Balasore Alloys: Raising Star 2

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Company Name: Balasore Alloys

Industry: Iron & Steel (Ferro Chrome)

Investment Horizon: Holding for 2 Years (This may not generate immediate return in the short term)

Recommendation: At CMP of 47 is a good price. Can enter on dips too (This may not generate the immediate return in the short term)

About the Company:

Balasore Alloys, formerly Ispat Alloys Limited is part of the renowned Ispat group of Companies, a major business house in the country, promoted by the Mittals. The group's companies are spread across several countries besides India.

Balasore Alloys was incorporated in the year 1984 at Balasore, Orissa and at present it has 5 furnaces with total capacity of 57 MVA to produce 95,000 MT bulk Ferro Alloys per annum
The company has captive mines in different locations like Chromite ore mines in Sukinda Valley at Jajpur Road (Orissa)



About the Industry – Already shared on Indian Metals (Both are same industry)

Pros:
  • Global Investment bank JP Morgan is bullish on Steel sector for the next 3 years
  • As incremental demand continues to outstrip capacity, we expect industry utilization to hit 86 percent by FY21, a ten-year high and stabilisation of prices,” it added
  • ‘Make in India’ holds great promise for the manufacturing sector in general
  • As per the Indian Mining Ministry, the chrome ore output for Q4 2015-16 increased by 100% last QoQ to 1.03 million tonnes and 18% over the corresponding period in the previous year. India is aiming to increase production of minerals including chrome ore by inviting private sector and foreign companies to take part in exploration projects
  • With the Current Valuations, it has a Margin of Safety of 40% from 52 week High
  • (The Overall Industry itself is undervalued)
  • Promoters are increasing their stake
  • Robust growth in terms of both top line and bottom-line in the recent quarters (35% and 100%)
  • Rise in Ferrochrome prices Rs.56,000/tn to Rs.1,07,000/tn and the Analysts believe the prices will continue to remain high for some time. This rise in prices can be attributed to inventory shortage in China, So they are accepting Ferrochrome even at higher prices (Simple concept Demand is increasing, while the supply is not enough to meet the demand which increases the prices—Concern is How far the increased prices sustain)

 Cons:
  • Lowering of Chinese economy impact growth prospects, global demand is not much attractive at the moment.
  • Limited reserves of chrome ore
  • Promoters have pledged the shares up to 35%
  • Company has delivered poor growth of 6% in terms of revenues over past 5 years
  • Low return on Equity of 10% for last 3 years

 Financial Highlights:
  • Net Sale per share is at Rs.130 (as per FY 17 data)
  • Book value of the company is Rs.57 (So it is trading at 0.8 time book value)
  • The Company’s debt is at Rs.131 crores and Profit after tax for FY 17 stood 90 crores, so the debt is just 1.4 times the profit.
  • Operating Margins are improved to 26% from 18%
  • Dividend pay-out is at 25%
  • 80% of its revenues come from exports
  • It is trading at P/E of 4.7 compared to the other players P/E of  14-17

Narration
2012
2013
2014
2015
2016
2017
Sales
     590.70
     686.13
     782.61
     847.85
     837.97
  1,036.08
Expenses
     485.74
     590.24
     659.94
     783.04
     755.95
     833.23
Operating Profit
     104.96
        95.89
     122.67
        64.81
        82.02
     202.85
OPM
        17.77
        13.98
        15.67
          7.64
          9.79
        19.58
Net profit
        31.93
        28.78
        46.00
        29.24
        18.69
        89.51
EPS
          4.74
          4.27
          6.83
          3.95
          2.28
        10.07
Price to earning
          3.39
          2.58
          2.07
          4.43
          7.76
          4.74
Price
        16.08
        11.01
        14.11
        17.53
        17.70
        47.75

Rating:

  • Technical rating: 63
  • Fundamental rating: 57
  • Overall rating: 60


Valuations:

With the investment horizon given, considering all the inputs of estimates the valuations are at Rs.216

Valuations are made at 11X projected FY 19 EPS

If the prices sustain in future also, then margins will increase with increase in revenues too. Then no one can stop this raising star

(The valuations are calculated on the basis of financial inputs/estimates but investors are required to invest based on the business potential and business risks too) 

ANNUAL REPORT FY 16
Jump in FC prices - ET

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