Integration, expansion lift Adhunik Metaliks’ prospects

Adhunik Metaliks Ltd, the flagship company of the Adhunik group, is a well-known player in iron & steel and ferrous alloy industry. It is the only integrated steel player in India which offers merchant mining and merchant power along with specialty steel and alloys. The group’s manufacturing facilities are located in West Bengal, Orissa, Jharkhand and Meghalaya, which are rich in raw material resources and provide easier logistics.
Business: Adhunik’s integrated steel plant is located in Rourkela, Orissa.

It produces value added steel, alloy steel and stainless steel products. Its cost-effective production model is supported by all allied facilities like coal washery, captive power, ferro alloy unit, railway sidings, etc. It sells steel products in the form of billets and rolled products.

Adhunik’s wholly owned subsidiary, Orissa Manganese and Minerals Ltd, is among the few mining companies in India that sell iron ore and manganese ore for merchant sales. Its efforts on the natural reserves of coal, iron ore and manganese are of huge significance. It has a reserve of 90 million tonne (mt) of iron ore and 50 mt of manganese. It produces 120 kilo tonne (kt) of iron ore and 25 kt of manganese ore per month. It sells ores in the form of lumps in the domestic market, which has huge demand. Fines generated in mining are used for future value additions. It is exploring opportunities in contract coal mining.

Adhunik forayed into merchant power business through its subsidiary Adhunik Power and Natural Resources Ltd (APNRL). It has MoUs with the Jharkhand, Chhattisgarh and Bihar governments for setting up a 1,000 mw thermal power plant. While it is setting up plants at Jamshedpur, the ones at Bihar and Chhattisgarh await coal linkages. Its Bihar power project for 660 mw already has land allocations, and clearances will take off once the coal linkages are complete.

Investment rationale: Adhunik has expanded its capacities at Rourkela to 0.45 mt in the first quarter and the benefits are likely to accrue soon. Its captive iron ore mines will commence operations by end of this financial year and benefits will accrue in the next financial year. Coal mines will take 2-3 years. Captive iron ore and coal along with captive power plant will add to margins and insulate the firm from price volatility.
It is integrating and consolidating steel business vertical and merchant mining and merchant power.

The three verticals together will result in expansion of value proposition. Massive ramping up of ore production from merchant mines is in progress. The production is slated to be increased to 1.5 mt of iron ore and 0.3 mt of manganese this year itself. These will be further scaled to 2.5 mt and 0.5 mt respectively in the next phase.

Adhunik’s wholly owned subsidiary Orissa Manganese would invest Rs 700 crore in two years for iron-ore benefaction and pelletisation plant at Jharkhand along with a 30 mw power plant for ferro alloy facility at Orissa.  About Rs 450 crore will be invested through internal accruals while remaining Rs 250 crore will be through debt, private equity or an IPO, a company source said.

The capex is for value addition as low-grade iron ore fines will be pelletised while low-grade manganese ore will be converted to ferro alloys improving realisation and margins. This also provides opportunity for additional mines as the government prefers miners producing value added products. Adhunik has received all clearances including ones from ministry of environment and forests for 6 manganese and 2 iron ore projects. Two manganese and one iron ore mines are operational at present.

APNRL is setting up merchant power plant 540 mw (2X 270 mw) at Jamshedpur. It has achieved clearances and placed order for a boil turbine & generator with Bharat Heavy Electricals Ltd. Total cost of project is around Rs 2,650 crore, of which Rs 2,000 crore is through debt while rest through internal accruals and private equity. With equity coming in, the stake of Adhunik in APNRL will be reduced from 98% to 55%. About 80% of debt has already been closed and remaining to be closed soon.

For fuel source it has captive coal blocks (138 mt) in 50:50 joint venture with Tata Steel. Its share thereby stands at 69 mt and this block is likely to commence production in next 2-3 years. The power purchase agreement for 100 mw at a minimum rate of Rs 2.75 per unit is in place with Tata Power Trading Company Ltd (TPTCL). Any price realisation above Rs 2.75 by TPTCL will be shared between APNRL and TPTCL in a ratio of 85:15. 

Concerns: Adhunik has forayed into new business areas of mining and power. Any delays in captive iron ore or coal mines being operational may impact estimated revenues. It also has high-cost debts, and interest costs had pulled down net profit in first quarter.

However, the efforts are on to convert high-cost debts to low-cost ones.Valuations: Adhunik clocked in revenues of Rs 268.37 crore in the first quarter ending June. This was 18.34% lower than last year’s figures due to fall in price realisations.

Operating margins, however, improved whooping 917 basis points on account of contributions by the high-margin merchant mining business. But the new business also increased depreciation costs, and higher interests costs dented profits.

Net profit at Rs 18.19 crore was 22.58% lower than the Rs 23.50 crore posted in the first quarter of the last fiscal. Going forward we expect improved volumes in steel business as benefits of capacity expansions will accrue. Margins will also see an upside from the third quarter as efforts on backward integration, etc will continue. Merchant mining will continue providing boost to consolidated margins.

Capacity expansions in steel and scaled-up activities in merchant mining space will lead to revenue growth. From the next fiscal, the contribution by captive linkages of iron ore and merchant power business will fall with the first phase of Jamshedpur plant getting commissioned by December 2011.

These indicate considerable upside to the stock from the current levels, making it a good bet for investors with medium- to long-term investment horizon.

Disclaimer: The writer does not hold any share in the company