Adhunik to benefit from mining, power foray

As the domestic economy continues to remain on firm footing, infrastructure spending and consumption would continue to spur the demand for steel products.

Adhunik Metaliks, a mid-size steel player is set to reap the benefits of its backward integration plans, ramp up in merchant mining volumes and its recent foray into power segment.

Business
Adhunik Metaliks manufactures alloy steel, special steel and stainless steel, catering to automobile, engineering, power, oil & gas and construction sectors. The company has recently diversified itself into the mining and power segments to generate additional revenues.

Steel segment: The company derives about 84% of revenues from this segment. It focuses on value added products from its single manufacturing plant, which has a total installed capacity to produce 0.45 mtpa of steel. Adhunik has an installed capacity to produce around 0.21 mtpa of pig iron and 0.3 mtpa of sponge iron. The company is looking to expand its sponge iron making capacity from 0.3 mtpa to 0.4 mtpa in next two years.

Adhunik’s focus to up the share of alloy revenues to total sales from 54% to 70% in the coming years would result in better realisations, increasing revenues.

The company sources 40% of its iron ore requirements from the merchant mines of its subsidiary, Orissa Manganese & Minerals (OMML). Adhunik has been allocated captive iron ore mines with reserves of 25 mt, which are expected to be partly operational in next 3-4 months. These would help company to meet close to 60% of total ore requirements in FY12. Also, the company has been allocated captive coal mines which are expected to get operational by FY13.  Adhunik is able to meet 40% of the power requirement in-house, through its captive plant  of 34 mw currently, which is being ramped up to generate 80 mw in the next two years.

Mining segment: This high-margin segment contributed 16% of consolidated revenues in FY10, which is expected to grow substantially as mining volumes go up. Adhunik, through OMML, possesses iron ore and manganese ore mines with reserves of 97 mt and 53 mt, respectively, both of which are expected to last over 30 years. The company, which mined 1.15 mt of iron ore and 0.14 mt of manganese ore last year, plans to enhance production gradually over next 1-2 years resulting in higher sales.

Furthermore, the company plans to set up 1.2 mtpa pelletisation plant (expected by Q4FY12), an iron-ore beneficiation plant 0.05mtpa ferro alloys plant along with 30 mw captive power plant, to convert low-grade materials into pellets which would provide better realizations.

Power segment: The company is also venturing into the merchant power business through its subsidiary Adhunik Power and Natural Resources Ltd (APNRL), which is planning to set up a 1080 mw thermal power plant, to be commissioned in three phases.  The company has already achieved financial closure of the first two phases of 270 mw each to be commissioned by April 2012. APNRL has signed a power purchase agreement with Tata Power for selling 100 mw.

Investment rationale:
Adhunik’s backward and forward integration efforts would result in huge benefits for the company in 2-3 years. Through forward integration, the company is looking to increase sales of value-added products ands this is likely to result in improved realisations and higher revenues.

The firm’s efforts to ramp up the capacities of finished value-added steel products from 0.45 mtpa currently to 1.2 mtpa by FY15, on back of improving demand from automobiles and construction sector will help the company to garner higher volumes and sales.

Captive raw material sourcing through its iron ore and coal mines is likely to ensure fuel security and reduce costs, aiding net profit margins. Rise in production volumes in its mining business and improved realisations from planned investments would further boost revenues and margins. The management expects the power business to contribute 20% to company’s consolidated revenues from FY13 onwards.

Concerns
Any slowdown in the auto and construction sectors may impact volumes and a fall in prices of ore and steel may also lead to lower revenues. Adhunik also faces execution risks in adding additional capacities both in steel and power segments. Any delays in its captive mines getting operational due to environmental issues or otherwise could also lead to delay in accrual of benefits and thereby impacting the profits.

Valuations
Driven by higher volumes in its steel and merchant mining businesses, Adhunik’s revenues are expected to grow at a compounded annual growth rate (CAGR) of 24% over FY10-FY12. Net profit is likely to grow at a CAGR of 47% on benefits out of backward integration and higher margins in the mining segment. At a current market price of Rs116.30, the stock trades at P/E ratio of 6.35 times expected FY11 earnings and 4.87 times FY12 expected earnings respectively. The stock can be looked at current levels from long term perspective.

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