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  • 1.       K E Y N O T E Keynote Capitals Research January 16, 2012Stock IdeasStocks Covered Page No. Andhra Sugars Ltd. 1 Kirloskar Pneumatic Company Ltd 3 Petronet LNG Ltd. 5 Polaris Financial Technology Ltd. 7 Tata Sponge Iron Ltd. 9   Keynote Capitals Research    Keynote Capitals Institutional Research –awarded “India’s Best IPO Analyst 2009” by MCX‐ Zee Business   
  • 2.     K E Y N O T E Andhra Sugars Ltd.Key St tock Data Andhra SSugars Ltd. (A ASL) was inco orporated in A August, 1947 engaged in m manufacture aand sale of su ugar, organic and inorganic chemicals being the ma ones at T c ajor Tanuku, Kovv vur,Sector Commod Chemicals dity Taduvai, Saggonda and Bhimadole in Andhra P e Pradesh. It is the largest manufacturer of s rCMP `116.15 caustic soda in south India. The c company has three subsid diaries viz. Th Andhra Fa he arm52wk H High/Low `130/ 84.55 Chemical Corporation Ltd. (AFCCL largest man L) nufacture of h hydrazine hyd drate (300 TPPA)Market Cap t `3.14bn at Kovvu JOCIL at Guntur is in the business of manufac ur, s cturing fatty a acids, glycerin ne, soaps, etc. and Hindusthan Allied Chemicals Ltd. ASL ha two assoc d as ciate companies ($61.05mn) known a Sree Akka as amamba Tex xtiles and An ndhra Petroc chemicals Ltd (APL) which d.6m Avg daily vol 8923 g. produces oxo-alcohols at Visakha s apatnam, with technical c h collaboration from M/s Da avyBSE Se ensex 16154.62 Mckee of London, usi the latest LP Oxo process technolo f ing t ogy, designed to produce 2- e ethyl hex xanol or butan nols.Reco ‘Buy’BSE Code 590062 Besides, ASL has in nterests in th power bu he usiness with investments in the Andh s hraNSE C Code ANDHRSUGA AR Pradesh Gas Power Corporation Ltd. (APGP PCL), apart from its ow 16 MW c wn co-Face V Value `10 generatio power plan and 11.60 MW of wind f on nt farm. Power i one of the critical inputs to is s manufact ture Caustic S Soda. Major power require ement for the production o Caustic So e of oda is met ou of this sour (APGPCL at an econo ut rce L) omical rate. T supplemen and to ensu To nt ure adequate and continu e uous availability of power f production purposes non-conventional for n Share tern (30th eholding patt wind pow is genera wer ated at Rama agiri in Andhr Pradesh and at Veeran ra nam in Tirunvveli Sept, 2011) district of Tamil Nadu. f Publi India is the second largest prod ducer of suga in the wor with 10 to 12% production ar rld c &  of the world. Acc cording to the sources, till September, 2011 sugar e , rcane has be een Othr DIIs planted in 50.93 la hectare a akh against 49.44 lakh hectares in same per s riod last year up 45% 1% by 3% ASL has s %. sugar manufa acturing capac of 5000 T city TCD at Sugar Unit-I, Tanuku, r a 250 TCD capa 00 acity plant at S Sugar Unit-II, Taduvai, and a 2000 TCD capacity pla d D ant Prom at Suugar Unit-III, Bhimadole. The compan produces 30 KL per d ny day of industrial oters alcoh from molasses, which is the raw mat hol s terial for etha anol (absolute alcohol), ace e etic 54% acid, acetic anhyddride and ethy acetate. yl At present ASL pr roduces ethan on a limite scale. But in the comin years ethanol nol ed t ng produuction in the c country will re eceive impetu as the GoI proposes to come out with a us h policy to make m y mandatory the blending of ethanol with petrol. This will provide an e h Price Performance (%) ) oppoortunity to the company to look into the possibility of expanding th production of he n ethannol.1 Mth 3 Mths 6 Mths 1 Yr Going forward ASL will also be benefited fro its strategic capacity ex g e om xpansion plan of n 4.64 18.46 19 9.68 2.65 Hi-Sttrength Hypo Plant propos to be set at Saggonda to produce Poly Aluminiu sed a um Stock Price Performance k Chlorride extensiv vely used in water treatm ment plants, aqua culture dairy, text e, tile, leather, paper and host of other industries. d 120 ASL intends to d diversify in p pharma segm ment and ha purchased a plot at t as d the 110 Jawaaharlal Nehru Pharmacity, Vishakhapat ttanam. It is i the proces of finalizing a in ss g 100 suitable product-line to be mannufactured fro this facilit With bette realisations in om ty. er s 90 sugar, steady dem mand for chloor-alkali products, new pr roduct develo opments back ked 80 by acctive R&D effo will help A post a de orts ASL ecent performmance going fforward. 70 ASL’s expansion plan and with cane crush s hing expected to be highe in the coming d er 60 seaso expect w on well for its gro owth. Althoug production of caustic soda remain gh n ned unde pressure ow er wing to highe imports. To help the do er o omestic industry, governme ent Jan‐11 J 11 Mar‐11 May‐11 Sep‐11 Nov‐11 Jan‐12 Jul‐11 J l 11 has imposed impo duty of bot caustic sod and soda a ort th da ash. Andh hra Sugars BSE_ _SENSEX 1 Keynote Cap K pitals Resear rch
  • 3. K E Y N O T E Key Financials (`Cr) Particulars FY07 FY08 FY09 FY10 FY11 Net Revenues 576.12 463.99 571.91 551.59 468.83 EBITDA 146.63 116.09 133.95 156.44 108.47 Net Profit (Adj) 64.15 42.58 45.28 66.76 36.21 Earnings Per Share 22.64 14.96 15.81 23.94 12.58 Price Earnings 3.82 5.46 3.76 5.01 7.01 EBIDTA Margin (%) 25.45% 25.02% 23.42% 28.36% 23.14% PAT Margin (%) 11.13% 9.18% 7.92% 12.10% 7.72% RONW (%) 20.53% 10.29% 15.60% 19.80% 10.89% ROCE (%) 25.37% 9.03% 14.48% 18.98% 9.36% Sources: Keynote Capitals Ltd. Quarterly Financials (`Cr)Particulars Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12Net Sales 132.1 143.61 126.59 103.48 107.22 116.69 142.64 180.32 195.51Other Income 9.95 5.34 6.89 8.26 13.37 15.89 14.22 9.27 17.58Total Income 142.05 148.95 133.48 111.74 120.59 132.58 156.86 190.04 217.5Total Expenditure 104 96.99 101.17 90.87 100.31 111.34 108.63 147.82 161.17PBIDT 38.05 51.96 32.31 20.87 20.28 21.24 48.23 42.22 56.33Less: Interest 5.72 4.74 4.39 4.1 3.94 4.73 6.05 6.28 4.35PBDT 32.33 47.22 27.92 16.77 16.34 16.51 42.18 35.94 51.98Less: Depreciation 8.68 8.72 8.81 9.17 9.4 9.6 9.79 9.85 9.47Tax 7.85 12.95 6.5 2.5 1.5 2.3 12.17 7.5 13.3Profit After Tax 15.8 25.55 12.61 5.1 5.44 4.61 20.22 18.59 29.21EPS (`) 5.83 9.43 4.65 1.88 2.01 1.7 7.46 6.86 10.78PBIDTM (%) 28.8 36.18 25.52 20.17 18.91 18.2 33.81 23.41 28.81PBDTM (%) 24.47 32.88 22.06 16.21 15.24 14.15 29.57 19.93 26.59PATM (%) 11.96 17.79 9.96 4.93 5.07 3.95 14.18 10.31 14.94 During FY11, ASL posted 45.76% lower net profit (adj) of `36.21Cr on 15% lower net sales of `468.83Cr. Its EPS was `12.58 and it paid dividend of 55%. For Q2FY12, its net profit shot up 440% to `29.21Cr from `5.44Cr in Q2FY11 on 82% higher sales of `195.51Cr and the Q2FY12 EPS stands at `10.78. For H1FY12, was `47.81Cr on 78% higher net sales of `375.83Cr leading to a H1FY12 EPS of `17.6. Its equity capital stands at `27.11Cr with reserves of `467Cr and sound debt:equity ratio of 0.7:1. ASL a six decade old company represents a relatively safe investment option for the investors. Although its sugar division continues to be a loss making units, the caustic soda & industrial chemicals divisions are doing extremely well.  ASL’s segment wise revenue is sugar – 26%; caustic soda – 46%; chemicals 17% and others – 11%. At the current market cap of `314.88Cr and considering ASL’s track record and management capability indicates a scope for share price appreciation. Keynote Capitals Research 2  
