Stock Review: Monnet Ispat and Energy(MIE)

 

 

Monnet Ispat and Energy looks to be an attractive bet for the long term given the visibility of its upcoming projects and operational efficiency

 

MONNET Ispat and Energy (MIE), a flagship company of Monnet group, is the second largest coalbased sponge iron producer in the country. Its volume growth in steel and power, backward integration initiatives and increased visibility of its upcoming projects make Monnet Ispat a clear winner among its peers. Investor with long-term prospective can consider exposure in this stock.

BUSINESS:

The company is mostly engaged in manufacturing sponge, steel and ferro alloys. It has a combined capacity of 0.86 million tonne per annum (mtpa) of sponge iron, 0.3 mtpa of steel, 0.06 mtpa of ferro-alloys and power generation facility of 150 megawatts (mw), besides running an underground captive coalmine of 1 mtpa production capacity in Aungul district of Orrisa.

GROWTH DRIVERS:

The company is expanding its steel capacity six times to 1.8 mtpa with 80 mw of incremental captive power plant to be operational by the end of FY11. The company is also on track to set up a new 1050 mw merchant power plant under its subsidiary Monnet Power. This will leverage on the captive coalmines and the residue from reduction processes and translate into significantly low variable cost per unit of power produced. The project has achieved financial closure, with Blackstone Capital investing $60 million for a 12.5% stake and $800 million of debt tie-up. The plant is scheduled to be commissioned by FY12. Existing power capacity also benefits from utilisation of residue flue gases, coal fines from the reduction. MIE has additional linkages with five coalmines, one of which is in advanced stage of commissioning.

   The company's share in these five blocks is in excess of 300 mt. It has obtained the required clearances for one of the coalmines and also acquired 50-60% of the land required for mine development. Similarly, the company has obtained clearances for setting up its power plant and also acquired land for this purpose. The company has already signed power purchase agreement of 200 mw with Karnataka government and 250 mw with Orrisa government so far for this project.

FINANCIALS:

In the June 2010 quarter, the company reported net sales of 451 crore, up 20%, while net profit increased 19%. Sharp increase in raw material cost dented operating margin for the company, which fell 141 basis points to 28.9% year-on-year basis. Still it is higher than most of its peers. The company, however, was able to maintain its net profit margin which can be attributed to lower interest payment in the June 2010 quarter compared with last year. For the past five years, the company has clocked sales CAGR of 25%. For FY10, nearly one-third of the company's revenues came from selling power. While the power segment has witnessed strong revenue and profit growth, the steel segment stagnated.

VALUATIONS:

At current price of 554, the stock is trading 11 times its trailing 12 months' earning per share (EPS). It is trading at a discount to most of its peers, such as Jindal Steel and Jai Balaji Industries. The capacity expansion plan in its core business as well as the new power plant will drive the company's earnings from the next year onwards. At the current price levels, Monnet Ispat and Energy can be a good long-term bet given the increased visibility of its coming projects and operational efficiency.