Centrum Research recommended hold rating on IFGL Refractories with a target price of Rs 320 in its research report dated September 12, 2017.
Centrum's research report on IFGL Refractories
We downgrade our rating on IFGL Refractories to Hold and revise our TP to Rs320 (vs. Rs300 earlier). The stock has outperformed its MNC peers in the last 6M/1Y in line with our view and its high valuation gap (v/s MNC’s) has narrowed materially but we see limited scope for further re-rating. Q1 performance was solid (EBITDA up 19% YoY) with all units except Hofmann doing well but the increase in the depreciation charge (due to goodwill creation post-merger) supressed PAT. We continue to like IFGL’s operationally sound high-quality global assets and expect strong earnings growth driven by i) increased share of higher-margin subs and ii) recovery in steel production in key markets of US/Europe/India (aided by regulatory support & demand revival). Strong free cash flow visibility and a solid balance sheet are added positives.
OutlookWe expect EBITDA/PAT CAGR of 13.4%/18.0% during FY17- 19E, led by volume growth and increased contributions from higher-margin operations of Kandla/US. The stock has seen significant re-rating in the last 12 months in line with our view and its large discount to the MNCs has narrowed significantly. At CMP of Rs295, trades at FY19E valuations of 17.3x P/E, 7.8x EV/EBITDA and 5 year FCF yield of 7.4% and further re-rating scope is limited in our view. We downgrade to Hold with a revised TP of Rs320 based on 14x FY19E P/E applied to EPS adjusted for goodwill write-off. We have ascribed 30% discount (vs earlier 35%) to IFGL compared to its MNC peer and industry leader Vesuvius. Key upside risk is higher volumes while downside risk is higher raw material costs.
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