    0.8    1.0     1.0     0.9     0.9
                    EV/EBITDA                      11.9    5.2    4.7     6.1    11.0     6.6
                    EV/Total Assets                 0.6    0.6    0.5     0.5     0.5     0.5
                    Per Share Data (`)
                    EPS (Basic)                     5.0    4.8    7.3     5.5     1.9     5.5
                    EPS (fully diluted)             4.0    4.2    6.8     5.2     1.8     5.2
                    Cash EPS                        5.2    5.9    8.3     6.8     3.5     7.5
                    DPS                             1.3    1.3    1.3     1.3     1.3     1.4
                    Book Value                     42.6   48.8   49.6    53.4    53.9    57.8
                    Dupont Analysis
                    EBIT margin                     4.4   12.0   17.2    13.0     5.5     9.7
                    Tax retention ratio (%)        96.2   64.5   66.3    67.1    85.0    70.0
                    Asset turnover (x)              0.8    0.9    0.7     0.7     0.7     0.7
                    RoIC (Post-tax)                 3.3    6.8    7.5     5.8     3.3     4.8
                    Cost of Debt (Post Tax)         4.5    6.8    2.9     3.2     3.8     3.5
                    Leverage (x)                    0.6    0.6    0.5     0.6     0.6     0.6
                    Operating RoE                   2.6    6.8    9.7     7.4     3.0     5.6
                    Returns (%)
                    RoCE (Pre-tax)                  3.5   10.3   10.0     7.8     3.3     6.0
                    Angel RoIC (Pre-tax)            4.4   12.9   13.8    11.1     4.5     7.6
                    RoE                             5.5   10.4   15.5    10.7     3.6     9.8
                    Turnover ratios (x)
                    Asset Turnover (Gross Block)    2.4    2.7    1.9     2.1     1.8     1.5
                    Inventory / Sales (days)       117     94     115     137    137     137
                    Receivables (days)             132    104      69      69     69      69
                    Payables (days)                 97     54      95      95     95      95
                    WC cycle (ex-cash) (days)      182    158     177     156    168     154
                    Solvency ratios (x)
                    Net debt to equity              0.6    0.6    0.5     0.6     0.6     0.6
                    Net debt to EBITDA              6.5    2.8    2.3     3.5     6.3     3.9
                    Interest Coverage               1.7    2.3    5.3     2.9     1.6     2.6




February 17, 2012                                                                          6
                                                                                           Electrosteel Castings | Company Update




  Research Team Tel: 022 - 39357800                   E-mail: research@angelbroking.com                    Website: www.angelbroking.com


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 Disclosure of Interest Statement                                         Electrosteel Castings
 1. Analyst ownership of the stock                                                  No
 2. Angel and its Group companies ownership of the stock                            Yes
 3. Angel and its Group companies' Directors ownership of the stock                 No
 4. Broking relationship with company covered                                       No

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


 Ratings (Returns):             Buy (> 15%)                             Accumulate (5% to 15%)                    Neutral (-5 to 5%)
                                Reduce (-5% to 15%)                     Sell (< -15%)


February 17, 2012                                                                                                                           7
                                                                                                                                                                                         Electrosteel Castings | Company Update


                     6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 39357800

Research Team
Fundamental:
Sarabjit Kour Nangra                                                                 VP-Research, Pharmaceutical                                                                              sarabjit@angelbroking.com
Vaibhav Agrawal                                                                      VP-Research, Banking                                                                                     vaibhav.agrawal@angelbroking.com
Shailesh Kanani                                                                      Infrastructure                                                                                           shailesh.kanani@angelbroking.com
Bhavesh Chauhan                                                                      Metals & Mining                                                                                          bhaveshu.chauhan@angelbroking.com
Sharan Lillaney                                                                      Mid-cap                                                                                                  sharanb.lillaney@angelbroking.com
V Srinivasan                                                                         Research Associate (Cement, Power)                                                                       v.srinivasan@angelbroking.com
Yaresh Kothari                                                                       Research Associate (Automobile)                                                                          yareshb.kothari@angelbroking.com
Hemang Thaker                                                                        Research Associate (Capital Goods)                                                                       hemang.thaker@angelbroking.com
Nitin Arora                                                                          Research Associate (Infra, Real Estate)                                                                  nitin.arora@angelbroking.com
Ankita Somani                                                                        Research Associate (IT, Telecom)                                                                         ankita.somani@angelbroking.com
Varun Varma                                                                          Research Associate (Banking)                                                                             varun.varma@angelbroking.com
Saurabh Taparia                                                                      Research Associate (Cement, Power)                                                                       Sourabh.taparia@angelbroking.com

Technicals:
Shardul Kulkarni                                                                     Sr. Technical Analyst                                                                                    shardul.kulkarni@angelbroking.com
Sameet Chavan                                                                        Technical Analyst                                                                                        sameet.chavan@angelbroking.com
Sacchitanand Uttekar                                                                 Technical Analyst                                                                                        sacchitanand.uttekar@angelbroking.com

Derivatives:
Siddarth Bhamre                                                                      Head - Derivatives                                                                                       siddarth.bhamre@angelbroking.com

Institutional Sales Team:
Mayuresh Joshi                                                                       VP - Institutional Sales                                                                                 mayuresh.joshi@angelbroking.com
Hiten Sampat                                                                         Sr. A.V.P- Institution sales                                                                             Hiten.Sampat@angelbroking.com
Meenakshi Chavan                                                                     Dealer                                                                                                   meenakshis.chavan@angelbroking.com
Gaurang Tisani                                                                       Dealer                                                                                                   gaurangp.tisani@angelbroking.com
Akshay Shah                                                                          Sr. Executive                                                                                            akshayr.shah@angelbroking.com

Production Team:
Simran Kaur                                                                          Research Editor                                                                                          simran.kaur@angelbroking.com
Dilip Patel                                                                          Production                                                                                               dilipm.patel@angelbroking.com




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 February 17, 2012                                                                                                                                                                                                                                                                          8