Stock Review: Adhunik Metalinks

 

Co Trades at 23.5 Times Its FY10 Earnings And High Growth Justifies Premium

 

THE stock of Kolkata-based steel maker Adhunik Metalinks has outperformed the Sensex over the past one year. It gained 23% compared with a 17% return of the Sensex during the period. In the past, the company recorded an impressive growth fuelled by the strong demand from the automobile sector, its key user segment.

   Adhunik Metaliks manufactures a wide range of products in carbon steel, alloy steel and stainless steel catering to the demand of automobile, power, engineering and oil industries. Currently, about 82% of the revenue comes from steel and the remaining from the merchant mining business.

   The company now intends to focus more on merchant mining of iron ore, manganese, and power business since margins are better in these segments. The company recently commissioned captive iron ore mine in Orissa. This can help the company to reduce its exposure to raw material prices and increase its operating margin. It is also expanding iron ore and manganese ore production facilities through its subsidiary Orissa Manganese and Minerals.

The expansion is expected to improve its iron ore mining by 50% in FY 11. The company also wants to foray into high margin merchant power business. It is currently setting up 1,080 MW merchant power plant at Jamshedpur. Both merchant power and merchant mining are profitable segments and are likely to help the company keep its growth momentum in the coming quarters.

   However, the company's expansion plans come at a cost. Its balance sheet is highly leveraged with debt: equity ratio of more than three. This leaves little room for Adhunik to raise further debt. The higher concentration of debt in its capital structure may prompt the company to look for strategic investors.

   In the March '10 quarter, the company clocked an impressive double-digit growth in sales whereas its net profit jumped more than 20 times. This was on account of investory stock adjustment and improvement in overall operational efficiency.

   The company is trading at 23.5 times its FY10 earnings. Though this seems to be higher than P/E of 14-16 for most of its peers, the premium can be attributed to Adhunik's high growth prospects.

STEELY SHOW

Adhunik Metaliks
manufactures a wide range of products in carbon steel, alloy steel and stainless steel

The expansion may improve its iron ore mining by 50% in FY 11. It also wants to foray into high margin merchant power business