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Oct 21st, 2010

Stock Data

Sector Capital Goods

Face Value(Rs) 10.00

52 wk. High/Low (Rs.) 328.30/147.55

Volume (2 wk. Avg.) 4860

BSE Code 520113

Market Cap(Rs in Mn) 6090.00

Financials (Rs.in.mn) CY09 CY10E CY11E

Net Sales 3637.70 4183.36 4601.69

EBIDTA 681.20 773.92 846.71

PAT 373.80 413.81 441.91

EPS 18.41 20.38 21.77

P/E 16.29 14.72 13.78

VESUVIUS INDIA LTD BUY F

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SYNOPSIS

Vesuvius is a world leader in the design,

engineering, manufacture and delivery of

refractory products, systems and services

for high-technology industrial applications.

The company products are designed and

conceived by material science specialists

supported by metallurgists and fluid-

dynamic experts using state-of-the-art

technologies. Vesuvius has built its

business model on proximity to its

customers. With 70 plants worldwide,

Vesuvius supplies products and services

anywhere at any time.

During the quarter, the company Net Profit

is increased of Rs. 119.50 million from

Rs.107.10 million in previous year same

quarter.

Net Sales and PAT of the company are

expected to grow at a CAGR of 9% and 13%

over 2008 to 2011E respectively.

1 Year Comparative Graph

Vesuvius India Ltd BSE SENSEX

V.S.R. Sastry

Equity Research Desk

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

C.M.P: Target Price: Rs.300.00 Rs.345.00

Share Holding Pattern

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Peer Group Comparison

Name of the company CMP(Rs.)

Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x) Dividend (%)

Vesuvius India Ltd 300.00 6090.00 18.41 16.29 2.86 37.50

SKF India 581.00 30637.60 29.23 19.88 4.29 40.00

Esab India 572.00 8804.80 41.93 13.64 5.27 200.00

Ador welding 223.05 3033.10 19.84 11.24 2.06 60.00

Investment Highlights

Q2 CY10 Results Update

Vesuvius India Ltd disclosed results for the quarter ended June 2010. Net sales

for the quarter up 16% to Rs.1100.80 million as compared to Rs.950.30 million

during the corresponding quarter last year. During the quarter, the company Net

Profit is increased of Rs. 119.50 million from Rs.107.10 million in previous year

same quarter. The Basic EPS of the company stood at Rs. 5.89 for the quarter

ended June 2010.

Quarterly Results – Standalone(Rs in mn)

As At Jun-10 Jun-09 %Change

Net sales 1100.80 950.30 16%

PAT 119.50 107.10 12%

Basic EPS 5.89 5.28 12%

Equity Capital 203.00 203.00

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Basic EPS of the company stood at Rs. 5.89

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Break up of Expenditure

Expenditure for the quarter stood at Rs.890.10mn, which is around 17% higher

than the corresponding period of the previous year. Raw material cost of the

company for the quarter accounts for 36% of the sales of the company and stood

at Rs.391.50mn from Rs.379.60mn of the corresponding period of the previous

year. Other Expenditure cost increased 12%YoY to Rs.226.30mn from

Rs.201.30mn and accounts for 21% of the revenue of the company for the

quarter.

OPM and NPM for the quarter stood at 19% and 11% respectively from 20% and

11% respectively of the same period of the last year.

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Board recommends Dividend

Vesuvius India Ltd has recommended payment of dividend Rs. 3.75 per share i.e.

37.50% for the year ended December 31, 2009.

Company Profile

Vesuvius, established in 1916 as Vesuvius Crucible, is a world leader in the design,

engineering, manufacture and delivery of refractory products, systems and services

for high-technology industrial applications.

Vesuvius was the originator of the technologies and processes it continues to deploy

today. The depth and breadth of expertise acquired over the years by engineers, in

ceramics, metallurgy and metal coating, enables them to interact as peers with their

customers on all continents to define value-creating solutions, monitor their

implementation and ensure their reliability over time. These solutions incorporate

products developed by R&D engineers in 7 Vesuvius Research Centres worldwide.

With the integration of Foseco in April 2008, Vesuvius is now present in 30 countries

on 5 continents, with 80 manufacturing units, 7 R&D centres and numerous sales

agencies, together employing over 12,000 people.

Foseco has been associated with the metals Industry for over 75 years and today is

acknowledged as a world leader in the supply of consumable products for use in the

foundry industry with a presence in 32 countries and major facilities in Germany,

USA, UK, Brazil, China, India, South Korea and Japan.

The company was founded by Eric Weiss in 1932 and quickly became established as

a supplier to the Foundry Industry, from where the name FOundry SErvice COmpany

was derived. In April 2008, Foseco was acquired by Cookson Group plc and is now

part of Vesuvius.

