| Electrosteel Castings-Initiates Value Unlocking From Subsidiary Value unlocking through listing of EIL: ECL is setting up a 2.2mn tonne steel plant through EIL, in which it holds 40% stake. The total project cost of Rs 7,262cr has been funded through a Debt-Equity ratio of 3:1 and the project has already achieved financial closure.
Of the total equity contribution of Rs1,815cr, ECL has made an investment of Rs726cr. ECL plans to list EIL to raise Rs300cr, which is likely to unlock value for ECL.
Background
Electrosteel Castings (ECL) is a leading player in ductile iron (DI) pipes and is venturing into steel making through its subsidiary Electrosteel Integrated (EIL), which is setting up a 2.2mn tonne steel plant expected to be commissioned by FY2012E.
ECL's backward integration initiatives through allocation of coking coal mines are expected to result in expansion of EBITDA Margin by 1,304bp over FY2009-12E. The company is also awaiting final environmental clearance for its iron ore mine, which will further lower costs, but has not been factored in our estimates.
Further, listing of EIL in which ECL holds 40% stake could unlock value for ECL. We Initiate Coverage on the stock, with a Buy recommendation and 18-month SOTP Target Price of Rs72, valuing the Core business at 8x FY2012E FDEPS and its investments in the Steel business at 1x Book Value.
Moving towards an Integrated business model: ECL is on track to have in place an integrated business model going ahead through a) Backward integration initiatives led by the allocation of mines, and b) Focus on beefing up its logistic infrastructure to further reduce costs. The company has already started coal production from its coal mines at Parbatpur, Jharkhand.
This is likely to result in EBITDA Margin improving by 1,304bp to 28.0% over FY2009-12E, despite the fall in DI realisations. Moreover, grant of iron ore mining lease, with estimated reserves of 91mn tonnes could further improve Margins, which is not factored in our estimates.
Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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