Adhunik Metaliks

Adhunik Metaliks (AML) is part of the Adhunik group, promoted by the Kolkata-based Agarwal family. Its current product portfolio includes sponge iron, pig iron and alloy billets. The company has also initiated rolling of its billets through third party arrangements to meet the current requirement of rolled products in various segments.

AML is setting up an integrated steel plant, with complete backward and forward linkages, at a cost of Rs 437.36 crore. The entire project is to be completed by March 2008. This will cater to user segments like the automobile, engineering and forging sectors. The company proposes to fund the project outlay through an IPO (Rs 100 crore), consortium of term loans (Rs 284.29 crore) and internal accruals (Rs 53.07 crore).

Strengths

• AML will have significant control over its production cost on account of:
• Charging of hot ferro chrome in steel making is expected to reduce energy cost.
• Charging sinter in blast furnace will reduce coke consumption and improve productivity.
• Usage of blast furnace gas in rolling mill and SMS will replace/reduce the consumption of expensive petroleum fuel, cutting down the cost of production
• Captive oxygen plant will replace the expensive liquid oxygen purchased from external sources.
• Captive power plant using blast furnace gas, waste heat/char from DRI, and middlings from washery will reduce the cost of electric energy
• AML plans to consolidate its business model into an integrated value chain with end-to-end capabilities, i.e., from iron-ore and coal to auto-grade special steel and stainless steel; to cater to the rapidly growing automotive components and engineering segment; and compete in the market place by way of effective cost control measures.

• Many players in alloy and special and stainless steel segments have lined up plans for capacity expansion, which may lead to an over supply in the market place.

• Due to its cyclical nature, the dynamics of the steel industry keep changing, depending on factors such as the demand-supply scenario in China and the cost of vital input such as iron ore and coal. Currently, the steel industry is facing pressure on prices on a high base of last year, as China has become a net exporter. Also, on account of rising input costs, the margin of players has crumbled.

• The promoters have few more group companies in the steel business, which can lead to conflict of interest and diversion of attention.

Valuation

AML reported net profit of Rs 9.56 crore in the quarter ended December 2005 as against Rs 7.25 crore in the six months ended September 2005 and Rs 7.1 crore in FY 2005. The jump in net profit was on account of the commissioning of steel melting shop (SMS) from November 2005, commencement of commercial production of the mini-blast furnace from September 2005, and expansion in >???(DRI) capacity from 1,20,000 tonnes per annum to 1,50,000 tonnes per annum, and increase in capacity utilisation of DRI kilns.

At a price band of Rs 37 – 42, AML’s PE works out to be 47.5 – 52.1 times FY 2005 earning and 15.1 – 16.5 times nine-month FY 2006 annualised earning on post-diluted equity. Kalyani Steels, which is an established player, commands a TTM P/E of 15.6, while the sector TTM P/E is 5.8. Most of the players in the special and stainless steel segment are trading at a PE well below 10.