Company Update | Capital Goods

May 29, 2012

Vesuvius India
Performance Highlights
Y/E December (` cr) Net sales EBITDA EBITDA margin (%) Adjusted PAT 1QCY12 139 21 14.9 12 1QCY11 120 22 18.6 13 % chg (yoy) 15.8 (7.6) (376bp) (11.4) 4QCY11 % chg (qoq) 148 22 14.8 11 (6.1) (5.9) 2bp 4.6

ACCUMULATE
CMP Target Price Investment Period
Stock Info Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Cap Goods 758 0.6 464 / 305 3,139 10 16,439 4,990 VESU.BO VI IN

`373 `413 12 Months

Source: Company, Angel Research

Vesuvius India Ltd. (VIL) reported 15.8% yoy top-line growth to `139cr in 1QCY2012 compared to `120cr in 1QCY2011. The increase in raw-material prices and other expenses led to contraction of EBITDA margin by 376bp yoy to 14.9%. Consequently, net profit declined by 11.4% yoy to `12cr in 1QCY2012 from `13cr in 1QCY2011. We recommend an Accumulate on the stock. Rupee depreciation- an opportunity for import substitution: Import constituted ~28% of Indian refractory market in CY2011. Rupee has witnessed a downward trend reaching its all-time low of 56.1 against USD in My 2012. This is expected to lead to decrease in import of refractories, thus increasing domestic demand. Moreover, VIL completed its expansion of Kolkata plant during the quarter. These factors would aid in better volume sales resulting in topline growth of the company. Outlook and valuation: We expect VIL to post a 15.1% CAGR in its revenue over CY2011-13E to `716cr in CY2013E, aided by better volume sales from import substitution and commencement of new capacity. However, the companys EBITDA margin is expected to contract by 95bp over CY2011-13E from 17.4% in CY2011 to 16.4% in CY2013E, while net profit is likely to report a 12.4% CAGR over the same period to `70cr in CY2013E. At the CMP, the stock is trading at PE of 10.8x its CY2013E earnings and P/B of 1.9x for CY2013E. We recommend an Accumulate view on the stock with a target price of `413, based on a target PE of 12x for CY2013E.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 55.6 16.0 14.0 14.5

Abs. (%) Sensex VESUVIUS

3m (7.4) (0.6)

1yr (9.8)

3yr 12.4

8.8 209.8

Key financials
Y/E December (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoIC (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 440 21.7 49 29.3 18.7 23.9 15.6 3.0 20.8 43.9 1.6 8.5

CY2011 540 22.8 55 13.7 17.4 27.2 13.7 2.5 20.1 40.6 1.3 7.5

CY2012E 628 16.3 60 9.5 16.4 29.8 12.5 2.2 18.8 38.3 1.0 6.3

CY2013E 716 14.0 70 15.5 16.4 34.4 10.8 1.9 18.6 41.0 0.9 5.2

Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com

Please refer to important disclosures at the end of this report

Vesuvius India | Company Update

Exhibit 1: 1QCY2012 performance

Y/E December (` cr) Net Sales Net raw material (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (% of Sales) Tax (% of PBT) Reported PAT PATM (%) Equity capital (cr) EPS (`)
Source: Company, Angel Research

1QCY12 139 80 57.2 9 6.3 30 21.6 119 21 14.9 0 4 0.4 17 12.3 6 32.5 12 8.3 20 5.7

1QCY11 120 67 55.7 7 6.2 23 19.5 98 22 18.6 (1) 3 0.0 20 16.3 7 33.6 13 10.8 20 6.4

yoy chg (%) 15.8 19.1 17.8 28.2 21.1 (7.6) (376bp) 19.6 (12.8) (15.6) (11.4)

4QCY11 148 90 60.6 6 4.2 30 20.4 126 22 14.8 0 4 0.0 18 12.0 7 37.7 11 7.4 20

qoq chg (%) (6.1) (11.3) 42.1 (0.5) (6.1) (5.9) 2bp 1.0 (3.6) (17.0) 4.6

CY2011 540 307 56.8 30 5.5 110 20.4 446 94 17.4 1 15 5 83 15.3 27 33.2 55 10.2 20

CY2010 440 242 55.0 25 5.8 91 20.6 358 82 1 13 6 75 17.0 26 34.7 49 11.1 20 24.1

% chg 22.8 26.7 16.2 21.6 24.7 14.4 47.7 13.6 (27.6) 12.6 5.8 13.1

18.7 (127bp)

(11.4)

5.4

4.6

27.2

13.1

Exhibit 2: Actual vs. estimates (1QCY2012)

Actual (` cr) Total Income PBIDT PBIDTA margin (%) Adjusted PAT
Source: Company, Angel Research

Estimate (` cr) 142 25 17.4 14

Var (%) (1.7) (16.1) (255bp) (19.6)

139 21 14.9 12

In-line top line, however higher expenses drag bottom line

For 1QCY2012, VILs top line stood at `139cr, in-line with our expectation of `142cr. However, raw-material cost and other expenses as a percentage of sales witnessed an uptrend during the quarter, impacting the companys EBITDA margin by 376bp yoy to 14.9%, lower than our estimate of 17.4%. As a result, net profit for the quarter declined by 11.4% yoy to `12cr, 19.6% lower than our estimate of `14cr.

