Adhunik Metaliks (AML) finds itself in a perfect environment to reap the benefits from mining activities of Orissa Manganese and Minerals Limited (OMML). AML's successful acquisition of OMML last year, would not only lead to its backward integration but also allow the direct selling of manganese and iron ores in the domestic market. Both of these products have witnessed sky rocketing prices amidst high demand in the domestic market. We expect the company to benefit from the acquisition of OMML to a great extent going forward due to higher EBIDTA margins in mining business.
Company Background
Adhunik Metaliks is the flagship company of the Adhunik Group and is currently engaged in the production of value added and speciality steel through its integrated steel plant at Rourkela , Orissa. Currently, the company has a 0.45 million tonne per annum (mtpa) capacity of steel making. It has plans to manufacture stainless steel in the near future to cater to the demands of auto and auto ancillary industry. The company has a well established distribution and sales & marketing network spread over the country.
Adhunik Group is also entering the merchant power business through its group company Adhunik Thermal Energy Ltd (ATEL). AML will own 51% equity stake in ATEL. ATEL has been allotted a coal block at Ganeshpur, Orissa, which has reserves of 65 million tonne. AETL has plans to set up 270MW power plant with an objective of using 50% of power produced for captive requirements and rest for selling in the market.
AML has also recently acquired a 75% stake in a 24,000 tpa capacity (to be expanded to 60,000 tpa) pre-revenue auto Forgings Company.
Backward integration to help improve EBIDTA margin
Adhunik Metaliks has taken significant strides towards insulating itself from rising prices of key raw materials such as iron ore and coal. The company has strived to achieve backward integration with captive power plant expansion and starting of iron ore production for captive use expected from Q3FY09. Also with OMML having already started the mining activities, AML stands to benefit from the same for internal use and move towards being an integrated player.
1.. Iron-Ore: AML owns a 25 million tonne capacity iron-ore mine in Kulum in Keonjhar, 125Kms away from its manufacturing plant. Iron-ore reserves in the mine are expected to high grade with Fe content of 62-64%. The company stands to save close to 2000-2500 per tonne once production of iron-ore from the mine starts. The production is expected to start from Q3FY09 onwards.
2.. Power: The company's captive power plant has been delayed and is expected to come on stream during the later part of FY09
Benefits to accrue from OMML FY09 onwards
The acquisition of Orissa Manganese and Minerals Ltd. was completed by AML last year and the company is all set to reap benefits of the same from this year onwards. OMML has reserves of 64 million tonnes of iron-ore and 36 million tonnes of manganese ore and is into mining business, which has high EBIDTA margins in the current scenario after a sharp rise in prices of minerals. The company would indulge in active mining of both these ores from FY09 onwards with production having already started and Rs 15 crore of net profit being realized in Q1FY09 on the top-line of Rs 24.7 crore. Given the current scenario, the mining business of OMML is expected to contribute ~Rs 100 crore to the consolidated bottom-line of AML in current year. This may bring re-rating on the counter on account of higher margins.
Strategic Plant Location
AML's steel plant is strategically located with abundant supply of low-cost manpower and availability of key raw material (such as iron ore, coal, limestone and dolomite) within a 200-km radius of the plant, which provides the company with a competitive edge. Sourcing of captive iron ore will reduce input costs significantly, and enhanced product portfolio of value-added and specialty steel will help the company achieve better realizations and strengthen the business.
Year ended Rs. cr
year 2007/03 2006/03 var %
Sales Income 811.54 461.30 75.92
Other Income 8.33 2.77 200.58
Expenditure 696.57 390.60 78.33
Interest 26.18 11.49 127.98
Gross Profit 97.11 61.99 56.67
Depreciation 11.34 6.88 64.77
Tax 8.30 21.40 -61.20
PAT 77.47 33.71 129.82
Equity 91.23 91.23 0.00
OPM (%) 14.17 15.33 -1.16
GPM (%) 10.94 12.84 -1.90
NPM (%) 9.54 7.30 2.24
since no matching quarter data is found, so no quarter comparison has been shown
Key Financial Ratios
2007/03 2006/03 2005/03 2004/03 2003/03
EPS 8.49 3.69 1.31 2.20 0.00
CEPS 9.74 4.45 1.73 2.61 0.01
Book Value 28.83 24.02 13.33 12.20 98.14
Dividend/Share 1.00 0.50 0.00 0.00 0.00
OPM 16.26 17.03 12.13 20.01 0.00
RONW 28.19 14.82 9.89 18.12 0.00
Debt/Equity 1.75 0.97 1.25 1.20 0.02
Ratio 1.67 2.26 1.42 2.11 0.39
Interest Cover 4.19 5.80 5.16 8.73 0.00
Financials:
In the recently declared Q1FY09 results, the company reported a sales growth of 58% and net profit growth of 32% y-o-y. On a quarter on quarter basis, the company showed a relatively stable net sales and PAT figures with growth of 5.4% and 7.2% respectively. The growth in net sales and profit is expected to enhance significantly going forward as the 100% subsidiary of the company OMML has started the production of manganese and iron ores from its mining activities and registered a top line of Rs 24.7 crore for the June quarter with Rs 15 crore of net profit for the same period. AML was successful in passing the increased raw material cost to some extent to the end users and experienced a 23% jump (q-o-q) in steel products realisations in the June quarter. The financial results for FY08 reported by the company were also good with significant growth in top line and bottom line on account of higher realisations and volume growth.
technical analysis
Risks & Concerns
The company is foraying into the mining activities, which has shown a very robust margins in the past on account of higher prices of minerals. With increasing concerns on inflation government may come forward to control the pricing, which would have a bearing on the margins. Risks to earnings would emanate from any weakness in alloy steel and steel product prices, which may be triggered by a decline in demand for alloy steel products or an oversupply situation in future.
Outlook and Valuations
The outlook for AML appears to be positive as price for steel products is expected to remain firm in the coming quarters on account of robust demand. The prevailing environment of high prices of iron-ore and manganese ore is also expected to be stable thus resulting in a huge benefit for the company in terms of net realizations from the mining activities of its subsidiary OMML. Overall the company finds itself in a sweet spot amidst an environment of high demand and prices of steel products and minerals like iron-ore and manganese ore. The enriched product mix of AML coupled with high margin oriented mining business of OMML is likely to help the company to achieve strong growth in the coming quarters. At the current price of Rs 110 the stock is trading at 3.9x FY10E consolidated EPS of Rs 28.01 and 5x FY09E consolidated EPS of Rs 22. We rate the stock as Outperformer with a price target of Rs 132, 4.7x FY10E EPS, for an investment horizon of 3-6 months.
Technical Outlook
The intermediate term downtrend finally found its feet at 94 levels and the sharp recovery from that low levels indicate bullishness and also shows that the uptrend is building. The volume in the stock has increased in line with the increased in price suggesting strength in the stock.
The stock came under pressure due to profit-booking during January 2008, which is line with the market as a whole, but the stock has shown smart recovery from low levels. Among the oscillators RSI is in uptrend and showing strength to move higher. The immediate support comes around 94 levels. One can expect a target around 134/152 in coming months.
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