Indian Metals…Raising star

Company Name: Indian Metals & Ferro Alloys (BSE code: 533047)

Industry: Mining and Minerals

Investment Horizon: 3 years (This can give a consistent return over the investment horizon)

Recommendation: Allocate not more than 10% of your portfolio, at a CMP of 497 is a value buy and try to add on dips

About the Company:

Established in 1961 in the Eastern State of Odisha known for its rich natural resources, IMFA is India's largest, fully integrated producer of ferro alloys with 187 MVA installed furnace capacity backed up by 258 MW captive power generation and extensive chrome ore mining tracts. They are unique from the quality perspective due to comprehensive ISO 9001 Quality Management certification besides ISO 14001 Environment Management and ISO 18001 Occupational Health & Safety certification.

Over the years, we have developed long standing relationships with multi-nationals like POSCO of South Korea, Marubeni Corporation and Nisshin Steel of Japan and leading stainless steel producers in China and Taiwan. Within India, Jindal Stainless and Shah Alloys are our leading customers.

The Company has an industry experience of 50+ years

Exports:

Our Ferro chrome output is mostly exported to the Far East (China, Japan and Taiwan) However, given the expected growth in stainless steel demand / production in India, going ahead there will be distinct shift to catering to the domestic market for which we are ideally positioned.

Consumption (present) - Potential:

India's per capita consumption of stainless steel is around 2 kg which represents a significant opportunity particular given the expected focus on infrastructure creation which will lead to more demand.

Long-term Relationships:

While in India we have long standing relationships with Jindal Stainless, Shah Alloys and other producers, internationally we have partnered with POSCO of South Korea (taking the lead in a 76:24 joint venture in India to produce ferro chrome with assured off-take commitment in addition to a long term contract) and Nisshin Steel (long term contract) besides supplying on a consistent basis to many large customers in China and Taiwan.

Business segments:

Ferro-Alloys
Mining – To cater to the raw material requirement of silicon alloys production
Power – Captive use

Six furnaces adding up to 187 MVA have been set up at Therubali (Rayagada District) and Choudwar (Cuttack District) in Odisha thus making us the largest merchant producer of ferro chrome in India capable of producing up to 275,000 tonnes per annum.

Business Outline:

High carbon ferro chrome is primarily used in manufacturing stainless steel, low and medium carbon ferro chrome find their use in the production of special and carbon steel and also for multiple applications.

South Africa has the largest share of chrome ore reserves globally (80%) following by Zimbabwe whereas India has a less than 1% share with most of it found in Odisha

(Source: Company website)

Pros:

• 80% Output is Ferro Chrome output is exported to multiple customers in six countries
• 45% revenues from Long term contracts (So the forthcoming revenues are predictable)
• 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
• Major Fund Houses invested in the stock (As of Mar-17)
• Reliance Mutual fund:         6.41%
• BNP Paribas Mutual fund:   2.70%

Cons:

• Lowering of Chinese economy impact growth prospects, global demand is not much attractive at the moment.
• Price volatility
• Limited reserves of chrome ore
• Low return on equity for last 3 years is at 0.53%
• Poor growth in revenues for last 5 years at 3%

Financial Highlights:

• The Market cap of the company is around Rs.1341 crores
• Book Value is at Rs.400 (Price to book is 1.24- worth investing)
• Currently it is trading at 5.4 and the Industry P/E is at 9.5
• Revenues are grown at 38% in FY 17 and Margins are improved tremendously
• Debt to Equity is at 1.3  (Total Debt of the Company Rs.1033 crores and the Q4 FY 17 profit itself is at 174 crores)

Narration	2012	2013	2014	2015	2016	2017
Sales	1,145.36	1,273.25	1,317.85	1,344.79	1,211.30	1,688.24
Expenses	916.35	1,028.35	1,029.54	1,108.89	1,115.11	1,172.91
Operating Profit	229.01	244.90	288.31	235.90	96.19	515.33
OPM	19.99	19.23	21.88	17.54	7.94	30.52
Net profit	63.93	53.89	39.12	11.98	(54.76)	249.83
EPS	24.61	20.75	15.06	4.61	(21.08)	92.61
Price to earning	12.98	11.40	17.88	42.80	(5.96)	5.12
Price	319.50	236.51	269.24	197.39	125.69	473.80

Management:

• Subhrakant Panda - Managing Director & CEO
• Jayant Misra - Director (Corporate) & COO
• C R Ray - Whole Time Director
• Prem Khandelwal - CFO & Company Secretary
• D K Mohanty - Head-Ferro Alloys Business Unit
• Dhananjaya Senapati - Vice President Manufacturing (Ferro Alloys)

 Rating:

• Technical rating: 71
• Fundamental rating: 75
• Overall rating: 73

Valuations:

With the investment horizon given, considering all the inputs of estimates the valuations are at Rs.2150

Valuations are made at 11X projected FY 20 EPS

(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) 

(Try to buy when the upper circuit is released but keep an eye on it)

ANNUAL REPORT FY 16

ANNUAL REPORT FY 15