Stock Idea - Esab India

Recommendation: Buy (again! J)

CMP = Rs 385 (at the time of this recommendation)

Price target: Rs 575

Key points:

• The revenues of Esab India for the quarter grew by 31% to Rs 114.4 crore led by the magnificent performance of the consumable division (revenues grew by 39.8% to Rs 86.6 crore) during the quarter. The equipment division's revenues grew by 9.6% to Rs 27.8 crore in the same quarter. The operating performance of the company remained stable with the operating profit margin at 24.6% in Q2CY2008. Consequently, the operating profit of the company grew by 29.8% to Rs 28.1 crore in the same period.
• The PBIT of the consumable division increased by 45.4% to Rs 25.2 crore in the quarter. This resulted in a 120-basis-point increase in the division's PBIT margin. The earnings before interest and tax margin of the equipment division, however, declined sharply by 320 basis points, leading to an 8% decline in the PBIT of the business to Rs 4.7 crore. Esab’s interest cost increased by 26.1% to Rs 0.3 crore whereas its depreciation charge rose by 21.8% to Rs 1.6 crore during the quarter. Consequently, its net profit grew by 30.9% to Rs 18.5 crore.
• For H1CY2008, Esab reported growth of 27.9% and 28.4% in its revenues and profits respectively. It also declared a 130% (= Rs 13 per share) dividend for its shareholders during the second quarter of CY2008. Esab would remain one of the major beneficiaries of the continued buoyancy in its user industries, such as pipes, shipbuilding and steel. Furthermore, a greater level of component indigenisation is likely to protect its margins against any adverse impact of the rising steel prices.
• At the current market price the stock discounts our CY2008 and CY2009 earnings estimates by 9.1x and 7.7x respectively.
• I maintain Buy recommendation on the stock with a price target of Rs 575 over next 5-6 months.