Stock Review: Kalyani Steels

 

 

Rising demand from the auto sector and high production capacity may help Kalyani Steels post better results going forward

 

KALYANI Steels is a part of well-known Kalyani group. The company has demerged into Kalyani Investment and Kalyani Steels some time back. Though Kalyani Investment is yet to be listed, Kalyani Steels witnessed a turnaround in June 2010 quarter, with its net profit surging more then 20 times. Going forward, the company can continue to post good result on its high production capacity, which can be utilised to fulfill growing demand from the auto sector — its main customer.

Business:

Pune-based Kalyani Steels is engaged in manufacturing of pig iron, rolled products and special steel in Karnataka. It supplies carbon alloy and special steel to different companies in automobile and forging sector. The company's pig iron capacity stands at 670,000 metric tonne, of which only a quarter is utilised at present. The company has integrated operations with its own iron ore mines, which hold sufficient reserves for its current and future requirements. All these mines are located near its steel plants, which ensure continues availability of quality iron ore.

   The company also has an 8 mw captive power plant and sells part of the power generated to the grid. This business, although tiny compared to
steel, enjoys very high margins.

Growth Drivers:

The company's ability to curtail coke and coal costs has helped it turn around in the past couple of quarters with its captive coke plant entering into joint venture with Gujarat NRE Coke. Till a few quarters back, the company was reporting losses due to the higher prices of coke and coal. Now the company has emerged as one of the lowest cost producers of special, carbon and alloy steels.

   The company already has excess capacity to utilise for rising demand from the auto and auto ancillary industries, which can boost its earnings without any incremental capex.

   It is also planning to expand its power plant to 20 mw, which will not only cater to its expanded operations, but also enable it to increase revenues from sale of power.

Financials:

Kalyani Steels reported net sales of 336 crore in the June 2010 quarter, up 70% against the year-ago period. Its margins improved substantially as the cost of coke and coal as a percentage to net sales fell to 40% from 48% in the corresponding quarter of previous year. During FY10, the company brought down its debt by nearly 40 crore enabling more than 32% reduction in its interest cost for June quarter. Last couple of years, the company has generated hefty cash flows from operations and is currently carrying debtto-equity of less than 0.6.

Valuations:

At the current market price of 139, the scrip is currently valued 9.5 times its earnings for the past 12 months, which is in line with other similar companies. However, its earnings growth is likely to outpace its peers. Kalyani Steels is expected to end FY11 with earnings of 80 crore, which discounts the current price at 6 P/E

Concerns:

Any slowdown in engineering and auto sectors or spurt in input costs can impact the company's margins.