Weekender January 6 th, 2012 Index Closing Chg Chg(%) Sensex 15867.73 412.81 2.7% Nifty 4754.1 129.80 2.8% Auto 8174.39 30.74 0.4% Bankex 9736.04 582.65 6.4% Cap Goods 8546.71 479.08 5.9% Cons Durables 5379.17 94.84 1.8% FMCG 4032.07-3.24-0.1% Healthcare 5971.04 100.52 1.7% IT 5878.21 126.28 2.2% Metal 9775.19 482.02 5.2% Oil & Gas 7688.49 159.22 2.1% Power 1837.73 41.78 2.3% Realty 1388.61 12.96 0.9% World Index Closing Chg(`) Chg(%) Dow Jones 12415.70 128.66 1.0% Nasdaq 2669.86 56.12 2.1% Hang Seng 18593.06 158.67 0.9% Nikkei 225 8390.35-65.00-0.8% FTSE 100 5641.10 68.82 1.2% Brazil Bovespa 58546.08 1792.00 3.2% Russia RTS 1416.39 34.52 2.5% Mexico Bolspa 37017.95-167.78-0.5% Singapore Strait 2715.59 69.24 2.6% As on Friday 4pm Top Gainers Closing Chg(`) Chg(%) MMTC Ltd. 826.7 288.8 53.7% Hind. Copper 270.9 84.65 45.4% Rashtriya Chemicals 56.45 10.2 22.1% Allahabad Bank 132.4 17.3 15.0% Shriram Trans.Fi 480.25 60.85 14.5% As on 06th Jan,12 Top Losers Closing Chg(`) Chg(%) Hero MotoCorp 1735-170.25-8.9% Bajaj Auto Ltd. 1459.2-133.6-8.4% Adani Enterprises Lt 269.9-23.75-8.1% Oil India Ltd. 1114.75-77.6-6.5% Wockhardt Ltd. 261.25-14.8-5.4% As on 06th Jan,12 Metal Closing Chg Chg(%) Gold($/oz) 1622.09 58.39 3.7% Silver($/oz) 29.34 1.49 5.4% Aluminium($/MT) 2452.75 478.75 24.3% Copper($/MT) 9587.00 2173.25 29.3% Lead($/MT) 2681.00 705.50 35.7% Zinc($/MT) 2457.00 641.25 35.3% As on Friday 4pm Date DII(cash) FII(Cash) FII(FO) 2-Jan-12 53.1 272 113.43 3-Jan-12 6.7 153.7 214.31 4-Jan-12-67.8 363.7 81.44 5-Jan-12 NA 169.7-1015.82 6-Jan-12 NA NA NA NA- Not Available ADR's Closing Chg($) Chg(%) Infosys 54.01 2.68 5.2% ICICI Bank 28.46 2.2 8.4% HDFC BANK 27.07 1.21 4.7% Tata Motors 19.1 2.21 13.1% Wipro 10.12 0.01 0.1% As on Thursday SNAP SHOT During the week ended 6 th January 2012, key benchmark indices closed positive mainly due to some positive developments by the Govt. The government's decision to allow qualified foreign investors to invest directly in local equities helped the market register gains. Data showing a sharp improvement in manufacturing activity in Dec 2011 and a steep decline in food inflation in late Dec 11 underpinned sentiment. Furthermore, comments by RBI governor that the central bank is likely to begin easing monetary policy to address concerns about economic growth also boosted sentiment. FIIs bought shares worth `381.42 crore on 5 th Jan 12, as per provisional data from the stock exchanges. FII inflow totaled `775.78 crore in three trading sessions on 3 rd to 5 th January 2012. Food inflation plunged into the negative territory in the 4 th week of December mainly due to base effect, data released by the government showed on 5 th January 2011. Food inflation shrank by 3.36% in the week ended December 24, after rising by 0.42% in the preceding week. Inflation in the Primary Articles group fell to 0.1% in the week under review, from 2.7% in the week ended December 17. The near term major trigger for the market is 3QFY12 corporate results. Infosys and housing finance major HDFC kick start the Q3 Dec 11 earnings season on 12 th Jan 12, among major companies. The focus will be on guidance from the company managements on outlook for the remaining part of the year and for the next year. Analysts expect weak 3Q12 results due to lower volume growth in a slowing economy, higher raw material costs and higher interest charges. On the macro front, data on IIP for November 2011 on 12 th January 2012, could provide cues on the central bank's likely policy stance at the third quarter review of Monetary Policy 2011-12 scheduled on 24 January 2012. 4800 4750 4700 4650 4600 4636.75 4624.3 Nifty 4765.3 4749.65 4749.95 4754.1 30-Dec 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan Global Economic Update United States: US Mortgage Bankers Association s Index decreased by 4.1% For the week ended December 16, 2011 compared to prior
