SURANA INDUSTRIES LTD Result Update: Q3 FY 11 C.M.P: Rs.320.00 Target Price: Rs.370.00 Date: 19 th April 2011 BUY Stock Data: Sector: Steel Face Value Rs. Rs.10.00 52 wk. High/Low (Rs.) 330.00/215.50 Volume (2 wk. Avg.) 4501 BSE Code 513597 Market Cap (Rs.In mn) 8686.6 Share Holding Pattern SYNOPSIS Surana Industries Limited is a fully integrated steel manufacturing enterprise and is one of the major TMT bars manufacturer. It offers a wide range of steel products. Surana Industries has proposed to enter into IT enabled services (ITES) business. The net sales and net profit of the company are expected to grow at a CAGR of 13% and 16% respectively over FY09 to FY12E. 1 Year Comparative Graph During the quarter the company net Profit stood at Rs.82.28mn from Rs.69.18mn of the corresponding period of the previous year. Surana Industries completes acquisition of 100% stake of Surana Mines, Minerals Pte Ltd. BSE SENSEX Surana Industries Ltd Years Net sales EBITDA Net Profit EPS P/E FY 10 9450.20 1199.90 347.20 12.79 25.18 FY 11E 11076.72 1568.15 429.45 15.82 20.36 FY 12E 12428.08 1758.60 512.92 18.89 17.04 1
Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Surana Industries Ltd 320.00 8686.6 15.51 20.63 1.81 15.00 SAIL 169.75 701135.5 13.22 12.84 2.10 33.00 Kalyani Steels Ltd 87.60 3824.0 14.36 6.10 1.38 25.00 Nava Bharat Ventures Ltd 274.00 2478.28 38.65 7.09 1.55 450.00 *As on 19/04/2011 Investment Highlights Results Updates (Q3 FY11) For the third quarter, the top line of the company increased 12%YoY and stood at Rs.2616.01mn against Rs.2344.08mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs.82.28mn from Rs.69.18mn of the corresponding period of the previous year i.e. a increase of 19%YoY. 2
EPS of the company for the quarter stood at Rs.3.03 for equity share of Rs.10.00 each. Expenditure for the quarter stood at Rs.2244.40mn, and there will be no change when compared to the corresponding period of the previous year. Production, Raw material and Manufacturing expenses of the company for the quarter accounts for 95% of the sales of the company and stood at Rs.2483.62mn. Employee cost stood at Rs.79.79mn from Rs.78.69mn.i.e., an increase of 1%YoY. 3
OPM and NPM for the quarter stood at 15% and 3% respectively from 17% and 3% respectively of the same period of the last year. Acquisition of stake in Surana Mines, Minerals Pte Ltd. Surana Industries Limited has acquired 15000001 Equity Shares of Singapore Dollars One each, of Surana Mines and Minerals Pte Limited, Singapore (Company incorporated in Singapore), constituting 100% of their paid up equity share capital, for a total purchase consideration of Indian Rupees 52.65 crores from Surana Power Limited (which is a 100% subsidiary of the Company). The consideration will be paid in due course and exact amount will be the conversion rate of Singapore Dollar on the date of actual transaction. With this acquisition M/s Surana Mines and Minerals Pte Limited become a 100% direct subsidiary of Surana Industries Limited. 4
Company Profile Surana entered in the field of steel by trading business from 1986-1994. On 12th march 1991; "surana metals & steels (India) limited" was incorporated as a public limited company. Since 1991, the Surana Group has been focusing on creation of high standards in their production fields. The company is headquartered in Chennai, India. In 2000, Surana Added A Power Wing, for its captive Consumption, Utilizing (Non Conventional) Wind Energy. From 5th February 2002, Surana Had Its Name Changed & Thus Was Born "Surana Industries Limited". Modernization Surana Industries Limited is one of the major TMT (thermo mechanically treated) bars manufacturer located in Chennai and sourced Eurotherm DEL India Limited to modernize their plant located at Gummidipoondi around 45KM from Chennai. The infrastructure advantage of Surana's fully integrated steel manufacturing plant is complete with Programmable Logic Controllers (PLC), where in the entire process is fully computerized. The means, the operations are faster and predictably accurate. Being the only plant in the private sector in Southern India, Surana offers a good value addition to the industry by studying and employing global trends in TMT processes. Manufacturing plants: Gummidipoondi Plant Raichur Plant Raichur Integrated Steel Plant 5
Group Companies Surana Corporation Limited Subsidiary Companies Surana Power Limited Surana Mines and Minerals Limited Surana Green Power Limited Products Surana offers Steel, can be described as high-strength steel having superior properties such as weldability, ductility and bendability meeting highest quality standards at domestic level. MS Billets MS Ingots CTD Bars Ms Wires rods Ms Structural o o o o o MS Rounds MS Angles MS Channels MS Beams MS Joist MOU with SAIL SIL is an accredited / authorized conversion agent of SAIL for TMT BARS and has also entered into MOU with SAIL (Steel Authority of India Ltd.) & LTC (Long Term Contact) with RINL (Rashtriya Ispat Nigam Ltd). 6
