Esab India –Buy- Sharekhan
For Q1CY2010 Esab India has posted a net profit of Rs14.4 crore (a decline of 11.9% year on year [yoy]) as against our estimate of Rs17.7 crore. The performance was lower than expected mainly due to a lower than expected operating profit margin (OPM) during the quarter.
The company’s net sales improved by 6.2% to Rs111.5 crore in the same quarter. In terms of the top line, both the business divisions, consumables and equipment, registered a growth. The sales from the equipment division increased by 10.1% whereas the sales from the consumables division increased by 4.7% yoy.
The OPM contracted by 419 basis points to 20.6% mainly due to an increase in the raw material cost as a percentage of sales to 60.4% from 58% in the year-ago quarter. Further, the sharp increase of 41% in the employee cost to Rs9.3 crore also dented the OPM. Consequently, the operating profit declined by 9.3% yoy and by 1.3% quarter on quarter (qoq) to Rs23.7 crore.
On a segmental basis the profit before interest and tax (PBIT) margin of the consumables division declined by 678 basis points yoy to 19.8%. However, the equipment division showed a year-on-year improvement of 178 basis points in its PBIT margin to 20.6%. Â The depreciation charges rose by 44.6% to Rs2.5 crore. Due to contraction in the margin coupled with the higher depreciation charge the net profit of the company decreased by 11.9% yoy to Rs14.4 crore.
In line with the company’s performance in Q1CY2010 we are revising our earnings estimates downwards to Rs47.6 per share for CY2010 and to Rs53.3 per share for CY2011.  The demand for Esab India’s products depends on the infrastructure activity in the country. We expect the business environment to improve considerably in line with the strong impetus of the government on infrastructure development in the country.
We believe Esab India is the leader in its industry and has the capability of delivering the best products in the space. Furthermore, its international parentage provides it a significant technological edge in the market and we feel the company should be able to post an 11.5% compounded annual growth in its profits over CY2009-11E.
In view of the company’s strong balance sheet, high return on equity and high dividend yield, we maintain our Buy recommendation on the stock with a price target of Rs672 (valued at 12.5x CY2011E earnings). At the current market price the stock trades at a price/earnings of 13x and 11.6x discounting its CY2010 and CY2011 earnings estimates respectively.
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