Buy Electrotherm with target of Rs 464: Niche Brokerage

RELATED NEWS Buy Usha Martin, target of Rs 228: India Infoline Buy Lupin: Edelweiss Research Accumulate Maruti Udyog: Edelweiss Research Citigroup bullish on Glenmark Pharmaceuticals Buy Voltamp Transformers: India Infoline Electrotherm BSE | NSE 28/05/12 Are Mutual Funds betting on Electrotherm?

Broking house, Niche Brokerage is bullish on Electrotherm India . It has maintained buy rating on the stock with a target price of Rs 464.

The Niche Brokerage report on Electrotherm India:

"Electrotherm India, EIL, is an Ahmedabad based 21 yrs-old company, having its business diversified into six business segment namely Engineering, Capital Equipments and Projects Construction Steel / TMT Steel, Stainless Steel, Structural & Alloys Steel Bar, Ductile Iron (DI) Pipe and Electrical & Hybrid Vehicle Division (YoBykes)."

Investment Rationale

Excellent all round performance to drive growth

"EIL continues to deliver strong operational performance in Q2'FY07 with nearly 105% jump in topline and nearly 35% jump in bottomline on YoY basis contributed by the commencement of value added higher margins final products like TMT bars, wire rods, Ductile Iron pipe units in the steel division supplemented with exponential volume growth in Induction furnace on the back of strong steel cycle and equally complemented by Electric Vehicle division (YoBykes) on the bottomline."

Leveraging expertise to manufacture Steel and DI Pipes

"EIL is leveraging its engineering know-how particularly in the production and installation of induction furnaces by backward integration and setting up steel plant to manufacture steel from sponge iron and scrap and vertically integrating to manufacture Stainless Steel, DI Pipes, TMT bars and Wire rods."

Substantial Savings on account fiscal incentive in Kutch

"EIL has started commercial production of Billets in April'05 and TMT bars in Decemeber'05. EIL is therefore eligible for refund of excise duty paid on finished products for a period of 5 years in addition to that is also eligible for sales tax exemption to the extent of 100% of the eligible investments (fixed assets) for a period of 10 years which would lead to an average annual savings of Rs 60 crore during FY07-09."

Significant savings by lowering power cost

"The installation of 30 MW Waste Heat Power Plant at Kutch by June'07 would lead to substantial savings in power cost. Power, which currently cost around Rs 4.70 a unit, would be brought down to Rs 2.25 unit translating into an annual average savings of Rs 60 crore by FY08."

YoBykes - New revenue segment set to Scale up

"Indus Electrans a division of EIL had launched electric bikes running on rechargeable batteries (under brand name YoBykes) in 22 towns in Gujarat in Feb'06. After the initial overwhelming response, EIL is all set to record a sale of around 40000-50000 units in FY07 and around 150000 units in FY08 across India with the help of nearly 200 dealers network and around 100 "YOWORLD" exclusive showrooms."

Vertical Integration

"EIL has vertically integrated from hot metals to final products. The hot metal will be manufactured using sponge iron and scrap in its induction furnace and has started to manufacture value added products like MS Billets, SS Billets and Alloy Steel Billets, which in turn, will be utilized for TMT, SS Bars, Alloy Steel respectively. For DI pipes, the hot metal will be processed in a caster, which in turn would produce DI pipes."

"This vertical integration would lead to substantial savings in overall production costs and higher realisation for EIL on account of sale of finished products. The commissioning of 30MW power plant will further lower cost of production."

Strategic location Advantage

"The Kutch plant has a strategic location advantage with proximity to Kandla and Mudra port. Scrap and Coal being the major raw-material required for manufacturing of steel, are imported through these ports and hence imports of these raw material are less time consuming and comparatively cheaper due to saving on freight cost. Also, Lignite- raw material required for generation of power, is available in abundance in Kutch, which will help to reduce the power cost."

Outlook and Valuations

"EIL earnings are expected to grow by 65% CAGR for the next 3 years driven largely by the increase in volumes of higher value added products on the back of aggressive expansion across all the business segments and substantial savings on account of captive power plant & fiscal incentives in the form of sales tax incentives and excise refund."

"Despite an expanded equity, EIL is likely to deliver an ROE of about 38% CAGR over the next 3 years. At CMP of Rs 305, EIL trades at a PER of 6x FY07E and 2.92x FY08E. In terms of EV/ EBITDA it trades at a multiple of 5.80x FY07E and 3.57x FY08E. Based on our DCF Valuation method, we maintain a "Buy" with target of Rs 464 in a year's time."