2QFY2013 Result Update | Steel

October 16, 2012

Electrosteel Castings
Performance Highlights
Quarterly highlights (Standalone)
(` cr) Net sales EBITDA % margin Adj. net profit
Source: Company, Angel Research

BUY
CMP Target Price
Investment Period

`22 `29
12 months

2QFY13

2QFY12

yoy (%)

1QFY13

qoq (%)

479 81 17.0 25

456 45 10.0 19

5.2 79.3 704bp 28.3

428 11 2.6 29

11.9 626.8 1439bp (13.3)

Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 775 (347) 0.7 29/16 95,723 1 18,578 5,648 ELST.BO ELSC@IN

For 2QFY2013, Electrosteel Castings (ECL) reported a strong growth in its operating profit, mainly due to a decline in costs. We maintain our Buy recommendation on the stock. Lower costs lead to higher profits: ECLs 2QFY2013 net sales increased by 5.2% yoy to `479cr due to higher realizations as well as sales, in our view. ECLs EBITDA increased by a massive 79.3% yoy to `81cr and EBITDA margin expanded 704bp yoy to 17.0% due to lower raw material costs and other expenditure. The company reported an exceptional item relating to write-back of forex losses provided during FY2012 and 1QFY2013, amounting to `12cr. Excluding this exceptional item, the adjusted net profit grew by 28.3% yoy to `25cr. Update on mining projects: The management expects stage-2 clearance for the companys iron ore mine by March 2013. Production of coking coal is expected to be ramped up in FY2014. The company has started commercial steel production from some of the facilities of Electrosteel Steels (ESL) from September 2012. Outlook and valuation: We maintain our positive stance on the companys initiatives of venturing into steel making through its associate ESL. Further, the companys backward integration initiatives through the allocation of iron ore and coking coal mines are expected to result in cost savings from FY2014. We maintain our Buy view on the stock with a sum-of-the-parts (SOTP) target price of `29. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 48.6 10.0 4.7 36.8

Abs. (%) Sensex ELSC

3m 8.6 14.6

1yr 9.1 (22.1)

3yr 7.2 9.1

FY2011

FY2012

FY2013E

FY2014E

1,873 18.5 178 (24.0) 5.1 16.1 4.3 0.4 10.6 8.0 0.8 5.3

2,102 12.3 (27) (0.8) 5.0 0.4 (1.6) 1.5 0.9 18.3

1,984 (5.6) 29 0.8 10.6 26.8 0.4 1.7 4.6 1.0 9.4

2,074 4.6 70 142.3 2.0 11.6 11.1 0.2 4.0 5.4 0.9 7.9 Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 E-mail: Bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

Electrosteel Castings | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 performance (Standalone)

Y/E March (` cr) Net sales Raw material % of net sales Power & Fuel % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM(%) Other operating income EBIDTA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Profit after tax Adjusted net income 2QFY13 479 255 53.2 38 7.9 35 7.3 84 17.6 412 86.1 67 13.9 15 81 17.0 26 14 2 12 44 9.2 7 16.0 37 25 2QFY12 456 273 59.9 33 7.2 35 7.6 85 18.7 426 93.4 30 6.6 16 45 10.0 15 14 3 0 20 4.5 1 5.0 19 19 91.3 28.3 599.6 116.5 72.9 (0.3) (41.5) (4.9) 79.3 123.3 (3.1) (1.2) 1.5 15.2 yoy % 5.2 (6.5) 1QFY13 428 232 54.3 35 8.2 31 7.1 137 32.1 436 101.7 (7) (1.7) 19 11 2.6 33 14 9 (46) (27) (6.2) 7 (26.6) (17) 29 (13.3) 0.0 (21.8) (0.5) (77.2) (20.2) 626.8 (5.3) (38.7) 15.0 8.0 qoq % 11.9 9.7 1HFY13 907 487 53.7 73 8.1 66 7.2 222 24.4 848 93.5 59 6.5 33 93 10.2 59 27 11 1HFY12 860 504 57.6 65 7.4 66 7.6 167 19.0 801 91.6 73 8.4 26 100 11.4 26 27 4 124.5 (0.2) 164.5 (65.2) 327.1 (58.1) 26.9 (7.1) (19.3) 5.8 33.1 (1.1) 13.4 yoy % 5.5 (3.2)

(34)
18 1.9 14 1.6 20 54

0.3
50 5.8 3 0.4 47 48

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Electrosteel Castings | 2QFY2013 Result Update

Top-line increases 5.2% yoy

ECLs 2QFY2013 net sales increased by 5.2% yoy to `479cr due to higher realizations as well as sales, in our view.

