Electrotherm (India) Ltd is a market leader in Indian foundry & Steel industry. The company caters to Ferrous & Non- Ferrous foundries and metal melting industry. The company manufactures medium frequency induction melting furnaces, induction heating and hardening equipment, Dc arc furnaces etc. The company is also in power generation and electric vehicles.

Key Highlights: Leader in Induction Furnaces with 50% market share in India coupled with strong presence in international market.

Electrotherm is the only Induction Furnace manufacturing company in the world that has its own Steel Plant (with an installed capacity of 360,000TPA), Ductile iron pipe plant
(with an installed capacity of 100,000TPA), Coal Based DRI (Sponge Iron) plants (with an installed capacity of 200,000TPA), and Mini Blast Furnaces as well.

Electrotherm is available below its book value of Rs 390.39. The Total Income and PAT of the company is expected to grow at a CAGR of 13% and 20% over 2008 to 2012E. Future Outlook

At the current price of Rs 305, the stock is available at 6.59x of its FY10E earnings, 4.40x of its FY11E earnings and 2.89x of its FY12E earnings. We recommend BUY with a price target of Rs398, given that the company¡¦s future shows potential.

Due to the recent economic slowdown, the demand for metallurgical engineering equipment, electric vehicles and heavy structural¡¦s has dropped.

The Debt to Equity ratio of the company stands at 2.43 as on 31st march 2009 which is on higher end as the company is in expansion mode.

Too many businesses might divert the attention of the management from its core business.

The cost of batteries is high as 30% of the cost of Electrotherm¡¦s electric vehicles. This will have an impact on the margins of battery operated vehicle division of the company.

During the quarter ended on 31st Dec, 2010, the total income of the company witnessed 23.32% growth on y-o-y basis to Rs 442.5cr as against Rs 358.81cr during the corresponding quarter last year, primarily on account of increased volume of steel & ductile pipes. The operating profit of the company saw an increment of 34.59% to Rs 72.69cr against Rs 54.01cr, as the raw material cost as a % of sales fell by massive 17.5% to Rs 237.82cr as against Rs 255.77cr. The operating profit margin of the company also improved by 118bps to 15.78% against 14.60%.

The net profit of the company, during the quarter ended on 31st December, 2010, witnessed an improvement of 35.64% to Rs 7.84cr as against Rs 5.78cr during the corresponding quarter last year. During the period both interest and depreciation cost were high to tune of 10.48% and 114.5% as the company raises debt to fund its expansion plans.

During the financial year ended on 31st March, 2010, total revenue of the company up by 33% to Rs 1781.66cr as against Rs 1338.44cr in FY08, largely driven by 35% increment in Steel engineering & DI pipe to Rs 1295.13cr. The company has seen significant growth in engineering revenue from overseas market.

Operating profit of the company saw an increment of 14% to Rs 244.11cr as against Rs 213.94cr during FY08, however operating profit margin of the company witnessed a fall of 157bps to 13.99% in FY09 against 15.56% in FY08, primarily due to increase in raw material cost as the volatility is witnessed in commodity prices.

The net profit of the company fell by 16% to Rs 52.25cr during FY09 as against Rs 62.34cr in FY08, the fall in net profit is largely due to increase in interest cost to Rs 115.04cr from Rs 78.51cr, as the company raise debt for funding its expansion plans, and increased deprecation from Rs 51.79cr against Rs 31.86cr.

The Indian steel industry is currently going through an expansionary phase backed by a liberalized policy environment. Prospects of domestic demand appear to be excellent driven by high investment rate, accelerated growth in the manufacturing industry and expansion in physical infrastructure creation. The Current capacity of the country is to produce 64.4MMT of finished steel which is expected to increase to 124MMT by
2015-16; this tremendous capacity expansion from steel companies would create potential demand for induction furnaces.

Induction Arc Furnace (IAF) is one of the most advance processes of making steel. Like EAF it uses electricity as its main fuel. IAF is most environment friendly and efficient way of producing steel. Over the past years Steel production through Electric arc and Induction Arc Furnace has increased nearly 55% of total steel is produced through these processes only.

Increased government spending on development of Infrastructure, non- hydrocarbon energy, refinery and oil & gas sectors is likely to provide a boost to the sector. This should ensure strong order flow for capital goods and engineering companies in future.

The demand for the sector depends on GDP growth, which in turn depends on expenditure in core sectors like steel, power, railways etc. With the growth in Indian economy and easing liquidity situation in the country, capital goods & engineering companies are expected to pick up pace with economy.

Leader: Electrotherm (India) ltd is the leader in induction furnaces with more than 50% share in the industry. The Indian steel industry is likely to doubling the capacity from 64.4MMT to 124MT by 2015-16, of which nearly 30MMT is from green filed projects, with tremendous expansion plans of various steel players demand for induction and electric arc furnaces is likely to remain robust.

Diversification: The company has diversified its business profile into the execution of turnkey projects, manufacturing of engineering equipment, specialty steel products, and battery operated vehicles.

Electric vehicle Division: The increased focused of the world on renewable energy, conservation of Oil & petrol and environmental concerns; we expect the electric vehicle division of the company to perform well in the coming future. The current product portfolio of the company includes Battery operated Scooters, Rickshaws and Bicycles. To avail the opportunity available in the future the company is planning to increase its product portfolio. The company is also looking to enter into overseas market for its electric vehicle division.

Steel & Pipe Division: Electrotherm (India) ltd has a steel plant (structural steel, and alloy steel) with the installed capacity of 360000 ton, the installed capacity of TMT bar mill stand has 150000 ton.

The company has increased its Ductile pipes manufacturing capacity to 150000 ton per annum, to grab the available opportunities. The Government has increased budget for Rajiv Gandhi Rural Water mission from at Rs 7400cr, which is a boost for the sector requiring huge amount of Ductile Iron Pipes.

Expansion plans: The company has plans to enter into green & renewable power generation business and to install both Wind mills and Solar power energy for both captive and commercial purpose. The company is working on installing a 40MW solar plant in Gujarat which is expected to be completed by the end of 2013.

Electrotherm is setting up a structural steel mill for manufacturing structures for telecom and transmission towers with a capacity of 100,000 TPA. It intends to foray into transformer business ranging from 10 MVA to 50 MVA with a total capacity of 3,000MVA. The company is likely to spend 600cr for the expansion.

Engineering Consultancy Business: Electrotherm (India) ltd is planning to provide engineering consultancy for steel companies to improve their operational efficiencies and to work on the cost front; this is a high margin business which will improve the overall margins of the company, we expect company to increase its focus on this segment.

Captive Resource: The company has allotted a non-coking coal block in chhattisgarh during late 2008 in an equal sharing with Grasim Industries. The total reserve block of mine is 46.9 MMT, which will ensure energy security for Electrotherm’s iron production facility and its captive power plant. The block is expected to become operational in mid 2013. Captive resources of coal will improve the operating margins of the company.