Buy Ess Dee; target of Rs 725: Prabhudas Lilladher

“Ess Dee Aluminium (EDAL) reported Q2FY11 Sales, EBITDA and PAT of Rs 1622 million, Rs 446 million and Rs 405 million as against our expectations of Rs1586 million, Rs 4476 million and Rs 344 million, respectively. Reported PAT included exceptional amount of Rs 103 million pertaining to reversal of impaired assets related to India Foils (in Q4FY09, EDAL has written off Rs 560 million as impairment of India Foil assets). Volumes came in at 5,400 tonnes (Ess Dee 3800 tonnes) as ramp up at India Foils facility (Kamahati) was slower than expected at 60% capacity utilisation. Hoera facility is not yet operational but management assured us of better utilisation in H2FY11E.”

“Operating margins remained flat QoQ at 27.5% but declined 160bps YoY primarily led by higher other expenses. Ess Dee reported ~30% op. margins while India Foils op. margins came in at ~17%. Management expects to reverse another ~Rs 350 million of impaired asset provisions in next two quarters depending on the progress achieved at India Foils facilities. These provisions are tax neutral.”

“Slower than expected ramp up at India Foils leads us to revise our estimates downwards for FY11E. For H1FY11, EDAL has done volumes of ~10,200 tonnes and management indicated much better H2FY11E owing to higher utilisations at Kamahati and Hoera facilities of India Foils. We revise our volume estimate for FY11E to 23,500 tonnes (29,000 tpa earlier). Consequently we also lower our revenue and earnings estimates downward by ~17% and 14%, respectively. We roll forward our estimates to Sep-12E and revise target price to Rs 725, continuing to value it at P/E of 10x. BUY for 47% upside,” says Prabhudas Lilladher research report.

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