Investment Precision Castings Nano Nivesh Research Report By ICICI-Direct

Investment & Precision Castings (IPCL) is a manufacturer of investment castings (low volume-high value castings) in India primarily catering to the auto sector.

IPCL commissioned fresh capacity to manufacture value added products, giving improved margin visibility, incremental growth, going forward.

We believe strong demand tailwind in auto sector, higher capacity utilisation will result in strong growth in sales, EBITDA, PAT to 18.9%, 24.1%, 40.3% CAGR, respectively, in FY18-20E.

Highlights

 Investment castings – High precision & complex castings; commands superior realisation: IPCL uses advanced & automated equipment with high degree of precision to manufacture variety of products for automotive, aerospace, compressors, pumps, valves etc. Due to factors like complexity & precision involved in manufacturing investment castings, IPCL has been able to generate superior average realisation of Rs 8.0 lakh/tonne in FY12- 18.

Almost ~8.0x average realisation for the castings industry. We expect realisations to remain strong and improve further to Rs 8.8 lakh per tonne by FY20E and aid overall revenue growth

 Focus on value added product mix; automotive segment in overdrive; IPCL in sweet spot! The company derives ~70% revenue from the automotive sector. Continued momentum in the business of the company’s top clients and addition of newer clients will drive IPCL’s overall volume growth (~19% in FY18- 20E).

To benefit from opportunities in high value-added segments like medical implants, aerospace and defence, IPCL has set up an additional capacity of 400 tonnes per annum.

Realisations for value-added segment products are more than 3x its average realisation per tonne (Rs 25-30 lakh per tonne). Improvement in utilisation (~63%-90% in FY18-20E) to result in operating leverage benefits kicking in leading to disproportionate profit.

We expect EBITDA margins to expand 170 bps to 21.1% with profit per tonne at Rs 1.86 lakh per tonne over FY18-20E. Further, we expect EBITDA at Rs 32.0 crore growing 24.1% for the same period

 Strong earnings; solid balance sheet; improved return ratios: Due to changes in product mix and robust demand outlook, we expect IPCL to report strong earnings, improved return ratios in FY18- 20E.

IPCL currently offers attractive operating cash flow yield of ~7.5% (FY18). We value IPCL at Rs 570-600, i.e. 9.5-10.0x EV/EBITDA on FY20E EBITDA of Rs 64/share