Friday, June 1, 2012

>ISMT: Power plant commissioned

Sluggish revenues performance: For the quarter ended March 2012, ISMT reported a sluggish revenue performance on the back of a slowdown in domestic demand. Net sales fell 6.5% year on year (YoY) to Rs447.2 crore with a drop in volumes of both the tube and steel segments. The tube and steel segments reported a volume drop of 8.4% and 27.2% respectively. The realisations remained resilient, up 11.7% and 6.4% for tube and steel segments respectively. The company is seeing some sluggishness in the domestic demand and going ahead it remains uncertain about the domestic demand. The export business has continued to pick up pace with export sales accounting for close to 37% of the tube segment sales for FY2012, up from 30% in the previous year. The ‘other operating income’ was benefited by a refund against regulatory liability charges to be received from Maharashtra State Electricity Board of Rs9.9 crore.
OPM decline continues: The operating profit margin (OPM) continued its downward trend. For the quarter, the OPM was down 180 basis points to 10.9%. The drop in OPM can be attributed to the drop in volumes which led to higher fixed costs as a percentage of sales. The power & fuel costs also increased in the quarter with the power cost up to Rs7.03 per unit up from Rs5.97 per unit in Q4FY2011. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel segment declined by 337bps to 8.5% whereas that of the tube segment fell by 170 basis points to 6.3%. Going ahead we expect the margins to improve on the back of lower power cost on commissioning of the 40MW power unit. We have maintained a subdued margin performance going ahead on the back of sluggish demand environment in FY2013.

Forex charge dents bottom line: Despite the rupee appreciating against the US dollar in the quarter, the company saw the adverse impact of higher foreign exchange (forex) loss of Rs12.3 crore up 416% on rupee depreciation and adoption of AS-30. Also, the interest\ charges were higher by 44.9% YoY to Rs37 crore. On the back of tax credit of Rs6.1 crore, the net loss was restricted to Rs2.2 crore against a profit of Rs17 crore in the corresponding quarter of the previous year.

Power plant commissioned: The company has announced the commissioning of the 40MW captive power plant at Chandrapur district, Maharashtra on May 28, 2012. The commissioning of the power plant would help in lowering the power costs for the company. The company has applied for coal linkages, however, we expect the same to take time and hence the company would have to acquire the coal from e-auctions leading to a higher coal price. Currently, the power costs are on an average at Rs6.7-7 per unit. We have assumed a lower plant load factor (PLF) for FY2013. For FY2013, we are now expecting savings of Rs29.2 crore and Rs45.7 crore in FY2014 as the PLF increases.

Valuation and view: The quarter gone by saw the company being impacted by the sluggish domestic demand with the margin fall continuing. However, the export side of the business has been picking up pace. Going ahead we have revised downwards our FY2013 estimates and introduced our FY2014 estimates. We believe that the demand environment would gradually improve from the third quarter of FY2013 and expect a better FY2014. On the margins front, with the commissioning of the power plant, we expect the margins to be safeguarded. We roll over our multiple to FY2014, lower our target multiple to 5x FY2014 estimates and arrive at a reduced price target of Rs29 maintaining our Buy rating on the stock.