May 29, 2012

Vesuvius India | Company Update

Investment rationale
Refractory demand to grow on better steel demand for India
About 75% of the total refractories are consumed in the iron and steel industry. Indias steel consumption reported sluggish growth of 5.5% in CY2011 vs. an estimate of 13.3% (WSA). WSA reduced its growth estimates for steel consumption for India to 6.9% for CY2012E vis--vis an estimate of 14.3% growth. However, WSAs steel consumption growth estimate for India still stands higher than most other developed as well as developing countries. Moreover, as per WSA estimates, Indias steel consumption growth is expected to accelerate to 9.4% in CY2013E on the back of urbanization and surging infrastructure investment. Thus, refractory consumption may witness a pick-up owing to better steel demand, helping VILs revenue growth.

Exhibit 3: Country wise steel consumption (2012E)

8 6

Exhibit 4: World refractory demand

000 metric tons 2004 North America Western Europe Asia/Pacific Other Regions 3,305 3,550 13,350 5,460 25,665 2009 2,445 2,725 21,340 4,990 31,500 2014E 3,150 3,240 27,850 6,460 40,700 % Change 20042009 (5.9) (5.2) 9.8 (1.8) 4.2 % Change 20092014E 5.8 3.5 5.5 5.3 5.3

Growth (%)

4 2 0

(2) World Japan EU China CIS US MENA Central & South America India

Refractory Demand
Source: WSA

Source: WSA

INR depreciation and capacity expansion to result in import substitution

Imports constituted ~28% of the Indian refractory industry, wherein a majority of imports is from China. Continuous rupee depreciation against USD is expected to increase the cost of imports thereby increasing domestic demand. This may provide opportunity for domestic players like VIL.

Exhibit 5: INR depreciated more than CNY

18 15

Exhibit 6: Indias import market share to decline

45 40 35

Depreciation (%)

12 9 6 3 0 (3) 1 month 3 months USD/ INR 6 months USD/ CNY 1 year

(%)

30 25 20 15 CY08 CY09 CY10 CY11 CY12E CY13E Refractory imports marketsh are

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

May 29, 2012

Vesuvius India | Company Update

Major refractory players in India have been increasing capacity resulting in ~15% additional refractory capacities which are expected to be operational by CY2012E. Besides, VIL has also acquired 15 acres of land in Visakhapatnam for setting up its proposed fifth plant.

Exhibit 7: Capacity expansion for major players (MT)

Expansion
VIL IFGL Tata Refractories Total capacity
Source: Company

2010
622,500 800,000 250,760

New capacity
155,900 84,000 36,000

2012E
778,400 884,000 286,760 1,949,160

1,673,260

Strong balance sheet favors return ratios

VIL being a debt-free company had RoIC of 40.6% for CY2011. Since the company has completed its expansion, no major capex is required in the short term. Hence, we expect the cash reserves to improve significantly going forward to `104cr and `146cr in CY2012E and CY2013E, respectively. This would lead to RoIC of 41.0% for CY2013E.

May 29, 2012

Vesuvius India | Company Update

Financials
Exhibit 8: Key assumptions
CY2012E Change in refractory volume sales (%) Change in MRP of refractories (%)
Source: Angel Research

CY2013E 12.9 5.0

11.8 3.0

Exhibit 9: Change in estimates

Y/E March Net sales (` cr) OPM (%) EPS (`)
Source: Angel Research

Earlier estimates CY2012E 621 17.1 30.3 CY2013E 713 18.1 37.3

Revised estimates CY2012E 628 16.4 29.8 CY2013E 716 16.4 34.4

% chg CY2012E 1.2 (65bp) (1.7) CY2013E 0.5 (167bp) (7.8)

Import substitution to drive topline; EBITDA margin - a concern

We expect VIL to post revenue CAGR of 15.1% over CY2011-13E to `716cr on account of better domestic demand aided by INR depreciation. However, EBITDA margin is expected to contract by 95bp over CY2011-13E to 16.4%, owing to increasing raw-material prices and overhead expenses on new capacity.

