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Emkay Research positive on Visa Steel

Saturday, June 23, 2007

Visa Steel (VSL) is engaged in the production of Pig Iron, Lam Coke and Chrome Concentrates. VSL has manufacturing facilities in Kalinganagar and Golagaon. It currently operating a mini blast furnace with production capacity of 225,000 tpa of Iron; a chrome ore benefication plant and a chrome ore grinding plant with capacity 100,000 tpa each. For 4QFY07, the company reported net sales of Rs 1,415 million (qoq 11%, yoy up 27%), PAT of Rs 7 million (qoq down 89%, yoy down 70%). For FY07, company reported net sales of Rs 5,312 million (yoy up 37%), EBITDA of Rs 437 million (yoy up 21%) EBITDA margins were 6.4% (yoy down 165bps). PAT was Rs 205 million (yoy up 65%), margins were 3.9% (yoy up 64bps). The company has plans to set up an integrated 0.5mtpa special and stainless steel complex in a phased manner in Kalinganagar. It also has plans to set up wire and bar mill and captive power plants.

4QFY07 net margins under pressure due to high depreciation and DTL

For 4QFY07, the net margins stood at 0.5% (qoq down 435bps, yoy down 150bps). The reduction in margins was mainly on account of higher depreciation, which stood at Rs.33mn (qoq up 31%, yoy up 134%); and also on account of increased deferred tax liability, which was at Rs.53mn (qoq up 279%, yoy up 28%). The company incurred losses in trading activities for FY07 of Rs71mn, which has also contributed to the reduction in margins.

Expansion Plans

Special steel and Stainless steel plant – backward integrated

The company is setting up an integrated 0.5mtpa special and stainless steel complex Kalinganagar, Orissa. It is expected to commence by Dec.08. The product mix for the 0.5mtpa steel complex will be 80% speciality steel and 20% stainless steel. This will be backward integrated to ferro chrome, coke and sponge iron.

Ferro Chrome Plant

VSL is setting up a Ferro Chrome plant of 50,000 tpa capacity, which is expected to commenced shortly. Its commencement was delayed by 3-4 months. This will meet the ferro chrome requirement of steel complex.

Coke Oven Battery

The company had plans of setting up a coke oven battery of 400,000 tpa; out of which 300,000 tpa is already commissioned and the balance 100,000 tpa is expected to commence in 2QFY08. Currently VSL has pig iron manufacturing capacity of 225,000 tpa; assuming 90% capacity utilisation the coke requirement will be 141,750 tpa which will be met by the coke oven battery. The surplus coke will be sold in the market, which will add to the bottomline of the company. The company is making coke through stamp charging technology, which enables usage of soft coking coal blended with prime hard coking coal; thereby reducing the cost of production.

Sponge Iron Plant

VSL is seting up a 300,000 tpa sponge iron plant; of which first DRI kiln is expected to be commissioned by 3QFY08 and second DRI kiln by 4QFY08. The project is progressing as per the schedule. This will meet the sponge iron requirement of the steel complex.

Bar and wire rod mill – leading to value addition

VSl is planning to set up a 0.5mtpa bar and wire rod mill. This will enable the company to forward integrate and enter into value added segment. This is expected to commence by 4QFY09.

Captive Power Plants

The company will be setting a 50MW captive power plant, which is expected to be commissioned by 4QFY08. This will meet the power requirements of the steel plant. VSL is also setting an additional captive power plant of 25MW to meet the power requirements of 0.5mtpa bar and wire rod mill. Currently, company is sourcing its power from grid at an average cost of Rs.3/unit.

Capex Plans

VSL expects a total capex of Rs 18 billion. The capex will be funded in a debt-equity ratio of 65:35. Rs 6.3 billion will be funded through internal accruals and balance debt of Rs 11.7 billion through rupee term loan. Out of the total debt requirement, the cost of Rs 1.65 billion is 8% fixed, cost of Rs 7.45 billion is 9% fixed and cost of Rs 1.04 billion is 11% floating. Balance Rs 1.6 billion debt is yet to be tied up. Average cost of debt tied up currently is 9%.

Risks and concerns

VSL was previously engaged in trading of iron ore fines, which resulted in a loss of Rs 71 million at EBITDA levels. The company still has an iron ore inventory of 20,000 tonnes, which the compnay expects to sell at a marginal profit. Any delay in the project implementation and project cost over-run may have an impact on the company’s topline and bottomline. Coke prices are historically benchmarked against Chinese prices. Currently the coke prices in China are USD 230-240/t FOB. Due to high volatility in the coke prices, the margins of this segment is likely remain volatile. Currently VSL imports coking coal from Australia. Frieght cost in the current year have increased from USD 23-27/t to USD 30 – 37/t. With the freight market expected to remain firm, any future hike in freight rates will likely impact the margins of the company.

Valuations

At the current market price of Rs 34 the stock is trading at 18.2x its FY07 EPS of Rs 1.87. We do not have any rating on the stock, however given the current expansion programe including benefits from coke and ferro chrome operations that are likely to flow in FY08, we are positive on the stock.

Posted by FR at 12:01 AM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.