IGI Logo

The Dark before the dawn

We maintain our TP (Rs360) and BUY rating for Kirloskar Ferrous Industries Ltd. (KFIL). We have marginally increased our earnings for FY22/FY23 to account for higher realisations and higher cost savings from captive mines. Although performance in 2QFY22 was clouded by coking coal and coke cost pressure which will continue for 2-3 quarters, we believe continuous volume rampup in both divisions led by robust demand, capacity expansion and completion of massive cost saving projects in the next 1 year will act as main triggers for KFIL’s outperformance. KFIL remains our top pick in metals space.

* Casting and Pig iron division delivers record revenues: KFIL delivered robust revenue growth led by higher sales and continuous price hikes. Growth in pig iron revenues was led by surge in Pig iron offtake at 139.3kt (71%yoy; 18%qoq). This was possible due to change in product mix (sale of steel grade pig iron). Casting division also achieved record sales at 30kt (23%yoy; 10%qoq) led by strong demand from tractor industry (47% share in end user mix). Continuous price hikes for castings; a pass on of high raw material cost led to record realisations at Rs1,10,606/tonne, higher by 21%yoy; 7%qoq. Total revenue doubled yoy basis to Rs9.58bn (16%qoq).

* Coke and coal cost headwind to continue: Despite a very strong show on the turnover, KFIL’s EBITDA margin declined to 19.4% (-310bps yoy; -628bps qoq) translating into EBITDA at Rs1.86bn (70%yoy; -125qoq) due to high coking coal cost and exponential hike in domestic third party coke cost. Although coking coal headwind will continue in 2HFY22; KFIL has secured enough low cost inventories to sail through FY22. All other cost being in control, KFIL reported PAT at Rs1.2bn (83%yoy; -14% qoq). Net Debt as on 30th September reduced to Rs2.2bn.

* Massive cost saving projects to mitigate coke cost inflation: In 3QFY22, we expect spreads to remain at similar level (2QFY22) as the hike in coking coal prices will be largely offset by higher pig iron prices and lower spot iron ore price. 4QFY22 will be a weak quarter due to coking coal pressure and shutdown of MBF2 but will be supported by higher output from Hiriyur with the sinter plant (reduction in coke rate) and aid from captive iron ore. Savings from shift to captive iron ore has now increased as KFIL will move from the regime of higher royalty (Amendment of MMDR Act – 37.5%) to 15%. All other capacity expansion and cost saving projects are on schedule to be commissioned in next 1 year which will be main triggers to drive KFIL’s performance making it our top pick in metals space.

* Valuation and risks: We attribute 11x multiple to the Casting division’s Sept’23E EBITDA (~30% discount to 15.8x - FY23E EV/EBITDA multiple for auto ancillary peers) and a 5.5x EV/EBITDA to the pig iron Sept’23E EBITDA (complete backward integration and rise in margins) to arrive at TP of Rs360/share (unchanged). On CMP, KFIL trades at 5.7x FY23E EV/EBITDA. We have increased our earnings for FY22/FY23 to account for higher realisations and higher cost savings from captive mines. Key risks: Rise of electric vehicles, commodity price volatility and tractor down-cycles.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at  https://www.mnclgroup.com/disclaimer

SEBI Registration Number : INZ000043833

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