Edelweiss' report on Vesuvius India
"Vesuvius India’s (VIL) 7% sales surge in Q2CY15, led by rise in domestic sales, came in line with our estimate. However, 33% YoY EBITDA jump was ~15% above estimate on improved product mix and cost saving initiatives—alternate material sourcing. Key positives were: (1) ~7% YoY sales growth in the backdrop of larger steel players’ production growth of 4% for the quarter; and (2) 372bps YoY and 299bps QoQ EBITDA margin expansion to 19.1% (16.5% estimate) led by robust 370bps jump in gross margin to 46.3%. With stronger-than-expected gross margin expansion and measures to sustain the same, robust operating leverage benefits with capacity utilisation at ~60-65%, we revise up CY15E/CY16E earnings by 6%/2%, respectively. We believe VIL is best placed to capture the cyclical uptick in the steel industry in India driven by impending capex in the industrial sector. With the steel industry seeing a shift towards primary producers, VIL will benefit most buoyed by a strong business model and new product introductions. This places it in a sweet spot to post strong earnings CAGR of 24% and 414bps RoCE surge to 26% over CY14-16E. The above, coupled with healthy balance sheet, cash at ~9% of market cap and reasonable valuations, portend rerating potential. Maintain ‘BUY’ with TP of INR890 (20x CY16E EPS)", says Edelweiss research report.
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