Electrosteel: The Dark Horse in the Ductile Iron Pipe Industry!

7 days agoSummary
● Electrosteel Castings Limited (ECL) is a prominent Indian company specializing in ductile iron (DI) pipes, fittings, and cast iron (CI) pipes. With a market cap of ₹13,640 Cr, ECL generates 88% of its revenue from India, holding a 28% domestic market share.
● Over the last 3 years, ECL recorded a 29% sales CAGR and 97% profit growth. Its current PE ratio of 15.3 is below the industry average, suggesting undervaluation.
● ECL plans to boost DI pipe capacity to 1 million tons by FY26. The ductile iron pipes industry is poised for growth due to urbanization and government initiatives.
● With its strong market position and robust financials, ECL is well-positioned to capitalize on this opportunity and deliver shareholder value.

Investment Advice by Goodluck Capital

Buy Electrosteel Casting ELECTCAST
● Best Buy Range - 210 - 220
● Target - 275 - 280
● Potential Return - 28 - 30%
● Approx holding period 8 - 12 months

Company Overview
Electrosteel Castings Limited produces and supplies ductile iron (DI) pipes, fittings, and accessories, as well as cast iron (CI) pipes, both in India and globally. Their DI pipes and fittings are used in various applications such as water transmission, potable water distribution, industrial water supply, ash-slurry systems, fire-fighting systems, desalination, sewerage, stormwater drainage, and recycling. They also offer ductile iron flange pipes for temporary installations and restrained joint pipes. Additionally, the company supplies metallurgical coke, sinter, sponge iron, ferro silicon, pig iron, and silico manganese ferro alloy, along with cement branded as SPL GOLD. Originally named Dalmia Iron and Steel Ltd, the company was established in 1955 and is headquartered in Kolkata, India.

Market Capitalization - ₹ 13,640 Cr.

Peer Companies
● Jindal Saw JINDALSAW - ₹ 22,576 Cr.
● Jai Balaji Industries JAIBALAJI - ₹ 19,682 Cr.
● Welspun Corp. WELCORP - ₹ 18,092 Cr.

Technical Aspects
● In January 2008, the stock reached an impressive peak of ₹71 but subsequently faced a significant decline.
● The price eventually stabilized around ₹8, leading to an extended period of consolidation.
● During this time, a Rectangle pattern, often referred to as the Darvas Box pattern, took shape.
● After breaking out of this pattern in May 2023, the stock price surged past its previous strong resistance level in October 2023.
● Since then, the stock has maintained its upward momentum and is currently trading just shy of its historical high of ₹226.
● Expectations are high that this momentum will sustain and lead the stock to reach new peaks in the near future.

Relative Strength

● The chart clearly illustrates that Electrosteel Castings has greatly outperformed the Nifty Smallcap 250 index, boasting an impressive annual return of 219%, which is truly an outstanding achievement.

Revenue Break-up

● Product wise break-up

➖ The primary source of the company's revenue comes from the production of Ductile Iron pipes and fittings, which alone makes up about 86% of its total income. Additionally, the company manufactures Cast Iron pipes, contributing roughly 2.8% to the overall revenue.

● Location wise break-up

➖ The company generates nearly 88% of its revenue from India, where it holds a 28% share of the domestic market. The remaining 12% of its income is sourced from international markets.

Revenue & Profit Analysis

● Over the last three years, this stock has recorded an impressive compounded annual growth rate (CAGR) of 29% in sales. Additionally, the total profit growth during this period has been remarkable, achieving a staggering 97% CAGR.
● Furthermore, the company has successfully maintained an operating profit margin of 16%, a notable increase from 10% in FY24.
● For the fiscal year 2024, earnings per share (EPS) have surged from 5.31 in fiscal year 2023 to an impressive 11.97. Currently, the EPS for the past twelve months is at 14.69.