Exhibit 2: Net sales increase 5.2% yoy in 2QFY2013

520 500 480 460 16.4 456 444 419 8.3 4.4 2.2 (0.7) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 % qoq (RHS) 2QFY13 428 5.2 503 479 18 16 14 12 10 6 4 2 0 (2)

(` cr)

420 400 380 360

Net revenue (LHS)

Source: Company, Angel Research

EBITDA up 79.3% yoy due to lower raw material cost

ECLs EBITDA increased by a massive 79.3% yoy to `81cr and EBITDA margin expanded 704bp yoy to 17.0% due to lower raw material costs and other expenditure. The company reported an exceptional item relating to write-back of forex losses provided during FY2012 and 1QFY2013, amounting to `12cr. Excluding this exceptional item, the adjusted net profit grew by 28.3% yoy to `25cr.

Exhibit 3: EBITDA margin stood at 17.0%

100 90 80 70 60 50 40 30 20 10 0 (10) 88 77 77 54 45 81 20 15 25

Exhibit 4: Net profit margin stood at 5.2%

60 50 40 30 39 47 39 28 19 29 25 12 10 8 6

(` cr)

(%)

5 11 5 2QFY11 4QFY11
EBITDA (LHS)

10 0 (10) (20) Adj. net profit 2QFY11 4QFY11 2QFY12 (11) Adj. net profit margin (RHS) (2) 4QFY12

2 0 2QFY13 (2) (4)

0 2QFY13 (5)

2QFY12 (1) 4QFY12

EBITDA margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Update on mining projects: ESL is currently producing small quantities (150,000 tonne in FY2012) of coking coal from its coking coal mine. ESL stated that it will spend a total of `950cr (already spent `650cr) to develop its coking coal mine. For iron ore, it is still awaiting a Forest stage-II clearance. ESL stated that it will start production from the mine within three to six months of signing a mining lease after it gets all clearances and signs mining lease with the state government. Although the company was hopeful to start production from March 2013, we believe it is

October 16, 2012

(%)

10

(` cr)

20

(%)

440

Electrosteel Castings | 2QFY2013 Result Update

currently challenging to estimate the timelines for completion of clearance formalities. In the past, we have witnessed significantly higher-than-expected time for getting regulatory approvals for captive mines. ECL raises stake in ESL: ECL has raised its stake to 39.33% in ESL from 34.80% recently via preferential allotment at a price of `10/share. This would be mainly to improve ESLs debt equity position in order to raise further debt for the project, in our view.

October 16, 2012

Electrosteel Castings | 2QFY2013 Result Update

Investment arguments
Backward integration initiatives to aid margin growth
Going ahead, ECL is on track to have an integrated business model in place through a) backward integration initiatives led by the allocation of mines and b) focus on beefing up its logistics infrastructure to further reduce costs. The company was granted mining lease for the Parbatpur coking coal mine in Jharkhand in January 2008. The mine is estimated to have blast furnace grade reserves of 231mn tonne. The company expects to commence meaningful production from FY2014. For its iron ore requirements, ECL had received forest stage-I clearance for iron ore mines located at Kodolibad, West Singhbhum, Jharkhand, from the Ministry of Forests and Environment (MOEF) during February 2012. ECL expects to receive stage-II clearance by March 2013 and then sign a mining lease with the state government. After signing the mining lease, ECL can develop the mine and resume production. The mine has reserves of 91mn tonne with 64% Fe content. ECL expects to commence production from this mine during 2HFY2013. However, procedural delays cannot be ruled out in our view.

ECL to turn into a fully integrated player

With the upcoming production of coking coal and iron ore, ECL will turn into a fully integrated steelmaker. Although there is lack of clarity on the timelines for the commencement of meaningful production from its coking coal and iron ore mines, ECLs margins are expected to be significantly higher than its peers once it reaches optimum production capacity at its mines. Moreover, ECLs associate - ESL (39.33% stake) with 2.5mn tonne of steel capacity is expected to benefit the most, as ECL will supply coking coal and iron ore from its mines to ESL at subsidized rates. (ECLs COP + 20%).

Outlook and valuation

ECLs production ramp-up from its coking coal mine has faced a few hurdles and its steel capacity expansion via ESL was delayed in the past. Nevertheless, the company is now on track to ramp up production of coking coal during FY2014, while its steel project (ESL) is expected to have meaningful commercial production from FY2014. We have a positive stance on ECLs initiatives of gradually venturing into steel making through its associate ESL. Furthermore, the companys backward integration initiatives through the allocation of coking coal and iron ore mines are expected to result in cost savings from FY2014. We recommend Buy on the stock with a SOTP target price of `29.

