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TSIL, a manufacturer of sponge iron, has an installed capacity
of 3,90,000MTPA and a 26MW captive power plant. The
company plans to expand its captive power plant capacity by
25MW to 51MW over a period of 2-3 years. TSIL gets 100%
supplies of iron ore from Tata Steel at subsidised rates. TSIL is a
cash-rich company with ROIC of ~65% for FY2012E. We
recommend Buy on TSIL with a target price of `469, based on
target P/B of 1.2 and implied P/E of 6.5 for FY2012E. These
valuations do not include the 45% stake in Talcher coal block in
Orissa (estimated reserves of 120mn tonnes for captive
consumption), which may lead to further upsides.
Assured supply of iron ore through Tata Steel to give higher
margins as compared to peers: TSIL has a long-term supply
agreement with Tata Steel for assured supply of iron ore for
uninterrupted production. Tata Steel supplies iron ore from its
Khondbond mine in Orissa, at a 20-25% discount from the
market price, leading to at least 5% higher operating margin
from other non-integrated sponge players.
Cost efficiency due to higher capacity utilization compared to
industry: TSIL operates at a capacity utilization of c88% compared
to the industry average of 66% which makes is most efficient in
terms of maintaining its costs which also contributes to its EBITDA
margins being higher compared to peers.
Stake in coal block can drive further upsides: TSIL has a 45%
stake in Talcher coal block in Orissa, which has estimated reserves
of 120mn tonnes for captive consumption, in which forest
clearance is pending. The company sources ~60% of its raw
material from Coal India and imports the remaining from Africa.
TSIL has received environmental clearance for the coal block
and, in FY2010, deposited `97cr with the Government of Orissa
for acquisition of part of the land. Progress on forest clearance
could be a potential trigger for the stock.
Substantially high return ratios due to lower cost of iron ore:
TSIL reported ROIC of ~65% for FY2011, exceptionally higher
than other industry players, driven by lower iron ore cost. We
expect the company's ROIC to be maintained at to ~65% in
FY2012E, driven by higher sponge iron prices. The company is
forcasted to have net cash of ~`236cr by FY2012E end.
Outlook and valuation: We maintain Buy on TSIL because of its
low valuations, with a revised target price of `469, an upside of
33% from current levels. At the CMP of `354, the stock is trading
at P/E of 4.9x its FY2012E and P/B of 0.9 for FY2012E. These
valuations do not include investment in the coal block, since it is
expected to commence after FY2012; however, it could provide
a potential upside to the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TSIL, a manufacturer of sponge iron, has an installed capacity
of 3,90,000MTPA and a 26MW captive power plant. The
company plans to expand its captive power plant capacity by
25MW to 51MW over a period of 2-3 years. TSIL gets 100%
supplies of iron ore from Tata Steel at subsidised rates. TSIL is a
cash-rich company with ROIC of ~65% for FY2012E. We
recommend Buy on TSIL with a target price of `469, based on
target P/B of 1.2 and implied P/E of 6.5 for FY2012E. These
valuations do not include the 45% stake in Talcher coal block in
Orissa (estimated reserves of 120mn tonnes for captive
consumption), which may lead to further upsides.
Assured supply of iron ore through Tata Steel to give higher
margins as compared to peers: TSIL has a long-term supply
agreement with Tata Steel for assured supply of iron ore for
uninterrupted production. Tata Steel supplies iron ore from its
Khondbond mine in Orissa, at a 20-25% discount from the
market price, leading to at least 5% higher operating margin
from other non-integrated sponge players.
Cost efficiency due to higher capacity utilization compared to
industry: TSIL operates at a capacity utilization of c88% compared
to the industry average of 66% which makes is most efficient in
terms of maintaining its costs which also contributes to its EBITDA
margins being higher compared to peers.
Stake in coal block can drive further upsides: TSIL has a 45%
stake in Talcher coal block in Orissa, which has estimated reserves
of 120mn tonnes for captive consumption, in which forest
clearance is pending. The company sources ~60% of its raw
material from Coal India and imports the remaining from Africa.
TSIL has received environmental clearance for the coal block
and, in FY2010, deposited `97cr with the Government of Orissa
for acquisition of part of the land. Progress on forest clearance
could be a potential trigger for the stock.
Substantially high return ratios due to lower cost of iron ore:
TSIL reported ROIC of ~65% for FY2011, exceptionally higher
than other industry players, driven by lower iron ore cost. We
expect the company's ROIC to be maintained at to ~65% in
FY2012E, driven by higher sponge iron prices. The company is
forcasted to have net cash of ~`236cr by FY2012E end.
Outlook and valuation: We maintain Buy on TSIL because of its
low valuations, with a revised target price of `469, an upside of
33% from current levels. At the CMP of `354, the stock is trading
at P/E of 4.9x its FY2012E and P/B of 0.9 for FY2012E. These
valuations do not include investment in the coal block, since it is
expected to commence after FY2012; however, it could provide
a potential upside to the stock.
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