RESEARCH:: COMPANY::ELECTROTHERM INDIA LIMITED

24th March 2010

COMPANY PROFILE

Electrotherm (India) Ltd is a market leader in Indian foundry & Steel industry. The
Long Term Buy
company caters to Ferrous & Non- Ferrous foundries and metal melting industry.
The company manufactures medium frequency induction melting furnaces, induction
Approx price = Rs 305
Target price = Rs 398
heating and hardening equipment, Dc arc furnaces etc. The company is also in power
Estimated EPS = 60 generation and electric vehicles.
Projected PE = 6.5-8
Investment period =6-12 months Key Highlights:
Potential Upside =30%
 Leader in Induction Furnaces with 50% market share in India coupled with
Stock Info (TTM Basis) strong presence in international market.

 Electrotherm is the only Induction Furnace manufacturing company in the world that has
Sector Engineering
its own Steel Plant (with an installed capacity of 360,000TPA), Ductile iron pipe plant
Market cap (Rs Cr) 350.37
(with an installed capacity of 100,000TPA), Coal Based DRI (Sponge Iron) plants (with an
Face value 10
installed capacity of 200,000TPA), and Mini Blast Furnaces as well.
Book value 390.39
EPS 42.62
 Electrotherm is available below its book value of Rs 390.39. The Total Income and PAT of
Cash EPS 113.53
the company is expected to grow at a CAGR of 13% and 20% over 2008 to 2012E.
Dividend 25%
Sales Growth 11%
RONW 10.96% Future Outlook
Debt to equity 2.43 At the current price of Rs 305, the stock is available at 6.59x of its FY10E earnings, 4.40x of
52 week H/L 415/90.05 its FY11E earnings and 2.89x of its FY12E earnings. We recommend BUY with a price target
Avg. Daily Vol (2wk) 2946 of Rs398, given that the company’s future shows potential.
Chairman M. Bandari
Incorporation 1986 Particulars (Cr) FY09 FY10E* FY11E* FY12E*
Listed At NSE/BSE
Equity capital 11.48 Revenue 1781.86 1823.54 2015.01 2176.21
Promoter Holding 33.58% Expenditure 1537.75 1517.89 1665.01 1766.76
s
FII’s/MF Holding 30.18/13.35%
PBIDT 244.11 305.65 350 409.45
Interest 115.04 146.33 143.77 135
Prepared By:-
Depreciation 51.79 79.77 87.57 92.17
Varun Khanna
Research Associate PBT 77.28 79.55 118.66 182.28
varun.khanna@fairwealth.in
Tax 25.03 26.39 39.16 61.06

Reviewed By:- PAT 52.25 53.16 79.50 121.22

Prakash Pandey EPS 45.51 46.31 69.25 105.59
AVP- Portfolio management
Prakash.pandey@fairwealth.in CEPS 90.63 115.79 145.53 185.88
OPM (%) 13.99 16.12 17.5 19
NPM (%) 3.10 2.94 3.96 5.62
*expected

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 Buy- Electrotherm India Ltd.

Key Roadblocks:

 Due to the recent economic slowdown, the demand for metallurgical engineering equipment, electric vehicles
and heavy structural’s has dropped.

st
 The Debt to Equity ratio of the company stands at 2.43 as on 31 march 2009 which is on higher end as the
company is in expansion mode.

 Too many businesses might divert the attention of the management from its core business.

 The cost of batteries is high as 30% of the cost of Electrotherm’s electric vehicles. This will have an impact on
the margins of battery operated vehicle division of the company.

