TATA METALIKS
CMP:135/- TARGET: 308/-
Company description:
TML is promoted by Tata Steel, and is engaged in the manufacturing of foundry grade pig iron. It is largest producer in India, with an installed capacity of 0.65 mn tpa. The manufacturing facilities are located in Kharagpur (2 MBFs) and Redi (3 MBFs). The latter was acquired from Usha Ispat Ltd. in Jan’06 for Rs 1150 mn.
Commercial production at the Company's Kharagpur factory commenced in April 1994 with an installed capacity of 90,000 tpa. This has been upgraded in phases to 163,000 tpa in 2004 and 325,000 tpa in 2005 after the Company installed its 2nd Mini Blast Furnace on 26 February 2005.
The Company has recently taken over Usha Ispat Limited, Redi unit, Maharashtra. The three blast furnaces of this unit would double the production capacity to 650,000 tpa of hot metal by 2007-08. In the meanwhile, the second blast furnace has become operational and already started contributing to the annual production. The increased volume would help us strengthen our national as well as global presence and make us the largest player among the foundry grade pig manufacturers in not just the country but also the world.
The Company's plant is independent of external energy resources with the entire energy requirement being met through in-house power generation of 6.76 MW from surplus blast furnace gas that is a by-product of the manufacturing process.
Robust results:
Tata Metaliks’ turnover for the 2007-08 financial year has clocked Rs.1185.47 Crores, a 51.64% hike over its turnover of Rs.781.75 Crores during 2006-07. Profit Before Tax (PBT) during 2007-08 is Rs.106.30 Crores, up from Rs.42.17 Crores, recording a 152% jump. Profit After Tax (PAT) has clocked Rs.69.62 Crores, up by 136% from last year’s figure of Rs.29.51 Crores.
TML achieved an annual production of 545,501 tons of hot metal and the total dispatch of pig iron for the year April 2007 – March 2008 was 516044 tons, an increase in each of the areas by 24% and 16% respectively, over the corresponding figures for the year 2006–2007, which were 441,280 tons and 444,953 tons respectively. Sustained levels of high performance both at the Kharagpur and the Redi plants of the Company helped the Company reach high levels of production. The third blast furnace at Redi started functioning from June 2007.
Capex plans:
Tata Metaliks Ltd is working on plans to set up projects in Madhya Pradesh and Karnataka. To facilitate its plans in this regard, the company has signed memoranda of understanding (MoUs) with the governments in these States to secure raw material linkages, including coking coal, iron ore, manganese, and so on. According to informed sources, the company, which is India’s largest producer of foundry grade pig iron, wants to set up facilities in States such as Madhya Pradesh and Karnataka. However, to do so effectively, it would be important to ensure raw material linkages for raw materials security in the long-term. The company had initiated efforts to forge tie-ups with various State governments for raw material linkages. To facilitate this, MoUs have been signed with Madhya Pradesh and Karnataka, the sources said. According to them, the investments proposed to be made were “in the process of being worked out.”The sources said work on the company’s ductile iron (DI) pipe project that is being set up at Kharagpur in West Bengal was progressing on schedule and the plant was expected to be operational in the fourth quarter of the fiscal 2008-09.In July last year, Tata Metaliks had signed a joint venture agreement with Kubota Corporation and Metal One Corporation, both of Japan, for setting up a 110,000-tonne a year capacity DI pipe manufacturing plant at Kharagpur at an estimated investment of Rs 150 crore. The DI pipes manufacturing facility will use liquid pig iron from Tata Metaliks’ mini blast furnaces at its existing Kharagpur facility. Besides equity participation, Kubota Corporation will offer latest technology in DI pipe manufacturing. DI pipes manufactured by the company would be marketed in India under the ‘Tata Kubota Pipes’ brand, while pipes sold in the export markets would be under the ‘Kubota Pipes’ brand.
Cost pressure persists:
However, the hardening raw material prices took its toll and resulted in operating expenditure rising along with net sales and thus constrained OPM expansion (flat at 12.6%). As a result, operating profit witnessed a similar growth to net sales to Rs392mn (+52% YoY).
Valuations and recommendations:
TML should be able to capitalize on buoyant pig iron prices and thus improve its OPM if it alters its raw material sourcing towards getting coking coal converted to coke from local cookeries, instead of buying coke at spot prices. Post commissioning of the DI pipe facility, its value chain would be the largest amongst pig iron players, which would result in a stronger revenue mix and impart earnings visibility. TML is expected the Sales CAGR for FY08-10E is 25.33% whereas CAGR 61% of diluted EPS for the same period.
At the CMP of Rs135, the stock trades at a P/E of 3.7x and EV/EBDIT of 2.2x its FY09E earnings. The price target based on PE basis considering the three conditions:
1. Bull trend: Assuming the 10 multiple the target price is 501/-
2. Bear trend: Assuming the 4 multiple the target price is 205/-
3. Consolidation phase: Assuming the 6 multiple the target is 308/-
Considering the buoyant pricing environment, stabilization of both its plants, improving operational efficiency through reliance on coking coal and the upcoming DI facility, It is a absolute BUY’ with a 12 month price target of Rs308/-
With thanks
K a l y a n
Be and make
23 th june 2008
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