Rohit Ferro Tech Ltd. Growth through backward and forward integration CMP Rs. 48 Target Rs 80 Buy

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1 March 9,211 Rohit Ferro Tech Ltd Growth through backward and forward integration CMP Rs. 48 Target Rs 8 Buy Key Share Data Equity Capital (Rs. Crs) Market. Capitalization (Rs. Crs) wk High / Low (Rs.) 67/34 Average Yearly Volume BSE code NSE code ROHITFERRO Reuters code ROHT.BO Bloomberg code ROFT IN Shareholding Pattern 31 st December, 21 21% 1% 3% Source:- Capitaline Financials 66% Promoters Public Non Prom Corp Foreign (Rs. Crs) FY1 FY11E FY12E FY13E Net Sales Sales Gr -6.45% 37.6% 26.5% 13.82% Operating Profit PAT PAT Gr 76% 11.76% 26.31% 31.25% EPS (Rs.) Key Financial Ratios FY1 FY11E FY12E FY13E P/E P/BV MCap/Sales EV/EBIDTA ROCE 16.2% 9.79% 9.71% 11.17% RONW 12.93% 9.79% 1.19% 11.58% OPM(%) 13.79% 1.87% 11.33% 12.61% NPM (%) 4.18% 3.41% 3.42% 4.9% Debt-Equity Source:- Capitaline, SKP Research Performance comparison /8/21 4/8/21 5/8/21 6/8/21 ROHITFERRO vs BSESMALLCAP 7/8/21 8/8/21 9/8/21 Analyst: Pinaki Banerjee 1/8/21 11/8/21 12/8/21 ROHITFERRO BSESMALLCAP Tel No.: ; Mobile: pinaki.banerjee@skpmoneywise.com 1/8/211 2/8/211 3/8/211 Company profile:- Rohit Ferro Tech is engaged in the manufacturing of chromium and manganese-based ferro alloys, such as high carbon ferro chrome, silico manganese and ferro manganese. In October 23, the company commenced commercial production and has grown from strength to strength over the last decade. Investment Rationale To benefit from the growth in the Steel Industry It is one of the major ferro alloys manufacturer in India as well as having an important presence in the international arena with exports contributing 7% of its produce. With the demand for global steel expected to 1625 million tons by CY14 and in India to about 11 million tons by FY19-2 the demand for ferro alloys is expected to remain buoyant. The steel industry is expected to grow on the back of heavy investment in infrastructure projects and auto. Backward Integration Acquisition of coal mines in Indonesia. Setting up of captive power plants. Through these measures the operating margins of the company are expected to improve over a period of time Forward Integration Setting up of a 1, MTPA stainless steel facility in Bishnupur, West Bengal. It is an attempt to forward integrate and to work extensively on the front of end use of the Ferro Alloys. Outlook & Recommendation:- We are positive on its long term growth plans down 2-3 years time period and have valued the company with the Discounted Cash Flow Method by taking a WACC of 1.5% from FY11E to FY15E and a terminal growth rate of 3% thereafter and have arrived at a fair value of Rs 8 per share implying a 67% growth from the current market price to be reached in the next 18 months time period. SKP Securities Ltd Page 1 of 12

2 Overview of the Ferro Alloys Industry Rohit Ferro Tech Ltd. It is used as a raw material for the steel manufacturing process and hence its growth is directly linked to the growth in the steel sector in India as well as the world. They are used in making of mild steel of various categories, alloy steel and stainless steel. Present Status The industry produces about 2.78 MT of which about 25%-3% of the produce are exported every year. The exports are worth Rs 15 million. The country has established itself as a regular exporter of Silico Manganese and HC Ferro Chrome, with major exports into countries like Bangladesh, Europe, Germany, Indonesia, Japan, Korea, USA and UAE. Sources:- SKP Research Number of Units 37 2 Noble Ferro Alloys Ferro Siliocn Chrome Alloys Manganese Alloys Availability of sufficient raw materials, trained manpower and latest equipment and technologies have contributed to the country being recognized as a major Ferro Alloys producing country in the world. The country has the fifth largest chrome ore with an estimated reserve of about 1 million tones and the sixth largest in manganese ore with an estimated reserve of 176 million tones. Million Volt Amperes Transformer Capacity Mid 6's Late 7's During 8's Beginning 9 Present Time Period The current production capacity of the industry as a whole is about 4.4 MT which is sufficient to produce 15 million tons of steel. The country has a 5%-7% share in the global ferro alloys industry with it being among the 1 largest producers of the material in the world. Sources:- SKP Research SKP Securities Ltd Page 2 of 12

