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Topline boosted by higher sales volume: SEML’s 2QFY2011 top line grew by
96.3% yoy to `200cr on the back of a) higher ferro alloy and billet sales volume
and b) improved realisations. During the quarter, ferro alloy sales grew by 97.2%
yoy and 10.3% qoq to 15,217 tonnes and billet sales increased to 17,078 tonnes
(1,829 tonnes in 2QFY2010 and 5,104 tonnes in 1QFY2011). Ferro alloy
realisations increased by 34.5% yoy to `67,385/tonne. During the quarter, SEML
produced 18,741 tonnes (54,615 tonnes in 1QFY2011) of pellets as the plant
was shut down for 49 days for maintenance work.
Margins impacted due to higher iron ore and manganese ore cost: On a
sequential basis, margins declined to 8.1% as compared to 23% in 1QFY2011
because of higher iron ore and manganese ore cost. However, on a yoy basis,
raw-material costs (as a percentage of sales) declined to 70% (74.5% in
2QFY2010) on account of usage of captive coal from Karwahi mine. EBITDA
grew by 162.1% yoy to `16cr as margins expanded by 202bp yoy (2QFY2010
margins were impacted due to fire). Other income increased by 451.2% yoy to
`12cr, which included profit on sale of marketable investments. Adjusted for forex
gain of `16cr, net profit increased to `1.4cr (loss of `4cr in 2QFY2010), but
declined by 94.9% qoq.
Outlook and valuation: We believe SEML is well poised to benefit from
backward integration into coal and iron ore, commercial production of pellets
and increased power and ferro alloy production. We maintain Accumulate on the
stock with a Target Price of `290, valuing the stock at 5.0x FY2012E
EV/EBITDA.
Other result highlights
During the quarter, SEML produced 18,741 tonnes (54,615 tonnes in
1QFY2011) of pellets as the plant was shut down for 49 days for maintenance
work. Going ahead, pellet production is expected to resume to the levels of
1QFY2011 with an upward bias.
Sponge iron sales fell by 30.4% yoy and 35.9% qoq to 32,832 tonnes and
power sales declined by 69.8% yoy and 85.8% qoq due to increased captive
usage in billet production.
In the current quarter, though there is some pressure on ferro alloy
realizations, the company expects it to remain at higher levels.
The Dongabore iron ore mine is currently not operational; however, the
company is transporting iron ore stock lying at the mine to its plant for captive
consumption. The company expects iron ore mining to start in the coming
quarter.
Other expenses were up by 142.7% yoy and 25.4% qoq to `34cr on account
of increased stores and spares consumed in the recently commissioned wire
rod and pellet plant.
Investment rationale
Captive iron ore and coal to lower costs: We expect SEML to earn incremental
EBITDA of `33cr and `36cr in FY2011E and FY2012E, respectively, on account of
securing coal from its captive mines. Moreover, SEML has started shipping iron ore
from its Dongarbore mines, which was affected by Naxal activities last year.
Pellet production to lower raw-material costs: SEML has started commercial
production of its 0.6mn tonne pellet plant in April 2010. Over the last six months,
management has successfully resolved most of the structural problems. We expect
the plant to operate at 45% and 50% utilisation levels in FY2011E and FY2012E,
thereby resulting in savings of `88cr and `105cr, respectively.
Ferro alloy sales volume and power production to increase: Ferro alloy sales
volumes are likely to increase by 58.5% in FY2011E. Further, we expect power
generation to increase by 40.6% yoy as last year’s operations were disrupted by
fire. SEML is expanding its power capacity by a) 50% to 90MW at its Raipur plant
and b) setting up an 80MW plant near its coal mine; we have not factored these
expansions in our estimates, as they are subject to regulatory approvals.
Outlook and valuation
We believe SEML is well poised to benefit from a) backward integration into coal
and iron ore, b) commercial production of pellets and c) increased power and
ferro alloy production. We expect the full benefits of captive coal to reflect in
FY2011E as the coal mine started operations in 3QFY2010. Moreover, an uptick
in ferro alloy prices accompanied by a 58.5% jump in volumes and a 40.6%
increase in power generation is expected to boost EBITDA by 189.6% yoy in
FY2011E to `222cr. We maintain Accumulate on the stock with a Target Price of
`290, valuing the stock at 5.0x FY2012E EV/EBITDA.
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