Research Desk GDR's Closing Chg($) Chg(%) RIL 27.34 0.74 2.8% SBI 63.45-0.55-0.9% L&T 20.5 1.36 7.1% Banking Data Credit growth 4235421 46377 1.1% Deposit growth 5710061 62797 1.1% ECONOMIC CALENDAR Date Economic Data Previous 11-Jan MBA Mortgage Applications -4.10% 12-Jan Advance Retail Sales 0.00 12-Jan Initial Jobless Claims 372K 12-Jan 13-Jan 3595K -$43.5B 12-Jan Industrial Production (YoY) -0.02 12-Jan BOE ANNOUNCES RATES 0.50% 12-Jan Current Account (EURO) 10.3B 12-Jan Trade Balance 11.6B 12-Jan Trade Balance - BOP Basis 305.5B 12-Jan 12/02/201 1(`Crs) UNITED STATES Continuing Claims Trade Balance UNITED KINGDOM GERMANY JAPAN Chg(`Crs) Japan Buying Foreign Stocks Primary Articles Inflation Chg(%) 5.7B week fall of 2.6%. The group refinancing gauge was down by 2.5% and purchases Index decreased by 9.6% for the same period. US vehicles Seasonally Adjusted Annualized Selling Rate (SAAR) for December 2011 was 13.48 million down from 13.59 million in November 2011. Initial Jobless claims increased by 15,000 to 372,000 from earlier week revised figure of 387,000 for the week ended December 31,2011 Continuing claims decreased by 22,000 to 3.595 million for the week ended Dec 24, 2011 from earlier revised claims of 3.617 million of previous week. UK & Europe: Asia: UK s lenders granted 52,854 loans to buy homes in December compared to 52,786 granted in month of November. UK service index rose to a five month high in December. The purchasing manager service index rose to 54 from 52.1 in November. Germany Unemployment fell a seasonally adjusted 22000 to 2.89 million in December. The adjusted jobless rate dropped to 6.8% Japan s December vehicle sales rose 23.5% in December compared to 24.1% recorded in November. Japan Investors were net buyers of foreign bonds and securities during the week ended Dec.16 having net purchase of 2729.7 billion Yen. 6.92% 5.48% CURRENCY, CRUDE & G-SEC 3.78% 2.70% 0.10% 26-Nov 3-Dec 10-Dec 17-Dec 24-Dec 77.4 77.2 77.0 76.8 76.9 USD-JPY 76.74 76.72 77.12 77.16 53.4 53.2 53.0 52.8 52.7 53.0 USD - INR 53.1 53.1 53.2 76.6 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan 52.6 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan 103.6 102.7 101.7 100.8 99.8 Crude($/bbl) 103.22 102.96 101.81 102.19 99.9 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan Govt.Yield 8.85% 8.70% 8.57% 8.55% 8.52% 8.45% 8.40% 8.34% 8.29% 8.25% 9-Dec 16-Dec 23-Dec 30-Dec 6-Jan 2
Research Desk TATA SPONGE IRON LTD (TSIL) CMP (06/01/12): `249.70 Rec: BUY Target: `307.7 Upside: 23.2% Eq. Capital (FV `10): `15.40 Crs Market Cap: `385 Crs Shareholding: Promoters-43.67%, FII-6.80%, Public & Others-37.04%, FIs & MFs-12.49% 52-w H/L: `393/232.60 Company Profile Incorporated in 1982, Tata Sponge Iron Ltd (TSIL) - formerly known as Ipitata Sponge Iron - was set up as J.V between Tata Steel Ltd (Tata Steel) and the Industrial Promotion and Investment Corporation of Orissa (IPICOL). TSIL became an associate company of Tata Steel in 1991 (after Tata Steel took 39.74% stake in the company). TSIL is a leading manufacturer of sponge iron, which is used as a raw material in steel manufacturing and is one of the best managed sponge iron plants in the country. TSIL produces premium & consistent quality sponge iron for its valued customers and it is the first Indian Sponge Iron Company to be accredited with ISO 9002 certification. Manufacturing Capacity: 3,90,000 TPA of sponge iron + 26 MW captive power plant The company has its manufacturing facility located at Bilaipada (in Joda Block of Keonjhar District in Orissa) and has an installed capacity of 3,90,000 TPA of sponge iron. The company also has two captive power plants that generate 26 MW of power from the waste heat of exit gases from its kilns; the power generated is in excess of what the company needs for internal consumption. About 93% of TSIL revenue comes from sponge iron (Tata Steel itself contributes ~30% of TSIL revenue) and ~7% from power. INVESTMENT POSITIVES Fully Integrated nature of Operations: Strategic tie-up with Tata Steel > Raw material security Coal along with Iron ore are the two major costs incurred for producing sponge iron. The coal prices have been moving upwards continuously, which adversely affects profitability of companies. TSIL has a long-term strategic tie-up with Tata Steel for the assured supply of iron ore which insulates it from price volatility in spot market. Tata Steel is among the top ten steel manufacturers in the world. It operates in more than 20 countries and has a commercial presence in over 50. TSIL procures almost 100% supplies of iron ore from Tata Steel with an attractive discount to market price, thus leading to better margins compared to other players. Tata Steel itself contributes ~30% of TSIL revenue (FY11). TSIL also has leased equipment to Tata Steel to operate the Khondbond iron ore mine and it receives iron ore at significantly lower cost. TSIL has 45% stake in Talchar coal block which has estimated reserves of ~120mn tonnes for captive consumption. The block has received environmental clearance while forest clearance is still pending. As coal constitute about 55% of raw material cost this potential backward linkage of coal will help in improving margins moving forward. Sponge Iron preferred over steel scrap by secondary steel producers Sponge iron is is used in making high quality steels. As a metallic, sponge iron is being preferred to steel scrap by secondary steel producers operating induction and electric arc furnaces for producing long products for catering to the construction and infrastructure sectors. As the Government is encouraging infrastructure development, the demand for long products is likely to improve in the future. 3