● A closer look at the quarterly results shows that the company reached a record high in quarterly sales, reporting 2,012 crore in June, up from 2,004 crore in the March quarter. This figure significantly exceeds last year's June quarter sales of 1,685 crore.

Product Demand Analysis

● Inventory Turnover Ratio
➖ Current Inventory Turnover - 1.82
➖ Inventory Turnover 3 years ago - 1.70
➖ These figures indicate that product demand has risen over the past three years.

Valuation

● P/E Ratio
➖ The company's current price-to-earnings (PE) ratio is 15.3, which is below its one-year median PE of 15.8. Compared to the industry average PE of 36.76, this suggests that the stock is significantly undervalued at present.

● P/B Ratio
➖ The stock seems to be undervalued, with a price-to-book (PB) ratio of 2.67, particularly when compared with the industry average PB ratio of 5.52.

● Intrinsic Value
➖ Electrosteel Castings is presently priced at ₹220, which is significantly below its intrinsic value of ₹258, suggesting that the stock is currently undervalued.

● Peg Ratio
➖ A PEG ratio of 0.47 suggests that the stock is undervalued relative to its expected earnings growth.

Cash Flow Analysis

● The operating cash flow has experienced an impressive leap, climbing to 806 crore from 452 crore in FY23. This remarkable growth highlights the company's robust financial health. Furthermore, the current CFO/PAT ratio stands at 0.9 of its five-year average, reflecting the company's exceptional capability in turning profits into cash efficiently.

Debt Analysis

➖ The company's existing debt stands at Rs. 2,332 crore, a figure that is notably low when juxtaposed with its market capitalization of Rs. 13,655 crore.
➖ With a debt-to-equity ratio of merely 0.46, it is clear that the debt burden is manageable for a capital-intensive enterprise, allowing the company ample room to pursue further financing if required.
➖ Examining the balance sheet shows a remarkable decrease in debt, which has fallen from Rs. 2,667 crore last year to the present Rs. 2,332 crore.

Capex Plans
➖ The ongoing capital expenditure stands at around ₹700 crores and is on track, with ₹410 crores already utilized by the end of Q1 FY25.
➖ There are ambitious plans to boost the total manufacturing capacity of DI pipes to 1 million tons by FY26.
➖ Additionally, land is being acquired in Odisha for a new Greenfield project focused on DI pipes and fittings.

Shareholding Pattern

➖ The promoters currently hold about 46.22% of the company, up from 44.08% in December 2023, indicating growth during the March quarter.
➖ Foreign Institutional Investors (FIIs) have been consistently increasing their stakes, with total holdings reaching 21.16% as of June 2024, a significant rise from 14.93% in June 2023. On a quarter-to-quarter basis,
➖ Domestic Institutional Investors (DIIs) have raised their holdings to 0.44% from 0.36% in the March quarter; however, this represents a notable decline from the 1.68% recorded in the same period last year.

Ductile Iron Pipes Industry Outlook

● Advantages of choosing DI pipes over PVC pipes
➖ According to the analysis of the ductile iron pipes market in India, these pipes are made up of approximately 90% recycled materials and are fully recyclable.
➖ Additionally, using ductile iron pipes instead of PVC can lead to an energy consumption reduction of around 40%.

● Ductile Iron Pipes Market Growth
➖ Ductile iron pipes play a crucial role in public infrastructure, serving irrigation, drinking water distribution, sewage, and wastewater systems.
➖ With India's economic growth, the rise of smart cities and projects like Bharatmala Priyojana and the Narmada Valley Development Project is driving the demand for extensive pipeline networks, boosting the ductile iron pipes market.
➖ Factors such as increasing urbanization and government initiatives like Jal Jeevan Mission, AMRUT, and Smart City Mission, focused on delivering drinking water to households, are further fueling this demand.

Conclusion
● After thoroughly examining both the technical and fundamental factors, we have concluded that Electrosteel Castings is well-positioned for substantial growth, driven by the increasing market demand for ductile iron pipes, which is likely to positively impact its share price as well.