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Buy Electrochem – HDFC Sec

July 25, 2007

HDFC Securities Research team has put a BUY Recommendation on Electrochem India with a potential upside of 50% in 15-18 months.

The core business of Electrotherm India Ltd (EIL) includes manufacturing induction furnaces required by the steel & forging industry (employing electric furnace route and not blast furnace route) and project engineering. EIL has taken initiatives to integrate forward by manufacturing major categories of steel including construction, structure/ alloy and stainless steel. EIL has set up a sponge iron unit in Kutch as a part of its backward integration measure to manufacture steel of all grades. To reduce its power cost, EIL has also setup a 30MW power unit in Kutch. The company had implemented a show case steel plant in Kutch, Gujarat.

Valuation and Recommendation:
EIL’s sales to grow at a CAGR of 41.4% over the next two-year period. The EBIDTA margins are likely to remain in the range of 14-15%. The EPS growth could be of 37% CAGR over the next two periods. We have assigned combined valuation of engineering and steel industry to EIL and expect it to command an P/E ratio of 9.5x in FY09 (E). The stock is currently available at a P/E ratio of 5.5x FY09 (E) earnings of Rs 89.2. HDFC recommends Electrochm India Limited as a compelling BUY with a price target of Rs 847 in the next 12-15 months.

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