PICK OF THE WEEK:

Sathavahana Ispat Ltd

BSE Code: 526093

CMP: Rs.43.70

Book Value: Rs.56.16

EPS: Rs.7.62

Dividend yield: 3.43%

Introduction: Sathavahana Ispat Ltd (SIL), promoted by Mr. A.S. Rao, a Metallurgical Engineer from IIT (worked in SAIL in senior capacities for over two decades) was set up in 1989 to manufacture pig iron. At present Sathavahana Ispat Limited (SIL) is engaged in the manufacture and sale of pig iron in core sector of the iron and steel industry. The Company is using Mini Blast Furnace Technology. SIL had replaced TATA-KORF technology with CHINASHOUGANG. It uses the Anshan technology sourced from P.R. China for metallurgical coke making. Production from the mini blast furnace is of a high quality and can be assured to contain a minimum iron content of 93.5% and 4% carbon content. With the production of metallurgical coke, SIL is integrated backward for the key input material. Metallurgical coke is the key input material for Iron making.

Pig iron is of two grades - basic grade and foundry grade. Basic grade is used in the manufacture of steel and whereas foundry grade is used to make castings. Basic grade is produced mainly by the Integrated Steel Plants (ISPs) for captive consumption in the manufacture of steel and exports. Part of the production is also diverted to the domestic market. Foundry grade is mainly used for castings and is produced by the Mini Blast Furnace units. Pig iron is also the basic raw material for most of the engineering products and construction industry. It is also a raw material for foundry and engineering industry. With the significant growth in the main user industries like automobiles, construction, foundries, etc, the demand for iron and steel has increased significantly.

Shareholding Pattern: The promoters hold 36.20% while the general public holds 63.80%. The DIIs hold 1.32%. Moreover 6.59% of the shares of the company are locked.

Financials: For Q4FY10, the company came out with very good set of numbers. The total income of the company came out to be Rs.121.05 Cr as against Rs.89.94 Cr in the same period previous year. The PBDT came out to be Rs.13.39 Cr as against a loss of Rs.39.96 Cr in the same period previous year. The net profit of the company came out to be Rs.9.50 Cr as against a loss of Rs.27.33 Cr in the same period previous year. The EPS of the company for Q4FY10 came out to be Rs.2.89 against a negative EPS of Rs.8.18 in the same period previous year. Moreover, both the operating and net profit margins improved significantly in Q4FY10 as compared to the same figures in the previous year.

Triggers:

