Pick of the Week
Sarda Energy & Minerals (SEML) Ltd: Massive Growth ahead.
Face Value Rs.10
CMP: Rs.74.95
Book Value: Rs.117.94
EPS: Rs.57.54
Dividend: 20%
Market Cap: Rs.255.17
Target: Rs.85 & Rs.140
Sarda Energy & Minerals (SEML) Ltd: Massive Growth ahead.
Face Value Rs.10
CMP: Rs.74.95
Book Value: Rs.117.94
EPS: Rs.57.54
Dividend: 20%
Market Cap: Rs.255.17
Target: Rs.85 & Rs.140
Introduction: Earlier known as Raipur Wires & Steel, Raipur Alloys & Steel was promoted in 1975 by the Tejpaul group, Mumbai. The Sarda group purchased it in 1979 and renamed it Raipur Alloys & Steel in 1985. It was again rechristened as Sarda Energy & Minerals (SEML) in 2007 after the merger of Chhattisgarh Electricity Company Ltd and Raipur Gases Pvt. Ltd with itself effective from April 1, 2006.
SEML is an integrated mill producing steel via sponge iron route at Siltara, Raipur (Chhattisgarh). SEML has recently raised its steel making capacity to 2, 40,000 tpa and captive power to 78 MW at a cost of Rs.440 crore. Sponge iron and steel making capacity has further increased to 3, 60,000 tpa a few months ago. The ferro alloys capacity is 66, 000 tpa. Captive iron ore mines meet up to 30% of the raw material requirement, which is very encouraging.
Shareholding Pattern: The promoters hold a whopping 69.01% while the general public holds 30.99%. Among the promoters Chhattisgarh Investments Ltd holds 32.94%, Sarda Agriculture & Prop Pvt Ltd holds 8.03%, and Prachi Agriculture & Prop Pvt Ltd holds 4.74% while G D Sarda holds 4.09% of the shares of the company. Among the non-promoters, LB India Holdings Mauritius II Ltd holds 7.73%, Infrastructure Dev Fin Co Ltd (IDFC) holds 5.41% and Reliance Capital Trustee Co Ltd holds 3.11% of the shares of the company, leaving very little floating stocks in the market. Moreover 57.47% of the total numbers of shares available are locked in for trade. This gives premium value to the shares of the company.
Financials: For Q2FY09, the company came out with spectacular results. The total income of the company for Q2FY09 came out to be Rs.348.74 Cr as against Rs.136.2 Cr in the same period previous year. The PBDT of the company more than doubled in Q2FY09 to Rs.64.76 Cr as against Rs.32.2 Cr in the same period previous year. Even after higher interest, tax and depreciation component the net profit of the company for Q2FY09 came out to be Rs.46.64 Cr as against Rs.24.07 Cr in the same period previous year. The EPS of the company for Q2FY09 came out to be a massive Rs.13.7 as against Rs.7.7. During H1FY09 whereas sales have advanced by 144 per cent to Rs.600 Cr, net profit has surged by 182 per cent to Rs.115.3 Cr.
Operating & Net Profit margins during H1FY09 stood at 30.8% and 19.2% respectively against 27.8% and 19.4% in H1FY08. However, while the operating profit margins remained flat, the net profit margins fell considerably in Q2FY09. During H1FY09, the company has recognized a net loss of Rs.21.3 Cr as a result of change in foreign exchange rates and is included in interest costs. This loss includes an unrealized notional loss of Rs.15 Cr (Rs.9.2 Cr for Q2FY09) on long term loans availed in foreign currency.
The loans are repayable between January 2011 and January 2015. SEML has also provided one-time expense of Rs.7.7 Cr in H1FY09 towards electricity duty demanded by State Government, which was claimed by SEML as exempt as per the prevailing industrial policy of the state government. It has also provided Rs.7.8 Cr for onerous contracts as per AS-29.
Investment Rationale:
1. SEML has captive iron ore mines with reserves of 20 million (mn) tonnes scalable to 28 mn tonnes. It has already received approval for raising the iron ore mines capacity five fold to 1.5 mn tonnes. It has also been allotted coal and manganese ore mines besides obtaining prospective mining license for five iron ore mines in Chhatisgarh with total reserves of 230 mn tonnes, which are expected to become operative in the next three-to-four years. The mining companies attractive high valuations in the market.
2. It is setting up 6 lakh tpa pelletization backward integration plant at a cost of Rs.130 Cr, which would become operative by April 2009. Although its captive coal mines have commenced production in FY08, its new coal mines will start production by April 2009.
3. SEML has signed memorandum of understanding with government of Chhattisgarh for setting up 1100 MW thermal power plant. The MOU replaces the earlier one of 600 MW signed on January 10, 2007.
4. It has signed a MOU with the Government of Chhattisgarh in July 2008 for setting up of a
cement plant of 2 million tpa capacity with clinker capacity of 1 million tpa at a capital outlay
of Rs.550 Cr.
5. The growth in global demand for steel, rising industry consolidation (ex-China) leading to greater production discipline, declining steel exports from China due to rising cost of metallic, trade friction with the Western world, and shortage of metallic is keeping steel prices at reasonable level. The Indian economy, especially infrastructure sector, is growing at a healthy pace. India spends about 4 % of its GDP on infrastructure investment as opposed to 9 % in China. The Government of India has planned to raise the total infrastructure spending to 8 % of GDP over the current Five-Year Plan. The GDP is expected to grow around 7% in FY09 and 8% in FY10, with India becoming fastest growing economies of the world overtaking China. In the view of this scenario, the demand of steel is expected to remain firm.
