Vesuvius India Ltd – Steel strength

Vesuvius India Ltd (VIL) is part of the Vesuvius Group of UK, a world leader in the molten metal flow engineering. Vesuvius, UK, holds 56% of VIL’s share capital. In India, VIL is the largest player in the steel flow control segment in the refractory industry with market share of about 50% and overall market share of about 12% in refractories.

Manufactured sale accounts for 65% and traded good 35% of overall sales. Within overall sales, 38% are shaped manufactured, 27% unshaped manufactured sales, 18% is from shaped trading sales and 16% from unshaped trading sales.

The group’s overall strategy remains centered on: i) reinforcing its technology leadership and increasing the penetration of value-creating solutions, e.g. high-technology steel (27% of India’s steel production versus 56% for parent) is estimated to expand at a CAGR of 9% over CY18–30 in India, which would benefit VIL. The parent’s new product sales make up 15.4% of total (vs 7% in CY12). ii) Capture growth in developing markets. iii) Develop technical services offerings. In India, revenue from repair and maintenance services has spiked 1.7x yoy. iv) Improve cost leadership and margins. OPM dropped to a four-year low of 15.9%, which would pick up with stabilizing sales, price hikes and cost reduction.

The industry is dependent on import of key raw materials like high grade alumina, bauxite, magnesite, silicon carbide, etc. China is a major supplier of imports and imposed heavy taxes on export of raw materials for refractories. This resulted in sharp increase in imported raw material costs. For VIL, imports constitute 26% of net sales. This includes currency headwinds of ~64% of raw material costs which are imported. However, the Company has sourcing arrangements with key suppliers and avails benefits of the parent’s long standing relationship with global raw material suppliers.

International players like RHI, acquired 70% stake in peer, Orient Refractories recently; Krosaki Harima bought 51% in Tata Refractories; Calderys, part of Imerys, France bought out full stake in ACE Refractories. All these players are setting up base in India through acquisitions. This will heighten competition in the refractory industry over the long term.

Capacity expansions of major public and private steel manufacturers is lined up over the next two years. OEMs (Tata Steel, JSW Steel, SAIL) come into play in the initial one year for ordering. We expect strong business from NCLT cases. Bhushan and Essar Steel revamps would add to Vesuvius’ growth prospects. By end-CY22, 156.5m tn of steel capacity are expected (130m at end-CY18). To produce a tn of steel, ~10kg of refractories are required. Hence, an additional ~18-20% demand for refractories would be generated in the next two years. Vesuvius would be the major beneficiary.

Royalty, trademark and service fees, as a percentage of overall sales, is around 1.8%. Any increase in the same could pose a risk to projections going ahead.

Raw material pressures have kept the gross margin flattish last quarter as margins dipped 229 bps yoy. Q1CY19 toplines were subdued due to lower realizations & week demand. With annual refractory contracts up for renewal, we expect realizations to improve as costs would be passed on. This would result in the margin improving ~200-300 bps by H2 CY19. The Company has sufficient spare capacity to cater to additional demand. With higher volumes, operating leverage should lead to margin expansion and growth in profitability.

The Company is debt free, cash surplus, maintaining a lean balance sheet with stable return ratios which we expect helps it command a premium. With the increasing steel industry capacities, & major steel plants coming out of CDR, Vesuvius would be a major beneficiary on account of its brand value and preference to others in the early stage of implementation.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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