Vesuvius India Rating ‘Hold’; Performance was subdued in relative terms

Vesuvius India’s (VIL’s) Q4CY20 sales grew 3% y-o-y (in line with estimate), in line with overall steel production, but underperformed large steel mills’ growth of 17% y-o-y. Ebitda slid 18% y-o-y (in line) despite 18% y-o-y dip in staff costs. During CY20, VIL generated cash flow of Rs 908 mn and ended the year with Rs 5.6 bn in cash balance.

Large mills’ steel production is on an uptrend; however, VIL’s relative underperformance indicates market share loss, which it is now regaining. It has restructured costs from fixed to semi-variable, which should aid margin. However, input cost pressure remains. We revise multiple to 28x June 2022e EPS – average of 5 years –as the cycle is yet to pick up fully, but maintain Hold with revised TP of Rs 1,092 (Rs 946 earlier).

Sales in line with overall steel production: VIL’s Q4CY20 sales were in line with industry-wide steel production growth of 3% y-o-y. However, the company continued to underperform large steel mills (its key customers), which grew 17% in Q4CY20 and versus 19% growth reported by Orient. CY20 sales dipped 11% y-o-y, broadly in line with steel production decline of 12% y-o-y. However, large mills’ production dipped mere 2% over the same period. With market share loss in CY20, management is firmly focused on recouping it. Production at large steel mills has recovered from the pandemic-led uncertainty. We await VIL’s growth to catch up with large steel mills’ production led by its sharpened R&D focus and new product offerings.

Margins hit sharply in CY20: Product mix changes resulted in gross margin dip of ~170bps y-o-y to 40.7%—lowest ever—for CY20. Further, Ebitda margin declined ~390bps y-o-y to 9.7% for CY20. Consequently, Ebitda fell 36%. For Q4CY20, while margin dipped 270bps y-o-y to 10.7%, Ebitda dipped 18% y-o-y. We believe cost levers should result in ~200bps Ebitda margin improvement to 11.7% in CY22E, leading to 24% Ebitda CAGR, yet we have built in lower than CY18-19 average of 14.7%. Improved material formulation, processes (like robotics) will lead to better margins ahead.

Outlook: Stable–Steel production has recovered from Covid-19 lockdowns and demand is on the rise; however, we await sustainable pick-up in VIL’s market share. Awaiting a structural uptick, we revise multiple to 28x June 2022e EPS (24x earlier), a 10% discount to ORL’s target. We maintain Hold.