Strengthening India’s infrastructure surge with solid growth and market dominance

Since economic liberalization in the 1990s, the Indian economy has grown at a remarkable rate and is now one of the fastest growing economies in the world. Gross domestic product (GDP) has been growing steadily for over 20 years.

This continued economic expansion has led to increased urbanization across India. As a result, villages are transforming into cities, then cities, and finally megalopolises. Water, the most basic necessity for survival, is expected to suffer the most due to increased demand due to population growth and economic development, and resource decline due to overdevelopment and pollution.

As demand for water supply and treatment continues to grow, the demand for pipes and fittings, which are the primary means of transporting water and wastewater, is increasing. Electrosteel Castings, an India-based pipeline solutions provider, has a significant presence in the industrial pipes market.

The stock has delivered multibagger returns, soaring nearly 460% in just one year. Over a three-year period, the stock returned a whopping 650%. So, let’s take a closer look at the article to evaluate the company’s future for investment opportunities.

Electrical steel casting industry overview

The growth of the domestic DI pipe industry is primarily driven by the expansion of water supply and wastewater infrastructure in urban, suburban and rural sectors in India. With approximately 31% of India’s population already urbanized and its population density high, India’s urbanization trend is likely to accelerate significantly, reaching 40% by 2030.

Moreover, the country suffers from serious drinking water supply problems and inadequate water supply and distribution systems. Only about a third of India’s homes are connected to the sewer network.

The use of DI pipes and fittings in pipe irrigation systems is another demand driver. To meet this growing demand, the Indian pipe market has been growing at a rate of 10-12% annually for over a decade.

Electrical steel sheet casting company overview

Electrosteel Castings is engaged in manufacturing Ductile Iron (DI) Pipes, Ductile Iron Fittings and Cast Iron (CI) Pipes. The company established the first ductile iron pipe plant in India and is currently the largest pipeline solutions provider in the country.

Global brand awareness is very high. Since 1994, the company has maintained its advantage over its competitors. Owing to the outstanding reliability and longevity of its products, the company has always been the preferred choice of water engineers and domain experts in the field of ductile iron pipes and fittings.

Manufacturing facilities are spread across five regions in India, three in West Bengal and one each in Tamil Nadu and Andhra Pradesh.

Electrosteel Castings’ customers are spread across a variety of sectors and locations, and it serves customers through subsidiaries in Europe, North and South America, Southeast Asia, the Middle East and Africa.

Key customers include ISRO, Boeing Corp, Doha Metro, Vikram Sarabhai Space Centre, Pfizer, Hamad International Airport, Kargil, BMW, Qatar’s Ras Abu Aboud Stadium and French Atomic Centre.

Electrical steel casting product overview

Ductile iron (DI) pipe

Ductile iron pipe plants produced 715,129 MT of DI pipe in 2022-23 compared to 603,751 MT in 2021-22. The company’s DI pipes are sold to nearly 90 countries across five continents in India and abroad.

The main raw materials used in the production of DI pipes are iron ore and coke. Most of the iron ore in eastern India is sourced from Odisha and Jharkhand. Coke is manufactured at Haldia for our East India operations and at our Srikalahasthi facility for our South India operations. Coking coal is mostly imported from Australia.

Cast iron (CI) pipe

The cast iron pipe plant, with a total production capacity of 90,000 TPA, produced 26,588 MT of CI pipes in fiscal 2022-23 compared to 19,049 MT in fiscal 2021-22. Due to increased demand for cast iron pipes, production capacity utilization rate has increased compared to the previous year.

The main raw material used in CI Pipe production is pig iron, which is procured domestically. The company’s CI pipes are mainly sold in southern India.

DI fittings and accessories

The company produced 20,343 MT of DI fittings in fiscal 2022-23 as compared to 20,684 MT in fiscal 2021-22. Production, productivity and overall performance were virtually identical to last year as the company’s operations and marketing teams focused on forward-looking efforts.

The company has also taken steps to increase productivity and capacity utilization at Haldia and Khardah Works and improve the performance of the departments.

Electronic Casting Financial Status

In FY 2023, Electrosteel Castings saw significant growth in its revenue, surging 38% to reach ₹7,275.51 crore compared to ₹5,280.95 crore in FY 2022. After analyzing four years from FY2020 to FY2023, the company recorded a compound annual growth rate (CAGR) of 39%.

On the other hand, net profit declined by 9% from ₹347.57 crore in FY2022 to ₹316.23 crore in FY2023.

This was due to large increases and fluctuations in the prices of input raw materials such as coal, iron ore, and consumables. On the other hand, DI Pipe’s older orders impacted its profitability as its production costs increased while its selling price remained constant.

Cumulative net profit recorded a CAGR of 54% over the four years from fiscal 2020 to fiscal 2023.

In FY23, Electrosteel Castings maintained favorable financial metrics with return on equity (ROE) of 7.45% and return on equity (ROCE) of 9.76%.

Future prospects of electromagnetic steel castings

Leading position as a backward integrated factory

The company has operations in southern and eastern India and serves the markets of central, northern, eastern and southern India. DI pipes are large and difficult to move across the country. As a result, the market is fragmented for all participants.

Additionally, with the exception of the coking coal mine and iron ore mine, ECL’s facilities are fully backward integrated. The company owns its own coke oven battery that converts imported coking coal into coke. The waste heat gases produced by the coke oven batteries are used to generate electricity through a dedicated power plant.

Dependent power plants help significantly reduce power costs. The company also operates a sintering plant that converts iron ore particles into sinter. This saves companies from having to buy chunks of iron ore that are more expensive than the fines.

ECL produces its own ferrosilicon, which is essential for the production process. Because DI pipe requires both an interior cement coating and an exterior paint coating to provide strength and prevent corrosion, the company also manufactures its own cement and paint. This backward integration allows organizations to remain cost competitive while maintaining product quality standards.

Merged with Srikalahasthi Pipes

Srikalahasthi Pipes Limited has merged with ECL with effect from December 31, 2021. The merger realizes significant economies of scale, resulting in a domestic market share of approximately 30% in operating capacity.

Moreover, ECL benefited from backward integration as a result of the merger. Previously, the pig iron used to make CI pipes had to be purchased from the open market, but now it is procured domestically.

conclusion

Electrosteel Castings’ leading market position, integrated operations from previous iterations, and recent mergers that provide significant synergies make Electrosteel Castings appear well positioned for future growth. However, investors should evaluate whether the company can effectively manage input cost pressures and improve profitability going forward.

What do you think about the future prospects of Electrosteel Castings?

Written by Nalin Surya

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