Stock Review: Tata Sponge

 

 

Firm Sponge Iron Prices, Robust Expansion Plans To Help Co Maintain Strong Growth

 

THOUGH the stock of Tata Sponge Iron (TSI) has receded from its recent peak, it has consistently outperformed the Sensex over the past one year. In the near term, TSI's expansion plans and opportunities in domestic steel and power industry are likely to keep investors interested in the counter.

   The stock has gained 46% over the one-year period, much higher than the 20% gains in Sensex. The 560-crore company has been aggressively ramping up its capacity to take advantage of growing demand in domestic steel industry. Currently, its capacity stands at 3.9 lakh tonne per annum. For the June 2010 quarter, net profit increased by 60% to 26 crore, while sales went up 20% to 140 crore, on a year-onyear basis.

   TSI is a pure sponge iron player with 93% of its revenue coming from the domestic segment. The rest comes from its two captive power plants with total capacity of 26 mw.

   The company is planning to add another 25-mw power plant at an investment of around 150 crore. The company can earn additional revenue by selling the surplus power generated by this plant.

   Sponge iron prices have seen an uptick for the past two months and are expected to remain firm in the coming quarters boosted by high scrap and other raw material costs.

   The company has a strategic tieup with Tata Steel to secure its iron ore requirements. The company's ore demand is met by Tata Steel's mines in Orissa, which are situated near its plants thereby reducing TSI's transportation costs.

   The company also has been allotted a coal block, which is expected to save as much as 900 per tonne on non-coking coal once the new power capacity goes online. This should further boost margins given that the backward integration initiative has already helped the company in improving its operating margin by 850 basis points in the June 2010 quarter.

   Over dependence on the domestic market insulates TSI from global turbulence to some extent. The company may find it easy to raise funds in future for further expansion with low debt levels.

   Currently, TSI stock is trading at six times the trailing 12-month earnings. These valuations are way below the P/E of 17 for its closest peer Vikas Metals. TSI is expected to repeat its good performance even in the coming quarters due to higher sponge iron prices and its capex plans.