6. SEML is one of the largest manufacturer and exporter of Premium Grade Ferro Alloys from India. The growth in steel industry, where ferro alloys are used as additives, has pushed the demand of ferro alloys globally. The company is strengthening the raw material linkages, which will sharply reduce the cost of production and lead margin expansion by FY10. The company’s integrated pellitization plant, coal mines and captive power plant would significantly enhance profitability in the coming years.
Conclusion: With a coking coal supply crisis the world over and the resultant spike in prices, the production cost of pig iron for mini blast furnace units is on the rise. Consequently, sponge iron will remain the preferred route for steel making as it uses non-coking coal. The company aims to develop a steel-cum-power business model by increasing its power capacity by 48MW to 213MW in the long run. This will lend stability to earnings as captive power supply will reduce the cost of steel making, while commercial power sales will significantly offset the earnings volatility inherent in the steel business. At the CMP of Rs.74.95, the share is trading at a P/E of only 1.3, which below the industry average. Investors can buy the stock at the CMP of Rs.74.95 and on declines for short term targets of Rs.85 and Rs.130. The scrip has resistances at Rs.80 and Rs.88, which it needs to cross with good volume.
Investment Rationale:
1. SEML has captive iron ore mines with reserves of 20 million (mn) tonnes scalable to 28 mn tonnes. It has already received approval for raising the iron ore mines capacity five fold to 1.5 mn tonnes. It has also been allotted coal and manganese ore mines besides obtaining prospective mining license for five iron ore mines in Chhatisgarh with total reserves of 230 mn tonnes, which are expected to become operative in the next three-to-four years. The mining companies attractive high valuations in the market.
2. It is setting up 6 lakh tpa pelletization backward integration plant at a cost of Rs.130 Cr, which would become operative by April 2009. Although its captive coal mines have commenced production in FY08, its new coal mines will start production by April 2009.
3. SEML has signed memorandum of understanding with government of Chhattisgarh for setting up 1100 MW thermal power plant. The MOU replaces the earlier one of 600 MW signed on January 10, 2007.
4. It has signed a MOU with the Government of Chhattisgarh in July 2008 for setting up of a
cement plant of 2 million tpa capacity with clinker capacity of 1 million tpa at a capital outlay
of Rs.550 Cr.
5. The growth in global demand for steel, rising industry consolidation (ex-China) leading to greater production discipline, declining steel exports from China due to rising cost of metallic, trade friction with the Western world, and shortage of metallic is keeping steel prices at reasonable level. The Indian economy, especially infrastructure sector, is growing at a healthy pace. India spends about 4 % of its GDP on infrastructure investment as opposed to 9 % in China. The Government of India has planned to raise the total infrastructure spending to 8 % of GDP over the current Five-Year Plan. The GDP is expected to grow around 7% in FY09 and 8% in FY10, with India becoming fastest growing economies of the world overtaking China. In the view of this scenario, the demand of steel is expected to remain firm.
6. SEML is one of the largest manufacturer and exporter of Premium Grade Ferro Alloys from India. The growth in steel industry, where ferro alloys are used as additives, has pushed the demand of ferro alloys globally. The company is strengthening the raw material linkages, which will sharply reduce the cost of production and lead margin expansion by FY10. The company’s integrated pellitization plant, coal mines and captive power plant would significantly enhance profitability in the coming years.
Conclusion: With a coking coal supply crisis the world over and the resultant spike in prices, the production cost of pig iron for mini blast furnace units is on the rise. Consequently, sponge iron will remain the preferred route for steel making as it uses non-coking coal. The company aims to develop a steel-cum-power business model by increasing its power capacity by 48MW to 213MW in the long run. This will lend stability to earnings as captive power supply will reduce the cost of steel making, while commercial power sales will significantly offset the earnings volatility inherent in the steel business. At the CMP of Rs.74.95, the share is trading at a P/E of only 1.3, which below the industry average. Investors can buy the stock at the CMP of Rs.74.95 and on declines for short term targets of Rs.85 and Rs.130. The scrip has resistances at Rs.80 and Rs.88, which it needs to cross with good volume.
Graphical Check: The stock after touching a high of around Rs.88, in November, 2008, the price fell back to around Rs.58 in late November, 2008 only to rise again from December, 2008. The stock made a high of Rs.80, in December before falling back again. The stock is currently trading near its support of Rs.72.5 and is on an uptrend. Though Stochastic, RSI and MACD are in buy mode, CCI and Bollinger bands are not giving any clear indication of immediate massive rise in the price of the scrip. However, any buoyant market condition might completely change the scenario and the scrip could jump up suddenly. The good point is that the scrip has broken out its envelope pattern and is moving up. In any case the uptrend in the scrip is expected to continue though an immediate & sudden jump may not be seen. Please keep a SL of Rs.69 and Rs.57.5 (exit) for any short term trade.
Note: This stock was recommended to the Paid Groups in the Sunday Report sent on 21st December, 2008, to be bought on today morning. The stock hit the upper circuits in the initial trade.
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