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Srikalahasthi Pipes Ltd (SPL), part of Electrosteel Group, is India’s leading manufacturer of Ductile Iron (DI) pipes, an important input in water infrastructure for movement of drinking water supply, sewerage and irrigation. Having a production capacity of 300,000 MTPA of DI pipes, it also manufactures pig iron (275,000 MTPA), cement (90,000 MTPA), low ash metallurgical coke (270,000 MTPA) and generates power (14.5 MW) for captive consumption at its facility located near Tirupathi, Andhra Pradesh.
Top-line to grow at a CAGR of ~6.6% during FY19-21E
* During Q4FY19, SPL reported net sales of Rs 4,087 mn, witnessing a growth of ~12.7% y-o-y (excluding onetime trading income of Rs 39.1 mn & Rs 5.5 mn in Q4FY19 & Q4FY18 respectively) driven by higher quarterly production of ~80,000 tonnes from DI pipes. SPL has made up the 9,000- 10,000 tonnes production loss suffered in Q1FY19 and reported ~8% y-o-y growth in production volumes in FY19.
* Going forward, we expect SPL’s DI sales to grow at a moderate CAGR of ~2.7% during FY19-21E due to optimum capacity utilization. Demand from end user industry continues to remain healthy.
Timely capex will lead to better realization and cost savings
* The Company is in the midst of setting up 2 Nos. 9 MVA furnaces to produce ferro silicon and silicon manganese and installing additional annealing furnace & other balancing infrastructure in DI plant at a cumulative capex of Rs 1.25 bn. The Ferro alloys projects first furnace is expected to get commissioned by Q2FY20 and the second furnace by Q3FY20, respectively. The production facility of 1200mm dia Dl pipe is under implementation and will be commissioned by Q1FY21.
* Further, the Company has decided to put up a new MBF of 380 M 3 at a capex of Rs 0.75 bn to replace the existing MBF and the same will be commissioned by the end of Q2FY21. The Company is also in the process of identifying and removing the likely bottlenecks in the existing D I Pipes plant to consume additional liquid metal.
* The cumulative impact of all capex will result in enhancement of DI pipe capacity by ~50,000 MTPA, higher utilizations, better productivity and realisations coupled with cost rationalization resulting in better margins.
* The said projects would be funded out of internal accruals and the proceeds of the QIP Issue of Rs 2.5 bn raised during Q/FY18.
Margins to stabilize at 15%+
* EBITDA margins during Q4FY19, contracted by 239 bps y-o-y to ~12.5% (ex-traded income), on account of sharp rise in input cost (higher imported coal) and depreciation of Rupee against Dollar coupled with muted realization on account of legacy orders. Going forward, margins will scale up on account of enhanced capacity utilization, pass on of raw material cost and cost rationalization measures initiated by the Company.
* With better capacity utilization to ~91%+ by FY21E and operational efficiency, we expect SPL’s EBITDA margins to stabilize at ~15%+ by FY21E.
Thrust of the Government on improving water infrastructure through centre & state sponsored programmes namely BHAGIRATHA and JALDHARA water grid project of Telangana and Andhra Pradesh, coupled with programmes like AMRUT and “Swachh Bharat Abhiyan” will give a fillip to demand of DI pipes which augurs well for SPL. We have valued the stock on the basis of EV/EBIDTA at 5.5x of FY21E EBIDTA, and recommend a BUY on the stock with a target price of Rs 279/- (~50% upside) in 15 months.
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