Electrosteel Castings Limited BSE Code: 500128 NSE Id: ELECTCAST

CMP (BSE): Rs. 51.20

CMP (NSE): Rs. 51.20

Industry: Construction & Engineering

Water infrastructure is the need of the hour because India has about 16% of the world population but is estimated to have access to just 4% of the world's water resource. As per the planning commission, in India almost 9% of the urban population and approximately 25 % of the rural population does not have access to water supply. 76% of the water supply in rural India is still being sourced from tubewells, handpumps, wells and others. In urban India, 31% of the water supply is through sources other than tap. This indicates the strong potential for developing pipeline network for supplying safe drinking water to the households. Thus future prospects for water infrastructure are bright. So the companies present in this area are set to grow in the future. Electrosteel Castings Limited (ECL) is one such company engaged in providing solutions for water infrastructure.

ECL is a company providing techno-economic solutions for water supply and sewerage systems. ECL is India's largest manufacturer, and one of the few manufacturers in the world, of ductile iron (DI) spun pipes. A lack of safe drinking water and proper sanitation is a significant problem in India, and the demand for safe drinking water is increasing at a rapid rate. In order to transport sufficient quantities of water from different sources, i.e. rivers, lakes or well, to a treatment plant with minimal loss and then transport the treated water to the end user, a reliable pipe material is required that is strong, long-lasting, corrosion resistant and reduces the risk of contamination. DI pipes possess these qualities and are currently the single most widely used type of pipe for the transportation of water and sewage. Initially cast iron (CI) pipes were used, however DI pipes are preferred over CI pipes because DI pipes are more light, strong, durable and cost efficient. They also have high water carrying capacity. The DI pipes can also be laid out much faster and are virtually maintenance free.

ECL manufactures DI spun pipes, DI fittings, pig iron, cast iron (CI) spun pipes and low ash metallurgical coke (LMAC). ECL has a total capacity of 460000 tonnes in the DI segment. ECL supplies DI spun pipes and DI fittings both domestically and internationally, mainly in South East Asia, South Asia, Middle East, Africa and Europe. CI spun pipes are manufactured for domestic market only. It is also involved in the execution of turnkey projects as an engineering, procurement and construction (EPC) contractor for water and sewerage infrastructure projects, including sourcing, treatment and distribution.

The government's thrust on the infrastructure facilities is already showing continuous increasing demand for the DI pipes in the domestic market. Currently domestic demand for DI pipes is estimated to be around 610 KTPA and is expected to grow at around 15% per annum. ECL currently enjoys 65% of the market share in the domestic market and 6% in the international market. However competition is creeping in due to additional capacity being installed by the new entrants and peer group companies. But the risks of ECL loosing its market share is minimal because of its strong relationship with the government. In addition to this, there is constant endeavor by the ECL for increasing the share in the existing foreign markets and enter new countries. Currently the total investment in water infratructure throughout the world is around US $ 70 billion, and is expected to increase to almost US $ 180 billion by 2025. Thus ECL is well poised to benefit from its expanding export initiatives.

However lately even the cost of the basic inputs are going up. To deal with this and aiming at cost reduction, the company has fully integrated production facilities which include Sinter plant, Coke Oven plant, Blast furnace, Pig Iron plant, Sponge Iron plant and Captive Power plant. This integrated manufacturing facility helps the ECL to minimize the production cost because ultimately cost competitiveness is the key component of success. ECL is also awaiting final environmental clearance for its iron ore mine, which will further lower its cost.

Value unlocking through listing of EIL:

ECL is setting up a 2.2 mn tonne steel plant through EIL, in which ECL holds about 40% stake. The total cost of the project is around Rs. 7262 cr. It has been funded through debt equity ratio of 3:1 and the project has already achieved financial closure. Of the total equity contribution of Rs.1815 cr, ECL has made an investment of around Rs. 726 cr. To raise the remaining equity portion (Rs.300 cr), ECL plans to list EIL, which is likely to unlock the value for ECL. Along with ECL, the other stakeholders in EIL are Stemcor, ILFS and others that hold 20%, 8% and 32% respectively. Stemcor is the world's largest steel trader with a network of 80 offices across the globe. The strategic alliance with Stemcor will enable EIL to leverage on the former's well spread distribution channel. EIL has also entered into a 20 year long agreement with ECL- owned mines and plans to set up a 120 MW captive power plant to meet 84% of the plant's power requirement.

ECL is quoting at almost its book value. Its PE is 7.72 compared to the industry PE of 10.07. The dividend paid last year was 125% which brings the dividend yield at about 2.56% at the current market price. The EPS for the year 2009-2010 was Rs. 6.31/share (Rs. 1 face value share). Following the listing of EIL, there would be value unlocking of ECL which will earn good good returns for the investors. In addition to this, with the increase in investment in water infrastructure, the ECL is bound to grow.

Buying this stock on dips would be a very good buy, somewhere around 40-45 levels.

Happy Value Investing.