Recommendation: Buy
CMP = Rs 32.95 (as of Friday)
Price Target = Rs 39.5
Key Points:
· Visa Steel Ltd (VSL), an emerging integrated special and stainless steel player, is part of the Kolkata-based Visa Group based in Kolkata with manufacturing facilities in Kalinagar and Golagaoan, both in Orissa. The company produces pig iron, lam coke and chrome concentrates.
· VSL is implementing a Rs 600 crore capex program that would transform its business profile from a secondary steel manufacturer to an integrated steel player with linkages across the entire value chain from critical raw materials such as iron ore, chrome ore and coal to value-added steel products. It is also integrating forward to manufacture special steel and stainless steel. Post expansion, we expect the company to emerge as one of the lowest cost producers of stainless steel in the country.
· The company is integrating backwards with captive ownership of critical raw materials (iron ore), which would enable it withstand pricing pressures and face competition better compared to its peers. It is setting up a power plant, which would reduce its dependence on the grid power and in turn increase operating margin. The surplus from the coke oven will be sold to the market and directly get added to the bottom line.
· In FY07, the company reported a top line of Rs 532.70 crore and bottom line of Rs 20.54. In Q108, sales dipped 38.3% y-o-y to Rs 69.41 crore, while bottom line fell 36.8% y-o-y to Rs 5.13 crore. The company's expansion project is expected to help it procure raw materials at the lowest cost and in turn increase margins. The usage of the coke is less as compared to actual production and hence the surplus could be sold.
· I expect the benefits to partly accrue this year and fully in FY09. The integration to value-added products would drive the company's top line going forward and we expect it to post the topline of Rs 1,168 crore and a bottom line of Rs 57.4 crore in FY09.
· The company is expected to double its top line and triple its bottom line on the back of capacity expansion and linkages into value added products. At the current price of Rs 32.90, the stock is trading at 5.84x the FY09E EPS. I expect the integration to drive the growth momentum going forward and the stock to rise 20% to Rs 39.50 within the coming 3-6 months.
· The stock has seen a strong uptrend for the last one year. The major trend continues to remain positive. Currently, the stock has got into a consolidation zone between Rs 1,400 and Rs 1,600 range, providing accumulation opportunities and is expected to breakout outside this range to test new highs. The short and medium-term averages have once again converged and a crossover should see another run-up. The RSI indicator has bottomed out and shows strength, while the MACD has corrected and is awaiting a positive crossover.
· Considering all above factors, I maintain Buy call on VSL with a price target of Rs 39.5.
