Buy IFGL Refractories; target of Rs 220: Centrum

We reiterate our conviction Buy on IFGL with a revised TP of Rs 220. Q2 performance surprised positively (EBITDA up 42% QoQ with margins of 15.1%) with all round improvement in margins across operations. We continue to like IFGL’s operationally sound high-quality global assets providing enough scope for growth at no additional capex and expect strong earnings growth driven by i) increased share of higher-margin subs, ii) recovery in steel production in key markets of US/Europe/India (aided by regulatory support) and ii) EPS accretion (10%) through the proposed merger of IEL with IFGL. Strong free cash flow visibility, solid balance sheet and attractive valuations (steep discount to peers) are added positives.

We expect strong EBITDA/PAT CAGR of 18.9%/30.3% during FY16-18E, led by volume growth and increased contributions from higher-margin subsidiaries of IEL/EIC coupled with low base effect due to subdued performance in FY16. Stock trades at inexpensive FY18E valuations of 6.9x P/E, 4.0x EV/EBITDA and FCF yield of 10.6% which is at steep discount to peers despite scoring well in our detailed corporate governance & quality of earnings study. We continue to value the stock on SOTP basis (with 30% discount to peers) and maintain Buy, with a revised TP of Rs 220. Key risk is extreme stress in the global steel industry.