Stock Review: Indian Metals and Ferro Alloys’ (IMFA)

 

Indian Metals and Ferro Alloys' (IMFA) acquisition of a 70% stake in an Indonesian coal mine on Tuesday failed to cheer investors as the ferro chrome producer announced a 31% drop in its first quarter net profit. Investors appeared to be more worried with near-term concerns than the benefits of this long-term acquisition.

IMFA is one of the largest ferro chrome producers in the country with a capacity of 275,000 tonnes which it uses for captive purposes from its mines in Orissa. Through its latest acquisition of a coal mine in Indonesia, the company plans to foray into coal trading in the overseas markets, as the coal from this mine has a calorific value of 6,000 kilo calories. Though the total reserves from this mine are still unknown, the company will also use some of the reserves for captive purposes which will reduce its dependency on the high cost of coking coal.

 

However, as this will only take shape by the second half of 2012, IMFA will continue to face pressures from high input costs. But the company's mine in Utkal in Orissa is expected to offer some relief from the sharp increase in procurement costs by the end of the current fiscal. According to the management, the company has received the first clearance and it is waiting for the second, which is expected by August 2011. Since the Utkal mine will be used entirely for captive purposes, it should reduce IMFA's input costs by the March 2012 quarter. In the quarter under review, the company had to shell out an additional 76% for raw materials than it did in the year-ago quarter, which amounts to 20% of its total revenue.

The company reported an 11% growth in sales to . 272.33 crore. Its operating profit margin decreased by 1,900 basis points to 27% due to input cost pressure. As a result of the 31% decline in net profit, earnings per share fell to . 14.2 from . 20.6 in the corresponding period last year.

As on June 2011, IMFA's total debt was . 570 crore, whereas its cash on books, post an outgo of . 39 crore for the Indonesian acquisition, was . 25 crore. With a debt-to-equity ratio of 0.6 times, the company is well placed to raise further debt for further infrastructural development of the mine.

At the close of trade on Tuesday, the stock was quoting at . 461, which is 8.2 times its 12-month trailing price-to-earnings ratio.