  • 4.     K E Y N O T E Kirloskar Pneumatic Ltd. Key Stock Data We recommend buying in Kirloskar Pneumatic Company Ltd. (KPCL) as a value buy. Sector Capital Goods Incorporated in 1958, KPCL provides high end integrated solutions using CMP `451.75 Compression & Transmission Technologies. The company caters to the 52wk High/Low `600 / 375 industries like Petrochemicals, Power, Steel, Cement, Food & Beverage, Market Cap `5.78bn Defense, Construction & Mining and many more. ($112mn) 6m Avg. daily vol 6,192 KPCL derives 89% of its total revenues out of compression systems products BSE Sensex 16,154.62 while rest from transmission products. The company generates 60% of revenues from projects business and balance from equipment supply. The Reco ‘Buy’ company pioneered CNG Systems, Coal Gasification compression systems etc in the country. It has supplied refrigeration system for all refineries in the BSE Code 505283 country. The compressor division has just completed the coal gasification order NSE Code NA project. It is the market leader in CNG market with 40-45% share. Face Value `10 In transmission products, KPCL caters to Gearboxes for Railways and Marine th Shareholding pattern (31 industries. The company does not supply to auto industry and therefore it is not December, 2011) vulnerable to auto industry slowdown. The company has also diversified into Public wind mill gear boxes, where the company manufacturers 1 MW gear boxes for 15% MW class WTGs. This is the only company apart from Suzlon, which has Corpo rate captive gear box production facility that is into manufacture of MW class gear 6% boxes. Prom nstitu oter tions 56% KPCL has completed a revamp program of transmission business for which it 20% Forei made huge investment. The company has demolished its old plant totally to gn 3% make it suitable for manufacturing large gear boxes. Replaced about 80% of   the old machines with machines with latest technology and is now brand new. Price Performance % The company received permission from Indian Railways for operating Road Railer trains in Delhi Chennai corridor. This is different from the roll on & rolls 1 Mth 3 Mths 6 Mths 1 Yr off service currently offered by CONCOR and other players. For example if a -0.15% -7.27% -4.24% -5.78% car loaded specialised wagon at the Gurgaon Factory of Maruti Udyog will get offloaded only in the premises of a Dealer in TN or AP without changing the Stock Price Performance wagons. The specially made bogies/wagons will be decoupled and connected to truck and taken to dealers. Manufacturing of road railers will start by 120% 115% Q3FY12. 110% 105% The company has over `500Cr order book while the average ticket size ranges 100% from 006020-100Cr. 95% 90% 85% KPCL is fundamentally strong company with debt to equity of just 0.14x and 80% Return on Equity of 25.2%. The company’s stock price outperformed the 75% Sensex over a one year period. Its share price dropped 19.3% for last one year 70% compared to a negative return of 22.5% by the Sensex. Considering the current inexpensive valuation, 7.7x for FY12 based on annualized EPS `58.76 KPCL BSE_SENSEX (5-year average forward P/e is 12.18x) and reasonable dividend yield of 2.9%,   we expect the downside is limited for the stock and can be considered as a good value pick. 3 Keynote Capitals Research   