QUARTERLY ANALYSIS:

Particulars (Cr) Dec-09 Dec-08 Var% Y-o-Y Sep-09 Var% Q-o-Q

Net Sales 439.11 356.9 23.03 454.6 -3.41
Add: Other Income 3.39 1.91 77.49 2.76 22.83
Total Income 442.5 358.81 23.32 457.36 -3.25
Less: Expenditure 369.81 304.8 21.33 390.4 -5.27
PBIDT 72.69 54.01 34.59 66.96 8.56
Less: Interest 39.65 35.89 10.48 31.94 24.14
Less: Depreciation 21 9.79 114.50 18.98 10.64
PBT 12.04 8.33 44.54 16.04 -24.94
Less: Tax 4.2 2.55 64.71 5.29 -20.60
PAT 7.84 5.78 35.64 10.75 -27.07
EPS 6.83 5.03 35.64 9.36 -27.07
CEPS 25.12 13.56 85.23 25.90 -2.99
OPM% 15.78 14.60 - 14.12 -
NPM% 1.79 1.62 - 2.36 -

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During the quarter ended on 31 Dec, 2010, the total income of the company witnessed 23.32% growth on y-o-y basis to Rs 442.5cr as
against Rs 358.81cr during the corresponding quarter last year, primarily on account of increased volume of steel & ductile pipes. The
operating profit of the company saw an increment of 34.59% to Rs 72.69cr against Rs 54.01cr, as the raw material cost as a % of sales fell by
massive 17.5% to Rs 237.82cr as against Rs 255.77cr. The operating profit margin of the company also improved by 118bps to 15.78%
against 14.60%.

st
The net profit of the company, during the quarter ended on 31 December, 2010, witnessed an improvement of 35.64% to Rs 7.84cr as
against Rs 5.78cr during the corresponding quarter last year. During the period both interest and depreciation cost were high to tune of
10.48% and 114.5% as the company raises debt to fund its expansion plans.

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HISTORICAL PERFORMANCE

Particulars (Cr) 2008-09 2007-08 2006-07 2005-06 2004-05

Net Sales 1682.78 1325.36 724.78 344.72 183.77
Stock Adjustments 90.33 6.3 25.54 9.74 11.15
Other income 8.75 6.78 2.76 1.84 2.22
Total Income 1781.86 1338.44 753.08 356.3 197.14
Less: Expenditure 1537.75 1124.5 638.73 317.77 179.94
PBIDT 244.11 213.94 114.35 38.53 17.2
Less: Interest 115.04 78.51 35.03 9.23 1.59
PBDT 129.07 135.43 79.32 29.3 15.61
Less: Depreciation 51.79 31.86 17.85 7.05 0.91
PBT 77.28 103.57 61.47 22.25 14.7
Less: Tax 25.03 41.24 18.12 10.41 1.2
Net Profit 52.25 62.33 43.35 11.84 13.5
Less: Extraordinary items -0.03 -0.01 0.11 0 -0.02
Adj. Net Profit 52.28 62.34 43.24 11.84 13.52
Equity Share capital 11.48 10.98 9.14 4.77 4.77
EPS 45.51 56.77 47.43 24.82 28.30
Cash EPS 90.63 85.78 66.96 39.60 30.21
Operating Profit Margins 13.99% 15.56% 14.87% 10.35% 7.69%
Net Profit margins 3.10% 4.68% 5.78% 3.34% 6.93%
Book Value 390.06 336.74 219.87 66.44 45.53

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During the financial year ended on 31 March, 2010, total revenue of the company up by 33% to Rs 1781.66cr as against Rs 1338.44cr in
FY08, largely driven by 35% increment in Steel engineering & DI pipe to Rs 1295.13cr. The company has seen significant growth in
engineering revenue from overseas market.

Operating profit of the company saw an increment of 14% to Rs 244.11cr as against Rs 213.94cr during FY08, however operating profit margin
of the company witnessed a fall of 157bps to 13.99% in FY09 against 15.56% in FY08, primarily due to increase in raw material cost as the
volatility is witnessed in commodity prices.

The net profit of the company fell by 16% to Rs 52.25cr during FY09 as against Rs 62.34cr in FY08, the fall in net profit is largely due to
increase in interest cost to Rs 115.04cr from Rs 78.51cr, as the company raise debt for funding its expansion plans, and increased deprecation
from Rs 51.79cr against Rs 31.86cr.

