Business prospects

Vesuvius makes refractories exclusively used by steel manufacturing companies using the continuous casting process. Hence, the company's earnings hinge on the fortunes of the steel industry, as this segment contributes 75 per cent of the total revenues. Considering the buoyancy in the demand for steel and the firm prices, the steel-makers and, in turn, refractory-makers are poised for good revenue growth.

The long-term supply agreements Vesuvius has entered into with its customers augur well for its revenue growth. The move to sell refractories as solutions (this includes not only the basic product but also other services such as consultancy), instead of as a commodity, is also likely to aid the company in the long term. Now, 10-15 per cent of the revenue comes through the solution route. The company aims to increase the revenue through this route by 30-35 per cent in the coming years.

Opportunities and risks

Domestic steel production is expected to go up to 50 million tonne in 2006 and up to 100 million tonne in 2010, from the current 35 million tonnes. This may, in turn, increase the demand for refractories proportionately. To cash in on this opportunity, the company has moved into the expansion mode. It may also add capacities through acquisitions.

China, which is a major raw material supplier to Indian refractory-makers, has withdrawn all benefits on such raw material exports. This has resulted in the cost of key inputs going up 20-25 per cent in the last three months. This may put pressure on the profit margins of the company.

The company has increasingly resorted to the use of indigenous raw materials instead of importing them. In 2003, 52.7 per cent of the raw materials consumed were indigenous against the previous year's 37.9 per cent.

In the latest Budget, the Government has pared the Custom duty on refractories by 5 percentage points to 15 per cent. This may result in increase in import of cheaper refractories particularly from China, as it continues to retain the benefits offered on exports of finished refractories.

Exports have shown robust growth. In 2003, the exports were valued at about Rs 10.4 crore against Rs 2.6 crore in 2002. Vesuvius India, however, depends on its parent company for exports, as it does not secure orders on its own. The Vesuvius Group bags the orders, decides on the exporter (subsidiary) and the destination of export.

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