The strong infrastructure spending will boost demand for steel, which will lead to higher sponge iron demand in the near future. The surge in demand for sponge iron led to a rise in prices by 50% over the last two years. Expect demand in India to witness 12-14% CAGR over the next five years and prices are likely to rule firm.
TSIL in FY07, increased its sponge iron capacity to 0.39mn tons with the addition of a third kiln of 0.15mn tons. Improving capacity utilization should lead to higher production by 18% and 10% in FY08 and FY09 respectively. Expect it to expand its operating margin to 23.4% and further to 26.1% in FY08 and FY09 respectively. TSIL’s strategic tie up with Tata Steel secures its future iron ore requirement. 100% of TSIL’s iron ore demand is met by ore mined from Tata Steel’s Khondbond Mine, Orissa.
TSIL should post revenue and profit CAGR of 36.4% and 78.6% over FY07-09E respectively. At the current price it trades at 7.3x and 5.6x FY08E and FY09E EPS of Rs33.8 and Rs44 respectively. Indiainfoline Research recommends a BUY with a price target of Rs286.