Ispat Industries Ltd. Not Rated (CMP: ` 23)
Market Cap: ` 28,230 mn; USD 614 mn Bloomberg code (NDEN IN)
We recently met with the management of Ispat Industries Ltd. (IIL) to have an understanding of i) status of IIL's steel business, ii) IIL's expansion plans, and iii) strategy to improve balance sheet position.
110 MW power plant to produce power at ~` 1.5/unit vs. current cost of ` 5.5/unit
IIL is setting up a 110 MW thermal power plant at Dolvi – majority of the generation of about 98MW would be via waste heat recovery from gases of the blast furnace & coke ovens. IIL's total power requirement is ~250 MW and the new power plant will suffice for IIL's ~44% power requirement. Currently, IIL procures power from the State Electricity Board at ` 5.5/unit, whereas the generation cost at the new 110 MW power plant is expected to be ` 1.5/unit. This is likely to bring down the blended cost of power from ` 5.5/unit to ` 3.75/unit. The power plant is expected to be completed by Q4FY12 with an estimated cost of ` 4.9bn. This project will have a debt:equity mix of 1:1 and IIL has tied up ` 2.45bn of debt and brought in ` 1.75bn of equity.
1mn MT coke oven in a JV with Stemcor to reduce cost, provide gas for power plant
IIL is setting up a 1mn MT coke oven in a JV with Stemcor wherein IIL has 26% stake. The total estimated project cost (including pellet plant of 2mn MT) is ` 11.25bn, which will have a debt:equity mix of 2:1. Financial closure is expected by October 31, 2010. Of total equity contribution of ` 3.75bn, IIL's contribution will be ` 0.975bn, whereas Stemcor will contribute ` 2.78bn. As part of the agreement towards its equity contribution of ` 975mn, IIL will be contributing ~500mn in the form of land for the project. Stemcor will get a fixed 18% return on equity (ROE) on this project. This will not only ensure cheaper coke supply for IIL but also provide waste gas, which is likely to generate ~40MW of power for its steel plant. The project is expected to be completed by Q4FY12.
For its 2.0mn MT of Pig Iron capacity, IIL uses pellet as feed mix imported from third party sources outside India. IIL, in collaboration with Stemcor, is setting up a 2.0mn MT capacity pellet plant, which is expected to be completed in the next 2 years.
Additional capacity at Dharmatar Jetty to be used for commercial use
IIL has existing capacity of ~12mn MT at Dharmatar Jetty, which is to be expanded to 15mn MT by FY11E. IIL utilizes ~9mn MT of its capacity at its jetty. With overall capacity of 15mn MT at this jetty, IIL will have ~6mn MT of additional capacity for commercial use, which will give it an additional revenue source.
HRC capacity to increase to 4.2mn MT from 3.3mn MT in next two years
IIL has liquid steel capacity of 4.2mn MT; whereas its HRC capacity is 3.3mn MT. IIL is increasing its HRC capacity by way of de-bottlenecking. Its HRC capacity is expected to reach 4.2mn MT in the next two years.
High possibility of takeover/acquisition of IIL
The promoters hold 41.1% stake in IIL and the bankers hold 5%. The promoters have pledged 95% of their holding with the bankers, who have the option to takeover the promoter's stake in the case of a default of key covenants. The bankers have an option to takeover the company and then sell their stake to another interested steel company. Also the public holding in IIL is 44%, enabling additional acquisition of shares from the secondary market. We believe IIL could witness a turnaround & be re-rated if acquired by any leading steel mill – as it is present in the high growth flat products segment.
Best Regards
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CA.RAJESH DHIRAJLAL DESAI
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