January 5, 2018 IFGL Refractories Ltd. Solid, stable, … ready for a ‘steely’ growth CMP INR 309 Target INR 403 Initiating Coverage - BUY SKP Securities Ltd www.skpmoneywise.com Page 1 of 22 Key Share Data Face Value (INR) 10.0 Equity Capital (INR Mn) 360.4 Market Cap (INR Mn) 11,138.2 52 Week High/Low (INR) 354/294 1 month Avg. Daily Volume (BSE) 9,905 BSE Code 540774 NSE Code IFGLEXPOR Reuters Code IFGLRF:NS Bloomberg Code IFGLRF:IN Shareholding Pattern (Post Amalgamation) 72% 5% 23% Promoter FII/MF Puiblic & Other Source: Company Particulars FY17 FY18E FY19E FY20E Net Sales 7,655.7 8,131.1 8,911.3 9,822.9 Growth (%) 6.8% 6.2% 9.6% 10.2% EBITDA 945.4 1,057.0 1,211.9 1,385.0 PAT 441.5 447.5 564.0 702.4 Growth (%) 5.3% 1.3% 26.1% 24.5% EPS (INR) 12.3 12.4 15.7 19.5 BVPS (INR) 189.8 202.2 217.9 237.2 Key Financials (INR Million) Particulars FY17 FY18E FY19E FY20E P/E (x) 22.9 24.9 19.8 15.9 P/BVPS (x) 1.5 1.5 1.4 1.3 Mcap/Sales (x) 1.3 1.4 1.3 1.1 EV/EBITDA (x) 11.2 10.8 8.9 7.5 ROCE (%) 6.7% 6.6% 7.7% 9.0% ROE (%) 8.2% 6.4% 7.7% 8.8% EBITDA Mar (%) 12.3% 13.0% 13.6% 14.1% PAT Mar (%) 5.8% 5.5% 6.3% 7.2% Debt - Equity (x) 0.1 0.1 0.0 0.0 Key Financials Ratios Source: Company, SKP Research Company Background IFGL Refractories Ltd (IFGL), promoted in 1989 by Mr S.K. Bajoria of Kolkata produces specialized refractories and operating systems for steel industry, in technical collaboration with Krosaki Harima Corporation of Japan, a subsidiary of Nippon Steel Corporation. IFGL has expanded its reach and product basket through several strategic acquisitions over the last decade and has manufacturing plants located in India, China, Europe and America. It has recently completed its reverse merger with its subsidiary IFGL Exports Ltd (IEL). Investment Rationale Favourable export demand Demand for refractories from European steel mills is expected to be better going forward due to gradual pick up in steel production (steel demand in European region including UK is expected to grow by 2.1% to 206.5 mtpa in CY18) and improving macro situation (as is visible from the pick-up in GDP numbers). Since European region accounts for ~70% of IFGL’s exports from domestic operations and ~48% of revenues on a consolidated basis (including overseas subsidiaries’ net sales), we expect IFGL to benefit from improving demand situation in Europe. Strategic Kandla location resulting in better margins IFGL’s Kandla plant is strategically located in Gujarat’s SEZ for better proximity with export customers in Europe and Middle East. It helps in reducing freight cost due to lower transit time, resulting in lower receivable cycle, alongwith benefits like income tax exemption, tax savings on domestically procured raw materials and no duty on imported raw materials. Collectively, its is a substantial saving as reflected in FY17 EBITDA margins at 26.6% for IEL vs 10.1% for IFGL standalone. Incremental capacity to drive volumes IFGL is in the midst of capacity expansion at Kandla unit from 1,60,000 pieces/year to 2,40,000 pieces/year at an investment of Rs 10 crores which is expected to get commissioned by FY19E. This expansion will be a game changer for IFGL as margins at Kandla is double of consolidated margins due to SEZ benefits and freight advantage on exports. We expect volumes & EBITDA at Kandla unit to more than double by FY20E. Exports from standalone operations (~35% share) should be substituted by Kandla gradually, improving margins at the standalone entity as it supplies more in the domestic market. Acquisitions led to expansion of product mix IFGL has increased its presence in overseas market through several acquisitions in the past few years, aimed at enriching product mix, access to new technologies, new markets and new customers. All subsidiaries are profitable and self-sufficient to fund their capex and maintenance requirement and have reported consistent performance. Every plant of the company's international subsidiary is dedicated for the local needs of steel industry except the Chinese plant. Merger of IFGL with IFGL exports (IEL) to rationalize costs With a view to rationalize cost and improve overall margins, IFGL has recently completed a reverse merger with IEL. Following the merger, IFGL’s 51% shareholding in IEL gets cancelled