This refractory stock delivered 73% returns in last one year – here’s why investors should keep it on radar

Vesuvius India stock has done well in past 1 year and outperformed its peer group. The stock has delivered returns of 73 percent in the last one year.

Vesuvius India belongs to the refractory market which is a 20 billion Euro market globally with RHI Magnesita and Vesuvius having one fourth of the market which is largely dominated by medium and small Chinese companies.

 

The refractory market is approximately $1.5 billion market in India with RHI Magnesita’s market share at 30 percent following the Dalmia OCL and Hi-Tech acquisitions while Vesuvius is at 13 percent and the top six players have 70 percent of the market. Since India is expected to be one of the top three economic powers in the world over the next five years the refractory industry is expected to see traction driven by end markets of construction, autos, machinery consumer goods and energy.

Refractories find bulk of their application in steel as it is a specialised ceramic which can withstand temperatures of over 1,600°C and which are used to control molten metal flow in steel industry. Refractory industry is a proxy to steel industry whose capacity is targeted to double to 300 million tonnes by 2030. Additionally from the sectors where it has exposure it is just 0.5 percent to 3 percent of customers’ costs. India’s refractories market growth is forecast to grow at a CAGR of 6 percent between 2023 and 2025. There is also an opportunity to increase exports from India as it becomes a manufacturing hub.

The street was disappointed with the December quarter results as there was a mild de-growth on the top-line but the bigger disappointment was on the margins which got compressed likely due to higher input costs, inferior product mix and also could be due to year end phenomena for the company. In the past 4 years the company has grown at a CAGR of 10 percent with an average of low teen margins.

On the valuation front it trades at a bit of a discount to RHI Magnesita but at a premium to its smaller peer IFGL Refractories.

Some of the key reasons why part of the street believes these premium multiples are justified are as follows:

1. Solid parentage as it’s an MNC.

2. Cash of more than Rs 550 crore which is 18 percent of current market cap.

3. In terms of return ratios its ROCE is at 13 percent but adjusted for cash in books its core ROCE is 30 percent.

4. In February 2023 the management announced a mega Rs 500 crore investment over next 3 to 5 years which could mean a meaningful surge in revenues in the years to come. As of now the company generates Rs 130 crore of EBIT on a last reported Gross Block of Rs 250 crore.

On the SHP front there are quite some marquee funds who hold stake in the company and majority is held by the promoter entity.