Exhibit 5: SOTP valuation

Particulars Standalone business Stake in Electrosteel Steels Stake in Lanco Ind. 6.0x FY2013E EV/EBITDA 1xP/BV 20% discount to CMP (`) 8 20 1

Target Price
Source: Company, Angel Research

29

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Electrosteel Castings | 2QFY2013 Result Update

Exhibit 6: Recommendation summary

Companies Prakash Sarda GPIL Electrosteel Cast.
Source: Angel Research

CMP (`) 53 130 120 22

Target price (`) 73 161 29

Reco. Buy Buy Buy

Mcap (` cr) 807 451 381 602

Upside 39 13 34 30

P/E (x) 3.2 4.1 3.6 26.8 2.5 3.7 2.8 11.1

P/BV (x) 0.3 0.6 0.4 0.4 0.3 0.5 0.4 0.2

EV/EBITDA (x) FY13E 3.4 3.2 3.3 9.4 2.3 2.8 2.9 7.9

RoE (%) 11.4 15.1 13.2 1.7 12.8 14.8 14.4 4.0

RoCE (%) 9.5 14.2 17.5 4.6 10.7 14.0 18.0 5.4

(%) FY13E FY14E FY13E FY14E

FY14E FY13E FY14E FY13E FY14E

148 Accum.

Company background
ECL is a Kolkata-based manufacturer of DI pipes and fittings and CI pipes used mainly for water supply and sewerage systems. The company has facilities at Khardah and Haldia in West Bengal and Elavur in Tamil Nadu. ECL has all the required clearances to operate coking coal mine (reserves 231mn tonne) in Parbatpur, Jharkhand. ECL is also at an advanced stage for getting clearance for its iron ore mine (reserves 91mn tonne) in Kodolibad, Jharkhand.

Exhibit 7: EV/EBITDA
3,000 2,500 2,000
(` cr)

1,500 1,000 500 0

Feb-08 Oct-09 Nov-11 Sep-07 May-09 Dec-08 Aug-10 Mar-10 Sep-12 Sep-12 Jan-11 Jun-11 Apr-12 Apr-12 Jul-08

1.0x
Source: Bloomberg, Angel Research

2.5x

4.0x

5.5x

7.0x

Exhibit 8: P/E band

140 120 100 80 60 40 20 0 (20) (40)

(`)

Dec-08

Mar-10

Aug-10

Jul-08

Feb-08

Oct-09

May-09

3x
Source: Bloomberg, Angel Research

8x

13x

18x

October 16, 2012

Nov-11

Sep-07

Jan-11

Jun-11

Electrosteel Castings | 2QFY2013 Result Update

Exhibit 9: P/BV band

250 200 150
(`)

100 50 0
Feb-08 Oct-09 Nov-11 Sep-07 May-09 Dec-08 Aug-10 Mar-10 Sep-12 Jan-11 Jun-11 Apr-12 Jul-08

0.5x
Source: Bloomberg, Angel Research

1.0x

1.5x

2.0x

October 16, 2012

Electrosteel Castings | 2QFY2013 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Extraordinary Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY09 1,948 27 1,975 35.1 1,684 986 586 113 291 184.6 14.9 53 238 268.8 12.2 103 64 32.3 198 87.2 198 70.4 35.5 128 9 1 135 135 17.1 6.9 4.8 4.2 7.2 FY10 1,580 30 1,610 (18.5) 1,280 646 503 131 330 13.4 20.9 54 276 16.4 17.5 52 87 28.1 312 57.2 312 105.2 33.7 206 28 1 234 234 73.1 14.8 7.3 6.8 59.9 FY11 1,871 34 1,905 18.3 1,604 897 558 149 302 (8.6) 16.1 56 246 (11.1) 13.1 86 62 27.9 221 (28.9) 221 61.1 27.6 160 18 0 178 178 (24.0) 9.5 5.4 5.1 (24.0) FY12 2,102 0 2,102 10.3 1,996 1,091 746 159 106 (64.9) 5.0 57 49 (80.0) 2.3 111 74 646.9 11 (94.8) 11 (17.1) (148.6) 29 (54) 1 (27) (27) (1.3) (0.8) (0.8) FY13E 1,984 0 1,984 (5.6) 1,773 940 665 169 211 99.2 10.6 54 157 218.8 7.9 131 45 63.2 70 514.6 70 12.7 18.0 58 (29) 0 29 29 1.5 0.9 0.8 FY14E 2,074 0 2,074 4.6 1,833 978 679 176 241 14.5 11.6 54 187 19.1 9.0 149 49 56.7 86 22.5 86 26.8 31.0 60 10 0 70 70 142.3 3.4 2.1 2.0 142.3

