PICK OF THE WEEK:

Balasore Alloys Ltd

BSE Code: 513142

CMP: Rs.26.75

Face Value: Rs.5

Book Value: Rs.156.29

EPS: Rs.3.11

P/E: 8.6

Industry P/E: 13.28

Market Cap: Rs.171.98

Introduction: Balasore Alloys Ltd (BAL), formerly Ispat Alloys Limited is part of the renowned Ispat group of Companies, promoted by the Mittals. The group’s companies are spread across six countries including Libya, Bosnia, Philippines, Azerbaijan and Uzbekistan. The Other Group Companies in India are Ispat Industries Limited, Ispat Metallics India Ltd., Ispat Profiles India Ltd., Gontermann Peipers India Ltd, etc.

Balasore Alloys Ltd was incorporated in the year 1984 at Balasore, Orissa and at present it has 5 furnaces with total capacity of 57 MVA to produce 95,000 MT bulk Ferro Alloys per annum. With multiple furnaces of different capacities, the company has the flexibility to produce different types of Ferro Alloys as per market dynamics. This adds to the competitive advantage of the organization as different product mix can be maintained at the same time even with low quantity. The company has captive mines in different locations like Chromite ore mines in Sukinda Valley at Jajpur Road (Orissa), Manganese Ore Mines in Hathoda (M.P.). The mines take care of the Chrome ore requirement of the company.

BAL is one of the very few Ferro Alloys manufacturing companies in the country having captive mines and this is a major competitive advantage since availability of Chrome ore is very uncertain and the price is also exorbitant. Other raw materials are sourced from both Domestic and International Markets. The products of the company enjoy international reputation.

The company has ISO-9002, ISO-14001 Certification for its Plant and ISO-9002 for its Mines in Jajpur, Orissa. Various modern management initiatives like Six Sigma, TPM, Supply Chain Management and Performance Management Systems are in place to promote excellence in all areas and improve the overall efficiency of the company.

Shareholding Pattern: The promoters hold 46.56% while the general public holds 53.44%. Among the general public FIIs hold 9.15% and DIIs hold 0.94%, while corporate bodies hold 8.66% of the shares of the company.

Shareholding belonging to the category "Public" and holding more than 1% of the Total No.of Shares
Sl. No.	Name of the Shareholder	No. of Shares	Shares as % of Total No. of Shares
1	Somerset Emerging Opportunities Fund	3,495,369	5.44
2	Emerging India Focus Funds	1,513,973	2.35
3	India Focus Cardinal Fund	871,442	1.36
	Total	5,880,784	9.15

Financials: For Q1FY11, the company came out with very good numbers. The total income of the company for the period came out to be Rs.143.37 Cr as against Rs.93.53 Cr in the same period previous year. The PBDT of the company for Q1FY11 came out to be Rs.22.30 Cr as against Rs.9.97 Cr in the same period previous year. The EPS of the company for Q1FY11 came out to be Rs.1.81 as against Re.0.65 in the same period previous year. While the OPM remained flat, the NPM almost doubled in Q1FY11 as against same period previous year.

For FY10, the company came out with diminished bottom and an encouraging topline. The total sales of the company for FY10, came out to be Rs.431.31 Cr as against Rs.649.97 Cr in the same period previous year. The net profit of the company for FY10 came out to be Rs.12.55 Cr as against Rs.94 lakhs in the same period previous year. The EPS of the company for FY10 came out to be Rs.1.95 as against Re.0.15 in the same period previous year. The OPM improved to 16.78% in FY10 as against 9.21% in FY09. The NP also improved to 2.91% in FY10 as against 0.14% in the same period previous year. The reserves of the company almost remained flat at Rs.209.28 Cr in FY10 as against Rs.208.06 Cr in the same period previous year.