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Different divisions of the company:

Iron & Steel Division VESUVIUS' STEEL DIVISION provides customers with a full

range of products and systems for the continuous casting of steel.

VESUVIUS' product range includes:

Isostatically-pressed alumina graphite consumable products

Slide gate systems and refractories

Continuous temperature measurement instruments

Process automation

Lining materials

Pre-cast insulating materials.

FOUNDRY

VESUVIUS' Foundry Division supplies ferrous and non-ferrous foundries as well as

investment casting, with a wide range of refractories. Key products include

monolithic and brick linings for furnaces, flow control products, crucibles used to

melt and transfer molten metals, temperature measurement systems, dosing

accessories, degassing products and ceramic filters which reduce flaws and control

turbulent flow during mould filling.

GLASS

VESUVIUS supplies a wide range of special refractories for the Glass industry. Key

products supplied by VESUVIUS to the glass industry include refractories used in

both glass production and glass transformation installations.

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SOLAR

A key component for the mass production of multi crystal Solar Grade Silicon ingots

is the availability of large ceramic crucibles in which ingots are manufactured.

Almost two decades ago, VESUVIUS has developed a unique process to produce these

complex ceramic parts on a commercial scale.

MINERAL PROCESSING

VESUVIUS has a long experience of the supply of refractories to all areas of the

cement production process, and to other rotary kiln based minerals processing

applications.

HPI & POWER

Vesuvius is a World Class supplier to the Hydrocarbon Processing and Power

Generation Markets. Our Superior Abrasion and Erosion Resistant Castables, Plastic

Refractories, Brick and Gun mixes are used extensively in all process units in these

industries. We also possess a full service Engineering and R&D department to stay

on the cutting edge of technology and offer state of the art refractory products.

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Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) CY08A CY09A CY10E CY11E

12m 12m 12m 12m

Description

Net Sales 3557.10 3637.70 4183.36 4601.69

Other Income 0 0 0 0

Total Income 3557.10 3637.70 4183.36 4601.69

Expenditure -2978.80 -2956.50 -3409.43 -3754.98

Operating Profit 578.30 681.20 773.92 846.71

Interest -14.80 5.00 5.10 5.30

Gross Profit 563.50 686.20 779.02 852.02

Depreciation -86.60 -126.70 -152.04 -182.45

Profit before Tax 476.90 559.50 626.98 669.57

Tax -170.50 -185.70 -213.17 -227.65

Profit after Tax 306.40 373.80 413.81 441.91

Equity Capital 203.00 203.00 203.00 203.00

Reserves 1645.30 1930.00 2343.81 2785.72

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 15.09 18.41 20.38 21.77

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Dec-09 31-Mar-10 30-Jun-10 30-Sep-10

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 1043.30 996.80 1100.80 1045.76

Other Income 0 0 0 0

Total Income 1043.30 996.80 1100.80 1045.76

Expenditure -824.70 -812.60 -890.10 -847.07

Operating Profit 218.60 184.20 210.70 198.69

Interest 1.80 2.80 2.90 3.02

Gross Profit 220.40 187.00 213.60 201.71

Depreciation -56.30 -30.60 -32.30 -33.92

Profit before Tax 164.10 156.40 181.30 167.80

Tax -62.90 -54.40 -61.80 -58.73

Profit after Tax 101.20 102.00 119.50 109.07

Equity Capital 203.00 203.00 203.00 203.00

Face Value(Rs.) 10.00 10.00 10.00 10.00

EPS 4.99 5.02 5.89 5.37

*A=Actual, *E=Estimated

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Key Ratios

Particulars CY08 CY09 CY10E CY11E

EPS (Rs.) 15.09 18.41 20.38 21.77

EBITDA Margin (%) 16.26% 18.73% 18.50% 18.40%

PAT Margin (%) 8.61% 10.28% 9.89% 9.60%

P/E Ratio (x) 11.88 16.29 14.72 13.78

ROE (%) 16.58% 17.52% 16.25% 14.79%

ROCE (%) 26.60% 26.00% 24.42% 22.23%

EV/EBITDA (x) 6.29 8.94 7.87 7.19

Debt-Equity Ratio 0 0 0 0

Book Value (Rs.) 91.05 105.07 125.46 147.23

P/BV 1.97 2.86 2.39 2.04

Charts:

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Outlook and Conclusion

At the current market price of Rs.300.00, the stock is trading at 14.72 x CY10E

and 13.78 x CY11E respectively.

Price to Book Value of the stock is expected to be at 2.39 x and 2.04 x respectively for CY10E and CY11E.

Earning per share (EPS) of the company for the earnings for CY10E and CY11E is seen at Rs.20.38 and Rs.21.77 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 9% and 13% over 2008 to 2011E respectively.