3 Future growth expectations Share of Global Steel Production The growth of the industry is directly linked to the growth in the steel sector which in turn is dependent on its user industry as infrastructure and housing, automobiles, consumer durables etc. 42% 58% BRIC Countries Others About 9% of the world ferro alloy production is consumed by the Iron and Steel Industry with the balance 1% being consumed by the engineering sector. The country is currently ranked fourth in steel production and has already produced 69 million tonne of steel in FY1-11 against a production target of 73 million tonne. A number of existing units are going in for expansion with additional capacities for production of ferro alloys and a number of new units are coming up, particularly in Visakhapatnam in Andhra Pradesh and Haldia in West Bengal. In % 65 In Million Tons Growth in Steel production in 29 Asia N.America Europe S.America Africa Regions 124 Global Steel Production CY9 CY12 CY14 Calender Year SKP Securities Ltd Page 3 of 12

4 Targe t t e d P ro d u ct io n L e ve ls in In d ia In Million Tonnes P e rio d Stainless Steel In % In Kg Growth in demand for stainless steel from Rest of World China India 1.2 Regions Per Capita Consumption of Stainless Steel 6 16 India China Japan Germany South Korea Italy Countries India is ranked 1 th in the stainless steel production in the world with a production of about 18 to 2 lakh ton per annum. The consumption of stainless steel in India is about 22 lakh tons per annum whereas exports are worth 2.5 lakh ton per annum. Demand is expected to rise with increased usage from houseware, hardware, furniture, Jewellery, construction and auto segments. The Government of India has recently permitted the usage of stainless steel in manufacturing of gas cylinders. The per capita consumption of stainless steel in India is 1.2kg, which is the lowest in the world. Hence, there is a tremendous scope for increasing production and consumption of stainless steel in India. A Net Investment of US $3 billion has been lined up till 215. SKP Securities Ltd Page 4 of 12

5 Alloy Steel Alloy Steel production is growing in double digits for the last 3-4 years. Strong demand from the construction, manufacturing, white goods and the capital goods sectors are expected to drive the demand further up in the times to come. The demand is expected to grow at a CAGR of 5% till In ' MT Source:- Company Estimated Demand for Alloy and Stainless Steel in India Financial Years Alloy Steel Stainless Steel What shall be the demand drivers? Asia being the fastest growing region in the world and India being the second largest growing economy in Asia. A steady YoY Industrial growth in the country of an average of 8%-9%. Steel consumption in India is only 4kg/Capita(CY21) against a world average of 185 kg thereby providing an enormous opportunity for growth. Availability of adequate resources for raw materials as well as trained manpower. Projected Demand for Steel In India World Steel Consumption In Million Tones Time Kg per Capita India Russia China US Germany Japan South Korea Countries Source:- Company SKP Securities Ltd Page 5 of 12

