Stock Review: MSP Steel and Power (MSP)

However, Rising Debt Burden Could Derail Company's Plans

 

KOLKATA-BASED MSP Steel and Power (MSP) has lined up an aggressive capital expenditure of . 800 crore for the three years ending FY 12 to increase capacities of sponge iron, pellets, power and to reduce its cost of production. The company's financial performance in the September 2010 quarter was promising as it doubled its net profit compared with the year ago quarter.

   The company's stock, however, has declined by more than 10% in the past month in line with its metal peers. Going ahead, the company is poised to benefit from its backward integration initiatives and improved domestic demand for steel.

   MSP is currently focusing on backward integration initiatives and intends to become a well-integrated player in this space. The company has set up a pellet plant at Rajgarh with three million-tonne capacity and plans to increase it three-fold by FY12. This will significantly reduce the cost of production by over . 2,300 per tonne as pellets can be directly used to produce sponge iron.

   MSP's power generation will also go up three times to 76 mw by FY 12. Of which, less than 35 mw will be needed to support the expanded manufacturing capacity. Also, the company will produce 80% of the total power through the waste heat gas route, which is far cheaper than the conventional coal route. The company plans to sell the excess power to the grid, which should boost EBITDA margin in future.

   On the flip side, rising debt can spoil the company's aggressive growth plans. Its debt increased by about . 185 crore within a year in the FY10 financial year. It has invested . 350 crore till August 31, of which . 250 crore was raised through debt and the rest through preference share issued to the promoters. The company plans to use internal accruals to reduce the financial burden in near future. Going ahead, to fund its expansion, MSP can also dilute its equity since promoters hold about 72% stake in the company.

   At the current market price, the stock trades about eight times its trailing 12-month earnings. This is at a discount to P/Es of 11-17 for its peers like Monnet Ispat and Usha Martin. The company is expected to report impressive growth given the robust earnings in its core business and increased contribution from the power segment.