Iron & Steel August 22, 2012 CMP Rs. 104.4 BSE Code 513005 BSE ID VBCFERROQ High/Low 1Y (Rs.) 206.5 / 100.6 Average Volume (3M) 1,204 Market Cap (Rs. Cr.) 46 Shareholding % June-12 Mar-12 Promoters 36.74 36.74 DIIs # 0.17 0.17 FIIs # 0 0 Public & Others 63.09 63.09 Stock Chart ( Relative to Sensex) 175 125 75 25 22-Aug-11 22-Feb-12 22-Aug-12 VBC Ferro Stock Perfm.(%) 1M 6M 1Yr VBC FERRO -11.9-34.8-39.3 Sensex 5.7-1.3 8.2 Financials FY10 FY11 FY12 Revenue 83.8 112.4 107.1 Y-o-Y 3.9% 34.1% -4.8% EBITDA 8.7 19.2 14.9 Y-o-Y 30.8% 120.7% -22.2% Net Profit 5.2 10.2 8.0 Y-o-Y 7.1 1.0 (0.2) EPS (Dil.) 11.8 23.2 18.3 EBITDA Margin 10.4% 17.1% 13.9% Net Profit Margin 6.2% 9.1% 7.5% P/E(x) 8.9x 4.5x 5.7x Financial year ends at March 31 on consolidated basis. All figures in Rs. crores except for per share data # FIIs- Foreign Institutional Investors # DIIs- Domestic Institutional Investors Sensex VBC Ferro Alloys Ltd. Company Overview Founded in 1967, VBC was incorporated by Dr. M.V.V.S. Murthi in the name of Vizag Bottling Company. In 1981, as a diversification strategy, VBC Ferro Alloys was incorporated to manufacture Ferro Alloys. The company has set up its plant at Rudraram Village, Andhra Pradesh with two 16.5 MVA Arc Furnaces. To capture opportunities in power generation, the company has invested in Konaseema Gas Power Ltd(KGPL) and Orissa Power Consortium Ltd. Company Fundamentals Expansion underway The company is currently in the midst of implementing multiple expansion projects. Timely completion of these projects, which have suffered delays in the recent past, will improve the company s topline as well as its operating margin. Captive power plant to improve competitiveness Production of ferro alloys is power intensive. As a result availability of consistent power supply at appropriate tariffs ensures a compettitive advantage. The trend within the industry is to invest in captive power plants. VBC Ferro Alloys has followed the trend and invested in a captive power plant. Completion of this power plant will improve the company s profitability, as the high power tariffs in India tend to make producers of ferro alloys vulnerable to threats from cheaper imports. Diversification into Power Generation Currently, the Ferro alloy capacity in the country is in excess. Capacities have been built in anticipation of the robust growth of the country before the global economic crisis in 2008. On the other hand power generation is in deficit in the country. The company s move to diversify into power generation in collaboration with its group companies will enable it to derisk its business. Comfort in interest coverage ratio The company s expansion plans in collaboration with its group company are debt based. With respect to this, the company s interest coverage ratio and debt to equity ratio are healthy. Over the past four years, the company s financials have grown from strength to strength, barring its performance in FY12, when revenue declined by 4.8%. Key Strengths - Completion of expansion to improve revenue - Establishment of captive power plant to improve profitability Initiative of the BSE Investors Protection Fund -1-
Company Business VBC Ferro Alloys traces its roots to a diversification strategy in 1981 of the VBC group, which is promoted by Dr. M.V.V.S. Murthi. While the primary activity of the company is production of ferro alloys, it has invested in power generation activities in collaboration with its group companies. The company is presently manufacturing Ferro Silicon, Ferro Manganese and Ferro Chrome and Silicon Manganese. These products are mainly consumed by the stainless steel industry. During FY11 the company s realisations of Ferro Silicon improved by 21%. The company has only a small exposure to global markets and the company is an ISO 9001:2000 certified company. VBC Ferro Alloys Facilities Particulars Description Capacity Rudraram Village, Medak District, Andhra Pradesh Konaseema Gas Power Limited (KGPL) Samal Barrage Hydro Electric Project operated by Orissa Power Consortium Limited (OPCL) Source: Annual Report and company website 2X16.5 MVA arc furnaces for producing Ferro Alloys Natural gas based combinedcycle power plant Hydro Electric Power Project 24000 tonnes of Ferro Silicon/ 48000 tonnes of Silico Manganese/ Ferrochrome 445 MW 20 MW The company is currently in the midst of implementing multiple expansion projects. For the captive thermal power plant, the company has obtained coal linkage from nearby M/s Western Coal Fields Limited and has acquired land measuring 150 Acres (approx). For KGPL, the company has enetered into a power purchase agreement with power distribution companies in Andhra Pradesh for 23 years at 85% plant load factor. VBC Ferro Alloys Expansion Plans Location Description Capacity Bodepalli Village, Sirpur Kagaznagar Mandal, Adilabad District, Andhra Pradesh Coal based Captive Power Plant 2x60MW(120MW) Ferro alloy production 3x9MVA N.A Estimated Project Cost Rs 632 crore KGPL, Devrapalli, Andhra