CRISIL assigns valuation grade of 5/5 to Kirloskar Ferrous

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CRISIL assigns valuation grade of 5/5 to Kirloskar Ferrous

CRISIL Research has come out with its report on Kirloskar Ferrous Industries (KFIL). The research firm has maintained the fundamental grade of 3/5 to the company in its October 21, 2011 report.

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CRISIL Research has come out with its report on Kirloskar Ferrous Industries (KFIL). The research firm has maintained the fundamental grade of 3/5 to the company in its October 21, 2011 report.

Kirloskar Ferrous Industries Ltd's (KFIL's) Q2FY12 revenues and EBITDA were below CRISIL Research's expectations as it operated only one furnace out of the two in Q2FY12 due to raw material scarcity arising from ban on iron ore mining in Karnataka. The company sourced iron ore through e-auction as the Supreme Court has allowed e-auction of 1.5 mn tonnes of iron ore stocks in Karnataka. We expect raw material shortage to continue in the near term, impacting KFIL's operations in H2FY12. However, KFIL's backward integration to sinter is expected to help tide over the current raw material issue. We are likely to cut our earnings estimates, at least for FY12, post interaction with the management. We remain positive on KFIL's long-term growth and maintain the fundamental grade of 3/5.

Q2FY12 result analysis
• Q2FY12 revenues declined by 13.7% q-o-q (18.6% y-o-y) to Rs 2.3 bn impacted by stoppage of production at one of its furnaces in Q2FY12. The decline in revenues would have been higher but for realisations, which we assume would have been higher in Q2FY12.

• EBITDA margin declined by 254 bps q-o-q to 8.1% impacted by lower production. EBITDA margin increased by 293 bps y-o-y as Q2FY11 EBITDA margin was impacted by higher raw material cost (iron ore and coke). EBITDA declined by 34.4% q-o-q but increased by 27.8% y-o-y.

• Other income declined to Rs 10 mn from Rs 15 mn in Q1FY12.

• PAT margin declined by 187 bps q-o-q to 3.2% (up 164 bps y-o-y). Adjusted EPS declined by 45.5% q-o-q to Rs 0.5 (up ~67% y-o-y).

Valuation: Current market price has strong upside
While we continue to value KFIL based on the EV/EBITDA method, we are likely to reduce the fair price post interaction with the management. At the existing fair value of Rs 42 per share, the valuation grade is 5/5.

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To read the full report click on the attachment