MSP Steel and Power aims to treble profit in two years

MSP Steel and Power Ltd, Kolkata-based steel player, is aiming at doubling revenues and trebling profits by fiscal 2013 on the back of its huge backward integration plans.

While the company is still relatively small according to its sales numbers, analysts say it is the company’s strategy of backward and forward integration that will take it to the big league of steel players.

The company posted revenues of `395 crore and net profit of `32 crore for the last fiscal. This year it is expected to post a jump of at least 33% and 72% in sales and net profit, respectively, analysts tracking the company say.

Saket Agarwal, promoter-director, MSP, said, “We have a capex plan of Rs815 crore till fiscal 2013 which is mainly to strengthen our backward integration plans.” This was to be invested in two phases, out of which the first phase is complete and the second phase has begun.

“In the first phase, we expanded our sponge iron capacity from 192,000 tonne per annum (tpa) to 307,000 tpa at an investment of close to Rs240 crore,” he said.

Under the second phase, MSP will expand its power generation and pellet capacity and operationalise its coal and iron ore mines, which are expected to be complete by fiscal 2013. It is increasing its power capacity to 76 megawatts (mw) from 42 mw currently and pellet capacity to 900,000 tpa from the current 300,000 tpa at present, besides bringing its mines onstream.

The company had been awarded a 26 million tonne coal mine and a 35 million tonne iron ore mine in Chhattisgarh, which will start production from 2013.

“With the operationalisation of mines, the company will become a completely integrated steel player. The mines will add significantly to its margins and bring down production costs,” said Rahul Sonthalia, vice-president, portfolio management services, MPA Finsecurities.

Agarwal said it is only on the back of backward integration that the company will see a major jump in its revenues and profits.

MSP currently sells four main products in the market — pellet, sponge iron, TMT bars and heavy structural steel products. It also has a fungible model wherein it can swap billet production by selling power on a merchant basis in the open market.

“Billet production is a very power intensive activity and it makes no sense to make billets if the power cost crosses `3.50 per unit. Therefore, whenever that happens we stop production of billets and start selling power,” said Agarwal.

Besides, with the increase in its power capacity, the company will also have surplus power to sell on a merchant basis. Post expansion, its power requirement will not be more than 40mw.

However, a Crisil Research report published after the company’s last quarterly results said, “MSP’s expansion plans are on track and, therefore, we expect it to register significant growth going ahead. However, concerns relating to high leverage (net debt : equity of 2.8x for FY11E) remain.”

But it said that since MSP completed its first phase of expansion five months before schedule, it expects that the company will be able to complete the remaining capacity expansion on time.