In a bid to cater to a wider market, its margins have suffered. In fact, this has been a trend right from the final quarter of the last financial year. For the full year 1998-99, the operating margins fell from 35 per cent to 29 per cent. The situation has been compounded as the margins have dipped further in the first quarter of the current year to 22 per cent (the corresponding OPM was 25.3 per cent). However, analysts point out that this was an industry-wide phenomenon, with IFGL Refractories reporting a fall in OPM to 14 per cent, from 15 per cent in the earlier year. The latest figures from Indo-Flogates are not available, though in the previous year the OPM was just13.2 per cent.

Essentially, the earlier profit growth was a play on reducing the cost of raw materials. In order to maintain quality, the company used to import raw materials from its parent in the UK. As its manufacturing facilities stabilised gradually, raw material manufacturing was taken up, thereby improving margins. This has stabilised now, reducing the scope for margin enhancement. Volume growth has become critical, which explains the push into other products such as castables, etc. Therefore, in Q1, there has been a 19 per cent topline growth, year-on-year.

"The new products are expected to contribute substantially to the growth rates as well as to the profitability in the current year," feels Nitin Khandkar, equities analyst with Mafatlal Securities.

Analysts feel that the realisations from the new product launches will improve as the initial low prices were in order to garner marketshare.Cutting interest cost has been a major focus in the past two years as the company has focused on reducingthe balance sheet size through repayment of debt. In 1997-98, interest cost has dipped by 67 per cent to account for just 11.5 per cent of operating profit from 41.7 per cent in the previous year. This proportion has improved even further. For 1998-99, the interest outflow has halved from Rs 1.5 crore to Rs 0.7 crore. In the first quarter of the current year as well, the interest outflow has reduced further by 33 per cent, y-o-y.

Several steel analysts have opined that there is still a large untapped potential for continuous cast refractories, but the growth rate is slowing down. In the recent past, the demand for this product has continued to improve, despite the slowdown in steel production, as a number of steel producers had switched from conventional refractories to continuous cast refractories. More steel plants are switching to using continuous cast refractories (CCRs) rather than the more conventional refractories, in line with the standard in the West. The company controls 64 per cent of the highend of the refractories market. For the rest of the products, it is a very scattered and fragmented market.

The stock has performed well, despite the fall in margins and the depressed profitability. Markets seem to be buying the story that the tempo of growth will be maintained in the current year and margins are likely to improve in the current year. Besides, Vesuvius has been consistently outperforming its industry peers, in both revenue growth as well as significantly higher margins.