Vesuvius India: A Very Well Focussed Company

2011-06-15

A highly heat resistant company
Vesuvius India trades in refractory products (heat resistant materials) which are used in kilns etc, and the steel industry comprises the biggest group of its customers. (The major identifiable raw materials in the manufacture of refractories are alumina, bauxite, silicon carbide and cement). The foundry industry which makes castings and forgings is a major consumer. As the directors' report avers, anything that affects the steel industry will have its one off effect on the company's business. India the report adds is set to emerge as the second largest producer and consumer of steel in the next five years, and refractory being an essential requirement in the steel industry, it will see increased demand.
The company manufactures refractory products at its four plants - one each in Kolkata and Gujarat, and two in Andhra Pradesh. Given the emerging demand scenario, the company is in the process of doubling the capacity of its Kolkata plant which is expected to be completed sometime this year. It is also contemplating further expansion of its 'monolithic' facility at Vishakhapatnam in Andhra Pradesh. But as the company does not give the separate installed capacities of its individual plants there is no knowing the quantum of increase in the manufacturing capacity of its Kolkata plant when the expanded capacity goes on stream. For the present, the total installed capacity of all the plants put together as stated in the annual report is 526,000 pieces of shaped refractories, and 96,500 pieces of unshaped refractories - quantity figures which remain unchanged from the preceding year. The company has spent Rs 454 m on fixed asset expansion in the last two years. The company also trades in 'other goods' which are not exactly specified, but they appear to contribute more than their bit to the gross margin.
The parent company
The ultimate holding company of Vesuvius India is the Cookson Group Plc of the UK. But as can be expected with any multinational entity, there are layers and layers of controls in between before it reaches the very top of the heap. The immediate holding company appears to be the Vesuvius Group Ltd, UK, just above which is Cookson Financial Ltd, UK. The Indian entity also has three fellow subsidiaries including Foseco India Ltd, Cookson Overseas Ltd and Cookson India Ltd. Where if at all, all these affiliates fit in, in the overall scheme of things is not known. Vesuvius India also boasts of 43 fellow subsidiaries.
Low employee base
The most fascinating aspect of this company which logged in total revenues of Rs 4.5 bn in the calendar year 2010 (Rs 3.6 bn previously) is its human resources base. It made do with just 387 members at year-end, up from 369 in the preceding year end. It would infer that the average payout per employee on a rough basis amounted to Rs 698,000 in 2010, against a slightly lower Rs 606,000 in the preceding year. That would make it one swell company to work for. Looked at another way, the gross sales generation per employee toted up to Rs 11.7 m in 2010, against Rs 9.9 m in the preceding year.
Its financials
The company has provided the brief financials of its working results for the last five years and it makes for positive vibes. The turnover has shown a consistent increase in each of the four years over that of the base year 2006. Net sales grew a cumulative 62%, but the profit before tax rose 77%. (This was due to its ability to rein in the cost increases of material inputs, and also from the margins that it was able to eke out on traded sales. The company depends heavily on the import of raw materials to make it all possible. Imported raw materials accounted for over 54% of all raw material consumption.) With some apparent smart tax planning being resorted to, the profit after tax grew 131%.
The net fixed asset base including capital work in progress rose 59%, but what is notable here is that the ratio of net fixed assets to net turnover which stood at 3.8 times in 2006 was almost identical in 2010. The company has been devoid of all borrowings in the last four years, and the reserves and surplus completely eclipses the paid up equity base. Against a paid up equity of Rs 203 m, the reserves and surplus amounted to a very sizeable Rs 2.3 bn. The management is very conservative on the dividend front, with the net outflow on this account rising to Rs 81 m in 2010 from Rs 71 m in 2006. The dividend payout accounting for a little over 19% of the post tax profit. The foreign parent has a 56% stake in the paid up capital.
What it makes and sells
The production of both product lines increased sharply during the year, with the capacity utilisation nudging the 98% mark (83%) for Shaped Refractories in 2010. Production of Unshaped Refractories however was a mere 43% of capacity (31%). The rupee sales of Shaped Refractories brought in 48% of the total gross turnover, with Unshaped Refractories bringing in another 32%, and traded sales accounting for the balance 20%. In line with higher rupee sales, the volume sales of the former grew 20%, while that of the latter grew 18%. But the per tonne gross realisation of Unshaped Refractories declined almost 10% to Rs 41,400 in 2010. This was however more than made up by a 29% higher gross unit realisation to Rs 4,206 per piece on the former. The report gives no clue on why there was a drop in the gross unit realisation of unshaped refractories.
Traded sales is some sort of manna from heaven, with this line of activity contributing a gross margin of Rs 229 m in 2010, against a much larger Rs 375 m in the preceding year. This margin is on total purchases of Rs 690 m in 2010 against Rs 526 m in the preceding year. These purchases in turn generated sales of Rs 918 m and Rs 901 m respectively. The vast bulk of the traded sales by value are sourced domestically. But income from this source cannot always be depended on; as such traded sales are fair weather friends. Besides, is it so easy to generate profits on such outsourced goods? The company's sales per-se is generated both through the domestic tariff area, and through the export arena. Export sales rolled in 15% of gross rupee sales in 2010 against 11.5% previously.
Minimal dealings with group companies
Given the vast network of companies within the group, it is only natural that there would be some inter-se dealings with other group companies. But the interaction is minimal - very minimal. The company purchased goods and services worth Rs 359 m from them, and in turn sold goods and services worth Rs 247 m to them. But the parent does collect its tithes from the subsidiary - and that too in a variety of forms. In 2010, Vesuvius India had to pay royalty, management fees and technical service charges collectively amounting to Rs 86 m against Rs 83 m previously.
This company appears to be a very tightly run ship and given the prognostications that the management has proffered on the future on the iron and steel industry, and the foundry industry, the company should be able to continue to put up a good show. This is definitely a share worth taking a long look at.