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with previous year numbers

October 16, 2012

Electrosteel Castings | 2QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability Other long term liabilities Long term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and advances Other non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 798 279 519 302 466 1,594 95 441 1,057 337 1,257 2,544 860 322 538 397 1,067 1,300 299 208 793 332 969 2,971 936 382 551 438 2 1,425 72 1 1,578 205 139 1,182 866 713 3,203 1,030 445 586 664 14 1,074 75 11 1,906 169 274 1,462 1,030 876 3,300 1,355 498 857 489 14 1,045 75 11 1,779 273 274 1,141 810 968 3,460 1,455 553 903 439 14 1,055 75 11 1,741 241 274 1,136 828 913 3,411 29 1,338 1,367 34 4 1,101 37 2,544 33 1,588 1,621 5 1,298 47 2,971 33 1,714 1,747 5 1,393 44 4 9 3,203 33 1,663 1,695 11 1,559 21 4 10 3,300 33 1,673 1,705 11 1,709 21 4 10 3,460 33 1,723 1,756 11 1,609 21 4 10 3,411 FY09 FY10 FY11 FY12 FY13E FY14E

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with previous year numbers

October 16, 2012

Electrosteel Castings | 2QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY09 193 53 (160) 124 (44) 166 (301) (177) (90) (568) 121 246 (7) (47) 314 (89) 184 95 FY10 312 54 172 (34) (115) 389 (174) (307) 13 (469) 15 359 (41) (50) 283 203 95 299 FY11 223 56 (100) 50 (59) 170 (119) (257) (66) (442) 0 277 (41) (96) 140 (132) 215 82 FY12 11 57 (399) 101 (25) (255) (238) 333 38 134 4 266 (41) (109) 120 (2) 82 81 FY13E 70 54 11 (13) 123 (150) (150) 150 (19) 131 104 81 185 FY14E 86 54 22 (27) 136 (50) (50) (100) (19) (119) (33) 273 241

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with previous year numbers

October 16, 2012

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Electrosteel Castings | 2QFY2013 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.6 2.8 2.3 0.5 2.3 5.3 0.5 2.8 2.9 0.7 11.4 0.4 0.7 5.9 1.2 0.7 4.9 1.3 2.7 94 104 54 158 1.9 115 69 95 177 2.1 137 93 156 139 2.1 138 100 132 154 1.7 130 80 170 155 1.5 120 80 170 122 10.3 12.9 10.4 10.0 13.8 15.5 8.0 11.5 10.6 1.5 2.2 (1.6) 4.6 6.5 1.7 5.4 7.4 4.0 12.0 64.5 0.9 6.8 6.8 0.6 6.8 17.2 66.3 0.7 7.5 2.9 0.5 9.7 12.9 67.1 0.7 6.2 3.2 0.5 7.7 2.3 85.0 0.7 1.4 3.8 0.7 (0.3) 7.9 82.0 0.7 4.3 6.6 0.7 2.6 9.0 69.0 0.7 4.3 6.2 0.7 3.0 4.8 4.2 5.9 1.3 48.8 7.3 6.8 8.3 1.3 49.6 5.4 5.1 6.8 1.3 53.4 (0.8) (0.8) 0.9 1.3 51.9 0.9 0.8 2.4 0.5 52.2 2.1 2.0 3.6 0.5 136.4 5.3 3.8 0.5 5.6 0.7 5.0 0.6 3.3 2.7 0.5 5.6 0.9 4.5 0.5 4.3 3.3 0.4 5.6 0.8 5.3 0.5 26.2 0.4 5.6 0.9 18.3 0.6 26.8 9.4 0.4 2.2 1.0 9.4 0.6 11.1 6.2 0.2 2.2 0.9 7.9 0.6 FY09 FY10 FY11 FY12 FY13E FY14E

Note: Some of the figures from FY2011 onwards are reclassified; hence some ratios may not be comparable with previous year ratios

October 16, 2012

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Electrosteel Castings | 2QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Electrosteel Castings No Yes No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 16, 2012

12