Rapid economic development has resulted in greater demand for steel. This has in turn led to a higher demand for ferro chrome, which is used as an alloy in stainless steel.
Rapid economic development has resulted in greater demand for steel. This has in turn led to a higher demand for ferro chrome, which is used as an alloy in stainless steel manufacturing to prevent corrosion; it also adds lustre to steel.
Rohit Ferro Tech Ltd (RFTL) is a leading producer of high-carbon ferro chrome. With a focus on enhancing its global presence, RFTL has embarked on an expansion to augment its capacity from 40,000 MTPA to a total of 1,80,000 MTPA by 2009 fiscal.
Almost 60% of its sales are exports. We expect RFTL to perform exceedingly well on the backdrop of buoyant demand scenario, both domestic and global.
Business
RFTL is a relatively new entrant in the business of manufacturing ferro chrome. But that has not been a deterring factor as it has already carved itself a comfortable position within the industry.
RFTL started operations in October 2003 with a ferro alloy plant comprising 2x9 MVA submerged arc furnaces in Bishnupur, West Bengal.
Later on, it added capacity by installing further 2x9 MVA furnaces to produce 55,000 TPA of high-carbon ferro chrome.
Continuing its expansion activity, RFTL announced the further expansion of its Bishnupur unit by setting up an additional 9 MVA to enhance total capacity to 70,000
TPA which is expected to be completed by February 2008.
RFTL came out with its maiden public offer for raising Rs 50.84 crore to
fund the setting up of 4x16.5 MVA furnaces totalling 1,10,000 MTPA at Jajpur, Orissa.
Jajpur — being close to the largest chrome ore deposits and sea port - offer a logistics advantage.
While two of the furnaces are already operational, RFTL recently announced the production from the third furnace at Jajpur.
The fourth furnace is awaiting power supply from the grid and its production is expected to start by end of November, said Pramod Jain,CFO and company secretary of the company.
With the completion of the expansion, the total capacity would stand at 1,80,000 MTPA, with Jajpur unit contributing 1,10,000 and Bishnupur contributing 70,000 MTPA.
Investment rationale
The demand for ferro chrome is directly linked to the demand for stainless steel. Stainless steel typically contains about 18% chrome and 8% of nickel. The demand for ferro chrome remained strong this year as stainless steelmakers substituted the metal for nickel.
Further as per industry sources ferro chrome prices are expected to rise as much as 50% during 2008 from current levels. The dollar rate for RFTL for new orders is
at $38. Post completion of the expansion, RFTL would perhaps be the largest producer of high-carbon ferro chrome.
Given the demand scenario it is expected that RFTL will have a 100% capacity utilisation rate.
Apart from producing ferro chrome, RFTL also has the capability to produce ferro alloys like silico manganese, ferro manganese and all our furnaces are capable of adapting to the change added Pramod Jain.
Further, the Orissa unit is expected to bring about substantial savings on
account of logistics thereby improving margins.
RFTL has an impressive clientele that includes steel manufacturers like Jindal Stainless, AIA Engineering, Ispat, SAIL and Mukand.
Risk factors
Two risk factors that immediately come to the forefront are raw material availability and power. RFTL is not an integrated player to the extent that it does not have its own mines.
Although RFTL has applied for mining rights for chromites ore, it currently has a tieup with Orissa Mining Corporation. RFTL is expected to enter into a JV with an Iranian company for sourcing chromium ore and coal.
It currently sources nearly 5-10% of raw materials from Indonesia and Iran. We are also looking at acquiring companies with own mines said Pramod Jain. On the power front, RFTL has a long term agreement with West Bengal State Electricity Board and NESCO at competitive rates.
It is also planning a 110 MW captive power plant in the state of Orissa which can result in a savings of almost Rs 85 crore per annum.
Valuations
With demand for steel going up we expect the benefits of expansion to accrue to RFTL. RFTL is traded at one time its book value. It is one of the low PE stock available within the industry.
At the CMP of Rs.56 the stock is available at 3.42 its fiscal 2008 earnings and at 2.16 its fiscal 2009 earnings. We expect the entire benefit of the expansion to come from FY09 onwards.
Investors can take long- term bet on RFTL with a time horizon of one year. The stock has the potential to double from these levels.
Disclaimer: The author does not hold any shares in the company.
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