Adhunik Metaliks Ltd - Analyst Meet Note

India Infoline Research Team / Mumbai Aug 21, 2008 00:48

Adhunik Metaliks Ltd’s (AML) acquisition of Orissa Manganese and Minerals Ltd (OMM) last year has proven to be a decisive step for the company

Adhunik Metaliks Ltd (AML) had organized an analyst meet to discuss its future strategies and to announce its plans to raise Rs2.5-3bn by an initial public offer of its 100% subsidiary, Orissa Manganese and Minerals Ltd (OMM). The company plans to use the proceeds from the IPO to set up an iron & manganese ore pellet and beneficiation plant. The key takeaways from the meet are as follows: AML expansion ahead of schedule The company in FY08, increased its billet making capacity to 0.4mtpa from 0.2mtpa and also set up a rolling mill of 0.22mtpa. It has also set up a sinter plant of 0.3mtpa to use the iron ore fines, which are easily available in the market. The company plans to increase its sponge iron capacity to 0.31mtpa from 0.15mtpa and also set up two waste heat recovery power generation units of 17MW each. AML’s existing and planned capacity Existing facilities Installed capacity (tons per annum) Sinter plant 300,000 Coal washery 700,000 Sponge iron 150,000 Blast furnace 214,000 Steel Melting Shop (SMS) 400,000 Rolling mill 220,000 Ferro Alloy 16,400 Power plant 17 MW Proposed facilities Installed capacity (tons per annum) Date of commence- ment Sponge iron 60,000 September,2008 Power plant 17MW September,2008 Sponge iron 105,000 March, 2009 Ferro Alloy 40,000 March, 2009 Power plant 17MW March, 2009 Source: Company, India Infoline Research Stainless steel production estimates reduced for FY09 and FY10 The company in Q1 FY09 commissioned its stainless steel plant of 119,000tpa. Stainless steel prices have dropped drastically in the last six months leading to lower margins for the producers. As a result, the company has indicated that it will produce lesser amount of stainless steel in FY09 and FY10. The company is likely to get higher returns on sales of rolled products instead of stainless steel. Orissa Manganese and Minerals Ltd (OMM) OMM plans to raise Rs2.5-3bn from a public issue in the later half of FY09 to fund its mining plans. OMM is planning to set up a pellet and iron ore beneficiation plant in Nuamundi, Jharkhand, and Manganese ore beneficiation plant at Dhenkanal, Orissa. These plants will convert iron ore fines into pellets and process low grade manganese ore waste for use in ferro alloy unit at an estimated cost of Rs11bn. The company plans to fund this expansion through a debt:equity ratio of 2:1. The equity portion of the project will be funded from the proceeds of the proposed IPO and the company’s internal accruals. Proven reserves Iron ore Manganese ore Mining lease Ghatkuri Block B and C Patmunda Others Location Jharkhand (Near Gua) Koira, Orissa Koira, Orissa Total Area 275.5 hectares 807.3 hectares 149.9 hectares Broken-up Area 131.0 hectares 92.0 hectares 50.0 hectares Lease life 20 years from 2006 20 years from 2007 20 years from 2007 Estimated reserves 90mn tons 45mn tons 5mn tons Grade 64%+ Fe content 34%+ Mn content 34%+ Mn content Strip ratio 1:0.30 1:1.16 1:1.16 Source: Company OMM has indicated that it has mineral resources comprising approximately 90mn tons of iron ore and 50mn tons of manganese ore. This is higher than the earlier estimates given by the company in March ’08 which stood at 64mn tons of iron ore and 36mn tons of manganese ore. The iron ore mine in Jharkhand has 64%-plus Fe content and the manganese ore mine in Orissa contains 34-36% Mn content. AML can use these mines for merchant selling and intends to sell the same in the spot market. The company plans to increase its production in two phases: Execution plan Particulars Phase I Phase II Iron ore Time frame Mar 08- Mar 26 Mar 12- Mar 26 Reserves 40mn tons 50mn tons Excavation rate (Lumps) Starting with 0.24mtpa to 1.8mtpa Starting with 0.29mtpa to 1.16mtpa Excavation rate (Fines) Starting with 0.16mtpa to 1.2mtpa Starting with 0.21mtpa to 0.84mtpa Manganese ore Time frame Mar 08- Mar 27 Mar 12- Mar 27 Reserves 15mn tons 35mn tons Excavation rate Started Starting with 0.5mtpa to 2.0mtpa Source: Company The company targets 0.3mtpa of manganese ore and 0.4mtpa of iron ore in FY09E against our earlier expectation of 0.2mtpa of manganese ore and 0.55mtpa of iron ore. We revise our production estimates as per the guidance given by the company and expect 0.3mtpa of manganese ore and 0.35mtpa of iron ore. Production plan Particulars (mn tons) FY09E FY10E FY11E Manganese Ore High grade 0.10 0.25 0.50 Low grade 0.20 0.25 0.50 Total 0.30 0.50 1.00 Iron ore Lumps 0.24 0.72 1.80 Fine 0.16 0.48 1.20 Total 0.40 1.20 3.00 Source: Company The company will be setting up an iron ore beneficiation plant of 1.2mtpa at Ghatkuri, Jharkhand and a pellet plant of 1.2mtpa to convert the beneficiated fines into pellets at Nuamumdi, Jharkhand. For its manganese ore, it is setting up a beneficiation, sinter and a chrome ore briquetting plant. It is also setting up 27Mva*4 submerged Arc Furnaces to manufacture ferro alloys. Some amount of the Rs11bn expenditure will be utilized to construct two railway sliding at the plant site and at the mines. Outlook Adhunik Metaliks Ltd’s (AML) acquisition of Orissa Manganese and Minerals Ltd (OMM) last year has proven to be a decisive step for the company. Iron ore and manganese ore prices have soared 100% in last one year and are expected to surge further. Mining operations being a high-margin business, we expect OMM’s operating profit to be Rs1.8bn in FY09 and Rs3.5bn in FY10. We have valued AML based on the sum-of-parts method, which is primarily based on EV/EBITDA multiple for its steel and mining business and DCF for its power business. We recommend BUY with a SOTP target price of Rs244 per share, implying an upside of 105.0%. Valuation summary Period to FY07 FY08 FY09E FY10E Rs mn (12) (12) (12) (12) Revenues 7,358 10,345 19,198 22,933 yoy growth (%) 73.6 40.6 85.6 19.5 Operating profit 1,159 1,675 4,955 6,589 OPM (%) 15.8 16.2 25.8 28.7 PAT 768 864 2,824 3,837 yoy growth (%) 127.1 12.5 227.0 35.9 EPS (Rs) 8.4 9.5 25.1 34.1 P/E (x) 14.1 12.6 4.7 3.5 P/BV (x) 4.1 3.0 1.7 1.1 EV/EBITDA (x) 13.1 12.1 3.9 2.9 ROE (%) 28.7 23.8 35.0 32.8 ROCE (%) 16.9 13.3 33.9 35.4 Source: Company, India Infoline Research