Saturday, August 18, 2012


Recommendation: Book out
Current market price: Rs22
Book out
Key points
  • Unfavourable business environment: ISMT's performance has deteriorated with the softening demand environment and increased foreign exchange (forex) fluctuations. Over the last two quarters, the volumes in the steel segment have dropped by 27.2% year on year (YoY) in Q4FY2012 and by 20.5% YoY in Q1FY2013. The volumes in the tube segment have also dropped by 8.4% YoY in Q4FY2012 and by 6.1% in Q1FY2013. Going ahead, with the gross domestic product forecasts being downgraded to sub-6% levels, the domestic demand is expected to deteriorate which could lead to a further fall in the volumes. ISMT has also been unable to effectively manage forex fluctuations. In the last four quarters, the company has reported a total forex loss Rs50.8 crore, which is close to one-third of its earnings before interest and taxes (EBIT) of Rs146.3 crore in the same period.
  • Limited benefit from its captive power plant: After a long delay in execution, ISMT commissioned its 40MW coal based captive power plant (CCP) in end May 2012. The company was expecting the CPP to save Rs60-65 crore in the power cost. However, it has been unable to secure coal supply at the indicated rates and the cost benefits of captive power supply are likely to get significantly reduced now. This was one of the major re-rating factors for the stock but has not played out well. 
  • Valuation; cheap but could get cheaper: ISMT has got de-rated significantly due to a weak demand environment, margin pressure and its inability to manage forex fluctuation related losses. The long-awaited captive power plant finally got commissioned but in the absence of a secure coal supply at reasonable prices the cost benefits would get curtailed significantly. Thus, the financial performance is unlikely to improve materially in the coming quarters. The stock could continue to languish despite trading at 0.6x its book value. We are, therefore, suspending our coverage on the stock and would advise you to book out of it at the current levels.