IFGL Refractories surge 27% in 4 sessions on strong Q2 earnings; should you buy?

Shares of IFGL Refractories surged almost 8 percent on Wednesday, extending gains for the fourth straight session to hit a new high on the back of robust September quarter (Q2FY24) earnings.

The stock rose as much as 7.8 percent to its record high of ₹874 in intraday deals today. It has now soared 344 percent from its 52-week low of ₹196, hit on March 28, 2023.

Meanwhile, in 4 sessions (November 17-22), the stock has advanced 27 percent. In the past one month, it has zoomed 87 percent, as compared to a 2 percent rise in BSE Sensex. In the last 1 and 2023 YTD as well, the stock has given multibagger returns, rallying 211 and 234 percent, respectively.

In Q2FY24, the firm's profit after tax jumped 95 percent YoY to ₹38 crore from ₹19.5 crore in a year ago quarter. IFGL reported highest-ever quarterly revenue of ₹459.5 crore, representing a 33 percent year-on-year (YoY) growth. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the quarter also jumped of 85 per cent YoY at ₹71.7 crore and EBITDA margin witnesses an expansion of 440 bps at 15.6 percent in Q2FY24.

Post the earnings, brokerage house Dalal & Broacha initiated coverage on the stock with a 'buy on dips' rating and a target price of ₹786, indicating a 10 percent downside due to the recent surge.

"IFGL emerges as a robust contender in the specialized refractories market, boasting a market share of 6 percent in the overall Indian refractory industry and an impressive 15 percent in the Indian flow control industry. The company's management has outlined ambitious plans, aiming to double its revenue from FY21 to FY26. This growth trajectory is expected to be powered by an expanded product portfolio, the introduction of cutting-edge technological products from its state-of-the-art R&D center, substantial investments in the domestic market, and enhanced performance from its subsidiaries," said the brokerage.

While peer companies command higher valuations due to their MNC status and marginally better return ratios, the brokerage firmly believes that IFGL offers a margin of safety merited by its past and expected operational performance. Based on our estimations, a contraction in the P/E multiple discount (currently 50 percent) between IFGL and its peers (RHI Magnesita & Vesuvius) is likely, particularly if IFGL sustains its robust performance. IFGL is available at a PEG ratio of 0.9x which is reasonable in our opinion as compared to its peers which trade at a PEG ratio in excess of 1.75x, it added.

The brokerage believes the ROCE/ROE will see an improvement of 342bps/316bps from FY23 to FY26 led majorly due to healthy revenue CAGR of 15% and operating margin expansion of 150 bps that will take place over the said period after accounting for goodwill ammortisation. Post FY26 the improvement in the return ratios will be sharp considering the fact that the goodwill ammortisation will no longer take place, it forecasts. 

It also pointed out that over the years IFGL has been able to maintain a net debt-free balance sheet, however, due to its aggressive capex program and working capital getting impacted in FY22 & FY23, it expects the net debt to increase to ₹767 Mn in FY26 from ₹-22.4 crore in FY23 but well below 0.5 D/E ratio.