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Centrum Broking
Kirloskar Ferrous (Buy)
CMP: ₹106.5
Target: ₹155
We initiate coverage on Kirloskar Ferrous (KFIL) with a ‘Buy’ and TP of ₹155 (56 per cent upside). KFIL features: i) a well invested asset base with spare capacity of 50 per cent/25 per cent in Castings/Pig Iron; ii) increasing share of high-margin casting business; iii) cost efficiencies from upcoming low-payback projects; iv) an enviable track record of converting cash profits to cash flows (5Y/10Y AOCF/CP ratio of 1x/0.9x); and v) strong earnings growth led by higher volumes and operating leverage, buttressed by a low D/E of 0.3x.
Exciting future growth prospects await KFIL’s castings business which boasts of: i) a strong product profile and customer relationships; ii) sustainable competitive strengths; and iii) satisfactory demand visibility. We expect an impressive EBITDA/PAT CAGR of 28 per cent/29 per cent during FY17-20E driven by castings volume CAGR of 19 per cent coupled with cost efficiencies. Finally, we believe that it merits re-rating based on an attractive cash flow yield of 11.4 per cent/15.9 per cent (FY19E/20E).
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