Triggers:

• Balasore Alloys Ltd is one of the largest Ferro Alloys producer and supplier in India. The company is also exporting its products since 1991-92 and continues to supply to most quality conscious countries like Japan, China, Taiwan, Korea, USA, Canada, Brazil, Mexico etc. The export base has increased from 4 countries in 1991-92 to 12 Countries in 2007-08 to over 26 Countries in 2010.
• Balasore Alloys Ltd, a major player in the international Ferro Chrome market, has notched up an impressive growth of 178.53% in its PAT for Q1FY11 as compared to Q1FY10. This shows that the company has been able to sustain the momentum of its accelerated growth chiefly on account of judicious product mix, improved capacity utilization, better realizations and improved cost efficiencies, despite rising of power and other input costs.
• As per growth estimates stainless steel is one of the fastest growing basic materials with a growth in production of 14.5% in 2010 followed by further 8.9% in 2011. In spite of the severity of the global recession, high carbon ferro-chrome survived remarkably well in 2009. Largely due to the resilience of China’s stainless steel industry, world HCFeCr demand fell just by 2.2% in the past year. HCFeCr consumption is likely to grow steadily throughout 2010. In the medium term China would continue to be the main driver of growth for HCFeCr, accounting for an estimated 58.5% growth of the overall increase in global consumption. The improvement in operating performances was triggered by increased volumes adoption of aggressive cost reduction measures, higher plant productivity and improvement in major techno-economic parameters. The company has taken a number of measures to mitigate the associated business risks. This is expected to bring about a long term growth of the company.
• All the growth/expansion projects which were put on hold due to global meltdown, were given a re-look, the board has decided to resume some of the projects. The company is in the process of finalizing strategic partners for the said projects. After the completion of the said projects, it is expected that the company would be ranked among the top ranked ferro alloy players of the world.
• Export of Ferro Chrome constitutes 77% of the total turnover of the Company. With the improvement in world economies, this is expected to give a further push to the company’s fundamentals.
• The stimulus packages initiated by various governments have focused on development of infrastructure. The growing usage of stainless steel in architecture, building and infrastructure fuels the demand in the long term. Huge de-stocking of Ferro Chrome throughout the world has led the stainless steel mills in China, India and Korea to start fresh buying. This amplified buying in the tight supply situation has given an upward swing to price which is expected to be stable through this year.
• Ferro Chrome is a power intensive industry and power contributes about 45% of the variable cost of production. The Company at present is totally dependent on the state power supply company, where the quality and consistent supply of power remains a concern area. Considering the present monopolistic situation of power in the state, the company has decided in setting up of captive power plant for its long term survival. Substantial progress like acquiring of land, tie-up of the coal linkage and various Government clearances/approvals, has already been made in this regard. The Company is in the process of obtaining necessary approvals from Government Agencies and Financial Institutions and securing financial tie-up for the project.
• The Company is having chromate ore mines located at Sukinda velley, Jajpur, Orissa, manganese ore mines located at Hathoda, Balaghat, Madhya Pradesh and at Joda, Keonjhar district, Orissa.
• The Company approached the lenders for second restructuring of its financial liabilities and in response State Bank of India (SBI), the lead lender of the Company, has approved and implemented the restructuring package under CDR mechanism on 30th June, 2009. The above restructuring package has also enabled the Company to improve its cash flow and avoid its account from becoming a NPA. With the above CDR package, coupled with the supportive market conditions, financial performance of the Company has shown turnaround in Q1FY11.
• Last year, the Company acquired shares of Milton Holdings Limited (MHL), a Company incorporated in Mauritius, resulting in MHL becoming a Wholly-owned Subsidiary of the Company. MHL, the wholly-owned subsidiary, shall be implementing, through joint-venture, the proposed Manganese-ore mining projects in Brazil.

Conclusion and Chart-check: Considering the points mentioned above, the scrip can be purchased at the CMP of Rs.26.75 (or above Rs.25.5) for a medium term target of Rs.31. However, this stock might not give good appreciation in the short term. Hence those who want to buy should do it only for medium to long term perspective. Moreover, since it is from the Ispat Group, and hence please do not play in the scrip without keeping a Stop Loss which should be around Rs.25 (exit if it breaks). The stock is slightly in the overbought zone and could come to around Rs.25.5 before moving up.

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 stock was recommended to the Paid Groups on 5th September, 2010. The stock gave good returns to the patient investors.