  • 5.     K E Y N O T E  Key Financials (`Cr) Particulars FY07 FY08 FY09 FY10 FY11 Net Revenues 353.56 398.75 514.57 453.28 491.73 - Growth (%) - 12.78% 29.05% 11.91% 8.48% EBITDA 37.07 37.99 66.67 70.96 72.77 Growth (%) - 2.48% 75.49% 6.43% 2.55% Net Profit 26.52 29.82 40.74 44.59 42.78 Growth (%) - 12.44% 36.62% 9.45% -4.06% EPS (`) 33.4 22.05 30.12 35.01 31.93 P/E (x) 22.8 6.2 14.1 14.8 14.1 EBIDTA Margin (%) 10.5% 9.5% 13.0% 15.7% 14.8% PAT Margin (%) 7.5% 7.5% 7.9% 9.8% 8.7% RONW (%) 41.1% 36.1% 46.8% 41.2% 36.1% ROCE (%) 41.8% 32.0% 35.1% 32.9% 25.2% Source : CompanyKeynote Capitals Research  4 
  • 6.         K E Y N O T E Petronet LNG Ltd. Key Stock Data Petronet LNG was incorporated in 1998 as a JV by the Govt. of India to import LNG and set up LNG terminals in the country. Its promoters are GAIL (India), ONGC, IOCLSector Gas Distrib. and BPCL, each having 12.5% stake in Petronet LNG. In addition, GDFI (part of GDFCMP `156.65 Suez, a French national gas company) holds a 10% stake and is a strategic partner.52wk High/Low GDF Suez has been the largest LNG importer in Europe for the past 30 years. Asian`185.85/105.1 Development Bank also has a stake of 5.2% in Petronet LNG.Market Cap `12198Cr The Dahej LNG terminal was started in 2004 with a capacity of 5 mmtpa. The terminal ($2.36bn) is strategically situated in the biggest gas consuming state in India and is in close6m Avg. daily vol 23,06,889 proximity to Qatar, the company’s main supplier. In 2009, capacity of Dahej terminalBSE Sensex 16,154 was increased to 10 mmtpa. Currently, the company has a 25 yr LNG supply contract for 7.5 mmtpa with Rasgas of Qatar. LNG is transported via three tankers—Disha, Raahi and Aseem to the Dahej terminal. The company has back-to back off-take Stock Codes agreements with GAIL, IOCL and BPCL in the ratio of 60:30:10, respectively. The terminal is well connected with GAIL’s HVJ & DUPL pipelines and GSPL’s network inBloomberg Code PLNG IN Gujarat. The company has recently contracted 1.5 mmtpa for 2 yrs and has enteredReuters Code PLNG.BO into offtake agreements for the same. The company also provides regasificationBSE Code 532522 services wherein companies can use Petronet LNG’s facilities for regasifying their LNGNSE Code PETRONET cargoes.Face Value `10 Capacity Expansion: Petronet LNG is expanding its capacity in Dahej by 5 mmtpa by constructing another jetty and expanding its regas plant facilities to handle Shareholding Pattern (31st Dec, higher volume of LNG. This expansion is being done at a very competitive capital 2011) cost of `20bn. The company is also constructing a greenfield LNG terminal of 5 mmtpa at Kochi at an investment of `42 bn. The higher capex/ton reflects current Public & costs of setting up LNG terminals and is in line with other projects scheduled to Others 27.53% come up in the future. Kochi terminal is expected to be operational by the end of FY13, thus, contribution to topline and bottomline is expected