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Sarda Energy & Minerals (SEML) is a manufacturer of steel
products (sponge iron, billets, ingots, TMT bars), with focus
on exports of ferro alloys. We visited company’s Raipur plant
to view existing operations and to understand its future
expansion projects.
Key takeaways
Existing operations: SEML has 360ktpa sponge iron, 200ktpa
steel melting shop, 180ktpa wire rod mill, 600ktpa pellet plant,
82ktpa ferro alloys and 62MW captive power plant at their Raipur
plant. Pellet plant is currently in the stabilisation phase, marked
by high yield losses (~35%). Also because of shortage of iron ore
fines (company’s captive mine is not operational because of
naxalite issues), the pellet plant is operating at below capacity.
Expansion projects: SEML’s 100% subsidiary Sarda Metal and
Alloys is setting up a 125ktpa ferro alloys plant, with 80MW CPP
in Vizag, AP. Financial closure for the capex of Rs5.5bn, in the
debt:equity ratio of 75:25, has been achieved and is scheduled for
completion by end-FY12.
Power: SEML has 61.5MW of operational CPP and awaiting
clearance for additional 18MW, which has already been
commissioned. Further, the company is planning to set-up 350MW
of pit-head power plant in two phases in Raigarh, Chhattisgarh
near its coal mines. Additionally, the company is planning to setup
more than 200MW of hydro power capacity in Sikkim and
Chhattisgarh through its various subsidiaries.
Raw material integration: SEML is one of the few secondarysteel
manufacturers to have operational iron ore and coal mines
for captive consumption. While coal mine in Raigarh is operational
since Q3FY10, iron ore mines in Rajnandgaon have been facing
disruption due to naxal issues. In addition, the company has been
allotted ML/PL for more iron ore, coal and manganese ore mines.
VALUATIONS
At CMP of Rs 311, the stock is trading at 7.0x EV/EBITDA and
9.0x P/E on FY10 basis. On H1FY11 annualised basis
(standalone), the stock is trading at 7.8x EV/EBITDA and 18.3x
P/E. We don’t have a rating on the stock.
Strategic stake sale: Recently, SEML announced preferential allotment of 1.8mn shares
(5.03% of equity post-issue) to Hong Kong based Asia Minerals Ltd (AML) @ Rs510/
share, at 62% premium to its minimum issue price of Rs314. AML has been a strategic
partner of SEML in supplying mn ore for ferro alloys and buying ferro alloys from SEML.
SEML has an option to acquire 5% stake in a project company of AML, which is developing
manganese ore mines in South Africa (Valuation yet to be decided).
Financial performance
H1FY11 performance: In H1FY11, net sales increased by 113% YoY to Rs4.2bn, due to
increase in sales volume of steel and ferro alloys. OPM expanded to 18.2% Vs. 6.8% in
H1FY10 on back of backward integration and rise in higher power sales. PAT rose to
Rs289mn.
Financial leverage: As of H1FY11, SEML has standalone gross debt of Rs5.9bn and
cash and investments of Rs1.2bn, with net D/E of 0.8x.
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