CRISIL lowers fair value to Rs 35.6 for Kirloskar Ferrous

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CRISIL lowers fair value to Rs 35.6 for 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 November 01, 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 November 01, 2011 report.

Kirloskar Ferrous Industries Ltd's (KFIL's) Q2FY12 revenues and EBITDA were below CRISIL Research's expectations. It was able to operate only one furnace out of the two in Q2FY12 due to raw material scarcity arising from the ban on iron ore mining in Karnataka and the company had to source iron ore through e-auction. We expect the raw material shortage to continue in the near term, impacting KFIL's operations in H2FY12. However, KFIL's backward integration to sinter, likely to be operational in November 2011, is expected to help tide over the current raw material issue. We expect pig iron volumes to improve by end-Q3FY12. We have lowered revenue and earnings estimate for FY12 to factor in lower sales of pig iron. We have broadly retained our FY13 estimates; in case the mining ban spills over to FY13, we may have to revisit our estimates. 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. Pig iron (~40% of Q2FY12 revenues) sales volume declined ~55% y-o-y (~38% q-o-q) to 31,113 tonnes. The decline in revenues would have been higher but for the improvement in pig iron realisations and growth in the castings business (~52% of total revenue in Q2FY12).

• EBITDA margin declined by 254 bps q-o-q to 8.1% impacted by low utilisation of pig iron capacity. The decline would have been higher but for the improvement in profitability of the castings business. EBITDA margin increased by 293 bps y-o-y as Q2FY11 EBITDA margin was impacted by higher raw material (iron ore and coke) cost.

• 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).

Earnings estimates - revised downwards
After factoring in lower production and sales of pig iron, we have cut our FY12 revenue estimate by 4.8% to Rs 11.4 bn. We have cut our EBITDA margin estimate by 77 bps to 9.1% for FY12. After factoring in higher interest cost, we have lowered our PAT estimate by ~21% to Rs 473 mn (EPS of Rs 3.4). While we broadly maintain our FY13 estimates, we have marginally lowered the earnings estimate to factor in increased interest cost.

Valuations: Current market price has strong upside
We lower our EV/EBITDA multiple used to value KFIL to 3x from 3.5x after factoring in the uncertain operating environment that may impact growth prospects. Thus, we lower our fair value to Rs 35.6 from Rs 42 per share.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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