Buy Tata Sponge Iron – Indiainfoline

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.