“I invested Rs.50 lakhs in Karur Vyasa Bank in 1993 and today it is more than Rs.200 crores.”– Rakesh Jhunjhunwala (Oct, 2012)
Moral: Buy Right, Sit Tight! This saying is as common as air.Have you recently watched that Kaun Banega Crorepati promotional video where a girl from the North-East India is quizzed about the Kohima City and she replies “Jaante Sabhi Hain, Par Maante Kitne Hain?” Such is the condition of this short and widely popular saying in the stock markets. The investment turned whooping 400x in less than 20 years;the micro-cap bank with conservative business model, strong fundamentals returned over 20x between 2002 and 2012. The residual of that initial investment of Rs.50 lakhs after booking substantial profits a couple of times now fetches an annual dividend income, yes, an annual income of above Rs.5 crores.
Quote:Recommended to members at 168rs few weeks back.It has just moved 15% since then.Readers,its your time to pocket the gem which is set to pen a new scripture for itself in the bourses.
Scripscan:IFGL Refractories ltd
Company Overview:Indo Flogates which was founded in 1979 managed to collaborate with Flogates, UK in 1983 for manufacturing of Slide Gate Mechanism & Refractories. The joint venture was with Flogates Ltd, UK and an exclusive Indian Licensee of Flocon Slide Gate Systems, developed by US Steel Corporation through their wholly-owned subsidiary USS Engineers and Consultants Inc. On the other hand, Mr. SK Bajoria founded IFGL Refractories in 1993 in collaboration with Harima Ceramic Co., Japan. In 1999, both the companies merged to come into the current form of existence.Over the past decade, the company has scaled up its operations significantly, both, organically and inorganically. During these years, the company made several acquisitions and also set up a few greenfield capacities to evolve from a single manufacturing facility to current eight capacities with across the globe distribution presence.
Later, during 2005, the company acquired Monocon Group with production facilities in the Brazil, China, UK, USA and Taiwan; the product portfolio included tundish spraying mass, refractory darts, monolithic lances robotics for EAF, Ladle and tundish lining maintenance, monolithics for EAF, Ladle and Tundish. Later, during 2006 the company acquired UK based Goricon Metallurgical Services Ltd and US based Goricon LLC that manufactured darts, lances, ladle powders etc. used by the steel industry. Again, in 2008, the company overtook Hoffman Group with manufacturing facilities in Germany and Czech Republic and the product offerings got wider with inclusion of foundry ceramics – casting filters, feeders, SiC chill plates, pouring system and monoblock stopper, high grade fire proof refractory shapes, drawing tools and tread guides. Recently, in September, 2010, the company acquired EI Ceramics LLC and CUSC International Limited engaged in manufacture of isostatically pressed continuous casting refractories in US.
Today, the company’s distribution network spreads over 50 countries and a business relationship with all the leading steel manufacturers; some of these clientele include Arcelor Mittal, SAIL, Tata Steel, Corus, Bhushan Steel, Gerdau Group, Nucor Group, Hyundai Steel, Essar Steel, Jindal Steel, Adhunik Metaliks and others while the company competes with Vesuvius India, Orient Refractories, Orissa Cement, etc. Vesuvius is the global leader and commands a majority of market share both in International markets and domestic markets.
Business Overview:IFGL Refractories is engaged in manufacturing of specialized refractories and requisite operating systems for the iron and steel industry through its facilities based in India, US, UK, China and Germany. The product range includes casting refractories, slide gates, furnace gates, tundish gate refractories, refractories for the purging in the ladle, precast refractories, monolithics and castables, tube changer mechanisms for slab caster, foundry ceramics, namely foundry ceramic filters, feeders, silicon carbide chill plates and mono-block stoppers for foundry industry. These refractories are made with the latest know-how from Krosaki Harima Corporation, Japan, a subsidiary of Nippon Steel Corporation. These refractories are used for flow control of steel and treatment of quality. As mentioned earlier, the company also offers customized operating systems for clean metal. The company also makes foundry ceramic filters. Additionally, the company is engaged in manufacturing of bio-ceramic products for dentistry, orthopedic and ophthalmic segments with the technical association of CSIR Laboratories; which is nothing but a substitute for human limbs. They make dental implants, bone implants, hip-joints, etc. This business maybe a low volume but ensures high profitability. Although the division is in nascent stage but the Management cites a huge potential for the segment in the long-run.
Recently, the company had announced significant capacity expansion programmes. The company is doubling up the capacity of its Kandla, Gujarat plant from 80000 odd pieces which will subsequently be tripled (phase-ii), during the next fiscal and also the capacities at the US plant (EI Ceramics LLC) would be doubled from current levels, during the current fiscal year.For the aforesaid developments, the company will incur a minimal capex since these are primarily brownfield expansions and de-bottlenecking; capex of less than Rs.6 crores (Kandla) and Rs.6-7 crores for US, which would be funded through internal accruals. These expansions would possibly have an incremental revenues of Rs.50-60 crores (Kandla) and Rs.75-85 crores (US). Besides, there would be a maintenance capex which could be in the range of Rs.10-15 crores on the consolidated level. However, the phase ii expansion at Kandla might require Rs.15-18 crores.
Financials & Investment Rationale:Despite a slump in the metals and probably the worst times of the last decade, the company has managed quite a handsome growth over the last 5 years through strategic investments, foray into new geographies, increased product portfolio and healthier industrial relationships. Resultantly, during the difficult times, the company has more than doubled the top-line and bottom-lines since FY2010. For FY14, the consolidated revenue stood at Rs.778 crores and the operating margin improved to 14%; the company managed a bottom-line of Rs.64 crores. During these times, the company has increased the net block from Rs.110 crores to Rs.258 crores while the debt levels have not gone up substantially.During these times, the debt has gone up moderately from Rs.78 crores in FY10 to Rs.98 crores in FY14. Going forward, the recent capacity expansions, an upturn in the steel sector and push to infrastructure will drive the top-line while debottlenecking,cost-efficiency measures along with savings on tax and logistics with expansion of Kandla facility would result into improvement in profitability. Moreover, foray into new markets, new products and technologies are likely to place the business poised for robust growth. However, significant appreciation in Rupee may pose threat to the company’s financials.
Outlook & Valuations:The management expects the country to witness significant growth in steel production and consumption in the domestic markets and thereby the industry to come out of the slump of last so many years over the next few years. Reportedly, there are a lot of steel plants that are lined up in commissioning stage; to the tune of some 30-40 MT of new capacities coming over the next 3-4 years on account of increased thirst for infrastructure by the new Government. Thus, there are bright years for refractories as well, going ahead.The current capacity utilization levels are 67-70% at the consolidated level which could be further taken to cent per cent utilization levels as witnessed in US facilities.
Conclusion:Going forward, we expect company to achieve a turnover of Rs.1000 crores by FY16 and a slight improvement in the EBITDA margin of 16% with the improved utilizations of current capacities and debottlenecking exercises being undertaken and savings on tax and logistics costs from Kandla facility. Strong free cash flow generation, strengthened balance sheet and comfortable valuations are added advantage. Assigning an EV/EBITDA of 6x (In a good market, it has historically traded at 10x) and Price/Sales ratio of 1.0x (historically traded at 1.3x), we expect market capitalization should be somewhat in the region of Rs.900-1000 crores that showcases huge potential upside from current levels. We strongly believe that with the recent growth, increased size of the company, wider coverage, leadership position in the industry, the company has all the reasons to trade beyond the historical multiples.
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Note: The above is not a research report but assimilation of information available on public domain and it should not be treated as a research report.
Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”
Disclosure: It is safe to assume that I might have ifgl in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments.