RESULT UPDATE

VESUVIUS INDIA
Robust exports spur stellar show
India Equity Research| Miscellaneous

Vesuvius Indias (VIL) Q1CY17 sales and EBITDA jumped 28% each EDELWEISS RATINGS
(surpassing estimate 12%) as plant closures in Europe by the parent led Absolute Rating BUY
to demand shifting to India operations. Exports catapulted 77% in CY16 Investment Characteristics Growth
and management expects the strong double digit growth to sustain led
by outsourcing from parent. In the domestic market as well, steel
production among large mills jumped a robust 15% YoY in Q1CY17. We MARKET DATA (R: VESU.BO, B: VI IN)

believe, the company is in a sweet spot to clock 21% earnings CAGR and CMP : INR 1,232

287bps RoCE expansion to 27.9% over CY16-18 on account of: (a) strong Target Price : INR 1,392

outsourcing opportunity from parent; (b) healthy domestic growth 52-week range (INR) : 1,340 / 801

spearheaded by large steel mills (VIL dominant player); (c) rising Share in issue (mn) : 20.3
M cap (INR bn/USD mn) : 25 / 397
opportunities in advanced refractories; and (d) strong cash balance
Avg. Daily Vol. BSE/NSE (000) : 10.9
(~INR2bn) to capture the uptick. Maintain BUY with target price of
INR1,392 (22x CY18E EPS).
SHARE HOLDING PATTERN (%)
This report contains Annual Report 2016 highlights
Current Q3FY17 Q2FY17
Robust exports fuel spurt Promoters * 55.6 55.6 55.6
MF's, FI's & BKs 19.9 18.1 16.6
Q1CY17 sales catapulted 27.6% YoY (outperforming industry) on account of steel
FII's 6.6 8.0 9.9
production in large mills jumping 15%. The bigger driver was exports, which sustained
Others 18.0 18.3 18.0
CY16 momentumit had jumped 77% YoY and contributed 20% to sales. While
* Promoters pledged shares : NIL
deemed exports grew 17% YoY on account of demand stabilising at Arcelor Mittal in (% of share in issue)
Kazakhstan, direct exports to parent surged 3.2x YoY to INR853mn (54% of exports).
This spurt was due to closure of European plants by the parent on subdued growth PRICE PERFORMANCE (%)
outlook in the region, which led to demand shifting to India. We estimate the robust BSE Midcap Stock over
Stock
export demand to sustain as the sales trajectory currently stands at ~INR500mn per Index Index
quarter versus ~INR350mn earlier. On the domestic front, primary customers JSW and 1 month 1.4 (0.9) (2.3)
Tata Steel continue to post steady growth production up 30% and 25%, respectively, 3 months 7.2 (1.0) (8.2)
in Q1. Production at PSUs too is on the rise. Moreover, VILs market share among PSUs 12 months 30.1 45.0 14.9
is expanding on account of its patented technology for which it is the sole supplier.
Though the GST rate is neutral for refractories, it will be beneficial as VIL will be able to
avail certain input credits not taken currently.

Outlook and valuations: Positive; maintain BUY

We expect VIL to post revenue and earnings CAGR of 16% and 21%, respectively, over
CY16-18E. We maintain BUY with target price of INR1,392. The stock is currently
trading at 23.6x CY17E and 19.5x CY18E EPS.
Financials (Standalone)
Shradha Sheth
Year to December Q1CY17 Q1CY16 % change Q4CY16 % change CY16 CY17E CY18E +91 22 6623 3308
Net rev. (INR mn) 2,280 1,786 27.6 2,119 7.6 8,215 9,501 10,960 shradha.sheth@edelweissfin.com

EBITDA (INR mn) 399 313 27.5 361 10.7 1,478 1,762 2,066 Sanyam Jain
Adj. PAT (INR mn) 234 186 26.2 208 12.6 871 1,058 1,284 +91 22 4040 7412
sanyam.jain@edelweissfin.com
Adj. Dil. EPS (INR) 11.5 9.1 26.2 10.2 12.6 42.9 52.1 63.3
Diluted P/E (x) 28.7 23.6 19.5
EV/EBITDA (x) 15.6 12.5 10.3
ROAE (%) 16.4 17.3 18.1 June 21, 2017

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Miscellaneous

Key Highlights of Annual Report 2016

India's steel production grew 6.8% from 89.6mt in 2015 to 95.6mt during 2016. This in
line with the World Steel Associations 6.5-7.0% growth forecast. VIL has benefited
from the spurt in production as well as exports.

The portfolio rejig and operational efficiencies built over the years paid off during the
year in a difficult market situation.

Competitive intensity has increased but VIL is holding on to its market share via
aggressive pricing.

VILs factories at Kolkata, Mehsana and Visakhapatnam and 2 of its sites at Surat in
Gujarat and Dolvi in Maharashtra have been certified ISO 9001:2008 for Quality
Management Systems Standards.

A new software has been installed to track all compliances and enable management to
take preemptive action to ensure and record compliances on pan-India basis.

Insurance claim for damages caused by cyclone Hudhud in October 2014 at

Visakhapatnam was fully settled during the year and losses, net of insurance, were
minimal.
The Board of Directors recommended a dividend of INR6.50 per equity share of
nominal value of INR10 each. The dividend together with dividend tax will entail cash
outflow of INR159mn (INR153mn in CY15). This was approved by shareholders.
VIL had 437 employees as on December 31, 2016.

Financials
Sales for the year jumped 17.4% YoY driven by export growth.
The companys exports jumped 77% YoY. Of this, intercorporate exports jumped 3.2x
YoY, while export to Kazakhstan grew 17%. Total exports constituted ~19% of CY16
sales.
While the trading segment grew 14% YoY, the manufacturing segment grew 19%.
Within manufactured goods, refractories (shaped) jumped 27%, whereas refractories
(unshaped) grew 10% YoY. Within the trading segment, refractories (shaped) grew 10%
YoY and refractories (unshaped) surged 17% YoY.

EBITDA grew 17.9% YoY as EBITDA margin remained flat at 18.0%. Raw material cost,
as % of revenue, declined 75bps YoY. This was set off by 68bps YoY rise in other
operating expenses.

Cash and bank balance rose 15% to INR2.0bn from INR1.7bn in CY15.

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Financial snapshot (INR mn)

Year to December Q1CY17 Q1CY16 % change Q4CY16 % change CY16 CY17E CY18E
Net revenues 2,280 1,786 27.6 2,119 7.6 8,215 9,501 10,960
Raw material 1,283 987 30.0 1,164 10.2 4,492 5,244 6,060
Staff costs 137 124 10.7 134 2.0 565 591 678
Other expenses 460 362 27.1 460 0.1 1,680 1,905 2,156
Total expenditure 1,880 1,473 27.7 1,758 7.0 6,737 7,739 8,893
EBITDA 399 313 27.5 361 10.7 1,478 1,762 2,066
Depreciation 67 61 9.9 75 (11.4) 275 284 289
EBIT 333 252 31.8 285 16.6 1,203 1,478 1,777
Other income 28 32 (12.9) 32 (13.7) 130 149 198
Interest
Profit before tax 360 284 26.8 317 13.5 1,333 1,627 1,975
Provision for taxes 126 99 27.8 109 15.2 462 569 691
Reported net profit 234 186 26.2 208 12.6 871 1,058 1,284
Adjusted Profit 234 186 26.2 208 12.6 871 1,058 1,284
Diluted shares (mn) 20 20 20 20 20 20
Adjusted Diluted EPS 11.5 9.1 26.2 10.2 12.6 42.9 52.1 63.3
Diluted P/E (x) - - - 28.7 23.6 19.5
EV/EBITDA (x) - - - 15.6 12.5 10.3
ROAE (%) - - - 16.4 17.3 18.1

As % of net revenues
Raw material 56.3 55.3 54.9 54.7 55.2 55.3
Employee cost 6.0 6.9 6.3 6.9 6.2 6.2
Other expenses 20.2 20.3 21.7 20.4 20.0 19.7
EBITDA 17.5 17.5 17.0 18.0 18.5 18.9
Reported net profit 10.3 10.4 9.8 10.6 11.1 11.7

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Company Description
Vesuvius India is part of the Vesuvius Group of UK, a world leader in the molten metal flow
engineering. Vesuvius, UK, holds ~56% of VILs share capital. In India, VIL is the largest
player in the steel flow control segment in the refractory industry with market share of
~50% and overall market share of ~12% in refractories.

Manufactured sales accounts for 71% of sales and traded goods contributes 29% to overall
sales. Within overall sales, 37% are shaped manufactured, 34% unshaped manufactured
sales, 14% is from shaped trading sales and 15% from unshaped trading sales. The company
also exports ~19% of its sales to the Vesuvius Group as well as to Kazakhstan.

Investment Theme
VIL is expected to deliver strong revenue and profit CAGR of 15.5% and 21.4% CAGR,
respectively over CY16-18E along-with ROCE of ~27.9% in CY18E. In the past 10 years (CY02-
12), has outpaced the steel industry with non cyclical 16% sales and 12% PAT CAGR, along
with healthy return ratios with an average of ~28% plus. Going forward, the Indian steel
industry will benefit from new plant commissioning will drive VILs revenues led by cyclical
uptick in steel demand at one among its historic low. Having increased its gross block by
~51%, with capex of ~INR1.5bn overCY10-15, we expect strong sales growth. Historically
company has averaged fixed asset turn of 1.9x. Further, exports will drive growth going
forward from outsourcing opportunity from parent.

Key Risks
Delay in recovery in key segment of steel sales.

Dependent on raw material sourcing through imports

Industry is dependent on import of key raw materials like high grade alumina, bauxite,
magnesite, silicon carbide, etc. China is a major supplier of imports and imposed heavy taxes
on export of raw materials for refractories. This resulted in sharp increase in imported raw
material costs.
For VIL, imports constitute 26% of net sales. This includes currency headwinds of ~64% of
raw material costs which are imported. However, the company has sourcing arrangements
with key suppliers and avails benefits of the parents longstanding relationship with global
raw material suppliers.

Royalty rate increase

Royalty, trademark and service fees, as a percentage of overall sales, stood at 1.8%, with the
average at 1.4-1.7% of net sales during CY11-15. Any increase in the same could pose a risk.

Intensifying competition
International players like RHI, acquired 70% stake in peer, Orient Refractories recently;
Krosaki Harima bought 51% in Tata Refractories; Calderys, part of Imerys, France bought out
full stake in ACE Refractories. All these players are setting up base in India through
acquisitions. This will heighten competition in the refractory industry over the long term.

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Financial Statements
Key Assumptions Income statement (INR mn)
Year to December CY15 CY16 CY17E CY18E Year to December CY15 CY16 CY17E CY18E
Macro Net revenue 6,997 8,215 9,501 10,960
GDP(Y-o-Y %) 7.2 6.5 7.1 7.7 Materials costs 3,879 4,492 5,244 6,060
Inflation (Avg) 4.9 4.8 5.0 5.2 Gross profit 3,119 3,723 4,257 4,900
Repo rate (exit rate) 6.8 6.3 6.3 6.3 Employee costs 467 565 591 678
USD/INR (Avg) 65.0 67.5 67.0 67.0 Other Expenses 1,398 1,680 1,905 2,156
Sector Operating expenses 1,865 2,245 2,495 2,833
Steel production growth 2.6 10.0 5.0 5.0 Total operating expenses 5,743 6,737 7,739 8,893
Company EBITDA 1,254 1,478 1,762 2,066
Shaped volume growth 3.6 21.0 21.5 16.5 Depreciation 232 275 284 289
Unshaped volume growth 5.8 13.0 13.5 13.5 EBIT 1,022 1,203 1,478 1,777
Export revenue growth (2.3) 77.4 50.0 25.0 Add: Other income 102.1 129.9 148.77 198.36
Shaped sales growth 10.0 13.0 13.5 13.5 Profit Before Tax 1,124 1,333 1,627 1,975
Unshaped sales growth 10.0 10.0 10.0 10.0 Less: Provision for Tax 388 462 569 691
Manufactured 71.9 72.7 74.5 75.4 Reported Profit 736 871 1,058 1,284
Traded 28.1 27.3 25.5 24.6 Adjusted Profit 736 871 1,058 1,284
Mfg. gross margin (%) 44.4 44.5 46.2 46.2 Shares o /s (mn) 20 20 20 20
Traded gross margin (%) 35.9 32.1 30.5 30.5 Basic EPS (INR) 36.3 42.9 52.1 63.3
Raw Material (% net rev) 55.4 54.7 55.2 55.3 Diluted shares o/s (mn) 20 20 20 20
Employee (% of net rev) 6.7 6.9 6.2 6.2 Adj. Diluted EPS (INR) 36.3 42.9 52.1 63.3
Admin exp(as % of rev) 10.9 11.3 10.7 10.5 Adjusted Cash EPS 4.6 5.4 6.6 7.8
Dividend per share (DPS) 6.5 6.5 8.0 9.5
Dividend Payout Ratio(%) 21.0 17.7 18.0 17.6

Common size metrics

Year to December CY15 CY16 CY17E CY18E
Operating expenses 26.7 27.3 26.3 25.9
Gross margin 44.6 45.3 44.8 44.7
EBITDA margins 17.9 18.0 18.5 18.9
EBIT margins 14.6 14.6 15.6 16.2
Net Profit margins 10.5 10.6 11.1 11.7

Growth ratios (%)

Year to December CY15 CY16 CY17E CY18E
Revenues 7.3 17.4 15.7 15.4
EBITDA 25.4 17.9 19.2 17.3
Adjusted Profit 24.4 18.4 21.4 21.4
EPS 24.4 18.4 21.4 21.4

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Balance sheet (INR mn) Cash flow metrics

As on 31st December CY15 CY16 CY17E CY18E Year to December CY15 CY16 CY17E CY18E
Share capital 203 203 203 203 Operating cash flow 540 502 1,274 999
Reserves & Surplus 4,767 5,479 6,347 7,405 Investing cash flow (211) 206 (291) (300)
Shareholders' funds 4,970 5,682 6,550 7,608 Financing cash flow (146) (153) (2) (27)
Long Term Liabilities 79 119 119 119 Net cash Flow 183 555 981 672
Def. Tax Liability (net) 12 (40) - - Capex (185) (211) (291) (300)
Sources of funds 5,060 5,762 6,669 7,727 Dividend paid (146) (153) (190) (226)
Gross Block 2,958 3,158 3,458 3,758
Net Block 1,308 1,244 1,260 1,271 Profitability and efficiency ratios
Capital work in progress 142 159 150 150 Year to December CY15 CY16 CY17E CY18E
Intangible Assets - - - - ROAE (%) 15.7 16.4 17.3 18.1
Total net fixed assets 1,451 1,403 1,410 1,421 ROACE (%) 24.0 25.0 26.6 27.9
Cash and Equivalents 1,734 1,989 2,970 3,642 ROA 15.3 16.1 17.0 17.8
Inventories 726 944 934 1,079 Inventory Days 68 68 65 61
Sundry Debtors 2,266 2,711 2,670 3,092 Debtors Days 108 111 103 96
Loans & Advances 243 356 356 356 Payable Days 91 91 85 80
Other Current Assets 21 14 14 14 Cash Conversion Cycle 85 88 84 76
Current Assets (ex cash) 3,256 4,025 3,974 4,542 Current Ratio 3.6 3.6 4.1 4.4
Trade payable 1,029 1,205 1,236 1,428 Debt / Cap employed (%) 27.5 28.0 25.3 24.3
Other Current Liab 351 450 450 450
Total Current Liab 1,380 1,655 1,685 1,878 Operating ratios
Net Curr Assets-ex cash 1,876 2,370 2,288 2,664 Year to December CY15 CY16 CY17E CY18E
Uses of funds 5,060 5,762 6,669 7,727 Total Asset Turnover 1.5 1.5 1.5 1.5
BVPS (INR) 244.9 280.0 322.7 374.9 Fixed Asset Turnover 5.3 6.4 7.6 8.7
Equity Turnover 1.5 1.5 1.6 1.5
Free cash flow (INR mn)
Year to December CY15 CY16 CY17E CY18E Valuation parameters
Reported Profit 736 871 1,058 1,284 Year to December CY15 CY16 CY17E CY18E
Add: Depreciation 232 275 284 289 Adj. Diluted EPS (INR) 36.3 42.9 52.1 63.3
Others (99) (174) (149) (198) Y-o-Y growth (%) 24.4 18.4 21.4 21.4
Less: Changes in WC 330 470 (82) 376 Adjusted Cash EPS (INR) 4.6 5.4 6.6 7.8
Operating cash flow 540 502 1,274 999 Diluted P/E (x) 34.0 28.7 23.6 19.5
Less: Capex 185 211 291 300 P/B (x) 5.0 4.4 3.8 3.3
Free Cash Flow 355 291 983 699 EV / Sales (x) 3.3 2.8 2.3 1.9
EV / EBITDA (x) 18.6 15.6 12.5 10.3
Dividend Yield (%) 0.5 0.5 0.6 0.8

