Buy Orient Refractories; target of Rs 170: Centrum

Centrum's research report on Orient Refractories

We maintain Buy on Orient Refractories (ORL), with an unchanged TP of Rs170 as the growth story remains on track with i) steady revenue growth led by improving domestic demand, and ii) strong traction in exports sales with approval of increased transaction limits with parent, RHI. Q1 performance was a mixed bag with revenue growth above expectations but provisioning for steel accounts keeping EBITDA/PAT supressed. We remain structurally positive on ORL and believe that the tremendous scope for brownfield expansion, as well as low capital and operational costs, MNC parentage and strong return ratios make it a compelling long term bet.

Outlook

We expect EBITDA/PAT CAGR of 14.1%/16.1% for FY17-19E on the back of higher market penetration aided by strong domestic steel production, increased sales in exports markets through RHI network and operating leverage benefits for margins. We maintain our fair value FY19E P/E multiple of 22x for ORL as it boasts of highest return ratios and highest margins in the industry with a strong growth outlook. We believe that ORL deserves premium to Vesuvius Ltd. as it stood out as the best in our comprehensive study of corporate governance and quality of earnings for refractory producers. Reiterate Buy with a TP of Rs170. Key downside risk is lower production at mini mills and bad debtors.