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Wednesday, July 8, 2009

Electrotherm India Ltd:-Future growth prospects and outlook

Scripscan:Electrotherm India Ltd

Story:EIL makes furnaces for ferrous and non-ferrous foundries and metal melting industry. It has two other divisions - a division with an annual manufacturing capacity of 200,000 tonnes of steel and 70,000 tonnes of cast iron. The most interesting segment of its business is its auto division which manufactures electric and hybrid electric vehicles. EIL makes and sells electric two-wheelers branded as YObykes and was also in the process of developing electric three-wheelers, four-wheelers and hybrid electric low-floor buses. This sounded very interesting in the face of rising fuel prices, and, despite softening of crude prices, appears a good business opportunity. It has, however, shelved its plans to make electric three-wheelers fearing competition from Tata’s Nano. The company’s growth has been robust in the segments that it operates in; this is reflected in its performance.In March 2008, the company had announced its ambitious capex plan involving Rs300 crore to be infused in its engineering projects division, steel, power and electric vehicles over the next one year. It had plans of pumping Rs80 crore in the engineering projects division while Rs50 crore was to be invested in its electric bike facility.The rest was to be invested in the company’s steel and captive power facilities. It was also expecting to start manufacturing 60,000 to 70,000 lead acid batteries at its Chinese facility. Riding on the back of its steel-making capabilities, EIL is setting up a structural steel mill to manufacture structures for telecom and transmission towers with a capacity of 100,000 tonnes per annum and is also planning a foray into the transformer business ranging from 10MVA to 50MVA with a total capacity of 3,000MVA in these fiscal. As a part of its future plans, it intends to enter the power generation business by setting up a thermal power plant, a windmill farm and a solar energy plant – a pollution-free renewable source. It was recently allotted a non-coking-coal block in Chhattisgarh for exploration and captive mining on an equal sharing basis with Grasim. This is estimated to have reserves of 46.9 million tonnes. It is also spreading its wings globally having received orders worth US$14.06 million from Istanbul and Turkey for basic design, engineering, manufacturing, supply, erection and commissioning of induction-melting furnaces, electrical and cooling systems, ladle refining furnace, continuous casting machine and equipment for a steel billet plant.It earns the bulk of its income (68%) from the special steels division while the engineering and projects division contributes 28% to its revenues. The electric vehicle division is still a small portion of its overall business portfolio but is growing quite strongly. The special steels division contributes the most (56%) to its profits followed by the engineering and projects division which brings in 42%. The electric vehicle division contributes just 3%. The company is reported to be hiving off its engineering and electric vehicle divisions into separate entities. Around Rs200 crore of foreign investment is on the cards in the auto and engineering businesses of the company and the management is expecting this move to provide a boost to its falling share price.Considering the slowdown that has affected industry in general and the capital goods sector in particular, separating companies with a clear growth path appears a sound strategy. The question is: will investors bite? At least, the stock is cheap. Looks to be worth a buy at lower levels.

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