Recommendation: Buy
CMP = Rs 51.85 (at the time of this recommendation)
Target price = Rs 62.2
Key points:
- Background: Visa Steel Ltd. (VSL) is a part of the Kolkata-based Visa Group. The company currently produces pig iron, low ash metallurgical coke, ferro chrome and to some extent chrome concentrates. VSL is currently operating a blast furnace with production capacity of 225000 TPA of pig iron and a stamp charged coke oven plant of 400000 TPA. The company is also operating a chrome ore beneficiation plant and a chrome ore grinding plant with capacity of 100000 TPA each. VSL has manufacturing facilities in Kalinganagar and Golagaon, both in Orissa. The company has also been commissioning a 300,000 tonnes sponge iron facility by FY09. VSL is an emerging integrated special and stainless steel player by Fy11. Apart from
- The performance of VSL has been remarkable in the past couple of quarters, mainly because of the sharply higher realisation from its coke and ferro chrome business. The company has stabilised its pig iron facility after a shutdown during the last couple of quarters. One of the two DRI kilns with a capacity of 150000 has already been commissioned. Full benefits are likely to come from Q3FY09 onwards and from Q2FY09. Good backward integration in terms of raw materials and expected firmness in coke and ferro chrome prices should help the company to do well in the near future.
- Since the company is already producing the raw materials for these two plants, there will be a significant cost reduction for the new plants. Adding to this, an additional 25 MW power plant by March 2010 would further help the company to reduce its costs and even earn some revenues as well. According to the latest development, the company is likely to set up a 2.5 MTPA steel plant in Chhattisgarh within three or four years.
- Shifting focus to manufacturing segment: The Q1FY09 result also indicates a significant transformation in the business of the company. Unlike previous years and quarters the revenues from the trading segment have come down sharply. Contribution of the manufacturing segment has been on the rise. Going forward the company plans to further scale down its trading business and concentrate more on its manufacturing segment. These robust numbers in Q1FY09 came despite a nil contribution from one of its major products, that is, pig iron due to a planned shutdown for a refractory lining in Q4FY08. However, the pig iron facility has been stabilised and is expected to contribute to the topline from Q2FY09.
- Sales were 10205 tonnes. The sponge iron plant of 300,000 tonnes capacity, along with 50 (2 x 25) MW power plant through waste heat recovery are expected to start functioning from Q2FY09. Thus, additional revenues from pig iron and sponge iron along with expected higher sales volume in coke and ferro chrome will further boost the topline, whereas lower power cost will support the bottomline from Q2FY09 onwards. Bright prospects for coke and ferrochrome price in the near to medium-term future is likely to help the company to enjoy strong realisations.
- Financials: Continuing its stellar performance since Q4FY08 Visa Steel reported an even more robust growth in earnings during the first quarter (April-June) FY2009, mainly driven by fairly higher sales volume and strong realisations from its two major segments (LAM coke and ferro chrome). Net sales soared more than 275% to Rs 255.73 crore against Rs 68.07 crore in the corresponding quarter of the previous year. Manufacturing activities, with a turnover of Rs 232.4 crore or almost 91% of the total net sales, mainly contributed to the growth in topline. Turnover from trading activities remained far lower at Rs 23.4 crore.
- Valuation: The backward integration into iron ore, chrome ore, steam coal, coke and power will help the company to expand its margins significantly, going forward. In addition, commissioning of fresh capacities in Q2FY09E and late FY10E would help it to expand its topline along with improved cost structure. The planned setting up of stainless steel and bar & wire rod plant during end FY10E is also going to be one of the key triggers for the company.
- I strongly recommend Buy call on this stock with price target of Rs 62.20, which is 3.12x of its FY10E EPS for an investment horizon of 3- 6 months.