On the basis of EV/EBITDA, the stock trades at 7.87 x for CY10E and 7.19 x for CY11E.

During the quarter, the company Net Profit is increased of Rs. 119.50 million from Rs.107.10 million in previous year same quarter.

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We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.345.00 for Medium to Long term investment.

Industry Overview

Engineering Sector : Market & Opportunities

India's engineering industry is highly competitive with a number of players in each

segment. The engineering sector has been growing, driven by growth in end user

industries and the new projects being taken up in the power, railways, infrastructure

Engineering sector

Heavy Engineering Light

engineering

Transport

equipment

Capital

goods

Other

machinery/

equipment

Low-tech items

like castings,

forgings and

Highly sophisticated

Microprocessor-based

Process control

equipment, diagnostic

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development, and private sector investments fields amongst others. The industry

attracted FDI inflows of US$ 1,196.7 million from August 1991-July 2006

India's exports of engineering goods are valued at US$ 27 billion during 2006-07

which represents a 6 per cent growth over the exports for 2005-06 (US$ 20 billion).

The engineering sector accounted for 14 per cent of the country's total exports. It is

also noteworthy that 40 per cent of India's engineering export is from the small and

medium enterprises (SME) sector. According to Engineering Exports Promotion

Council (EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a

scenario, India, driven by the engineering sector, will emerge as a key global

manufacturing hub

Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a

function of expenditure in core segments like power, railways, and infrastructure

development, private sector investments, and the speed at which projects are

implemented. The power sector is the largest contributor to the revenues of

engineering companies. Engineering majors like Bharat Heavy Electricals Limited

(BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent and

60 per cent, respectively) through the supply of equipment to the power sector.

Infrastructure is another key area of operation. Larsen & Toubro Limited, for example,

garners around 35 per cent of itssales from infrastructure activities like engineering,

design and construction of industrial projects, social and physical projects like

housing, hospitals, information technology (IT) parks, expressways, bridges, ports, and

water/effluent treatment projects. The industrial segment contributes to around 30

per cent of the total revenues of the engineering sector. While India’s engineering

industry has capabilities in manufacturing the range of machinery required by the

different user sectors, the rapid rise in demand has led to a large part of the

machinery requirements being met through imports. This indicates the size of

opportunity for investment in the engineering and capital goods sector in India. The

engineering industry has attracted FDI inflows of US$ 1,196.73 million from August

1991-July 2006.

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Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07

which represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion).

The engineering sector accounted for 14 per cent of the country’s total exports. It is

also noteworthy that 40 per cent of India’s engineering export is from the small and

medium enterprises (SME) sector. A key driver for increased engineering exports is the

trend towards shifting of global manufacturing bases to countries like India that offer

lower costs and good engineering talent. This trend is expected to continue and boost

exports of engineering goods from India over the next 5 years. According to

Engineering Exports Promotion Council (EEPC), engineering exports could touch US$

30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub.

The nature of Indian engineering exports is also changing with time. India is fast

moving from exporting low value goods to developing countries to more sophisticated

goods targeted at developed countries. Capital goods account for 27 per cent of total

engineering exports. Exports to European Union countries and North America

accounted for 19 per cent and 17 per cent respectively, of total engineering exports in

2005-06. Engineering goods worth US$ 3.34 billion were exported to USA alone in

April – Feb 2006-07

Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power,

mining, oil & gas, refinery, steel, automotive, consumer durables are driving growth in

the engineering industry. The framework below captures some of the key factors that

are contributing to domestic and international demand for engineering goods from

India. Restructuring of the state electricity boards in different states, growth of private

sector players and focus on capacity creation have driven growth in the power sector.

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Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other

infrastructure development activities, industrial growth and favorable policy

regulations will drive growth in manufacturing. The Indian engineering industry has

been witnessing significant level of capability enhancement over the years. As export

markets open up, this will help India develop a strong presence in global engineering

exports. Power sector contributes the largest to the engineering companies’ revenues.

Major players in this sector like ABB and BHEL derive 60 per cent and 69 per cent of

their revenues from supplying equipments to the power sector. Going forward, with

the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07)

and eleventh 2007-12) five-year plans, the potential is high for the engineering

majors. Emerging trends such as outsourcing of engineering services can provide new

opportunities for quantum growth. Engineering and design services such as new

product designing, product improvement, maintenance and designing manufacturing

systems are increasingly getting outsourced to countries like India and China. India’s

engineering sector has significant potential for future growth, in manufacturing as well

as services.

With development in associated sectors like automotive, one of the largest evolving

markets for engineering and industrial goods, and a well developed technical human

resources pool, India is poised to make significant strides in all segments of

engineering.

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_________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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