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) CY17E CY18E CY17E CY18E CY17E CY18E
Vesuvius India 397 23.6 19.5 12.5 10.3 17.3 18.1
Orient Refractories 263 21.9 17.9 14.0 11.2 29.4 30.4
Median - 22.8 18.7 13.3 10.8 23.4 24.3
AVERAGE - 22.8 18.7 13.3 10.8 23.4 24.3
Source: Edelweiss research

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Additional Data
Directors Data
Biswadip Gupta Chairman Tanmay Kumar Ganguly Director
Subrata Roy Managing Director Sudipto Sarkar Director
Francois Clement Wanecq Director Nayantara Palchoudhuri Director
Patrick Georges Felix Andre Director

Auditors - BSR & Co LLP

*as per last available data

Holding Top -10

Perc. Holding Perc. Holding
HDFC Asset Management Co Ltd 8.28 Standard Life PLC 0.42
Reliance Capital Trustee Co Ltd 5.20 Sundaram Asset Management 0.34
UTI Asset Management 1.17 Axis Asset Management 0.25
Grandeur Peak Global Advisors LL 1.02 L&T Mutual Fund 0.04
Wasatch Advisors 0.61 Dimensional Fund Advisors 0.02
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available
*as per last available data

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 Miscellaneous

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
Aditya Narain DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f20
bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f9f4d
9b8311cf0678cd975097fc645327865,
st=Maharashtra
aditya.narain@edelweissfin.com Date: 2017.06.21 19:31:56 +05'30'

Coverage group(s) of stocks by primary analyst(s): Miscellaneous

AIA Engineering, Apar Industries Ltd, Aarti Industries, Agro Tech Foods, Balkrishna Industries, CCL Products India, Essel Propack, Orient Refractories,
Supreme Industries, Solar Industries, SRF, Vesuvius India, VIP Industries
`
Recent Research
Date Company Title Price (INR) Recos
15-Jun-17 Aarti Multi-year deal bolsters 938 Buy
Industries visibility;
Event Update
05-Jun-17 Orient DeMon impacts; strong capex 137 Buy
Refractories ahead;
Result Update
01-Jun-17 Solar Defence gaining muscle ; 827 Hold
Industries Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

One year price chart

1,400

1,280

1,160
(INR)

1,040

920

800
Apr-17
Sep-16

Feb-17
Mar-17
Mar-17
Dec-16

Jun-17
Jul-16
Aug-16
Aug-16

Oct-16
Oct-16
Nov-16

Jan-17
Jan-17

May-17
May-17

Vesuvius India

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 Vesuvius India

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