Stock Pick From The Engineering Sector

Here is why:

• Revival in steel industry to benefit immensely for IFGL.
• Strong second quarter result gives confidence of its performance in remaining year.
• The stock is trading at considerable discount to its immediate competitor.

Market participants have started talking about upcoming market revival in the near future.  The discussions are taking place since September quarter and the domestic market has also reacted giving handsome 12.50 per cent return since 2nd September 2013. The global markets are also trading at their all time highs. And as the market revival is expected, the steel industry will be one of the most benefited industries. Adding to this, one can clearly see some signs of recovery in steel industry also. There is consensus of 2.6 per cent CAGR for steel production by 2015. Further the demand for steel is expected to boost due to strong economic growth in emerging markets. 

To take the benefit of revival in steel industry, we are recommending IFGL Refractories to our reader in this issue's “Low Price Scrip” column. IFGL is a manufacturer of continuous casting and special grade refractories which are widely used in steel industry. Statistics showed that more than 75 per cent of the refractories produced worldwide are consumed by the single steel industry. Furthermore, the increased capital expenditure by steel majors across both in India and globally will have strong positive for the refractory industry. 

Over the years, IFGL has became a global player with manufacturing capacities in Brazil, China, Czech Republic, Germany, India, UK and USA. The company has significantly expanded its product portfolio and scaled up its capacities through both inorganic and organic ways of expansions. In the last few years, it acquired various overseas capacities through its subsidiaries Monocon International and Hoffman Ceramics. This very fact has helped IFGL to spread its operations in six countries now. In India, IFGL has recently has recently set up Greenfield plant in Kandla export processing zone. In addition to these products for steel sector, IFGL has set up the manufacturing plant for of Bio Ceramic, which makes dental implants, bone implants, hip joints and widely used for dental and orthopedic applications. Vesuvius was traditionally the largest Indian refractory company in terms of revenues. However, IFGL has taken over Vesuvius and became the largest listed player in India in the refractory sector. 

On financial front, IFGL showed strong performance during second quarter of FY14. The company's revenue showed a handsome growth of 21.55 per cent on yearly basis clocking revenues of Rs 202 crore for the same period. Interestingly, its net profit during the same period boosted to almost 5 times to Rs 19.06 crore compared to Rs 4 crore in Q2FY13. This strong profitability is mainly due to lower raw material and other expenses as percentage of sales and lower financial cost compared to Q2FY13. Further, IFGL has a good balance sheet with a debt equity ratio as low as just 0.55. Adding to this, the company's half year EPS is Rs 9.70 per share which is more than the full year' EPS in last financial year 2013. IFGL has Indian promoters holding 56.83 per cent stake with no pledging and a foreign promoter, Krosaki Harima Corporation Japan, a subsidiary of world’s second largest steel maker Nippon Steel Corporation, holding 14.47 per cent. 

Major business of refractory company is closely related to the growth in steel sector. As there are some signs of revival in steel sector, being a global player, IFGL is the first to get benefit from this revival. On valuation front, the company is trading at a PE ratio of 4.55x its TTM EPS of Rs 12.94. This is considerable attractive valuation compared to its immediate competitor Vesuvius which is trading at a PE ratio of 13.19x its TTM EPS of Rs 34.11. Further, major part of portion in IFGL's revenue comes from exports and weaken rupee will add up its realisation in next one year. We recommend our readers to buy this stock with a price target of Rs 80 in next one year.