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Buy Sathavahana Ispat

January 4, 2008

Sathavahana Ispat (SIL), a standalone pig iron manufacturer with capacity of 210,000 TPA is stepping ahead as an integrated pig iron producer. It has commissioned 300,000 TPA of metallurgical coke and is on the verge of completing a 30 MW waste heat based power plant.

The company is setting up 30 MW cogen power plant. As it is waste heat based, cost of power generation is a meager Rs.1.2 per unit against selling price of Rs.3 per unit, representing net margins of approximately 60%. It is also increasing its power capacity by another 33% to 40 MW by Dec’08. Coke production – The company has commissioned 300,000 TPA coke plant at cost of Rs.1.1 bn in Mar’07. It requires 160,000 TPA of coke for captive consumption while the remaining it would sell in open market. The plant has stabilized and running at 79% utilization, we expect the impact would be visible in Q3 & Q4, FY08 numbers. Strategic tie up with Stemcor Holdings – Recently, Stemcor Holdings has taken 14.7% stake in SIL at Rs.60 per share. This association with SIL should help it in raw material procurement and finished goods sales contracting.

Expect SIL to grow its net sales and net profit at a CAGR of 28.8% and 68.1% to Rs.5.2 bn and Rs.667 mn respectively in FY10E over FY07. Currently it is trading at 6.7x its FY09E EPS of Rs.13 and 4.4x its FY10E EPS of Rs.20.Based on 14x average FY09-10E EPS of Rs.8.3, value of power business comes to Rs.116 per share and 7x average EPS of Rs.8.2, value of pig iron and coke business comes to Rs.58. Buy with a Target price of Rs 174

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