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Revenue Mix FY09

Segments FY09 FY08

% to % to
Sales Sales
Total Total

Engineering & Projects 357.81 21.26 328.12 24.76

Steel Engineering division of the company
contributes maximum to the total revenue of the
company, which also shows an improvement by
Steel Engineering 1278.09 75.95 950.78 71.74
400bps during the FY09 to Rs 1278.09cr as
against Rs 950.78cr.
Electric Vehicle 46.88 2.79 46.46 3.51

Total 1682.78 100 1325.36 100

FY09 FY08
% to % to
Sales Sales Exports sales jumped by 50% in FY09 to Rs
Total Total
223.64cr as against Rs 148.97cr. The company
Exports 223.64 13.29 148.97 11.24 drives major part of total revenue from domestic
markets while overseas market contributes over
Domestic Sales 1459.14 86.71 1176.39 88.76 13% to the company total revenue.

Total 1682.78 100 1325.36 100

BALANCE SHEET: Electrotherm India Limited (Rs Cr)

2009 2008 2007 2006 2005

Net Worth 459.79 384.74 218.81 43.69 25.28

Loans- Term 833.4 588.36 333.95 157.48 72.73

Loans - Working Capital 395.97 232.01 56.13 56.59 16.28

Deferred Tax Liability -69.41 -52.16 -25.57 -14.29 0

Total 1758.57 1257.27 634.46 272.05 114.29

Net Block Including WIP 1097.19 689.02 383.64 189 71.5

Investments 2.2 2.13 0.07 0.07 0.02

Net Working Capital 620.04 536.08 238.49 81.34 42.77

Deferred Revenue Expenses 39.14 30.04 12.26 1.64 0

Total 1758.57 1257.27 634.46 272.05 114.29

The company is in expansion mode, it is planning to invest Rs 600cr for its capital expenditure, funding will be done partially through internal
accruals and partially through raising debt. The total reserves of the company stand at Rs 436.31cr.

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Peer Comparison:

Electro Steel
Particulars(Cr) Electrotherm McNally Bharat Elecon Engg Texmaco
Casting
Market Cap 350.37 1583.12 936.55 670.46 1755.13

Sales 1812.38 1598.45 1442.24 1005.8 901.61

PBIDT 269.77 429.11 104.02 161.24 137.08

Net Profit 48.88 275.53 38.79 50.41 83.12

PBIDTM (%) 14.88 26.85 7.21 16.03 15.20

PATM (%) 2.70 17.24 2.69 5.01 9.22

EPS 42.62 8.43 12.48 5.43 6.53

P/E 7.1 5.74 24.16 13.30 21.16

EV/PBIDT 5.60 5.75 9.72 7.43 13.18

P/BV 0.78 1.25 4.78 2.43 5.91

Figures on TTM Basis,

Electrotherm (India) Ltd is an attractive bet on the basis of its EV/PBIDT value & earning visibility, along with this, the company is able to
maintain a healthy operating margin of 15%. However its low net profit margin of 2.7% is a cause concern for the company as its interest cost
and depreciation is high.

ANALYSIS & REPORT

Why invest in shares of Electrotherm India Limited?

SECTOR:

The Indian steel industry is currently going through an expansionary phase backed by a liberalized policy environment. Prospects of domestic
demand appear to be excellent driven by high investment rate, accelerated growth in the manufacturing industry and expansion in physical
infrastructure creation. The Current capacity of the country is to produce 64.4MMT of finished steel which is expected to increase to 124MMT by
2015-16; this tremendous capacity expansion from steel companies would create potential demand for induction furnaces.

Induction Arc Furnace (IAF) is one of the most advance processes of making steel. Like EAF it uses electricity as its main fuel. IAF is most
environment friendly and efficient way of producing steel. Over the past years Steel production through Electric arc and Induction Arc Furnace
has increased nearly 55% of total steel is produced through these processes only.

