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Sales in line; margins under pressure

Vesuvius India (VIL) posted Q4CY21 sales growth of 10% YoY (5% above estimate; steel production growth of 5% YoY). EBITDA fell 19% YoY (20% below estimate) owing to cost headwinds. For CY21, sales shot up by 32% YoY (steel production growth of 16.8% for industry).

The company is building in escalation clauses with major customers, which should aid margin expansion hereon. Capacity expansion of 50% led by the Viso segment in Kolkata and land purchase in Vishakhapatnam for expanding pre-cast capacity are strong positives. Even so, given VIL’s underperformance to peers, we are cutting the target to 28x Q1CY23E EPS (20% discount to peer RHI’s) from 32x. Overall, retain ‘BUY’ with a TP of INR1,242 (INR1,475 earlier).

Sales growth in line

VIL’s Q4CY21 sales grew 10% YoY, ahead of industry-wide steel production growth of 5% YoY. However, revenues dipped 3% sequentially, which should stabilise ahead. For CY21, sales rose strong 32% YoY (steel production growth of 16.8% for industry). The company is in the process of acquiring land at Vishakhapatnam for a consideration of INR0.5bn for pre-cast capacity expansion and to meet its future expansion plans. Furthermore, VIL had announced 50% Viso capacity expansion in Kolkata previously. Given VIL’s planned capacity expansion, the production uptick thereby should help it capture the uptick at large steel mills in our view.

Margin levers: Escalation clauses in contracts

VIL has undertaken price hikes of ~10% to mitigate the pressure from raw material and freight. Hence, gross margin rose ~233bp YoY/29bp QoQ to 41.02%. However EBITDA margin fell ~286bp YoY/260bp QoQ to 7.8%. Consequently, EBITDA fell 19% YoY (with increase in staff cost by 58% led by higher variable payouts). With the company building in escalation clauses in long-term contracts with customers and moving to quarterly contracts, marginsshould expand hereon. With price hikes being taken, although with a lag, we anticipate margins would improve hereon and VIL would post a 22% EBITDA CAGR over CY21–23E.

Outlook and valuation: Margin lever; maintain ‘BUY’

With price hikes showing up in numbers, margin expansion is likely. We expect a sales/EBITDA CAGR of 11%/22% over CY21–23E due to rising steel production and capacity expansion. Given VIL’s underperformance, we are cutting the target to 28x Q1CY23E EPS (20% discount to RHI). Retain ‘BUY’ with a TP of INR1,242.

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