Adhunik metaliks : A value bet

Adhunik Metaliks Ltd (AML), a value-added steel manufacturer, is expected to more than double its top line and quadruples its bottom line during FY06-09E on the back of capacity expansion into high-margin products along with backward integration into critical raw materials such as iron ore and coal. We believe these initiatives would result in a significant de-risking of its business model and lend stability to earnings.

Adhunik Metaliks Ltd (AML) is the flagship company 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.

Adhunik Metaliks’ (AML) Q1FY09 net revenues, at INR 3.29 bn, were in line with our expectation of INR 3.31 bn. Though sales volume of pig iron and steel was flat sequentially, net revenues grew 5% Q-o-Q on back of higher average net realizations. Except Ferro alloys, realizations of all products increased more than 20% sequentially and 28-66% Y-o-Y. Steel production dipped 7% sequentially due to inadequate captive metallics and buying of metallics was uneconomical due to increasing sponge iron prices.

Orissa Manganese and Minerals’ (OMM; mining subsidiary) results were way ahead of our estimates. EBITDA, at INR 173 mn, was better than our expectation of INR 129 mn due to lower operational cost. Net profit, at INR 151 mn, exceeded our expectation due to lower tax rate of 11.8% vis-à-vis our expectation of 33%.

AML, during the last two years has been in a major expansion phase. It is not only increasing its steel-making capacity but also going up the value chain. It is doubling its sponge-iron and billet-making capacity. The expansion is being done in two phases. In the first phase, it is increasing its billet-making capacity to 0.45mtpa and setting up a rolling mill of 0.1mtpa and a ferro chrome plant of 37,760tpa. In the second phase, it is doubling its sponge iron capacity to 0.3mtpa and setting up a sinter plant.

Adhunik Metaliks Ltd’s (AML) acquisition of Orissa Manganese and Minerals Ltd (OMML) last year has proved to be a decisive step for the company. Iron ore and manganese ore prices have soared 100% in last one year and are expected to surge further. OMML’s mining operations commenced on a small scale in Q3FY08 and are expected to ramp up in FY09. Mining operations being a high-margin business, we expect OMML’s operating profit to be Rs3.3bn in FY09 and Rs4.9bn in FY10.

At CMP of INR 119, the stock is trading at P/E of 6.2x and 3.1x our revised FY09E and FY10E earnings, respectively. Hence considering the three conditions as bearish case pe 06 then 180/- realistic stage 10 pe 302/- Optimistic stage 14pe then 402/- for 18-24 month period

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