Tulsyan NEC Steel - A Steal :)

On Tulsyan NEC

This Company is listed on BSE as well as NSE. It got its listing permission from NSE a couple of months back. This is a company, which is in two lines of business: Steel and woven sacks. The company manufactures TMT bars, MS alloys and billets in the steel division. They also manufacture HTP and PP woven sacks. Tulsyan NEC is not ideally one of those steel companies which you would want it to be in terms of backward linkages. The company as of now doesn’t have any backward linkages. It buys steel scrap/sponge iron for manufacture of steel and it also buys power from the grid. It doesn’t have its own captive power source.


But if you look at the other positives of the company, this company is available at a market cap of just about Rs 33 crore. The company does sales revenue of about Rs 650-700 crore. This company has been a profit making company for the past 15 years. It has made profit not just at the operational level but also in the net level in the last 15 years. The company has got a track record of dividend for the last ten years which is uninterrupted – even during the worse phases of the steel cycle this company has paid dividend in the last 10 years.
The company made an operating profit of about Rs 46 crore last year and operating profit for the first nine-months is about Rs 31 crore. PAT for first nine months is about Rs 4.5 crore, which results in an annualized EPS of about Rs 12. At the current price of about Rs 65 this stock is trading at a PE multiple of about 5-6.
The other good thing happening here is that the company is now going in for backward linkages, about 2-3 months back this company has acquired a sponge iron plant called Chitrakoot Steel and Power Limited, which has got a 30,000 tonne per annum for sponge iron capacity, which they are increasing further to about 1 lakh tonne per annum. The company is also putting up a 35 megawatt power plant. They have already acquired about 75 acre of land. This will be operational in Q3 2011, which is FY12.
Considering all this, the company had been making good profits for the past 15 years without any backward linkages. Now the backward linkages are coming. The market cap of the company is just about Rs 33 crore – even assuming a 1% increase in net profit margins on a sales of Rs 700 crore results with an EPS increase of about Rs 14.
Of course, this is not an ideal steel company in terms of linkages but its available at a market cap just about Rs 33 crore on sales of Rs 700 crore. The downside from these levels looks extremely restricted but once the linkages are there, obviously, the profitability will go up. Also there is a potential for huge upscale increase in profits after the linkages are available.
So at the current price of Rs 60-65 I think it’s a stock to accumulate for the next maybe two years. Once the linkages are in place the profits can go up really sharply.

GPIL - As Reliable as Steel

Strong growth in the domestic infrastructure sector has boosted many allied business segments, including companies which manufacture steel wires and rods. 

There are a number of small players in this segment, but only companies with large volumes and backward integration capabilities are expected to do well. Godawari Power and Ispat (GPIL) is one such player. GPIL has invested in a steel billet unit, sponge-iron production plant, iron ore and non-coking coal mines, with the aim of insulating itself from the vagaries of input prices and improving operating profit margins. At the current price level GPIL’s financials and future plans make it an ideal pick for investors with a 2-3 year horizon. 

BUSINESS: GPIL manufactures mild steel wires, which are used as binding wire and barbed wire. To manufacture this end product, it produces all the required raw materials. 

This gives it two advantages — firstly, it is independent of the variability in the supply in raw materials, and secondly, it generates a higher operating margin. It also utilises waste heat generated during sponge iron-making process to produce power. This makes it self-sufficient in power. GPIL also manufactures ferro-alloy, which provides better operating margins. 

GROWTH DRIVERS: GPIL has been allotted an iron ore mine with estimated reserves of 15 million tonnes (mt), the final approval for which is pending. Once the company obtains this approval, it will take around four months to start mining the ore. This means the company will have sufficient captive iron ore supply for the next 30 years. 

This will also increase its operating margin to 35-40% of its net sales from the current 18%. GPIL is setting up a pellet plant at a cost of Rs 235 crore, which will utilise the iron ore fines to make quality coke. 

This will improve its capacity utilisation. The company was granted a sales tax waiver of Rs 300 crore in early ’00, which can be utilised till ’11. This will directly add to its bottomline. 

FINANCIALS: The company’s net sales and net profit have witnessed a compound annual growth rate (CAGR) of 59.8% and 89.8%, respectively in the past three years. Its current market capitalisation, at Rs 685 crore, is 1.55 times its FY07 net sales, which is the same as the industry average. GPIL’s operating margin, at around 18%, is nearly double that of peers like Ramsarup Industries and Bansal Wire Industries. Similarly, GPIL’s return on capital employed (RoCE) and return on equity (RoE) are 20% and 30%, respectively — slightly higher than that of other players in this segment.

VALUATIONS: The effect of the new pellet plant, captive iron ore and coal mines will be reflected in the company’s financials in FY10 and will also help to improve its operating margin to around 35%. The estimated EPS for FY09 and FY10 are Rs 47 and Rs 107, respectively. This translates into forward P/E multiples of 5.6x and 2.5x, respectively, at the current price level, providing sufficient upside growth potential. The EV/EBITDA multiples for FY09 and FY10 are 4.0 and 2.0, respectively. 

Moreover, if GPIL increases its dividend payout ratio consistent with the past two years, it will result in a 10% dividend yield after three years at historical investment cost. Hence, investors are advised to buy this stock at current levels of Rs 265 with a horizon of 2-3 years.