Pradesh Source: Annual Report and company website Natural gas based combinedcycle power plant Increase existing facility by 820MW Rs 2800 crore As per latest disclosures the two power plants in which the company has invested have posted losses. While delays in supply of gas led to setbacks in KGPL, a poor monsoon adversely affected operations of the Samal Barrage Hydro electric power plant. Following accumulation of losses in 1996 the company was sanctioned a rehabilitation scheme, and the company was successfully discharged from Board for Industrial and Financial Reconstruction in 2001. The company s operating margins imporved significantly in FY11, however, the poor economic environment led to a discernible decline in margins in FY12. Inspite of the expansion plans underway the company continues to operate at a comfortable interest coverage ratio. This should come as a comfort to investors, since the company has pledged its equity shares in KGPL and OPCL against term loans for expansion. Initiative of the BSE Investors Protection Fund -2-
Tonnes VBC Ferro Alloys Ltd. Industry Overview The demand for Ferro alloys is derived and is dependent on the steel production in the country. Ferro alloys are used in production of mild steel, carbon steel, special alloy steel and stainless steel in the country. Based on the infrastructure spend in the country, the demand for steel is likely to increase in the near term. According to the Indian Ferro Alloys Producers' Association (IFAPA), the industry s present capacity is around 5.15 Million Tonnes. This is sufficient to meet the domestic requirement of more than 120 million tonnes of steel. According to estimates by SteelWorld, Ferro alloys' production in India has shot up to 2.87 million tonnes in FY11 as compared to 2.63 million tonnes in the previous year. Inspite of this, as per IFAPA, the capacity utilisation of the industry has declined to 62% in FY11 as compared to 65% in the previous year. The availability of manganese ore has become very critical in the country, and the industry has already started importing manganese ore in large volumes. At the other end, the Ferro alloy industry is under constant pressure from cheaper imports. The industry was protected from imports in the form of import duty, however, following liberalization this import duty was nil by 2007-08. The custom duty was restored to 5% from January 2009 onwards. The high power costs in the country tips the price balance in favour of imports. The manufacture of Ferro Alloys is highly power-intensive, on an average 40% of the total cost per tonne of Ferro alloys is accounted for by power. As such, producers, who have captive power generation, are protected against volatile market trends in this industry. Growth of Ferro Silicon 120,000 110,000 110,742 117,000 100,000 92,632 96,972 97,682 90,000 Source: IFAPA Ferro Silicon 2006-07 2007-08 2008-09 2009-10 2010-11 (P) The key raw material used in the production process is manganese ore. The availability of manganese ore has become very critical in the country, and according to data collated by Steel World, the industry has begun importing large quantities of the raw material. Competitor Analysis We have compared VBC Ferro alloys with its closest peers, and barring Balasore Alloys, the company is relatively better placed. Company Year End CMP M Cap Revenue EBIT Margin EPS VBC Ferro Alloy Mar-12 104.45 45.96 107.05 12.98% 18.25 5.7x Balasore Alloys Mar-12 13.83 88.93 596.67 15.80% 4.97 2.8x Ferro Alloys Co Mar-12 7.71 142.87 487.06 1.32% - - Impex Ferro Tech Mar-12 6 40.48 526.39 4.71% 0.69 8.7x Source: Company Financials, BSE, Capitaline, ICRA Online Research Market cap and Revenue in Rs. Crores; P/E Initiative of the BSE Investors Protection Fund -3-
Summary Financials Particulars (Rs crore) FY10 FY11 FY12 Net Sales 83.8 112.4 107.1 Other Op. Revenue 0.0 0.0 0.0 Total Revenue 83.8 112.4 107.1 Growth (%) 3.9% 34.1% -4.8% Cost of Goods Sold (62.5) (79.2) (77.4) Gross Profit 21.4 33.2 29.6 Employee Costs (5.6) (7.0) (7.6) Other Expenditure (7.0) (7.0) (7.0) EBITDA 8.7 19.2 14.9 Growth (%) 30.9% 120.6% -22.2% Depreciation (1.5) (1.3) (1.0) EBIT Profit 7.2 17.9 13.9 Finance cost (3.2) (3.8) (4.5) Other Income 3.8 1.3 2.3 Exceptional Items 0.0 0.0 0.0 PBT 7.8 15.4 11.7 Growth (%) 661.3% 98.9% -24.5% Income Tax (2.6) (5.2) (3.6) Profit after Tax 5.2 10.2 8.0 Extra Ordinary Items 0.0 0.0 0.0 Net Profit 5.2 10.2 8.0 Growth (%) 709.2% 96.4% -21.1% Earnings Per Share (EPS) 11.8 23.2 18.3 Equity Capital 4.4 4.4 4.4 Face value 10 10 10 Ratio Analysis FY10 FY11 FY12 Margins EBITDA Margin (%) 10.4% 17.1% 13.9% Net Profit Margin (%) 6.2% 9.1% 7.5% Valuation BVPS 309.9 329.6 344.4 P/E (x) 8.9 4.5 5.7 P/BV (x) 0.3 0.3 0.3 Profitability ROCE (%) - 11.0% 8.2% RONW (%) 3.8% 7.0% 5.3% Solvency Ratio Debt/ Equity Ratio (x) 0.27 0.28 0.33 Interest Cover (x) 2.2 4.8 3.1 Initiative of the BSE Investors Protection Fund -4-
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