and to that extent profitability of merged IEL improved. Also, merger has been accounted following purchase method, resulting in Rs 267 crores as goodwill, which is to be amortised over a period of 10 years. Strong free cash flow generation and low leverage IFGL’s EBITDA margins deteriorated significantly from 14.5% in FY14 to 12.7% in FY17 due to 1) under utilization of capacities (slow down across steel industry) and 2) lower realisations. Margins are expected to improve gradually as revenues from Kandla unit picks up. Going forward, increase in volume, prices and cost control measures are likely to expand margins despite increase in costs. We expect IFGL’s consolidated EBITDA margins to improve to 14%+ by FY20E. IFGL has a strong balance sheet with gross debt of Rs 0.8 bn and cash & cash equivalents of ~Rs 0.7 bn resulting in a net debt of ~Rs 0.1 bn at the end of FY17. D/E stands at an attractive level of 0.1x and is expected to improve further as no incremental capex is planned in near term. Valuation IFGL is well positioned to capitalize on the recovery in steel production in key markets of US/Europe/India (aided by regulatory support and demand revival) coupled with operationally sound high-quality global assets and a solid balance sheet with strong free cash flow visibility. We have valued the stock on the basis of P/E of 15x of FY20E EPS adjusted for goodwill write-off and recommend a BUY on the stock with a target price of Rs 403/‐ (~30% upside) in 18 months. Analysts: Nikhil Saboo Tel No: +91-33-40077019; Mobile: +91-9330186643 e-mail: [email protected]Anik Das Tel No: +91-33-40077020; Mobile: +91-8017914822 e-mail: [email protected]
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IFGL Refractories Ltd.… · specialized refractories and operating systems for steel industry, in technical collaboration with Krosaki Harima Corporation of Japan, a subsidiary of
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Company Background IFGL Refractories Ltd (IFGL), promoted in 1989 by Mr S.K. Bajoria of Kolkata produces specialized refractories and operating systems for steel industry, in technical collaboration with Krosaki Harima Corporation of Japan, a subsidiary of Nippon Steel Corporation. IFGL has expanded its reach and product basket through several strategic acquisitions over the last decade and has manufacturing plants located in India, China, Europe and America. It has recently completed its reverse merger with its subsidiary IFGL Exports Ltd (IEL). Investment Rationale
Favourable export demand Demand for refractories from European steel mills is expected to be better going
forward due to gradual pick up in steel production (steel demand in European region including UK is expected to grow by 2.1% to 206.5 mtpa in CY18) and improving macro situation (as is visible from the pick-up in GDP numbers). Since European region accounts for ~70% of IFGL’s exports from domestic operations and ~48% of revenues on a consolidated basis (including overseas subsidiaries’ net sales), we expect IFGL to benefit from improving demand situation in Europe.
Strategic Kandla location resulting in better margins IFGL’s Kandla plant is strategically located in Gujarat’s SEZ for better proximity
with export customers in Europe and Middle East. It helps in reducing freight cost due to lower transit time, resulting in lower receivable cycle, alongwith benefits like income tax exemption, tax savings on domestically procured raw materials and no duty on imported raw materials. Collectively, its is a substantial saving as reflected in FY17 EBITDA margins at 26.6% for IEL vs 10.1% for IFGL standalone.
Incremental capacity to drive volumes IFGL is in the midst of capacity expansion at Kandla unit from 1,60,000
pieces/year to 2,40,000 pieces/year at an investment of Rs 10 crores which is expected to get commissioned by FY19E. This expansion will be a game changer for IFGL as margins at Kandla is double of consolidated margins due to SEZ benefits and freight advantage on exports. We expect volumes & EBITDA at Kandla unit to more than double by FY20E. Exports from standalone operations (~35% share) should be substituted by Kandla gradually, improving margins at the standalone entity as it supplies more in the domestic market.
