Production facilities at Gudur (Andhra Pradesh) and Ponneri (Tamil Nadu) have installed capacities of 42,000 tonnes per annum (tpa) and 60,000 tpa, respectively, totaling 1,02,000 tpa. Nelcast Inc, the wholly owned subsidiary in the US, was formed to tap export opportunities.

The cost of expansion/ modernisation of the existing production facilities from 72,000 tpa to 1,50,000 tpa is estimated at Rs 61.46 crore, while incremental working capital requirement is projected at Rs 25 crore.

Part of the expansion has already been carried out: Installed capacity has increased to 1,02,000 tpa from 72,000 tpa end of the second half of the year ending March 2007. Further expansion is on the anvil at both the existing plants to achieve a total capacity of 1,50,000 tpa FY 2009. The expansion would be undertaken in a phased manner. Capacity would be increased from 1,02,000 tpa to 1,20,000 tpa by September 2007, and from 1,20,000 tpa to 1,50,000 tpa by September 2008.

Right now, Neelcast exports about 9% of its sales Globally, export of castings to developed nations is on the rise on account of rising costs, lack of skilled foundry people and environmental restrictions in these markets. The company plans to increase its focus on exports and become the preferred full service supplier to original equipment manufacturers (OEMs) across the globe. The export target is 30% of sales by 2010.

Strengths

• The composition of machined castings is about 10% of production. This is to be increased to about 20%-25% over the next two years so as to improve margin.

Weaknesses

• More than 70% of revenue is derived from the HCV and tractor segments. Both these user industries are set to slow down significantly in FY 2008 when the company’s substantial capacity expansion is under implementation.
• Ancillaries to domestic auto and auto components sectors often have to maintain their prices despite rising raw material cost due to a limited number of clients. Margin is down from 11.9% in FY 2004 to 8.9% in FY 2006, though it jumped to 13.4% in FY 2007.

At a price band of Rs 195 – 219, Nelcast’s P/E works out to 17.2 – 19.3 times FY 20007 earning on post-diluted equity. Industry peer Ennore Foundries is trading at a P/E of 19.0.