This Small Cap Refractories Stock Likely To Surge 56% In 12 Months, Buy: Monarch Networth Capital

Monarch Networth Capital, a leading brokerage firm, in its recent report published on IFGL Refractories Ltd. has suggested investors buy the stock of the company for a target price of Rs 420 apiece. Considering the brokerage estimated target price, the stock of IFGL Refractories could surge 56% in 12 months.

IFGL Refractories Ltd. is a manufacturer of Specialised Refractories and requisite Operating Systems for the Iron and Steel Industry. It is a small-cap company having a market capitalization of Rs 5,303.22 crore.

IFGL reported weak set of financials in 1QFY23 due to several factors like currency headwinds, demand weakness in Europe, increase in labour and energy cost also deteriorating the performance of subsidiaries.

Stock Outlook

The current market price of the stock is Rs 269.45 apiece. The 52-week low of the stock was recorded on 21 June 2022 at Rs 241 apiece and the 52-week high was recorded on 11 January 2022 at Rs 354 apiece.

Stock Returns

In the past 1 week, the stock has fallen 1.19% and gained 4.64% in the past 1 month. In the past 1 year, the it has given a negative return of 19.48%. In the past 3 years, it has given a positive return of 65.46%. Since its listing on the exchange, it has delivered a negative return of 14.15% returns. It was listed in November 2017.

Revenue declines; margins disappoints in 1QFY23

IFGL reported 4% qoq decline in standalone revenues at Rs2.25bn mainly hit on exports. Demand weakness in Europe along with negative impact of Euro depreciation (Europe contributes half of the exports from standalone business) together led to drop in revenues. Consolidated revenues remained flat qoq at Rs3.6bn as the tepid show on standalone side was offset with 5- 10% qoq growth in revenues at EI ceramics and Monocon. Standalone margins shrinks to 12.5%; -300bps yoy; -600bps qoq mainly due to dollar appreciation, rise in energy cost and labour cost. This phenomenon along with failure to obtain enough price hikes is clearly visible for the subsidiary where EI ceramics is barely breakeven and Hoffman reported margin deterioration. Effectively, consol. margins declined 240bps yoy; 470bps qoq to 9.5%. Consol. PAT declined 19% yoy and 58% qoq to Rs146mn. 

Margins to struggle in FY23; earnings growth to slow down

Volume growth will continue in FY23/ FY24E on the back of rising steel demand and heavy capex (product addition at Vizag) of Rs1.6bn is a testimony to demand growth expected by IFGL. However, we believe that revenue growth will slow down in FY23e due to demand weakness in Europe, challenges in achieving price hikes at subsidiaries and export related headwinds. This will also keep margins under pressure until RM cost eases and subsidiaries start performing. We therefore downward revise margins to 11%/ 13.4% for FY23E/ FY24E and expect ~12.2% CAGR growth in revenues over FY22-24E. We downgrade the multiple attributed to the standalone business due to on-going macro and business-specific risk. 

Valuation and rating

The brokerage said, "We value the overseas business at 2.8x Jun'24E EV/EBITDA (60% discount to global peers) and domestic business at 6.8x Jun'24E EV/EBITDA (60% discount to its domestic peer from 40% previously) to arrive at the fair value of Rs420/share and continue with BUY rating. Change in Target Price is due to downward revision in margins and downgrade in multiple, partly offset by valuation rollover to Jun'24.

According to the brokerage, the key risks could be Subsidiaries underperformance, currency headwinds and limited pricing power.

Disclaimer

The stock has been picked from the brokerage report of Monarch Networth Capital. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.