Stock Review: Adhunik Metaliks

Co's operating profit margin of over 23% is the best among smaller steel producers

 

The stock of Adhunik Metaliks has gained 21% since its third quarter results were announced a fortnight ago. The higher gain made by the stock in comparison with the 5%rise in the ET metal index reflects the company's continued growth momentum.

The company has maintained its operating profit margin above 23%. ADML is well poised to take advantage of the growth in its user markets, which include automobile, railways, engineering, oil & gas and construction sectors, over the coming quarters.

ADML derives over 60% of its sales from steel and the remaining from mining operations through subsidiaries, Orissa Mining and Minerals and Adhunik Power and Natural Resources. This gives ADML an opportunity to capitalise on iron ore, manganese and coal resources for captive and merchant mining purposes. These mines have about 97 million tonne of iron ore and 53 mt of manganese reserves. It has not been able to start operations at its Jharkhand mine due to environmental concerns. ADML recently entered into a JV for ownership and management of an iron-ore mine in Orissa. The company consumes about 40% of the iron ore from its mines while the rest is sold in the domestic market. Since it sells only about 3-4% of its ore overseas, the Budget proposal to increase the export duty on iron ore will not impact the company much. ADML also plans to enter the power segment with a 540 MW power plant in Jharkhand. The first phase of the plant is expected to be completed by March 2012. During the December 2010 quarter, ADML registered 20% sales growth year-on-year due to higher demand of iron and manganese ores. The company's net profit increased 41%, while its operating margin rose 300 basis points.

At a market price of Rs 101, the stock trades at a 12-month trailing price-earnings ratio of six. The company is highly leveraged with a debt-equity ratio of 2.72, but this is warranted given its expansion plans.