from FY14. There is sufficient pent-up demand for natural gas in the Southern region, mainly from the industrial sector in Mangalore and Kochi. The management is confident of DII supplying LNG from its Kochi terminal to BPCL’s 9.5 mmt Kochi refinery and MRPL 7.92% (Capacity: 11.8 mmt). Both these refineries are undergoing capacity expansion to Promoter 15 mmt, which would require additional volumes of gas. FII 50% 14.55% Key Financials (`Cr) Price Performance Particulars FY07 FY08 FY09 FY10 FY11 (%)1 Mth 3 Mths 6 Mths 1 Yr Net Sales 5508.96 6555.31 8428.70 10649.09 13197.29-0.8% 0.3% 8.5% 26.5% Y-o-Y Growth % 43.6% 19.0% 28.6% 26.3% 23.9% Total Expenditure 4860.90 5689.18 7527.43 9802.63 11981.02 Stock Price Performance EBITDA 648.06 866.13 901.27 846.46 1216.27 Y-o-Y Growth % 32.8% 33.6% 4.1% -6.1% 43.7% 160 140 Margin 11.8% 13.2% 10.7% 7.9% 9.2% 120 Interest 107.04 102.36 101.21 183.93 193.13 100 Depreciation 102.03 102.18 102.52 160.86 184.67 80 Tax 162.33 240.52 255.60 195.00 286.80 60 PAT 313.25 474.65 518.44 404.50 619.62 Jan-11 Mar-11 May-11 Jun-11 Dec-11 Jan-12 Feb-11 Jul-11 Sep-11 Oct-11 Apr-11 Aug-11 Nov-11 Y-o-Y Growth % 60.7% 51.5% 9.2% -22.0% 53.2% Margin 5.7% 7.2% 6.2% 3.8% 4.7% Petronet LNG BSE Sensex EPS (`) 4.18 6.33 6.91 5.39 8.26 (Source - Keynote Capitals ltd.) 5 Keynote Capitals Research
  • 7. K E Y N O T E Demand-supply gap of natural gas in India: The Indian market for natural gas has always suffered from a chronic shortage of supplies. This is due to limited domestic gas supplies, gas pricing & customer allocation being the prerogative of the Govt. and inadequate transmission infrastructure in the country. A study by Mercados shows that natural gas demand is expected to grow at CAGR of 21% from 179 mmscmd in FY11 to 381 mmscmd in FY15. On the other hand, the Directorate General of Hydrocarbons (DGH) estimates that supply will grow at CAGR of 8.6% only from 146 mmscmd in FY11 to 203 mmscmd in FY15. Thus, the demand-supply gap is expected to increase by more than 5 times from 33 mmscmd in FY11 to 178 mmscmd in FY15. No regulatory threat to regas tariffs: Petronet LNG is perhaps the only player in the oil & gas industry whose margins / pricing / returns are not subject to any regulations. The company has reported ROEs in the range of 25-30% historically. This has created a concern that the regulator may bring LNG terminals and regas tariffs into its ambit. However, since the regasification tariff accounts for a small portion of the delivered price, controlling the tariff may not result in any meaningful relief to regasified liquefied natural gas (RLNG) customers. First mover advantage at Dahej Terminal: The Dahej terminal is located in Gujarat, which accounts for 1/3rd of the total gas consumption of India. Gujarat is home to various refineries, petrochemical, fertilizer & power plants which account for the lion’s share of R-LNG consumption. The 10 mmtpa LNG terminal at Dahej will continue to be the base of Petronet LNG’s operations going forward due to its optimal location, low capital cost translating into competitive regas tariffs and tying up of 75% of its capacity at favorable long term contracts. Valuation and Outlook Demand for natural gas is expected to remain robust in India and domestic supply of natural gas fails to meet the shortfall, which will boost business prospects for Petronet LNG. With growing volumes and increasing revenue visibility through capacity expansions at Dahej and new capacities coming up at Kochi makes Petronet LNG as an attractive long term investment opportunity. As per the consensus estimates, Petronet LNG is trading at 12.05x FY12E EPS of `13.0 and `11.85x FY13E EPS of `13.23.Keynote Capitals Research 6  
