Dear Sir/Madam,
Visa Steel is set to complete the last leg of its expansion programme by the end of this fiscal and move up the steel value chain. The company's next focus is on resource integration and setting up additional steel and power plants to improve the topline as well as bottomline. We met the management of the company to understand its future growth plans and following are the key takeaways.
Steel Rolling Mill to be operational in October
The company's 0.5mntpa steel rolling mill has already commenced trial runs from September and commercial production is expected to be commissioned by October 2011. The rolling mill will use produce from the recently commissioned 0.5mntpa Steel Melting Shop as its feedstock. The management is aiming to sell 0.4mnt of steel from its SMS and Rolling Mill in FY12.
JV with Baosteel to be operational in phases
Visa has entered into a JV agreement with Baosteel, China to setup a 100,000tpa ferro chrome plant at a cost of INR 2,600mn with the former holding 65%. Both the JV parties together have infused INR 910mn by way of equity and the remaining INR 1,690mn will be funded through debt.
The JV will setup four furnaces totaling to 100,000tpa of capacity with the first furnace expected to be commissioned by March 2012 and the last one expected to be commissioned by October 2012. Out of the total production, Baosteel has entered into an agreement to buy out 70% of the production.
75MW of captive power plant
Visa was operating a 50MW power plant based on the WHRS, due to which the company's power costs were quite low. The company has recently commissioned another 25MW (boiler capacity of 37.5MW) thermal based power plant for its captive consumption, taking the total power generation capacity to 75MW. Visa has tied up with Mahanadi Coalfields Ltd. for coal supplies and expects to operate the new power plant at 85% PLF.
High chrome ore prices hurting margins
Chrome ore prices have shot up by almost 8-10% from INR 10,000 - 11,000/t levels to INR 12,000/t over the past few weeks, whereas ferro chrome prices have remained more or less stagnant. The sudden rise in chrome ore prices has hampered the ferro chrome margins by 5-6 percentage points. However, we believe that the ferro chrome prices may trend upwards as most of the suppliers are finding it unfeasible to manufacture ferro chrome at current price levels.
Outlook
The company will finish its last leg of expansion programme by this fiscal which will help the company to move up the steel value chain. The company will cease its sponge and pig iron sales and use it for captive consumption and earn better margins. At the CMP of INR 58.50, the stock is available at a P/E multiple of 12.53x and at an EV/EBITDA multiple of 10.99x.
Regards,
Ankit Shah | Research Analyst
ankit.shah@spasecurities.com | Cell: +91 9892095225 | Tel: +91 (22) 42895600 | Fax: +91 (22) 26573708/9
SPA Securities Ltd. | www.spacapital.com
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