Exhibit 10: Revenue growth on better demand

800 700 600 30 25 20

Exhibit 11: Higher expenses to contract EBITDA margin

140 120 100 19 18 17

(` cr)

500 400 300 200 100 0 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E Revenue (LHS) Revenue growth (RHS)

(` cr)

(%)

60 40 20 0 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E EBITDA (LHS) EBITDA margin (RHS)

10 5 0

15 14 13

Source: Company, Angel Research

Source: Company, Angel Research

May 29, 2012

(%)

15

80

16

Vesuvius India | Company Update

Net profit growth to recover in CY2013E

We expect the companys net profit to post a 12.4% CAGR (lower than the topline growth of 15.1%) over CY2011-13E, to `70cr in CY2013E on account of margin contraction and increased depreciation expenses on new capacity.

Exhibit 12: Net profit growth to improve from CY2013E

80 70 60 50
(` cr)

40 30 20 10 0 (10) CY2008 CY2009 CY2010 PAT (LHS) CY2011 CY2012E CY2013E PAT growth (RHS)
(%)

40 30 20 10 0

Source: Company, Angel Research

Outlook and valuation

We have revised our revenue estimate marginally higher for CY2012E and CY2013E considering import substitution opportunities, however we have reduced earnings estimates downwards owing to cost pressures. At current levels, the stock is trading at PE of 10.8x its CY2013E earnings and P/B of 1.9x for CY2013E. We recommend an Accumulate on the stock with a target price of `413 based on target PE of 12x for CY2013E.

Exhibit 13: One-year forward P/E

500 400 300
(`)

200 100 0 May-07

May-08 Price

May-09 5x 8x

May-10 11x

May-11 14x

May-12

Source: Company, Angel Research

May 29, 2012

Vesuvius India | Company Update

Exhibit 14: Relative valuation

Year end IFGL Refractories Vesuvius India
Source: Company

Sales (` cr) 604 540

OPM (%) 12.5 17.4

PAT (` cr) 40 55

EPS (`) 12 27

ROE (%) 31.5 20.1

P/E (x) 3.7 13.7

P/BV (x) 1.2 2.5

EV/ Sales (x) 0.1 1.3

EV/ EBITDA (x) 1.1 7.5

FY2012 CY2011

Risks
Slowdown in the steel industry: VIL is a manufacturer of refractories, which
has major application (~75% of total production) in the iron and steel industry. Slowdown in steel demand has a direct impact on refractory demand. Underperformance in the steel industry may be a cause for declining demand of refractories, thus affecting the company.

Volatile raw material prices: Raw material constitutes a major chunk (65-70%)
of the total expenses. Raw material cost as percentage of sales has witnessed volatility in past few quarters, thus affecting the total expenditure. Substantial increase in raw material cost in the previous two quarters has impacted the EBITDA margins. Such volatility may hamper the stability in the EBITDA margin going forward.

Exhibit 15: Varying raw material as percentage of sales

100 80 60 40 20 0 62 60 58

Exhibit 16: Trend in quarterly raw material cost

25 20 15 10

(` cr)

(%)

56 54 52

(%)

5 0 (5)

(10)

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

(15)

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

Net raw material (LHS)

% of net sales (RHS)

qoq % change

Source: Company, Angel Research

Source: Company, Angel Research

Currency fluctuation: Since imports constitute 25-30% of the total refractory

industry, currency appreciation will shift the industry demand towards cheap imports, thus impacting domestic demand.

May 29, 2012

1QCY12

Vesuvius India | Company Update

The company
Vesuvius India Ltd. (VIL) is a subsidiary of Vesuvius Group Ltd., UK, which holds a 55.6% stake in the company. VIL provides refractory products and services for the construction and maintenance of industrial equipment and processes. The company caters to different industries such as iron and steel plant, CFBC and other boilers, aluminium calciner, aluminium melting and holding furnaces, DRI plants and iron pellet plants. VIL has doubled the capacity of its Kolkata plant from 400pcs per day to 800pcs per day, which is expected to be operational by CY2012E. The company is a supplier of refractories to large companies such as SAIL, JSW Steel, Rashtriya Ispat Nigam, ESSAR and L&T.