6 Company profile Rohit Ferro Tech Ltd. Rohit Ferro-Tech Ltd is engaged in the manufacturing of chromium and manganese-based ferro alloys, such as high carbon ferro chrome, silico manganese and ferro manganese. The company manufactures high carbon ferro chrome (HCFeCr), ferro manganese (FeMn) and silico manganese (SiMn) through submerged arc furnace (SAF) route. C o n stitu e n ts o f Fe rro A llo ys Su p p ly 6 % 3 2 % 6 2 % Fe rro & Silico n M n Fe rro C h ro m e O th e rs Source:- Company Increase in production capacity over a period of time Production Capacity The company began its journey in 23 with an installed capacity of 24, mtpa in Bishnupur in West Bengal. The plant currently has a production capacity of 7, mtpa. In 26, the company also set up a 11, mtpa production facility in Jajpur, Orissa. Along with that the capacity utilization rate has also shown a steady increase over the period of time. Steady financial performance It has reported a CAGR of 52% from FY6 to FY1 in its top line and a CAGR of 34% during the same period in its bottom line. FY8 was the best year for the company in terms of financial performance. In FY9, though it reported a rise in its top line, a substantial increase in operating expenses dragged the bottom line down to single digit figures. MTPA Amt In Rs Cr Yr 23 Yr 21 Yr Years Financial Performance FY6 FY7 FY8 FY9 FY1 Financial Years Sales Turnover Net Profit Amt In Rs Cr Source:- Company SKP Securities Ltd Page 6 of 12

7 3% Exports constitute 7% of its sales The total installed capacity of the company was 18, mtpa in FY1 and it exported about 7% of its produce. Sales Exports Domestic Sales In MT Exports FY7 FY8 FY9 FY1 Financial Years Improvement In Capacity Utlization Source:- Company 7% In % FY7 FY8 FY9 FY1 Financial Years Holds a dominant position among its closest competitors The company has the highest sales turnover among its peers though on the bottom line Maithan Alloys scores over it P e e r C om parision on a TTM Basis Sale s N e t Profit Amt In Rs Cr Balasore A lloys Fe rro A lloys Corp M aithan A lloys Rohit Fe rro Com panie s Source:- Capitaline (Figures are available on a TTM basis based on the Dec 1 results) SKP Securities Ltd Page 7 of 12

8 Rationale for investment Growth in the steel industry looks buoyant The steel industry is expected to show a strong growth momentum on the back of growth in the infrastructure and the auto industry. In the Union Budget for , the Finance minister has allocated funds worth Rs 214, cr for infrastructure development. Captive coal mines and power plants to help improve the operating margins The company has already acquired coal mines in Indonesia through its overseas subsidiary giving it access to both thermal and coking coal reserves of about 5 million metric tonne and 2 million metric tonne respectively. It is also in the process of setting up a 67MW power plant as a backward integration process in Jajpur, Orissa in the 1 st Phase for which it has already achieved financial closure. The plant is expected to become operational by Mar 12 and the effect shall be seen from FY Improvement in Operating Margins Increase in production capacity through its Haldia Unit and improvement in overall capacity utilization levels In % FY11E FY12E FY13E Financial Years Production Capacity and Utlization Levels 25 Consolidated Financials 2 18 Production in MT (in Rs. Crores) % Utlization Levels FY1 FY11E FY12E FY13E Financial Year 75 Source:- Company, SKP Research SKP Securities Ltd Page 8 of 12

9 Apart from the 5 X 9 MVA furnaces in Bishnupur with a total production capacity of 7, MTPA and 4 X 16.5 MVA furnaces at Jajpur having a total production capapcity of 11, MTPA, the company is in the process of setting up 6 X 9 MVA furnaces in Haldia having a total capacity of 1, MTPA. Out of the 6 new furnaces 4 have already been operational and the remaining 2 are expected to be come into operation in another 2-3 months time period. The order books of the company especially the export orders are pretty robust and the capacity utilization levels are expected to go up steadily over a period of time. The company s present capacity utilization levels of around 89% is much higher than the overall industry average of about 68%. Forward integration through setting up of a 1, MTPA Stainless steel facility at Bishnupur In an attempt to forward integrate and to work extensively on the front of end use of the Ferro Alloys, the company is in the process of setting up the Stainless steel plant at Bishnupur at an estimated cost of about Rs 1 Cr. The project is expected to be completed by Oct-Nov 211. Exports to be the main revenue drivers in the times to come Amt In Rs Cr Source: Company, SKP Research Source:- Company, SKP Research Total Sales and Exports Exports FY1 FY11E FY12E FY13E Total Sales Exports constitute 7% of the total produce and contributes about 55% to the top line The company has a strong presence in countries of Europe and China, Japan, Slovania, Peru, Ukrain, Egypt and Turkey. Has direct contacts with the steel plants in those respective countries. With the recovery in the global economy taking place slowly and steadily, the exports of the company are expected to go up with the passage of time. SKP Securities Ltd Page 9 of 12

