Electrosteel Castings Stock Jumps 185% In 1 Year: Reasons Behind

Electrosteel Castings Stock Rally

You know, if there’s one stock that’s been making huge waves recently, it’s Electrosteel Castings stock. How? You may ask. Well, with a stunning 185% rise in its stock price over the past year, it’s worth diving into the factors driving this incredible growth. 

Electrosteel Castings Stock Rally

So, in this article, we will go through the reasons behind the Electrosteel Castings stock rally and what it means for the investors.

Stay tuned!

(A) Reasons behind Electrosteel Castings Stock Rally

Here are the major reasons why the prices of this stock are rising rapidly-

(A.1) Positive Financial Performance

First off, let’s talk numbers. Electrosteel Castings has reported strong financial results recently. The company’s standalone net sales grew by 3.97% year-over-year in the December 2023 quarter. But that’s not all. The return on equity (ROE) improved significantly to 14.47% in the year ending March 2024, a massive leap from its 5-year average of 7.33%. This shows that the company utilizes its shareholders’ equity more efficiently to generate profits.

Moreover, the company’s progress in reducing its net debt/EBITDA ratio is impressive. From a high of 7.5x in FY14, it has brought this down to less than 1.5x by December 2023. 

And guess what? 

They anticipate further improvement to just 0.3x by FY26E. Strong expected cash flows, estimated at Rs.13 billion from FY24-26E, will primarily be used to retire long-term debt, giving the company even more financial flexibility.

Electrosteel Castings Products

As per brokerage estimates, the return on capital employed (RoCE) is likely to double from 9.3% in FY23 to 18.6%, primarily due to lower capital expenditure (capex) costs. Speaking of capex, the company is enhancing its Ductile Iron (DI) pipes capacity by 220k tonnes through a brownfield expansion, investing Rs.6.5 billion. 

Additionally, Rs.6 billion is anticipated to be allocated for working capital. With this investment, Electrosteel Castings is expected to generate an incremental EBIT of Rs.3.2 billion over FY23-26E, leading to a pre-tax RoCE of 26.0%. 

This is significantly higher compared to the decadal average RoCE of 7%, thanks to the brownfield capex, process improvements, and lower fixed costs.

(A.2) Outperformance of the Sector

Electrosteel Castings’ stock has also been outshining its peers. On July 1st, 2024, the stock outperformed the overall sector by 4.46%. This indicates that the company’s performance is not just good, but exceptional compared to others in the castings and forgings industry.

(A.3) Strong Market Positioning

Electrosteel Castings holds a dominant position in the market. With a 20% market share in the domestic DI pipe industry (in volume terms), it is the clear leader. The company was the pioneer in introducing DI (Ductile Iron) pipe products to the domestic market in 1994. Since then, it has maintained its leadership through regular expansions focused on DI Pipes and Fittings, tailored to industry needs.

The company commands 60% of the nation’s exports and is the only Indian company to have global accreditations from major rating agencies. Its diverse market presence, focus on high-value DI fittings, esteemed product quality, and vertically integrated operations ensure competitive production costs, setting it apart from competitors.

(A.4) Largest Beneficiary of Government Projects

Electrosteel- Largest beneficiary of govt projects

As India’s market leader, Electrosteel Castings is the largest beneficiary of the government’s emphasis on water projects like the Jal Jeevan Mission and AMRUT 2.0. These projects aim to provide safe drinking water to millions of households, driving demand for DI pipes.

Internationally, there’s a strong demand for DI pipes in major infrastructure projects in Europe, the Middle East, the USA, and Africa. Limited supplies due to capacity constraints and higher conversion costs present a significant opportunity for Electrosteel Castings. B&K Securities highlights that the company is well-positioned to capitalize on this demand.

(A.5) Positive Technical Indicators

From a technical standpoint, the stock is currently trading above its short-term, medium-term, and long-term moving averages, which is a bullish sign. Additionally, the stock reached an intraday high of Rs.185, marking a 6.6% increase from its previous closing price. This indicates strong buying interest and momentum in the stock.

(A.6) Potential Trend Reversal

After four consecutive days of falling stock prices, the recent positive performance suggests a potential trend reversal for Electrosteel Castings. This could attract more investor interest and further drive the stock price higher. Trend reversals often indicate a change in market sentiment, which can lead to sustained rallies.

(A.7) Favorable Market Conditions

The overall market sentiment has been positive, with the Sensex gaining 7.11% in the past month. This broader market rally has likely contributed to the rise in Electrosteel Castings’ stock price as well. When the market is on an upswing, it lifts many stocks along with it, including those with strong fundamentals like Electrosteel Castings.

(A.8) More Rally Ahead

In light of these growth factors, B&K Securities has initiated coverage on the stock with a ‘buy’ rating, setting a target price of Rs.233 apiece based on an FY26E EV/EBITDA multiple of 9.0x. This target price signals a 43% upside for the stock. This optimistic outlook from a reputable brokerage firm can boost investor confidence and potentially drive the stock price even higher.

Hence, all these factors together paint a compelling picture for the continued growth of Electrosteel Castings. If you’re keeping an eye on promising stocks, this one certainly deserves your attention.

Note: Apart from Electrosteel Castings stock, there are several other stocks whose prices increased exponentially-

(B) What Should Investors Do with Electrosteel Castings?

Investor's Opinions

So, you’ve been keeping an eye on Electrosteel Castings and noticed its impressive stock performance. You’re probably wondering what your next move should be, right? Let’s break it down using some straightforward advice from MarketsMOJO.

(B.1) MarketsMOJO’s Recommendation: Hold

First things first, MarketsMOJO, a leading stock analysis and recommendation platform, has given Electrosteel Castings a ‘Hold’ rating. What does this mean for you? Essentially, it suggests that while the stock has been performing well, it’s not the time to buy more shares or sell the ones you already have. It’s a signal to stay put and see how things unfold.

(B.2) Why Hold?

Given all this positive performance, why is the recommendation still to hold? Well, the ‘Hold’ rating usually means that the stock is fairly valued at its current price. It’s performing well, but not necessarily a bargain buy at the moment. It’s also a way of saying that while there’s no immediate reason to sell, it might not be the best time to invest more either.

(B.3) Do your own research

While MarketsMOJO’s recommendation is a great starting point, it’s crucial for you to do your own research. Look into the company’s recent financial reports, market position, and future growth prospects. 

Apart from this, you can take the following things into consideration-

  • Consult a Financial Advisor
  • Monitor Market Trends
  • Diversify your portfolio
  • Stay Informed

So, there you go! While Electrosteel Castings has shown impressive performance, the current recommendation is to hold. This means maintaining your position without making additional purchases or selling off shares. Keep doing your research, consult with a financial advisor, and stay informed about market trends. This balanced approach will help you make the best decisions for your investment portfolio!

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Published By: Supti Nandi
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