Financial Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY09 FY10 FY11E FY12E Description 12m 12m 12m 12m Net Sales 8711.34 9450.20 11076.72 12428.08 Other Income 30.81 333.20 53.29 55.95 Total Income 8742.15 9783.40 11130.01 12484.03 Expenditure -7766.71-8583.50-9561.86-10725.43 Operating Profit 975.44 1199.90 1568.15 1758.60 Interest -352.85-575.10-776.78-851.64 Gross profit 622.59 624.80 791.38 906.96 Depreciation -122.90-220.40-223.14-232.07 Profit Before Tax 499.69 404.40 568.24 674.89 Tax -174.74-57.20-138.78-161.97 Net Profit 324.95 347.20 429.45 512.92 Equity capital 201.50 271.50 271.50 271.50 Reserves 2188.13 4517.60 4947.05 5459.97 Face Value 10.00 10.00 10.00 10.00 Total No. of Shares 20.15 27.15 27.15 27.15 EPS 16.13 12.79 15.82 18.89 7
Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 30-Jun-10 30-Sep-10 31-Dec-10 31-Mar-11E Description 3m 3m 3m 3m Net sales 2745.39 2759.23 2616.01 2956.09 Other income 26.87 9.49 8.38 8.55 Total Income 2772.26 2768.72 2624.39 2964.64 Expenditure -2446.45-2334.68-2244.40-2536.33 Operating profit 325.81 434.04 379.99 428.31 Interest -170.71-164.29-215.50-226.28 Gross profit 155.10 269.75 164.49 202.04 Depreciation -55.23-55.56-55.62-56.73 Profit Before Tax 99.87 214.19 108.87 145.31 Tax -16.59-62.18-26.59-33.42 Net Profit 83.28 152.01 82.28 111.88 Equity capital 271.50 271.50 271.50 271.50 Face Value 10.00 10.00 10.00 10.00 Total No. of Shares 27.15 27.15 27.15 27.15 EPS 3.07 5.60 3.03 4.12 8
Key Ratio Particulars FY09 A FY10 A FY11 E FY12 E EBIDTA % 11% 13% 14% 14% PAT % 4% 4% 4% 4% P/E ratio (x) 19.97 25.18 20.36 17.04 ROE - % 14% 7% 8% 9% ROCE - % 9% 8% 11% 11% EV/EBIDITA (x) 2.48 6.07 6.24 6.21 Debt Equity Ratio 3.05 1.49 1.44 1.38 Price/Book Value 1.01 1.83 1.68 1.53 Charts: Net sales & PAT 9
P/E Ratio (x) P/BV (X) 10
EV/EBITDA(X) Outlook and Conclusion At the market price of Rs.320.00, the stock is trading at 20.36 x and 17.04 x for FY11E and FY12E respectively. On the basis of EV/EBDITA, the stock trades at 6.24 x for FY11E and 6.21 x for FY12E. Price to book value of the company is expected to be at 1.68 x for FY11E and 1.53 x for FY12E respectively. EPS of the company is expected to be at Rs.15.82 and Rs.18.89 for the earnings of FY11E and FY12E respectively. The top line and bottom line of the company are expected to grow at a CAGR of 13% and 16% respectively over FY09 to FY12E. We recommend BUY this stock with a target price of Rs.370.00 for medium to long term investment. 11
Industry Overview Sector structure/market size India became the fourth largest producer of crude steel in the world in 2010 as against the eighth position in 2003 and is expected to become the second largest producer of crude steel in the world by 2015. India also maintained its lead position as the world s largest producer of direct reduced iron (DRI) or sponge iron. Led by strong demand for autos and engineering services, the domestic steel demand in India remains robust, as per Moody's sectoral analysis on Asia's steel sector. According to the analysis, the outlook for the domestic operating environment is positive, driven by robust growth in infrastructure, autos and construction and constrains on additional supply by 2011. Production As per provisional data released by World Steel Association (WSA), India was the fourth largest producer of crude steel during January September 2010. India produced 50.1 million tonnes (MT) crude steel during the period under review. Capacity for crude steel production expanded from 51.17 million tonnes per annum (mtpa) in 2005-06 to 72.96 mtpa in 2009-10. Crude steel production grew at 8.4 per cent annually from 46.46 MT in 2005-06 to 64.88 MT in 2009-10.As per the latest estimates, the crude steel capacity in the country is likely to reach 120 MT by 2012 from 72.9 MT in the 2009-10. Production for sale of finished steel stood at 59.69 MT during 2009-10 as against 46.57 MT in 2005-06, an average annual growth of 6.5 per cent. Production for sale of finished steel during April-October 2010-11 stood at 35.595 MT and was up by 4.4 per cent over the corresponding period of the previous year. Public sector steel companies Steel Authority of India Ltd. (SAIL) and Rashtriya Ispat Nigam Ltd. (RINL) are in the process of expanding their crude steel capacities. SAIL envisages increasing its crude steel production from existing 12.84 Mt to 21.40 MT per annum in Phase-I to be completed by 2012-13 at an approximate estimated cost of US$ 15.23 billion including cost of mine development. RINL is expanding its existing capacity of 2.9 MT of crude steel production to 6.3 MT per annum to be completed by December, 2011 at an estimated cost of US$ 26.60 million. Another public sector company, NMDC Ltd., is to set up a 3 MT per annum integrated steel plant at Nagarnar, Chhattisgarh at an estimated investment of US$ 33.78 million. The Plant is likely to be commissioned in 2014. Tata Steel registered sales of 5.9 MT during the third quarter ended December 2010, while Steel Authority of India Ltd (SAIL) sold 3.25 MT steel in Q3 FY'11, registering a growth of 10.7 per cent over Q3 FY'10. Meanwhile, JSW Steel s production during the quarter grew by 11 per cent to 1.636 MT. 12
