(BSE: 532721 | NSE: VISASTEEL | ISIN: INE286H01012)
Company Background Visa Steel Ltd (VSL), an emerging integrated special and stainless steel player, is part of the Kolkata-based Visa Group based in Kolkata with manufacturing facilities in Kalinagar and Golagaoan, both in Orissa. The company produces pig iron, lam coke and chrome concentrates. It currently operates a mini-blast furnace with production capacity of 225,000 tonnes per annum (tpa) of iron, a chrome ore benefication plant and a chrome ore grinding plant with capacity 100,000 tpa each. A 400,000 tpa stampcharged heat-recovery coke oven plant is currently under implementation. The company is also active in the iron ore and coal logistics business. It has undertaking an expansion project that would fully integrate it over the entire value chain.
Investment Rationale Rs 600 crore capex to transform business model … VSL is implementing a Rs 600 crore capex programme that would transform 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, chrome ore and coal to value-added steel products. It is also integrating forward to manufacture special steel and stainless steel. Post expansion, we expect the company to emerge as one of the lowest cost producers of stainless steel in the country.… and enhance capacity
The expansion programme would increase its capacity of coke oven battery from 300,000 tpa to 400,000 tpa. The company is planning to set-up a 75 MW captive power plant to meet the electricity requirement for its steel plant and value added products (bar and wire rods). The company has entered into a joint venture with China’s Baosteel to set up a 100,000 tpa ferro chrome plant in Orissa, which is expected to commission from 2009.
Integration to drive profitability The company is integrating backwards with captive ownership of critical raw materials (iron ore), which would enable it withstand pricing pressures and face competition better compared to its peers. It is setting up a power plant, which would reduce its dependence on the grid power and in turn increase operating margin. The surplus from the coke oven will be sold to the market and directly get added to the bottom line.
Risk and Concerns Any delay in the project implementation and project cost over run could impact the company’s earnings and valuation. Coke prices are historically benchmarked against Chinese prices. Due to the high volatility in coke prices, margins in this segment are likely to remain volatile.
Financials In FY07, the company reported a top line of Rs 532.70 crore and bottom line of Rs 20.54. In Q108, sales dipped 38.3% y-o-y to Rs 69.41 crore, while bottom line fell 36.8% y-o-y to Rs 5.13 crore. The company’s expansion project is expected to help it procure raw materials at the lowest cost and in turn increase margins. The usage of the coke is less as compared to actual production and hence the surplus could be sold. We expect the benefits to partly accrue this year and fully in FY09. The integration to value-added products would drive the company’s top line going forward and we expect it to post the topline of Rs 1,168 crore and a bottom line of Rs 57.4 crore in FY09.
Valuation The company is expected to double its top line and triple its bottom line on the back of capacity expansion and linkages into value added products. At the current price of Rs 32.90, the stock is trading at 5.84x the FY09E EPS. We expect the integration to drive the growth momentum going forward and the stock to rise 20% to Rs 39.50 within the coming 3-6 months
Technical Outlook The stock has seen a strong uptrend for the last one year. The major trend continues to remain positive. Currently, the stock has got into a consolidation zone between Rs 1,400 and Rs 1,600 range, providing accumulation opportunities and is expected to breakout outside this range to test new highs. The short and medium-term averages have once again converged and a crossover should see another run-up. The RSI indicator has bottomed out and shows strength, while the MACD has corrected and is awaiting a positive crossover.
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