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Performance Highlights

1. In-line Topline: Vesuvius delivered yoy Top-line growth of 16% for 4QCY2007 to Rs90cr. For CY2007, the company’s Topline grew 18% yoy to Rs319cr. We expect Vesuvius to clock 28% yoy growth in Top-line in CY2008 on account of increase in production capacity and 10-12% increase in Steel manufacturing capacity in India.

2. Margins improve by a robust 300bp: OPMs improved by 300bp to 20.4% in 4QCY2007. OPMs ended higher by 95bp to 17.8% (16.8%) to Rs18.3cr in CY2007. Operating Margins improved primarily due to lower raw material costs and reduction in other operating expenditure. However, in CY2008 we expect the company’s OPMs to decline to 16.4% as the proportion of revenue from unshaped products, which fetch lower margins, is expected to increase. Margins would however, recover in CY2009 with the brown-field expansion at the company’s Kolkata plant for shaped products getting operational.

3. Operating costs decline: Other expenditure including freight and power related costs declined to 21% (22%) in 4QCY2007. Similarly, for CY2007, other expenditure fell to 22% (24%) during CY2006. Employee costs declined to 4.9% in 4QCY2007 compared to 6.6% in 4QCY2006. However, employee costs remained flat at 5.7% for CY2007.

4.  Net Profit surges 51% yoy: For 4QCY2007, Vesuvius clocked a substantial 253% increase in Net Profit to Rs9.9cr (Rs2.8cr). In 4QCY2006, Vesuvius had extraordinary expenses to the tune of Rs6cr. For CY2007, Net Profit surged 51% to Rs32cr compared to Rs21cr in CY2006. During CY2006, the company had extraordinary expenses pertaining to write-off of receivables for the earlier long-term contracts.

Business Outlook

New plant at Vishakapatnam commences production: Vesuvius’ brown-field expansion at its Vishakapatnam steel plant commenced production on December 22, 2007. The company manufactures unshaped products at this facility. Capacity post expansion is upgraded to 75,600 tonnes as against 39,600 tonnes earlier. However, it may be noted that unshaped products fetch lower margins compared to shaped products. Hence, the company’s OPM is expected to decline in CY2008 whereas Operating Profit would increase due to the overall increase in Revenues.

Outlook and Valuation

Vesuvius is part of the Cookson group, which is the world leader in the Refractory business. Hence, Vesuvius is a competitive player in the Indian Refractory space offering technologically superior products compared to peers and offers value-added services through total refractory management services to certain steel manufacturers in India. Further, the Steel Industry, which is the primary consumer of refractory, is expected to grow at 10-12% over the next few years. To capitalise on this opportunity, Vesuvius commissioned its new plant at Vishakapatnam to increase the manufacturing capacity of its unshaped products. Vesuvius is also in process of enhancing production capacity at its Kolkata plant where it manufactures shaped products. At CMP the stockis valued at 9x CY2009 EPS.

Report Card-

PE ratio        14.82   28/02/08
EPS (Rs)        15.80   Dec, 07
Sales (Rs crore)     89.83   Dec, 07
Face Value (Rs)         10   
Net profit margin (%)   7.72   Dec, 06
Last dividend (%)   37.5   22/02/08
Return on average equity 15.48   Dec, 06