(BSE: 532727 | NSE: ADHUNIK | ISIN: INE400H01019)
Company Background Adhunik Metaliks Ltd (AML) is the flagship of Rs 1,000 crore Adhunik Group based in Kolkata with manufacturing facilities at Rourkela, Orissa. The company began operations as a sponge iron manufacturer in FY04 and set up a pig iron and steel-making facility in FY06. The company is undertaking an expansion that would fully integrate it over the entire value chain. At present, the company has a capacity of 250,000 tonnes per annum (tpa) with sponge and pig iron capacities of 150,000 tpa and 187,500 tpa respectively, and carbon and alloy billet capacity of 250,000 tpa.
Investment Rationale Capex to transform business model AML is implementing a capex programme that would change its business profile from a secondary steel manufacturer to an integrated steel player with linkages across the entire value chain from critical raw materials such as iron ore and coal to value- added steel products. It is also creating an integrated business model that would give it more control over critical raw materials like iron ore and coal. It is also integrating forward in an effort to lower earnings sensitivity due to product prices. post expansion, we expect the company to emerge as one of the lowest cost integrated special steel manufacturer in the country by 2008.
Capacity to almost double The company is executing an expansion plan that would almost double its capacity from 250,000 tpa to 440,000 tpa by 2008. It has set up a sponge and pig iron capacity of 150,000 tpa and 187,500 tpa respectively, along with a continuous casting unit for manufacturing billets (alloy steel). We expect that the expansion would result into high realization from the value added product, as prices in this segment are higher and more stable than base grades products.
Backward integration to drive profitability The company is integrating backwards with captive ownership of critical raw materials, viz. iron ore and coal mines which would enable it to withstand pricing pressures and face competition better compared to its peers. It would insulate the company from a sustained upward pressure on iron ore & coal prices. In addition, it is setting up a power plant, which would lower its dependence on the grid power. This integration would result in annual combined savings of about Rs. 50 crore annually.
Risk and Concerns Steel is subject to price fluctuations and in the last eighteen months, global steel prices have come off their top. Global steel prices may soften further due to lower Chinese steel consumption, post-2008 Olympics which would have an adverse impact on company’s earnings and valuation as well.
Financials In FY07, the company reported a top line of Rs 735.76 crore and bottom line of Rs 77.48. In Q1FY08, sales grew 21.86% y-o-y to Rs 208.12 crore, while bottom line grew 14.22% to Rs 17.75 crore. During the quarter under review, the company acquired Orissa Manganese & Minerals Pvt Ltd as a 100% subsidiary, which has mining rights with reserves of 15 million tonnes for manganese ore and 35 million tonnes for iron ore. These mines do not have captive clause and the manganese ore and iron ore can be sold in the open market to various end users. We expect the benefits from these mines to accrue partially this year and for the full year of FY09. The integration and acquisition of mines would drive the company’s top line at a CAGR of over 40.70% during FY06-09E to Rs 1,180.37 crore and bottom line at a CAGR of around 59.58% to Rs 137.00 crore.
Valuation The company is expected to double its top line and quadruple its bottom line on the back of capacity expansion into high margin value added products along with the backward integration into critical raw materials such as iron ore and coal. At the current price of Rs 75, the stock is trading at 6x the FY09E EPS. We expect the integration and the mines acquisition, to drive the growth momentum going forward and expect the stock to touch Rs 90, an upside of 20%, within a 3-6 month timeframe..
Technical Outlook The stock has been in a strong uptrend since April this year. The weekly charts display good support on the rising trend channel. The stock has shown a bullish candle in the previous week, which is positive. The stock is likely to test new highs as the RSI momentum indicators have began moving up.
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