  • 8.     K E Y N O T E Polaris Financial Technology Ltd. Polaris FT was founded in 1993. It provides software services and solutions toKey Stock Data multinational clients. The Company provides its services to companies in the banking andSector IT financial industry, which specialize in retail banking, credit cards, insurance, riskCMP `137.80 management, investment banking and a variety of telecom related activities. It is chosen52wk High/Low 214/113 outsourcing partner for 9 of the top 10 global banks and 7 of the 10 top global insuranceMarket Cap `1369Cr companies. It is worlds first CMMi (Capability Maturity Model Integrated) level 5 certified ($268mn) Company.6m Avg. daily vol 64829 Revised guidance upward:- Polaris’s management has increased its revenuesBSE Sensex 16154.62 guidance for FY12E at `2014Cr –`2060Cr from `1968Cr – `2014Cr backed by robust volume growth and strong performance of Intellect. The EPS guidance is revised toReco. ‘Buy’ `22.65 – `23.47 from `21.95 – `22.35. Excellent numbers for the Q2FY12:- The Company has registered strong numbersBSE Code 532254 for the quarter ending September 2011. The company has crossed `500Cr asNSE Code POLARIS revenues in the September quarter ended. A sharp rise of 35% in the consolidatedFace Value `5 revenues to `523.12Cr in Q2FY12 as compared with `387.95Cr in the same quarter last year. Operating profit moved up to `75.54Cr as compared to `60.24Cr Y-o-Y basis. Similarly revenues contribution from Top 5 clients increased to 43.03% against Shareholding pattern (30th Sep, 2011) 40.81% in the same quarter last year.   Geography-wise revenues contribution:- The company received more than 67% revenues from US and Europe. The highest revenues come from US (45.43%) as Prom compared to Europe (22.40%). Revenues contribution from Offshore stood at 59.15% Other oters s 29% in Q2FY12 as compared to 56.68% Y-o-Y. It will have positive impact on companies 36% bottom-line. Key Financials (`Cr) DII FII 11% 24% Particulars FY07 FY08 FY09 FY10 FY11 Total Sales 1032.4 1099.3 1377.9 1353.8 1586.3 Y-o-Y Growth % 25.1% 6.5% 25.3% -1.8% 17.2% Price Performance (%) Total Expenditure 871.8 981.1 1144.4 1131.7 1372.41 Mth 3 Mths 6 Mths 1 Yr EBITDA 160.6 118.2 233.5 222.0 213.99.9% 7.8% -24.6% -15.8% Y-o-Y Growth % 110.4% -26.4% 97.6% -4.9% -3.7% Depreciation 48.1 46.0 50.5 35.0 33.7 Stock Price Performance EBIT 112.5 72.2 183.0 187.0 180.2 Close Price Sensex Other income 9.3 18.1 -31.6 -7.3 59.1 Bse IT Interest paid 0.8 0.8 0.7 0.9 1.1 115 PBT 121.0 89.5 150.7 178.8 238.2 105 Tax 19.9 16.1 20.9 25.5 35.9 95 PAT 101.1 73.4 129.8 153.3 202.3 85 Y-o-Y Growth % 374.3% -27.4% 76.9% 18.1% 32.0% 75 NPAT & Minority 101.2 73.2 130.7 152.8 202.5 EPS(`) 10.2 7.4 13.2 15.4 20.4 65 EBITDA Margin 15.6% 10.8% 16.9% 16.4% 13.5% 55 PAT Margin 9.8% 6.7% 9.4% 11.3% 12.8% PE 14.7 11.0 8.1 11.2 6.8 Source: Keynote Capitals Research 7 Keynote Capitals Research