Acquisitions led to expansion of product mix IFGL has increased its presence in overseas market through several acquisitions
in the past few years, aimed at enriching product mix, access to new technologies, new markets and new customers. All subsidiaries are profitable and self-sufficient to fund their capex and maintenance requirement and have reported consistent performance. Every plant of the company's international subsidiary is dedicated for the local needs of steel industry except the Chinese plant.
Merger of IFGL with IFGL exports (IEL) to rationalize costs With a view to rationalize cost and improve overall margins, IFGL has recently
completed a reverse merger with IEL. Following the merger, IFGL’s 51% shareholding in IEL gets cancelled and to that extent profitability of merged IEL improved. Also, merger has been accounted following purchase method, resulting in Rs 267 crores as goodwill, which is to be amortised over a period of 10 years.
Strong free cash flow generation and low leverage IFGL’s EBITDA margins deteriorated significantly from 14.5% in FY14 to 12.7% in
FY17 due to 1) under utilization of capacities (slow down across steel industry) and 2) lower realisations. Margins are expected to improve gradually as revenues from Kandla unit picks up. Going forward, increase in volume, prices and cost control measures are likely to expand margins despite increase in costs. We expect IFGL’s consolidated EBITDA margins to improve to 14%+ by FY20E.
IFGL has a strong balance sheet with gross debt of Rs 0.8 bn and cash & cash equivalents of ~Rs 0.7 bn resulting in a net debt of ~Rs 0.1 bn at the end of FY17. D/E stands at an attractive level of 0.1x and is expected to improve further as no incremental capex is planned in near term.
Valuation
IFGL is well positioned to capitalize on the recovery in steel production in key markets of US/Europe/India (aided by regulatory support and demand revival) coupled with operationally sound high-quality global assets and a solid balance sheet with strong free cash flow visibility. We have valued the stock on the basis of P/E of 15x of FY20E EPS adjusted for goodwill write-off and recommend a BUY on the stock with a target price of Rs 403/‐ (~30% upside) in 18 months.
Glass industry also requires refractories in refiner, regenerator, dog-house and ports of
furnace.
IFGL Refractories Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 3 of 22
Exhibit: Sector wise refractories demand
Source: RHI, SKP Research
Steel, 60%Non-Metallic , 15%
Non-Ferrous, 15
%
Others , 10%
Sector wise refractories demand - Global
Steel , 75%
Cement , 12%
Non-Ferrous
, 6%
Glass, 3%
Sector wise refractories demand - India
Exhibit: Global Refractories Market size
Source: Industry, SKP Research
$45.09 Bn $53.08 Bn
2016 2021Growing at CAGR
of 3.32%
>60% 42.5 Mn MT 15kg/tonne
Iron & Steel to contribute in Product-Demand in Volume Terms
Size of Refractories Market in 2016
Average consumption of Refractories per tonne in crude steel
Global refractory market estimated at ~USD 45 bn; expected to grow ~3% CAGR: Global refractories market valued at USD 45 bn in 2016 is expected to reach USD 53 billion
by 2021, witnessing CAGR of 5%. In terms of tonnage, the global market was at 42.5 million
metric tons per annum (mtpa) in 2016 and is expected to post a substantial growth over the
next 2-3 years. China enjoys ~50% of global refractory market and is expected to maintain
that. Growing forward, with rebound in global steel sector along with strengthening
economic conditions, we expect volume of refractories consumed to rise in the U.S.,
Western Europe, and Japan.
Domestic refractory industry - Strong growth within process flow: According to various
industry studies, Indian refractories market is estimated at ~Rs 70 bn with production of 1.2
mtpa in FY17 on an installed base of 2 mtpa (~60% capacity utilization, accounting for a
mere ~3% of global refractories market by volume). In India, the refractory industry is
fragmented with more than 150 players, of which, 15 to 16 are major players while the
remaining are small private players. Although the average consumption of refractories has
fallen from 19 kg per tonne of steel about five years ago to 13-15 kg on an average, 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.
IFGL Refractories Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 4 of 22
This will be led by the thin castings segment, which is at ~15% of the current refractory
market, growing at ~50%, wherein players like VIL, ORL and IFGL have a strong
competitive advantage. The slump in the global steel market and a surge in imported
finished steel products have led to an oversupply of refractories and refractory minerals in
India. Domestic producers also have to contend with competition from low cost raw
materials, particularly from China.
