Stock Review: Monnet Ispat and Energy

Monnet Ispat and Energy's prospects in the power business and its de-risked business model will drive its growth

 

Monnet Ispat and Energy has a considerable amount of un-locked value in its power business. Its de-risked business model, captive resources and ongoing expansion plans ensure that the company is well positioned to take advantage of the 12% growth in the steel industry.

BUSINESS

Monnet Ispat and Energy, or MIEL, is the second-largest sponge iron-based steel manufacturer in India. It has a combined capacity of 860,000 tonnes per annum (TPA) of sponge iron, 300,000 TPA of steel, 60,000 TPA of ferro alloys and is currently utilising close to 90% of its total capacity. MIEL also has a power generation facility of 150 mega watts and runs the largest underground coal mine in the country. It is 100% coal and power captive, but is dependant on third parties for about 70% of its iron ore requirement.

GROWTH DRIVERS

MIEL's total capacity expansion from 1.2 mtpa to 1.5 mtpa is almost complete and is expected to start contributing by the second quarter of this fiscal. The plant is being set up at the company's existing plant location in Raigarh, where it has 690 acres of land. As part of the 500 crore ($100 million), which the company has earmarked for overseas acquisitions of mines within the next two years, MIEL recently acquired a coal company in Indonesia — PT Sarwa Sembada Karya Bumi for $24 million. This acquisition, funded through internal accrual gives the company access to 25,000 hectares of land in Sumatra, of which 1,500 hectares have been explored, which has about 65 million tonnes of coal reserves.

   According to the management, production at the mine is expected to start by the beginning of 2012. Owing to its proximity to the port, the company will be able to substantially reduce freight rates once operations commence. The company also plans to invest up to 5,000 crore on power projects and 3,000 crore on steel units over the next 2-3 years.

FINANCIALS

The company's sales have been growing at 30% over the past five years when compounded annually. Despite muted sales growth over the past four quarters, the company has managed to maintain operating profit margins at 29-30%. Net profit for FY11 rose 6% to 285.1 crore. As on March 31, 2011, the company's cash on books tripled to 648.8 crore over the previous year. The debt-equity ratio has increased to 1.1 times, but this is warranted given the company's expansion plans. It gives a return on capital of 14.29% and a return on equity of 18.2%. At 492, the stock trades at 9.9 times its trailing 12-month P/E.

INVESTMENT RATIONALE

Blackstone Capital paid 275 crore for a 12.5% stake in Monnet Power Company,
an 88% subsidiary of MIEL in July 2010, valuing the power business at close to 2,400 crore. The first power project — a 1,050 mega watt plant — which will be commissioned in two phases, is expected to be completed by June 2012. The total outlay for the project was 5000 crore, which the company funded through internal accruals, debt and Blackstone's investment. The project has also received clearance for an additional 660 mw, which will be completed in the third phase.

   MIEL currently has a market capitalisation of 3,200 crore. Therefore, with a valuation of 2,400 crore a year ago for the power business alone, there is an unlocked value in MIEL as a whole which has not been captured in the stock price so far.