Recommendation from Auto Ancillaries - Castings/Forgings sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

STEELCAST LTD.: MOVING AHEAD WITH A STEELY RESOLVE

HERE IS WHY
✓ Good growth in global metal casting industry
✓ Significant increase in net profit
✓ Available at cheaper valuation 

The metal casting industry was valued at USD 151.6 billion in 2022 and is expected to reach USD 236.7 billion by 2028, exhibiting a growth rate CAGR of 7.4 per cent during 2023-2028. This growth is driven by the rising awareness towards numerous advantages offered by metal casting, such as improved energy efficiency, lower production costs, enhanced environmental quality, etc. The automotive and transportation sector accounts for the largest market share in the metal casting industry. The growth in the market is driven by increasing industrialisation and urbanisation, giving a boost to the construction industry and growing demand for lightweight vehicles. Considering the importance of metal casting in mind, the choice scrip for the issue is Steelcast Ltd. The company caters to earthmoving equipment manufacturers, heavy electrical equipment manufacturers and mining and mineral processing equipment manufacturers along with general engineering equipment manufacturers. 

The product range of the companyincludes carbon steel, low alloy steel, high alloy steel, manganese steel and other superior grades of wear and abrasionresistant steel castings. In Q1FY24, the company’s revenue rose by 3.35 per cent YoY to ₹119.49 crore compared to ₹115.62 crore from the previous year’s same quarter. On a sequential basis, revenue decreased marginally by 0.69 per cent. Its PBIDT excluding other income increased by 34.25 per cent to ₹32.30 crore YoY as compared to ₹24.06 crore from the previous year’s same quarter, while sequentially it increased by 4.33 per cent. 

The net profit stood at ₹20.28 crore compared to ₹14.14 crore, a YoY increase of 43.43 per cent, while sequentially it increased by 3.73 per cent from ₹19.55 crore. On the geographical front, 52 per cent of the company’s revenue comes from India, while the remaining 48 per cent is generated from the rest of the world. The company benefits from its strategic location as its plant is situated in Bhavnagar, Gujarat, which boasts excellent connectivity via roads, railways and waterways to major cities and ports. 

Recently, the company entered into a long-term supply agreement with a prominent OEM in the USA specialising in the railroad industry. Furthermore, it has plans to expand into the defence, railways and ground-engaging tool industries to fuel future growth. Currently, the company’s capacity utilisation is projected to be around 50 per cent for the current financial year, with targets set at 60 per cent for FY25 and 75 per cent for FY26. India’s economic growth has led to an increase in crude oil production, steel output and construction equipment. Additionally, there has been a rising demand for India’s railways. 

In the post-pandemic world, corporate entities are adopting the China Plus One strategy, which has emerged as a major growth driver for the casting industry of India. The shares of the company are currently trading at a PE of 17.6 times as against the industry PE of 28.6 times and lower than its three-year median PE of 21.8 per cent, which shows that the company is available at a cheaper valuation. Considering the company’s business and its leading position in the metal casting industry while also taking into account the trend in favour of metal casting, we recommend BUY.