Exhibit: Indian refractory industry—SWOT analysis
Strengths
- Increasing preference for quality & service (complete solution provider) - Global parentage of established players
Weaknesses - Declining consumption per ton of refractory for steel companies - Low pricing power - Raw material dependence on China
Opportunities
- Increasing production of primary producers with BOF set up - Import substitution of monolithic - Technological advancement among steel players - Steel under penetration in India
Threats - Tighter working capital during slowing steel cycle - Competition from Chinese players - Any possible disruption in Raw Material Imports from China
Source: SKP Research
Refractory industry - Raw materials sourcing: The industry is largely dependent on
imports for key raw materials like high grade alumina, bauxite, magnesite, silicon carbide,
etc. Raw material accounts for 50% of total production costs and roughly 70% of global
magnesite deposits are located in China, North Korea and Russia. Magnesia products are
mainly imported from China, because India does not have magnesite of high enough purity
to make refractory bricks – products, which only a handful of Indian companies make. Also,
other raw materials are imported from China, as quality of domestically produced raw
materials does not meet the standards required by the steel industry. Similarly, the
availability of high quality refractory clays is limited, while kyanite, sillimanite and alusite
remain unavailable from Indian suppliers.
IFGL Refractories Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 5 of 22
Exhibit: Favorable Government Policies aiding Indian Steel Exhibit: New Steel Policy 2017…
Source: Company, SKP Research
Imposition of CVD for 5 years on import of certain Stainless steel products will boost domestic production.
Make in India and preference to Locally produced Steel in Projects
Increased focus and budgetary allocation towards R&D & Innovation
100% FDI through automatic route in Indian Steel
Reduction in Customs Duty on Plant & Equipment
Adoption of energy efficient technologies in the MSME steel sector to improve productivity
To facilitate R&D in the sector via setting up Steel Research and Technology Mission of India (SRTMI)Projects
Entire Demand of High grade automotive steel, electrical steel, special steels and alloys to be met ‘DOMESTICALLY
Increase per capita Steel Consumption to 160Kgs from current level of 60Kg by 2030
Targets to achieve 300MT of Steel Making by 2030
Demand Drivers:
Indian refractory sector is well placed to reap the benefits arising because of: (a) steady
rebound of global steel demand (b) sizeable growth potential as per capita consumption of
steel at 60 kg is a meagre one fourth of world’s average (217 kg) and one tenth of China’s
average (447 kg); (c) the National Steel Policy devised to enhance India’s steel capacity
2.5x to 300 mtpa by 2030; 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.
Exhibit: Growing Opportunities in India a positive Exhibit: World Steel Utilization levels improving
Source: Company, SKP Research Source: WSA, SKP Research
The government targets capacity addition of 100 GW under the
13th FiveYear Plan (2017–22)
Rural India is expected to reach per capita consumption of
12.11 kg to 14 kg for f inished steel by 2020
Automotive
Capital Goods
Infrastructure
Airports
Railw ays
Oil-Gas
Pow er
Rural India
The Automotive industry is forecasted to grow in size by USD
74 billion in 2015 to USD 260-300 billion by 2026
The capital goods sector accounts for 11% of steel
consumption w hich is expected to increase to 14/15% by 2025-
26 and has the potential to increase in tonnage & market share
The infrastructure sector accounts for 9% of steel consumption
w hich is expected to increase to 11% by 2025- 26
Estimated steel consumption in airport building is likely to grow
more than 20% over next few years
Crisil estimated that the railw ays sector could create business
opportunities w orth USD 99.65 billion
Oil and gas amongst major end-user segment accounted for
~34.4% of primary energy consumption in FY16
72%
72%
69%
69%
71%
70%
70%
68%
70%
71%
73%
74%
72%
74%
73%
73% 74%
73%
64%
66%
68%
70%
72%
74%
76%
May
-16
Jun
-16
Jul-
16
Au
g-1
6
Sep
-16
Oct
-16
No
v-1
6
De
c-1
6
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
Capacity Utilization (%)
1
IFGL Refractories Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 6 of 22
Exhibit: Income Statement Figures in INR Million Figures in INR Million
Exhibit: Cash Flow Statement Figures in INR Million
Source: SKP Research
IFGL Refractories Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 21 of 22
Notes:
The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg and
Thomson First Call.
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IFGL Refractories Ltd.
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