IGI Logo

Company Background

IFGL Refractories Ltd (IFGL), promoted in 1989 by Mr S.K. Bajoria of Kolkata produces specialized refractories and operating systems for steel industry, in technical collaboration with Krosaki Harima Corporation, Japan, subsidiary of Nippon Steel. It has its manufacturing facilities at Kalunga, Odisha and Kandla SEZ, Gujarat. IFGL has expanded its product basket, markets, customer base and manufacturing footprints globally through several strategic acquisitions over the last decade. It’s 100% subsidiaries viz. EI Ceramics, USA, Hofmann Ceramics, Germany and Monocon, UK (which has a subsidiary in China) help IFGL serve respective local markets or exports. In August 2017, IFGL completed reverse merger with its subsidiary IFGL Exports Ltd (IEL).

Investment Rationale

Strong top line growth driven by healthy volumes

* During Q3FY21, IFGL net sales grew by ~32.8% y-o-y and ~17.5% q-o-q to Rs 2.9 bn on the back of increased demand from steel industry which witnessed sharpest V-shaped demand recovery post lifting of lockdown and improved realisation. The realisation improvement was mainly on account of better product mix and pass on of input cost escalations. Of late, raw material (RM) prices are on increasing trend, thus further increase in realisation will be in alignment with any upward movement in input cost.

* During the quarter, 100% subsidiaries of IFGL viz. EI Ceramics, USA, Monocon, UK and Hofmann Ceramics, Germany reported a revenue growth of ~14% y-o-y and ~38.1% q-o-q to ~Rs 1.1 bn. Performance of overseas subsidiaries has witnessed a sharp improvement compared to preceding quarters led by gradual economic recovery in US and Europe. Thus, with visibility of sustainable demand, management expects overseas subsidiaries to deliver better results in future.

* Going forward, we expect IFGL’s top line to grow by ~12% and ~10.8% to ~11.7 bn and ~12.9 bn in FY22E and FY23E respectively driven by buoyancy in steel demand which is expected to grow by ~4.1% to 1,795 mn tn globally in 2021 and ~23% to 100.4 mn tn in India supported by GoI’s thrust on infrastructure development. Further, recovery in all sectors especially in steel consuming sectors of Real Estate and Auto augurs well for the refractory players. Iron and steel industry accounts for approximately 71% market share of refractories.

EBITDA margin to stabilize at ~13-14%

* EBITDA margin during Q3FY21 increased by 710 bps y-o-y to an all-time high of ~16.9% on account of favorable exchange rate, benign RM prices, higher volumes and cost optimization efforts undertaken by the Company. However, RM costs have started increasing from Q3FY21 onwards, the impact of which will be seen going forward. With acute shortage of containers at the port, IFGL is also being hit by the hardening up of ocean freight rates with delays in the delivery of both finished goods and RM shipments.

* Going forward, with cost headwinds sweeping in, current EBITDA levels of ~15-16% are not sustainable and management expects EBITDA margins to be in range of ~13-14%.

* During the quarter, other income was higher by ~499% y-o-y to ~Rs 107.2 m on account of ~Rs 79.1 mn of loan waived under the Pay check Protection Program obtained from the US Government. Further, the Company continues to amortize goodwill of ~Rs 67 mn quarterly (Rs 267 mn per annum) arising out of merger of IFGL with IFGL Exports in 2017, which is to be amortised over a period of 10 years. In Budget 2021, the Government has proposed to disallow depreciation on goodwill from 01 April 2021 (assessment year 2021-22 onwards). Thus, IFGL amortizing goodwill is subject to change, which might have an impact on FY22E and FY23E projected financials

Valuation

We have valued the stock on the basis of P/E of 10x FY23E EPS, upgrading it from 8x EPS, adjusted for goodwill write-off, on the back of buoyancy in steel demand leading to better demand visibility for refractories and well placed capex plans with strong cash flows. We recommend a “BUY” on the stock with a target price of Rs 347 (~24% upside) in 18 months.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.skpsecurities.com/index.php/Disclaimer_new/disclaimer

SEBI Registration number is NOS : NSE : INB/INF 230707532

Above views are of the author and not of the website kindly read disclaimer