Increased government spending on development of Infrastructure, non- hydrocarbon energy, refinery and oil & gas sectors is likely to provide a
boost to the sector. This should ensure strong order flow for capital goods and engineering companies in future.

The demand for the sector depends on GDP growth, which in turn depends on expenditure in core sectors like steel, power, railways etc. With
the growth in Indian economy and easing liquidity situation in the country, capital goods & engineering companies are expected to pick up pace
with economy.

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COMPANY:

Leader:
Electrotherm (India) ltd is the leader in induction furnaces with more than 50% share in the industry. The Indian steel industry is likely to
doubling the capacity from 64.4MMT to 124MT by 2015-16,of which nearly 30MMT is from green filed projects, with tremendous expansion
plans of various steel players demand for induction and electric arc furnaces is likely to remain robust.

Diversification:
The company has diversified its business profile into the execution of turnkey projects, manufacturing of engineering equipment, specialty steel
products, and battery operated vehicles.

Electric vehicle Division:

The increased focused of the world on renewable energy, conservation of Oil & petrol and environmental concerns; we expect the electric
vehicle division of the company to perform well in the coming future. The current product portfolio of the company includes Battery operated
Scooters, Rickshaws and Bicycles. To avail the opportunity available in the future the company is planning to increase its product portfolio. The
company is also looking to enter into overseas market for its electric vehicle division.

Steel & Pipe Division:

Electrotherm (India) ltd has a steel plant (structural steel, and alloy steel) with the installed capacity of 360000 ton, the installed capacity of TMT
bar mill stand has 150000 ton.
The company has increased its Ductile pipes manufacturing capacity to 150000 ton per annum, to grab the available opportunities. The
Government has increased budget for Rajiv Gandhi Rural Water mission from at Rs 7400cr, which is a boost for the sector requiring huge
amount of Ductile Iron Pipes.

FUNDAMENTALS:

Expansion plans:
The company has plans to enter into green & renewable power generation business and to install both Wind mills and Solar power energy for
both captive and commercial purpose. The company is working on installing a 40MW solar plant in Gujarat which is expected to be completed
by the end of 2013.

Electrotherm is setting up a structural steel mill for manufacturing structures for telecom and transmission towers with a capacity of 100,000
TPA. It intends to foray into transformer business ranging from 10 MVA to 50 MVA with a total capacity of 3,000MVA. The company is likely to
spend 600cr for the expansion.

Engineering Consultancy Business:

Electrotherm (India) ltd is planning to provide engineering consultancy for steel companies to improve their operational efficiencies and to work
on the cost front; this is a high margin business which will improve the overall margins of the company, we expect company to increase its
focus on this segment.

Captive Resource:
The company has allotted a non-coking coal block in chhattisgarh during late 2008 in an equal sharing with Grasim Industries. The total reserve
block of mine is 46.9 MMT, which will ensure energy security for Electrotherm’s iron production facility and its captive power plant. The block is
expected to become operational in mid 2013. Captive resources of coal will improve the operating margins of the company.

Notes: Figures are sourced from www.bseindia.com , capital market and annual report (2008-09).
END

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FUNDAMENTAL ANALYSTS DESIGNATION CONTACT NO.

0124 -3024862
Rajesh Gupta Chief Investment Officer Rajesh.gupta@fairwealth.in
Research@fairwealth.in
0124-3024864
Prakash Chandra Pandey AVP-PMS
Prakash.pandey@fairwealth.in
0124 – 3024874
Varun Khanna Research Associate
Varun.khanna@fairwealth.in
0124 – 3024840
Shashi Srivastava Research Associate
Shashi.s@fairwealth.in
0124-3024869
Suvarna Binjola Research Associate
Suvarna.binjola@fairwealth.in
0124 – 3024864
Tanisha Jolly Research Associate
Tanisha.jolly@fairwealth.in
0124 – 3024869
Shakti Rajpal Research Associate
Shakti.rajpal@fairwealth.in

Disclaimer:

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