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ICICI - Adhunik Metalik
Tuesday, June 5, 2007
Adhunik Metalik’s Jan-March 2007 quarter results were above our expectation with company posting a 28% jump in bottom line to Rs 21.58 crore against Rs 16.9 crore profits a year ago on the back of improved margins and higher share of value-added products. Sales were flat at Rs 188.02 crore (Rs 184.63 crore) due to sharp dip in trading sales which we were anticipating as it is a non-core area and a low-margin business. We had recommended the stock at the Rs 37 levels and it is trading above our target price of Rs 52.50. We were conservative in our estimates and had valued the company at FY08 estimates. We now believe that the company is taking progressive strides in de-risking its business model through backward integration and foraying into high-margin, value-added products such as stainless steel and rolled products where realizations are less volatile. We reiterate our outperformer rating and value the stock at 5x FY09E EPS of Rs 15.02, which gives us target price of Rs 75, an upside of 40% from current levels.
RESULTS HIGHLIGHTS
During the quarter, the company posted a marginal jump in net sales to Rs 188 crore as trading sales were lower at Rs 53.23 crore compared to Rs 65.60 crore in the corresponding quarter last year. Manufacturing sales rose from Rs 119 crore to Rs 133 crore during the same period.
The company posted a jump of 8% in steel volumes for FY07 at 228,505 tonnes against 211,207 tonnes in FY06. This along with an improved product mix towards value-added products such as rolled product and higher realizations helped it log a 74% jump in sales to Rs 735.75 crore (Rs 423.78 crore).
EBIDTA margins were flat at 17.56% (17.34%) during FY07 due to higher other expenses on account of conversion and additional freight expenses of Rs 13.18 crore and Rs 5.92 crore along with LC charges of Rs 1.67 crore, provision of Rs 2.5 crore. We expect the company to save these conversion charges after its rolling mill goes onstream in FY08.
The company doubled its net profit during the year to Rs 77.46 crore (Rs 33.70 crore) due to an improved product mix from sponge & pig Iron and billets to rolled products that offer much higher margin.
Revenue mix to improve
We expect company’s revenue to grow at a CAGR of 40.33% during FY06-09E to Rs 1171.14 crore on the back of higher contribution from high value-added products such as rolled products
and stainless steel. These products are expected to contribute 44% and 40% to top line respectively.
OTHER HIGHLIGHTS
Adhunik Metaliks has acquired 100% stake in Orissa Manganese & Minerals Private Ltd, which
has the mining rights for reserves of 15 million tonnes for manganese ore and 35 million tones for iron ore. Manganese production is expected to commence during Q2FY08 and iron ore production during Q4FY08. We expect the company to sell additional manganese & iron ore after meeting captive requirement, the full benefits of which would be realized in FY09. However, we have not included them in our estimates due to non-availability of data.
Unistar Galvanisers & Fabricators Private Ltd, a wholly-owned subsidiary of the company bagged an order worth Rs 53 crore for the manufacture and supply of complete telecommunication towers. Here also, we have have not factored in the benefits in our estimates due to lack of data, but we remain bullish on the growth prospects of the company.
VALUATIONS
We expect the company to more than double its top line and quadruple its bottom line during FY06-09E on the back of capacity expansion into high-margin, value-added products along with backward integration into critical raw material such as iron ore and coal. We believe these initiatives would result in significant de-risking of its business model. The stock has bridged the valuation differential to certain extent, but still does not capture the entire benefits from backward and forward integration.
We still find the stock very attractive at the current price of Rs 55, which trades at 3.66x FY09E EPS of Rs 15.02 and an EV/EBIDTA of 3.66x FY09E, which we feel is at the lower end of the P/E multiple band. We are upgrading our target price to Rs 75 taking a multiple of 5x its FY09 EPS, which given us an upside potential of 36% from current levels.
RESULTS HIGHLIGHTS
During the quarter, the company posted a marginal jump in net sales to Rs 188 crore as trading sales were lower at Rs 53.23 crore compared to Rs 65.60 crore in the corresponding quarter last year. Manufacturing sales rose from Rs 119 crore to Rs 133 crore during the same period.
The company posted a jump of 8% in steel volumes for FY07 at 228,505 tonnes against 211,207 tonnes in FY06. This along with an improved product mix towards value-added products such as rolled product and higher realizations helped it log a 74% jump in sales to Rs 735.75 crore (Rs 423.78 crore).
EBIDTA margins were flat at 17.56% (17.34%) during FY07 due to higher other expenses on account of conversion and additional freight expenses of Rs 13.18 crore and Rs 5.92 crore along with LC charges of Rs 1.67 crore, provision of Rs 2.5 crore. We expect the company to save these conversion charges after its rolling mill goes onstream in FY08.
The company doubled its net profit during the year to Rs 77.46 crore (Rs 33.70 crore) due to an improved product mix from sponge & pig Iron and billets to rolled products that offer much higher margin.
Revenue mix to improve
We expect company’s revenue to grow at a CAGR of 40.33% during FY06-09E to Rs 1171.14 crore on the back of higher contribution from high value-added products such as rolled products
and stainless steel. These products are expected to contribute 44% and 40% to top line respectively.
OTHER HIGHLIGHTS
Adhunik Metaliks has acquired 100% stake in Orissa Manganese & Minerals Private Ltd, which
has the mining rights for reserves of 15 million tonnes for manganese ore and 35 million tones for iron ore. Manganese production is expected to commence during Q2FY08 and iron ore production during Q4FY08. We expect the company to sell additional manganese & iron ore after meeting captive requirement, the full benefits of which would be realized in FY09. However, we have not included them in our estimates due to non-availability of data.
Unistar Galvanisers & Fabricators Private Ltd, a wholly-owned subsidiary of the company bagged an order worth Rs 53 crore for the manufacture and supply of complete telecommunication towers. Here also, we have have not factored in the benefits in our estimates due to lack of data, but we remain bullish on the growth prospects of the company.
VALUATIONS
We expect the company to more than double its top line and quadruple its bottom line during FY06-09E on the back of capacity expansion into high-margin, value-added products along with backward integration into critical raw material such as iron ore and coal. We believe these initiatives would result in significant de-risking of its business model. The stock has bridged the valuation differential to certain extent, but still does not capture the entire benefits from backward and forward integration.
We still find the stock very attractive at the current price of Rs 55, which trades at 3.66x FY09E EPS of Rs 15.02 and an EV/EBIDTA of 3.66x FY09E, which we feel is at the lower end of the P/E multiple band. We are upgrading our target price to Rs 75 taking a multiple of 5x its FY09 EPS, which given us an upside potential of 36% from current levels.
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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.