• Sathavahana Ispat Ltd’s pig iron manufacturing capacity is 2.10 lakh tpa and metallurgical coke 3 lakh tpa. It commenced operation in its 30MW co-generation of power in the Bellary district of Karnataka from July 2008. It has already signed Power Purchase Agreement (PPA) at Rs.3.25 per unit. The surplus metallurgical coke production from this facility is being sold in the nearby market. SIL is enhancing coke capacity to 4.5 lakh tpa.
• Meanwhile, Sathavahana Ispat Ltd informed that the Pig Iron making plant of the Company situated at Haresamudram Village, Bommanahal Mandal, Anantapur district, Andhra Pradesh has been re-started (after it was shut down from August 17, 2009 for relining of blast furnace and for other repairs) on October 01, 2009 after completion of Blast Furnace relining..
• During FY08, the SIL had issued 15.4% stake (49 lakh shares) to Stemcor Holdings, a strategic investor at a price of Rs.60 per share. Stemcor is a $6 billion leading consultancy firm, which provides marketing, finance and logistic services to steel industry. SIL also converted 6.25 lakh shares and 15.70 lakh warrants issued to promoters at Rs.60 per share. The funds raised were utilized to meet the aforesaid coke capacity expansion and 10 MW power plant.
• In order to insulate itself from impact of fluctuation in international prices of metallurgical coke, it has now started manufacturing metallurgical coke, a key raw material, in house from March, 2004. Further, the SIL has now taken up expansion of the coke making facility by 1, 50, 000 tpa and augmentation of additional co-generation power of 10 MW is expected to be completed by the end of Q2FY11. It has also taken up works to de-bottleneck idle capacity in the turbine generator capacity whereby additional power of 25 MW can be generated through thermal route. This work is likely to be completed by the end of this year, CY2011.
• Pig Iron is the basic raw material for most of the engineering products, foundry industry and construction industry. With the significant growth in the main user industries like automobiles, construction, foundries, the demand for iron and steel has increased significantly. The total production of pig iron in India has increased from 1.59 million tonnes in 1992 to the present level of 5.30 million tonnes in 2009.
• On the domestic front, India is the fifth largest steel producer with a production of steel of 59.57 million tonnes (+4.2% YoY) in FY10. The steel consumption in FY10 rose by 7.6% YoY to 56.32 million tonnes as against 52.35 mt in the FY09. The steel production is likely to go up to 124 mt by 2012 and cross 200 mt by 2020. The proposed investments of Rs.1.5 lakh crore to create additional 22.4 mtpa of steel in the last three months would increase the demand of pig iron going forward.
• The SIL enjoys prominent position in South India being the largest and quality supplier of pig iron to casting & forging industry, is expected to boom in the near future due to increased exports (China factor) and high growth in domestic automotive and engineering sectors.
• Moreover, very recently the Chinese government has removed tax rebates on some steel products reflecting China's increasingly prudent attitude towards exports of resources including steel. The repeal of rebates will impact China's domestic steel products market in the short term. Many analysts are of the opinion that, the Chinese steel industry may suffer losses in the third and fourth quarters due to the government's decision to remove export rebates, putting further pressure on mills. Not to mention that those mills have already suffered from falling product prices and soaring raw material costs. The decision to remove export rebates comes amid growing export risks imposed by trade measures from the United States and the European Union. So China is already in trouble and its efforts to bully the world in term of steel industry will be further curtailed if the Yuan is made to appreciate. The Yuan appreciation is likely to have a negative impact on the Chinese steel industry in the short term despite lowering the import costs for iron ore. From an export point of view, a 3% increase in the Yuan and the removal of the 9% and 13% rebates on hot-rolled coil and cold rolled coil will reduce the competitiveness of Chinese steel products in the global market. Some industry insiders are of the opinion that the Yuan appreciation will also push the Chinese steel industry to adjust restructuring moves and focus more on improving the technical value of products. Besides this most of Chinese steel products exported overseas are low value-added products and have been successful mostly because of the price advantage. Now, with the present scenario emerging, it might be difficult for the Chinese Steel companies to pass on the additional costs to the exporting countries, making Indian exports much more competitive---THIS WOULD GIVE INDIAN STEEL EXPORTS AN ADDITIONAL EDGE AGAINST THE DRAGON...!!
• With the augmentation of enhanced pig iron and coke capacity together with upcoming cogeneration of power at the Greenfield site, SIL is confident of taking fullest possible advantage of the current uptrend in the iron and steel industry. SIL is likely to post an EPS of Rs.13.5--14 in FY11.

Chart Check and Conclusion: From the charts it is seen that the scrip has made very good pattern. Moreover, from the charts it is found that a rock solid bottom around Rs.40—42, has been formed which will be difficult to break on the downside, unless there is a crash in the markets. Most of the parameters on the charts are seen in buy mode and the scrip could give a break out in the next week, if the markets remain stable.

The scrip of Sathavahana Ispat Ltd is available at an unbelievable price of Rs.43.70 with a dividend yield of 3.43%. Moreover, with expansion plans in place and expected boom in industry cycles in the coming days, we can assume that good growth rates in the company will be sustained in FY11 & FY12, making SIL, a steal in a growing industry. Buy the scrip around Rs.43—44 for a target of Rs.51—Rs.58-Rs.65, for the short and medium term perspective. In the long term the scrip could even cross Rs.100. Please keep a SL of Rs.39 for any short term play.

Disclaimer: Though due care has been taken while preparing this report but no responsibility will be assumed by the author for the consequences what so ever, resulting out of acting on these recommendations or after reading the report.

The calls made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is derived from sources that are deemed to be reliable but its accuracy and completeness are not guaranteed. The author does not accept any liability for the use of this column for buying and selling of securities. Readers of this column who buy or sell securities based on the information in this column are solely responsible for their actions. The author, his acquaintances, his company or his family members may or may not have positions in the Scrips mentioned in this column. Investors should take their own decisions while buying and selling the shares/securities.

Note: The scrip was recommended to the Paid Groups on 4th July, 2010 in the Sunday Report sent to the Paid Groups.