Visa Steel Ltd. (VISST)
Goutam Chakraborty
The performance of Visa Steel has been remarkable in the past couple of quarters. The reason behind the robust performance in Q1FY09 was 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.
Company Background
Visa Steel Ltd (VSL) is a part of the Kolkata-based Visa Group. The company currently produces pig iron, low ash metallurgical (LAM) 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 India, Visa Steel has a strong global presence in countries like China, Australia, Indonesia, Switzerland, UK and Hong Kong.
Capacity expansion to focus on value-added products
Out of its total Rs 1800-crore capex plan till FY11, the company has already spent Rs 1000 crore while the balance Rs 800 crore will be spent in the next couple of years including the current financial year. During Q1FY09, the LAM coke facility remained fully operational at a capacity of 400000 TPA. The ferro chrome capacity of 50000 TPA also stabilised and delivered a fair amount of production. The pig iron facility with a capacity of 225000 TPA has been re-stabilised. It is likely to start contributing to the topline from Q2FY09.
The sponge iron capacity of 300000 TPA, though a little delayed, is nearing completion. Trial run of the first kiln with a capacity of 150000 TPA has commenced already. Besides that the 50 (2X25) MW power plant is also expected to be operational from Q2FY09. Moreover, the company is commissioning a 500,000 TPA stainless steel plant and 500,000 TPA wire rod mill by March 2010. This is expected to contribute significantly to the topline of the company.
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. In the first quarter FY09 revenues from the manufacturing segment contributed 91% of the net sales. Manufacturing revenues rose over three times to Rs 232.4 crore while the operating profit for the manufacturing segment came at Rs 77.9 crore, a more than eight times jump against the figure in the corresponding quarter in FY08. Going forward the company plans to further scale down its trading business and concentrate more on its manufacturing segment.
Strong realisations to drive sales growth
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. LAM coke production jumped 199% to 82,386 tonnes while sales came at 57,727 tonnes, a rise of 645%. The ferro chrome facility also stabilised in the said quarter and production remained at 7921 tonnes.
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.
Quarter ended Year ended Rs. cr
year 2008/06 2007/06 var % 2008/03 2007/03 var %
Sales Income 255.73 69.41 268.42 680.77 531.18 28.16
Other Income 0.09 2.65 -96.71 2.04 6.75 -69.77
Expenditure 184.70 59.92 208.24 588.88 487.46 20.81
Interest 3.44 1.30 164.97 8.53 6.39 33.49
Gross Profit 67.67 10.83 524.75 85.39 44.07 93.76
Depreciation 5.71 3.56 60.60 18.26 9.77 86.95
Tax 13.44 2.14 527.61 23.99 13.78 74.02
PAT 48.51 5.13 845.27 43.15 20.52 110.26
Equity 110.00 110.00 0.00 110.00 110.00 0.00
OPM (%) 27.78 13.67 14.11 13.50 8.23 5.27
GPM (%) 26.43 11.80 14.63 12.24 7.03 5.21
NPM (%) 18.96 7.39 11.57 6.33 3.86 2.47
Key Financial Ratios
2007/03 2006/03 2005/03 2004/03 2003/03
EPS 1.87 1.13 0.87 2.22 1.12
CEPS 2.75 1.60 0.93 2.50 1.50
Book Value 31.54 28.78 26.92 11.22 13.33
Dividend/Share 0.00 0.00 0.00 0.00 0.00
OPM 7.00 9.80 5.99 2.18 6.46
RONW 6.70 4.67 10.23 16.76 7.88
Debt/Equity 1.57 0.62 0.88 1.33 0.52
Ratio 1.90 1.98 1.52 3.72 1.31
Interest Cover 0.00 2.75 4.75 33.00 4.44
Financials:
Continuing its stellar performance since Q4FY08 Visa Steel reported an even more robust growth in earnings during the first quarter (April-June) FY09. This was mainly driven by fairly higher sales volume and strong realisations from its two major segments, namely, 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.
Valuations
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. We rate the stock as OUTPERFORMER with a target price of 62.20, which is 3.12x of its FY10E EPS for an investment horizon of 3- 6 months.
technical analysis
Technical
On the weekly chart, the stock is forming a base around 50 levels before the next up move. It has retraced 50% of the recent rally from 43 to 60 to find support around 50 levels. The up move from the level of 50 with high volumes clearly indicates the strength in the stock.
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