Stock Review: Adhunik Metaliks

 

The glut of selling in the market since the beginning of August shaved off 24% of the market capitalization of Adhunik Metaliks. Though the stock is now available at a price to earnings ratio below its historical valuation, going by the company's performance over the past two quarters, investors should wait for some operational improvement before entering the stock.

During the first quarter of FY12, the company's consolidated net sales grew a mere 9% over the yearago period to . 467.72 crore, the slowest growth in four quarters. This was mainly on account of the 6% degrowth in its mining subsidiary — Orissa Manganese & Minerals (OMML) and on account of lower volumes in the steel business on account of maintenance shutdowns. The sharp rise in key inputs resulted in operating profit margin contraction of 500 basis points to 31%. Moreover, the higher interest burden led to a 50% fall in net profit to . 28.25 crore.

Since January, the cost of key steel making ingredients has been rising. Contract prices for iron ore and coking coal touched a peak of $171 per tonne and $330 per tonne, respectively, during the April-June quarter, 40% and 65% higher than they were last year. But steel prices did not rise on similar lines on account of sluggish demand. Currently, contract prices for both iron ore and coking coal have marginally decreased, but not enough to have a significantly positive impact on operating profit margins of steel makers.

Adhunik Metaliks's captive iron ore mine at Keonjhar with reserves of 25 million tonne should ease the pressure on its margins to some extent. However, the benefit of this integration is not expected till the end of the year.

For the second quarter, some improvement can be expected as the recommencement of operations at certain facilities will increase steel sales volumes, which contribute about 70% to the company's total revenue. For its mining business, the surplus in the manganese ore market is likely to keep prices low hence realisations are expected to be low as well.

At . 55, the stock trades at a price which is 5.2 times its trailing 12 month earnings per share.