May 29, 2012

Vesuvius India | Company Update

Profit & Loss Statement

Y/E December (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Net Raw Materials Other Mfg costs Personnel Other Total Expenditure EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of Net Sales) PBT % chg Tax (% of PBT) PAT (reported) Extraordinary (Exp)/Inc. ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY2008 386 34 353 353 10.4 193 53 20 33 300 53 (8.0) 15.0 9 44 (10.1) 12.5 3 6 1.7 48 (5.1) 17 36 31 (1) 32 (3.9) 9.0 15.6 15.6 (3.9) CY2009 384 22 362 362 2.5 198 46 21 32 298 64 20.9 17.7 13 51 15.9 14.2 1 6 1.5 56 17.4 19 33 37 (0) 38 18.8 10.4 18.5 18.5 18.8 CY2010 473 33 440 440 21.7 242 59 25 32 358 82 28.5 18.7 13 69 35.1 15.7 1 6 1.5 75 33.6 26 35 49 0 49 29.3 11.0 23.9 23.9 29.3 CY2011 CY2012E CY2013E 581 40 540 540 22.8 307 73 30 37 446 94 14.4 17.4 15 79 14.6 14.7 1 5 0.9 83 10.6 27 33 55 55 13.7 10.2 27.2 27.2 13.7 672 44 628 628 16.3 356 87 38 45 525 103 9.9 16.4 18 85 7.6 13.6 0 5 0.8 90 9.2 30 33 60 60 9.5 9.6 29.8 29.8 9.5 766 50 716 716 14.0 407 98 43 50 598 118 14.1 16.4 19 98 15.4 13.8 0 6 0.8 104 15.5 34 33 70 70 15.5 9.8 34.4 34.4 15.5

May 29, 2012

Vesuvius India | Company Update

Balance Sheet
Y/E December (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability 20 165 185 5 190 135 57 78 10 172 9 13 48 101 71 102 190 20 193 213 5 218 161 79 82 21 193 55 11 29 98 77 115 218 20 233 253 6 259 181 90 92 20 373 56 164 38 116 226 147 259 20 278 298 6 304 207 99 109 30 452 54 200 48 149 286 165 304 20 326 347 6 353 224 117 107 10 577 104 233 69 170 341 236 353 20 384 405 6 411 235 136 99 10 684 146 265 78 194 383 302 411 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

Total Liabilities
APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Inventory Debtors Current liabilities Net Current Assets Misc. Exp. not written off

Total Assets

May 29, 2012

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Vesuvius India | Company Update

Cash Flow Statement

Y/E December (` cr) Profit before tax Depreciation Change in Working Capital Direct taxes paid Other income Others Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Others Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 48 9 (16) (17) (6) 10 27 (15) 6 (6) (16) (5) (6) (10) 1 8 9 56 13 32 (19) (6) (4) 73 (37) 6 8 (23) (9) 5 (4) 45 9 55 75 13 (31) (26) (6) 6 31 (19) 6 (8) (21) (9) 1 (9) 1 55 56 83 15 (20) (27) (5) (0) 45 (37) 5 (7) (39) (10) 2 (8) (2) 56 55 90 18 (21) (30) (5) 53 4 5 9 (12) (12) 50 55 104 104 19 (24) (34) (6) 59 (11) 6 (5) (12) (12) 42 104 146

May 29, 2012

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Vesuvius India | Company Update

Key Ratios
Y/E December (` cr) Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (0.1) (0.2) 17.4 (0.3) (0.9) 61.0 (0.2) (0.7) 80.5 (0.2) (0.6) 62.4 (0.3) (1.0) 426.6 (0.4) (1.2) 492.5 2.6 50 105 86 96 2.2 30 99 95 61 2.4 31 96 231 75 2.6 33 101 234 75 2.8 40 99 198 76 3.0 40 99 195 79 24.8 28.4 18.4 25.1 33.8 18.9 29.0 43.9 20.8 28.2 40.6 20.1 26.0 38.3 18.8 25.8 41.0 18.6 12.5 0.6 2.1 16.7 (0.1) 14.2 0.7 2.5 24.0 (0.3) 15.7 0.7 2.4 24.7 (0.2) 14.7 0.7 2.5 24.1 (0.2) 13.6 0.7 2.6 23.9 (0.3) 13.8 0.7 2.8 25.9 (0.4) 15.6 15.6 19.8 2.0 91.0 18.5 18.5 24.8 3.7 105.1 23.9 23.9 30.3 4.0 124.6 27.2 27.2 34.4 4.3 146.9 29.8 29.8 38.6 5.0 170.8 34.4 34.4 43.9 5.0 199.4 23.8 9.2 4.1 0.5 2.1 14.0 3.9 20.0 7.4 3.5 1.0 1.9 10.9 3.2 15.5 6.0 3.0 1.1 1.6 8.5 2.7 13.6 5.3 2.5 1.1 1.3 7.4 2.3 12.5 9.7 2.2 1.3 1.0 6.3 1.9 10.8 8.5 1.9 1.3 0.9 5.2 1.5 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

May 29, 2012

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Vesuvius India | Company Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies 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. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Vesuvius India No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 29, 2012

13