  • 9. K E Y N O T E 12 Intellect wins across banking and insurance verticals: - Intellect (The flagship product of company) suite is a set of most comprehensive pack of solutions designed for the Corporate, Retail and Investment Banking segments. Intellect is a service-enabled, component-based core banking system. Polaris is assessed at CMMI Level 5 certification offering highly repeatable, continuous-improvement processes. Intellect revenues contributed `139.28Cr in the Q2FY12, representing 27.32% of its revenues; witnessing a jump of 68% y-o-y. Services revenues contributed 72.68% at `370.46Cr to the revenues; representing a growth of 21% on y-o-y basis. Polaris has recorded 12 intellect wins across banking and insurance verticals during the quarter. Revenues split by Products and Services `Cr Particulars Q2FY11 Q1FY12 Q2FY12 Product Revenues 83.0 105.2 139.3 Services Revenues 305.3 344.9 370.5 Source: Company Quarterly performance `Cr Particulars Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Total Sales 388.0 411.4 443.0 455.8 523.1 Q-o-Q Growth % 5.0% 6.1% 7.7% 2.9% 14.8% Total Expenditure 327.7 347.5 384.8 392.3 447.6 EBITDA 60.2 63.9 58.2 63.5 75.5 Q-o-Q Growth % 5.7% 6.1% -9.0% 9.2% 19.0% Depreciation 8.4 8.7 8.7 9.6 11.2 EBIT 51.8 55.2 49.5 53.9 64.4 Other income 5.4 5.3 17.5 8.0 8.9 Interest paid 0.3 0.3 0.4 0.5 0.6 PBT 56.9 60.2 66.6 61.5 72.7 Tax 9.0 10.1 9.0 16.9 18.9 PAT 47.9 50.2 57.7 44.5 53.8 Q-o-Q Growth % 3.0% 4.7% 15.0% -22.8% 20.9% Source: Company Valuation At current market price of `137.80 stock is trading at 6.8x FY11 and 6.3x Q2FY12 (TTM) earnings. Which is low as compared its industry PE of 14.3x (From Bloomberg). The management of Polaris has revised the revenue guidance upward and increasing deal sizes will lead to outperform going forward. Similarly Rupee depreciated against the Dollar, which will have positive impact on the company’s EBITDA margin.Keynote Capitals Research 8  
  • 10.     K E Y N O T E  Tata Sponge Iron Ltd. Tata Sponge, which has its manufacturing facility at Bilaipada (in Joda Block ofKey Stock Data Keonjhar District in Orissa), was initially set up as a joint venture company betweenSector Metals Tata Steel and the Industrial Promotion and Investment Corporation of Orissa LimitedCMP `254.7 (IPICOL). It has a production capacity of 390000tpa of sponge iron. The company has52wk High/Low 379.0/232.6 also set up 26MW of captive power plants to gain from the waste hot gases releasedMarket Cap `389.77Cr from its kilns in phases. ($74.9mn) High Dividend yield: Over the last several years company has consistently paid6m Avg. daily vol 5235 dividend more than 40% of face value. Last year company paid dividend of Rs8 perBSE Sensex 16154.6 share translation dividend yield of 2.33%. Average dividend yield for the last 5 years isReco ‘Buy’ 2.8% which is reasonably good.BSE Code 513010 Debt free: The Company is totally debt free and therefore higher cost of capital will notNSE Code TATASPONGE affect the company’s performance.Face Value `10 Lower production and sales volume muted by higher realization: Despite Shareholding pattern (30 th significantly lower production and sales volumes, strong sponge iron realizations are Sept, 2011) supporting both revenue and margins. Sponge Iron production was significantly lower in H1FY12 to 143K tons from 193K tons on account of disruption in iron ore supply due to mining ban in Karnataka and regulatory rigor in the Barbil region has affected supply of iron ore to the industry. Current sponge iron prices are at a 3-year high in the Othe Prom