10 Effective Risk Mitigation Key Risks faced by the industry in general High Power tariff High cost of coal and coke Availability of ore Measures to offset them by the company Setting up of captive power plants Acquisition of mines in Indonesia Long term contracts with suppliers, looking for suitable acquisitions However, some key concerns always remain. They are:- High import duty on the basic raw material and cheap imports from outside are some of the major problems the industry faces in general. The Union Finance minister in his budget proposals for has proposed to reduce the basic duty on raw material from 5% to 2.5% bringing some relief. With regard to the anti dumping duties and cheap imports from outside, negotiations are on with the Government in this regard. It is very much essential for the protection of the industry in the long run. Valuations We have valued the company with the Discounted Cash Flow Method by taking a WACC of 1.5% from FY11E to FY15E and a terminal growth rate of 3% thereafter and have arrived at a value of Rs 8 per share implying a 67% growth from the current market price to be reached in the next 18 months time period. PV Of Projected Cash Flows -16 PV Of Terminal Value 6 Total 44 No. of shares outstanding 5.52 Cr Fair Value Per Share 8 Since the company is incurring substantial amount of Capital Expenditure in FY11 and FY12, the Free Cash Flow shall be negative for these two years. However, from FY13, the Free Cash Flow is expected to become positive. Valuations and financial figures are subjected to change once the power plant as well as the Stainless steel plant become operational from FY12 onwards. We have not taken them into consideration for our valuation purpose now. SKP Securities Ltd Page 1 of 12

11 Financials in Rs. Crores Income Statement Particulars FY1 FY11E FY12E FY13E Net sales Growth (%) -6.45% 37.6% 26.5% 13.82% Other Income Stock Adjustments Total Income Raw Material Consumed Power and Fuel Cost Employee Cost Other Mfg Expenses Selling and Admn Expenses Misc Expenses Total Expenditure Operating Profit OPM(%) 13.79% 1.87% 11.33%% 12.61% Interest Depreciation PBT Tax PAT Growth in PAT 76% 11.76% 26.31% 31.25% EPS** NPM(%) 4.18% 3.41% 3.42% 4.9% Dividend Per Sh. (Rs.) **There was a rights issue during FY11 Cash Flow Statement Particulars FY1 FY11E FY12E FY13E Profit before Tax Add: Depreciation, Int. & Other Expenses Net changes in WC, tax interest Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net Increase/Decrease in Cash & Cash Equivalents Opening Cash Balance Closing Cash Balance** **As per FY1 Annual Report closing cash balance is not the same as per the Balance Sheet figures.however, for our own analysis we have taken the closing cash balances as the one that is shown in the projected Balance Sheets. Balance Sheet Particulars FY1 FY11E FY12E FY13E Equity Capital Reserves Share Warrants.... Net worth Secured Loan Unsecured Loan Total Liabilities Net Fixed Assets Capital WIP Investments Inventories Accounts receivable Cash & Bank Loan & Advances Current Assets Current Liab Provisions Total Curr. liab. & prov Net Current Assets Net Deferred Tax Total Assets Key Ratios Particulars FY1 FY11E FY12E FY13E Valuation Ratios P/E P/BV EV/EBIDTA Mkp/Sales Earnings Ratios OPM 13.79% 1.87% 11.33% 12.61% NPM 4.18% 3.41% 3.42% 4.9% ROCE 16.2% 9.79% 9.71% 11.17% RONW 12.93% 9.79% 1.19% 11.58% Balance Sheet Ratios Current Ratio Debt/Equity Debtor days Inventory Days SKP Securities Ltd Page 11 of 12

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