Realization/ton Capacity Utilization Research Desk Sponge Iron production in India witnessed a CAGR of 14.77% during the period FY05-10. Production growth is expected to accelerate during FY11-13E on account of a strong demand from the secondary steel industry, which uses sponge iron for manufacturing steel. High Capacity Utilization with improving realization Capacity Utilization of plants has improved over the past five years. The plant was operating at ~98% capacity utilization level in FY11 from ~53% in FY06. However for the last quarter capacity utilization remained low because of shortage of iron ore supply due to unrest caused by villagers surrounding the supplier mine leading to disruption in transportation. Also growth in steel consumption in India slowed down significantly to around 2.5% in the first six months of the current financial year from around 14.5% in the corresponding period last year. On full year basis too capacity utilization is going to remain low because of shortage of iron ore supply due to mining ban in Karnataka. Realization/ton is likely to remain high as sponge iron prices are at three year high. 19,000 100% 17,000 90% 15,000 80% 13,000 70% 11,000 60% 9,000 FY06 FY07 FY08 FY09 FY10 FY11 50% Realization/ton Capacity Utilization Healthy Earnings track record TSIL net sales have grown at a CAGR of 23.6% in the past 5 years (FY07-11). Like-wise, PAT has grown at a CAGR of 47.8% during the same period. Net profit has grown 108.7% on Y-o-Y to `21.73 Crs in 2QFY12 from `10.41 Crs recorded in 2QFY11. This was mainly due to ~59% Y-o-Y increase in realization of sponge iron. Current sponge iron prices are at a 3 year high in domestic market because of shortage of Iron ore supply due to mining ban in Karnataka and regulatory rigor in Barbil (Odisha) region. 4
FY 1994 FY 1995 FY 1996 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Research Desk Strong Financials Zero debt company + High cash balance + strong operating cash flows TSIL is a debt free company with high cash balance. The Cash & Bank balance on the Balance Sheet as on 30 th Sep 2011 was `183.09 Crs, Investments at `60.16 Crs and Other Current Assets at `3.81 Crs. The Cash Per Share works out to be ~`160. The latest Book Value per Share (BVPS) for this stock is at ~`360 which is much higher than its current market price. Thus P/BVPS currently stood at 0.70x. Strong operating cash flows since last 5 years. Gross block has been stagnant at ~ `350 Crs since FY07. However, there exists a Capital WIP of `129 Crs for FY11 on balance sheet. This will increase the earning capacity once the new capacities will be on stream. Impressive Shareholding: (shareholding > 1%) Source: Capitaline Consistent dividend payout track record The company has rewarded its shareholders by paying Dividends consistently since year 1994 without skipping a year. TSIL has paid dividend of `8 /- per equity share of `10 /- each (80%) fully paid, in FY11. 90 80 70 60 50 40 30 20 10 0 Dividend (%) Concerns Volatility in raw material prices of coal and iron ore has affected the margins of the company as it forms major portion of expenditure. Regulatory clearance may take longer time than expected. 5
Research Desk Valuation We believe the stock is at attractive valuation given its strong business model, high cash balance and debt free status. At the CMP of `249.70, the stock is trading at 3.65x its FY13E EPS of `68.39. We recommend BUY on the stock with a 12-18 months target price of `307.70, providing an upside of 23.2% from the current levels. Financials Source: Company Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and it s affiliates may act as market maker or have assumed an underwriting position in the secureties of companies discussed herein and may sell them to or buy them from customers on a principal basis. 6