domestic market and are expected to be elevated till the ban is not taken back. rs oters Currently, price of the sponge iron is `24000 per ton as compared to `17200 per ton 42.3 43.7 % during same period previous year. % Key Financials (`Cr) DIIs FIIs 7.3% 6.8% Particulars FY07 FY08 FY09 FY10 FY11 Price Performance (%) Total Income 296.83 480.04 628.28 541.94 694.871 Mth 3 Mths 6 Mths 1 Yr Growth (%) 45.2% 61.7% 30.9% -13.7% 28.2%4.6% 18.5% 19.7% 2.6% Total Expenditure 245.04 311.92 424.16 396.09 526.07 PBIDT 51.79 168.12 204.12 145.85 168.8 Stock Price Performance Growth (%) 23.5% 224.6% 21.4% -28.5% 15.7% 110% Interest 5.36 12.03 4.64 0.25 0 100% PBDT 46.43 156.09 199.48 145.6 168.8 90% Depreciation 13.49 19.65 18.31 19.38 18.52 80% Tax 2.91 19.48 60.5 46.08 55.6 70% Fringe Benefit Tax 0.2 0.31 0 0.02 0 60% Deferred Tax 8.6 21.12 0 -4.4 -6.66 50% Reported PAT 21.23 95.53 120.67 84.52 101.34 Jan‐11 Mar‐11 May‐11 Sep‐11 Nov‐11 Jan‐12 Jul‐11 Extra-ordinary Items 5.37 3.17 0 0 0 Adj PAT Extra-ordinary item 15.86 92.36 120.67 84.52 101.34 Tata Sponge Metals Growth (%) -28.4% 482.3% 30.7% -30.0% 19.9% Sensex Source: Company & Keynote Capitals Research 9 Keynote Capitals Research
  • 11. K E Y N O T E Quarterly performance(`Cr) Net sales grew 19% Q-o-Q (down 1% Y-o-Y) to `174Cr while realizations increased 23% Q-o-Q to `22397 per ton. EBITDA decreased 10% Q-o-Q (13% Y-o-Y) to `29.9Cr while EBITDA/ton declined 8% Q-o-Q to `4206. Radhikapur (East) coal block is on track. Coal production is likely to start in 2013. `Cr Particulars Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Net Sales 175.3 168.38 191.64 138.09 168.02 Other Income 3.8 2.89 4.14 4.48 6.22 Other Operating Income 0.09 2.01 3.8 7.6 5.7 Total Income 179.19 173.28 199.58 150.17 179.94 Total Expenditure 159.74 135.53 131.51 112.6 143.86 PBIDT 19.45 37.75 68.07 37.57 36.08 Interest 0 0 0 0 0.06 PBDT 19.45 37.75 68.07 37.57 36.02 Depreciation 4.64 4.64 4.52 4.56 4.62 PBT 14.81 33.11 63.55 33.01 31.4 Tax 4.4 10.91 20.72 10.49 9.67 Reported Profit After Tax 10.41 22.2 42.83 22.52 21.73 EPS (`) 6.76 14.42 27.81 14.62 14.11 PBIDT Margins (%) 11.1% 22.4% 35.5% 27.2% 21.5% PBDT Margins (%) 11.1% 22.4% 35.5% 27.2% 21.4% PAT Margins (%) 5.9% 13.2% 22.3% 16.3% 12.9% TTM Profit & Loss A/C `Cr Particulars TTM Q208 TTM Q209 TTM Q210 TTM Q211 Net Sales 603.54 492.84 606.09 666.13 Other Income 10.27 9.98 7.96 17.73 Other Operating Income 6.26 9.93 10.84 19.11 Total Income 620.07 512.75 624.89 702.97 Total Expenditure 364.7 415.84 472.23 523.5 PBIDT 255.37 96.91 152.66 179.47 Interest 8.43 1.5 0.25 0.06 PBDT 246.94 95.41 152.41 179.41 Depreciation 17.89 19.2 19.02 18.34 PBT 229.05 76.21 133.39 161.07 Tax 65.75 26.83 43.4 51.79 Reported Profit After Tax 163.3 49.38 89.99 109.28 EPS (`) 106.04 32.06 58.44 70.96 PBIDT Margins (%) 41.2% 18.9% 24.4% 25.5% PBDT Margins (%) 39.8% 18.6% 24.4% 25.5% PAT Margins (%) 26.3% 9.6% 14.4% 15.5% Source: Company & Keynote Capitals Research Valuations: We expect sponge iron production to be significantly lower due to iron supply issues. However, this has been factored and the stock is available at the attractive valuations. At CMP of `254.7, company trades at the TTM PE multiple of 3.59x and P/BV multiple of 0.71x which are very low as compare to the industry peers of 10.9x and 1.68x respectively.Keynote Capitals Research 10  
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