Expansion Into India's Growing Steel Market And Joint Venture With Marvels International Will Strengthen Future Prospects

Key Takeaways

• Expansion into nonferrous sectors and a joint venture for new facility development could improve revenue diversity and future earnings.
  
• Increasing domestic market share and Indian steel demand growth signify positive revenue and margin prospects.
  
• IFGL Refractories faces revenue challenges due to global steel demand decline, economic pressures, geopolitical uncertainties, and increased costs impacting profitability.

Catalysts

Engages in the manufacturing, trading, and selling of refractory items and related equipment and accessories used in steel plants in India and internationally.

• IFGL Refractories is benefiting from India's strong steel demand growth, projected at 8% over 2024 and 2025, driven by infrastructure investments, which could boost future revenues.
  
• The company is expanding into the nonferrous sector, enhancing product offerings with a new casting flux granules unit and a magnesia carbon production line, potentially improving revenue diversity and margins.
  
• A joint venture with Marvels International to set up a greenfield facility in India for high-quality bricks is expected to contribute significantly to revenue by March 2026.
  
• IFGL is increasing its domestic market share, showing consistent 30% growth year-on-year over three years, which could lead to improved revenue and margins domestically.
  
• The planned state-of-the-art ISO plant in Ohio aims to increase capacity by 40%, which could significantly boost future earnings from North American markets when geopolitical conditions stabilize.

IFGL Refractories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IFGL Refractories's revenue will grow by 17.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 7.2% in 3 years time.
• Analysts expect earnings to reach ₹1.8 billion (and earnings per share of ₹41.28) by about January 2028, up from ₹507.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 27.4x today. This future PE is lower than the current PE for the IN Basic Materials industry at 35.5x.
• Analysts expect the number of shares outstanding to grow by 7.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.85%, as per the Simply Wall St company report.

IFGL Refractories Future Earnings Per Share Growth

Risks

• Global steel demand is expected to decline by 0.9% in 2024 due to headwinds such as declining household purchasing power and geopolitical uncertainties, which could negatively impact IFGL Refractories' future revenues and earnings.
  
• The economic pressures and geopolitical uncertainties faced by IFGL Refractories' overseas businesses, particularly in the EU and the U.S., may result in lower revenues and a constrained profit margin.
  
• The company's financial performance was negatively impacted by a preventive restructuring undertaken by a significant customer, Liberty Ostrava, leading to potentially lower revenues in the current fiscal year.
  
• Increased freight costs and a challenging macroeconomic environment, including inflationary pressures and supply chain disruptions, have contributed to a decrease in EBITDA margins, affecting overall profitability.
  
• Despite a focus on ramping up domestic business and expanding into the nonferrous sector, the company's revenue from international operations declined by 6% year-on-year, indicating potential challenges in maintaining growth momentum and profit margins globally.

Valuation

• The analysts have a consensus price target of ₹619.0 for IFGL Refractories based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹25.8 billion, earnings will come to ₹1.8 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 13.8%.
• Given the current share price of ₹386.55, the analyst's price target of ₹619.0 is 37.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.