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Nelcast Review and Recommendation

June 8, 2007

Nelcast is dependent on the auto industry ramping up of exports and increasing machining are required to maintain growth as domestic users face a slowdown.

Right now, Neelcast exports about 9% of its sales Globally, export of castings to developed nations is on the rise on account of rising costs, lack of skilled foundry people and environmental restrictions in these markets. The company plans to increase its focus on exports and become the preferred full service supplier to original equipment manufacturers (OEMs) across the globe. The export target is 30% of sales by 2010.

Strengths:
The composition of machined castings is about 10% of production. This is to be increased to about 20%-25% over the next two years so as to improve margin.

Weakness:
More than 70% of revenue is derived from the HCV and tractor segments. Both these user industries are set to slow down significantly in FY 2008 when the company’s substantial capacity expansion is under implementation.

Ancillaries to domestic auto and auto components sectors often have to maintain their prices despite rising raw material cost due to a limited number of clients. Margin is down from 11.9% in FY 2004 to 8.9% in FY 2006, though it jumped to 13.4% in FY 2007.

Valuation:
At a price band of Rs 195 – 219, Nelcast’s P/E works out to 17.2 – 19.3 times FY 20007 earning on post-diluted equity. Industry peer Ennore Foundries is trading at a P/E of 19.0.

Investors with some risk appetite may apply at Cut-Off.

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