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Radhika Kamath

Demand from user industries prop up growth.

INVESTMENT can be considered in the stock of Vesuvius India. At its current price of about Rs 200, the stock trades at a price-to-earnings multiple of about 16 times.

The sustainable business model, the strong fundamentals, the rich product range and the ability to leverage the future growth of the steel industry could deliver value to investors.

Demand drivers

Vesuvius India makes high-end refractory products, flow control systems and services, and competes with companies such as Tata Refractories, ACC, IFGL Refractories and OCL India. Its product range includes refractories for steel manufacturers using the continuous casting process.

Since most steel manufacturers, including the older steel makers such as SAIL, have now switched to this technology, this segment is likely to offer stable growth in demand.

At a time when the primary and secondary steel players are going in for massive capacity expansion exercises, refractories consumption is only expected to increase.

Focus on solutions selling

Over the past few years, Vesuvius has been focussing on solutions selling. That has paid off, introducing an element of stability into its business model.

The company's refractory solutions are now predominantly sold on the basis of per tonne of steel produced instead of on `per piece' basis.

This shift has enabled Vesuvius work more closely with its clients, provide customer-specific solutions and enter into long-term contracts with them.

This augurs well for the company, as the current uptrend in the production of steel, which is expected to continue, will have a positive impact on its earnings.

Rich product range

The company's broad product portfolio has helped it cater to the requirements of non-steel sectors too. Although it derives about 75 per cent of its revenues from the steel sector, the balance is spread across the cement, foundry, glass and petrochemicals.

The acquisition of a crucibles manufacturing plant in Gujarat and a monolithic refractory plant at Visakhapatnam has placed it in a better position to meet the demand from the non-steel sector, thus reducing its concentration risk.

The capacity expansion of its refractory plant in Kolkata, which is likely to go onstream in 2007, is also expected to bolster its volume grow.Vesuvius India's financial performance over the past four years shows a steady growth in earnings.

Even when the steel industry was reeling under recession, the company has steady growth.

On an average, while the revenues recorded an annual growth of 25 per cent, the OPMs remained at 25 per cent, which is above-the-industry average.

The contribution of exports to total sales increased and, together with a reduction in the import of raw materials from over 70 per cent in FY-2000 to just above 30 per cent in 2004, has minimised the exchange risk.

While the reduction in Customs duty on finished refractory and an increase on all refractory materials may reduce the competitiveness of domestic industry, its impact on the company's earnings may not be high.

However, the cyclical nature of the steel industry is an inherent risk for the company.

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