Consumption The domestic steel consumption grew by 9.8 per cent to 29.82 MT during April- September 2010 over the year-ago period, on the back of steady demand from sectors like automobile and consumer durables. As per the provisional data from the Ministry of Steel, consumption was at 27.15 MT in the same period a year ago. In September 2010, steel consumption rose 4.1 per cent to 4.72 MT, against 4.53 MT in the year-ago period. Major Developments A host of steel companies have lined up major investment proposals. Furthermore, with an expanding consumer market, the Indian steel industry is likely to receive huge domestic and foreign investments. Tata Steel plans to invest US$ 22.5 million to commission its proposed ferroalloys plant and bar mill at its industrial park at Gopalpur and a greenfield steel plant at Kalinga Nagar. JSW Steel plans to invest US$ 16.86 billion over the next 10 years to ramp up capacity from 7.8 million tonne per annum (MTPA) to 32 mtpa through greenfield and brownfield projects. Japan's Nippon Steel will begin a manufacturing operation in India making steel pipes for use in automobiles and plans to invest US$ 36.91 million on production and sales operations. Tata Steel plans to ink a pact with Japan-based Nippon Steel Corporation (NSC). The proposed joint venture (JV) with a 50:50 holding would be set up at an investment of US$ 537.37 million for producing auto-grade steel. Visakhapatnam Steel Plant (VSP) has entered into a memorandum of understanding (MoU) with the Central Public Works Department (CPWD) to develop a new stockyard here near Ukkunagaram township and augment its facilities at Hyderabad stockyard. The Ukkunagaram project would cost US$ 3.7 million while the Hyderabad one is estimated at US$ 1.70 million. Essar Steel and Kobe Steel of Japan have entered into a memorandum of understanding (MoU) to produce autograde steel in India. Steel Authority of India Ltd has signed a memorandum of understanding (MoU) with Japanese steelmaker Kobe Steel Ltd for a comprehensive strategic collaboration covering technologies, projects and other areas. India's largest miner NMDC has signed a pact with Russian steel and mining major Severstal to set up a 5 million tonne per annum steel plant in Karnataka as part of a strategy that aims to boost the company's revenue by increasing presence in value added product chain. 13
National Aluminium Company (Nalco), JSW Steel and Jaiprakash Industries have evinced interest in setting up an alumina refinery and aluminium smelter in Kutch. The 1 million tonne per annum (TPA) alumina refinery project and 0.5 million TPA smelter project involves expenditure of US$ 2.20 billion. Sunflag Iron and Steel Ltd, makers of automobile spring steel, has announced a technical tie-up with Japanese speciality steel maker Daido Steel Ltd. JSW Steel plans to infuse US$ 83.54 million in Ispat industries in the next 2-3 years. Government Initiative As per the Press Information Bureau, during 2009, the government took a number of fiscal and administrative steps to contain steel prices. Central value added tax (CENVAT) on steel items was reduced from 14 per cent to 10 per cent with effect from February 2009. Moreover, in the Union Budget 2010-11, the government has allocated US$ 37.4 billion to the infrastructure sector and has increased the allocation for road transport by 13 per cent to US$ 4.3 billion which will further promote the steel industry. In order to encourage R&D activities in iron and steel sector, Ministry of Steel is providing financial assistance from Steel Development Fund (SDF) and Plan Fund. 64 research projects initiated by public and private undertakings, research laboratories, educational and other promotional institutions have so far been approved at a cost of US$ 98.45 million during 2010, of which the SDF component is US$ 61.92 million. So far 31 projects have been completed and 24 research projects are underway. US$ 26.28 million was allocated from Plan Fund during the 11th five year plan for promotion of R & D in steel sector. Under this scheme eight R& D projects have been approved with Plan fund of US$ 24.72 million. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 14
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