ISMT Ltd--- Multibagger Idea by Anand Rathi

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ISMT Ltd


Investment Argument
 ISMT is one of the largest integrated manufacturers of
Precision Seamless tubes [4,75,000 MTs] & Special/Alloy
steel [3,50,000 MTs. Most of the alloy steel production is
used captive for tube making.


 The commissioning of new mill will lead to reduction in cost
of production [by almost Rs 3,000‐5,000 per MTs], as also
enable company to make new grades of seamless tubes
viz. – Powergen & Auto grade tubes, apart from existing
uses in ‐ Oil & Gas and Mining applications.

 Company is also setting up 40 MW Thermal coal based
Captive Power Plant which is scheduled to start generating
usable power during the Q4 of FY 2010‐11. This will
benefit by saving of Rs 35‐40cr /annum in power cost in FY
11‐12, by when better utilisation of PQF mill will also
improve the volumes and margins.

 ISMT has also acquired a 100% stake in Structo Hydraulics
AB, Sweden; which is of the largest and most renowned
manufacturer of tubular component for the Hydraulic
cylinder industry. The strategic benefits for ISMT will be ‐
quick access to growing demand for Hydraulic Cylinder
tubes and components within India and China plus existing
market of Europe.

 With improving economic outlook domestic demand for
its products [seamless tubes] is rising across segments like
in – PowerGen, Automotive, Oil & Gas, Construction,
Mining etc etc. Exports will also grow as major European
countries have recently imposed antidumping duty on
Chinese low cost imports.

Recommendation
We are extremely bullish on the long term outlook of
company and expect significant margin improvement
and earnings growth from FY11‐12. We expect EPS of Rs
7/‐ in FY’11 and over Rs 12/‐ in FY’12. We look for target
of Rs 90/‐ in 6 months, Rs120/‐ in 12 months and still
higher going forward.



Background
ISMT is one of the largest and integrated manufacturers of Precision Seamless tubes in the Asia Pacific region and also manufactures Special/Alloy steel. It has Alloy steel making capacity of 3,50,000 MTs [increased from 2,50,000 MTs]. Most of the alloy steel production is used captively for tube making.

It has recently expanded its tubes capacity also, by three times to 4,75,000 TPA [from 1,55,000 Mts] by setting up a new PQF Mill of latest technology [with Capex of Rs. 375crs.] which was commissioned in June’10. The commissioning of new mill will not only lead to reduction in cost of production, but will also enable the company, to make new grades of seamless tubes viz. – Powergen[Boilers] & Auto grade tubes [Tubular auto components], apart from Oil & Gas[OCTG], Engg, Bearing and Mining applications.

Company is also in the process of setting up 40 MW Thermal coal based Captive Power Plant which is progressing well and is scheduled to start generating usable power during the Q4 of FY 2010‐11.

The PQF Mill technology will help in saving ~Rs.3000‐5000/mt and will also improve economies of scale and also captive power plant will benefit in low cost power by saving Rs 35‐40cr /annum which will overall reduce cost of production gradually with increasing capacity utilisation by next FY i.e. FY 11‐12.

ISMT has also acquired 100% stake in Structo Hydraulics AB, Sweden ‐which is largest and most renowned manufacturer of tubular component for the Hydraulic cylinder industry [40,000 MTs capacity].

Company is also pushing for anti‐dumping duty on Chines tube imports in India, which is hurting the industry.
Risks and concerns

Fluctuations in raw material prices [Sponge/Pig iron] may affect the operating margins for the company. Demand trend from user segments and Chinese competition may have a bearing on margins.

Recommendation
We are extremely bullish on the long term outlook of company and expect significant margin improvement and earnings growth from FY11‐12. We expect EPS of Rs 7/‐ in FY’11 and over Rs 12/‐ in FY’12. We look for target of Rs 90/‐ in 6 months, Rs120/‐ in 12 months and still higher going forward.