Reliance Communicatin Ventures - ENAM

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Sharekhan Investor's Eye - March 13

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Shivalik Global: Avoid

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Adhunik Metaliks - IPO - AVOID

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Adhunik Metaliks

Adhunik Metaliks (AML) is part of the Adhunik group, promoted by the Kolkata-based Agarwal family. Its current product portfolio includes sponge iron, pig iron and alloy billets. The company has also initiated rolling of its billets through third party arrangements to meet the current requirement of rolled products in various segments.

AML is setting up an integrated steel plant, with complete backward and forward linkages, at a cost of Rs 437.36 crore. The entire project is to be completed by March 2008. This will cater to user segments like the automobile, engineering and forging sectors. The company proposes to fund the project outlay through an IPO (Rs 100 crore), consortium of term loans (Rs 284.29 crore) and internal accruals (Rs 53.07 crore).

Strengths

• AML will have significant control over its production cost on account of:
• Charging of hot ferro chrome in steel making is expected to reduce energy cost.
• Charging sinter in blast furnace will reduce coke consumption and improve productivity.
• Usage of blast furnace gas in rolling mill and SMS will replace/reduce the consumption of expensive petroleum fuel, cutting down the cost of production
• Captive oxygen plant will replace the expensive liquid oxygen purchased from external sources.
• Captive power plant using blast furnace gas, waste heat/char from DRI, and middlings from washery will reduce the cost of electric energy
• AML plans to consolidate its business model into an integrated value chain with end-to-end capabilities, i.e., from iron-ore and coal to auto-grade special steel and stainless steel; to cater to the rapidly growing automotive components and engineering segment; and compete in the market place by way of effective cost control measures.

Weaknesses

• Many players in alloy and special and stainless steel segments have lined up plans for capacity expansion, which may lead to an over supply in the market place.

• Due to its cyclical nature, the dynamics of the steel industry keep changing, depending on factors such as the demand-supply scenario in China and the cost of vital input such as iron ore and coal. Currently, the steel industry is facing pressure on prices on a high base of last year, as China has become a net exporter. Also, on account of rising input costs, the margin of players has crumbled.

• The promoters have few more group companies in the steel business, which can lead to conflict of interest and diversion of attention.

Valuation

AML reported net profit of Rs 9.56 crore in the quarter ended December 2005 as against Rs 7.25 crore in the six months ended September 2005 and Rs 7.1 crore in FY 2005. The jump in net profit was on account of the commissioning of steel melting shop (SMS) from November 2005, commencement of commercial production of the mini-blast furnace from September 2005, and expansion in >???(DRI) capacity from 1,20,000 tonnes per annum to 1,50,000 tonnes per annum, and increase in capacity utilisation of DRI kilns.

At a price band of Rs 37 – 42, AML’s PE works out to be 47.5 – 52.1 times FY 2005 earning and 15.1 – 16.5 times nine-month FY 2006 annualised earning on post-diluted equity. Kalyani Steels, which is an established player, commands a TTM P/E of 15.6, while the sector TTM P/E is 5.8. Most of the players in the special and stainless steel segment are trading at a PE well below 10.

Uttam Sugar Mills

Promoted by the Adlakha family, Uttam Sugar Mills commenced sugar-manufacturing operations in January 2001 by setting up a 2,500-tonne crushed per day (TCD) plant along with a 6-MW co-generation capacity in Libberheri, Uttaranchal. In the year ended September 2005, the company had a manufacturing capacity of 6,250 TCD and a co-generation capacity of 16 MW.

Uttam Sugar Mills is now coming out with a maiden public issue of 40,00,000 equity shares at a face value of Rs 10 in the price band of Rs 290 to Rs 340. With this issue, the company expects to collect proceeds anywhere in the range of Rs 116 crore to Rs 136 crore.

The object of the issue is to set up two greenfield units to manufacture premium quality white sugar with a capacity of 4,500 TCD and 5,000 TCD along with co-generation of power with a capacity of 15 MW and 30 MW at Muzzafarnagar and Saharanpur in Uttar Pradesh (UP), respectively. Both the units are expected to commence commercial production by October 2006. The units will employ a concept of single sulphitation and re-melt process that is expected to result in production of superior quality sugar as compared to sugar produced by the conventional double sulphitation process.

Uttam Sugar Mills has also received an approval from the Ministry of Commerce & Industry to set up a distillery unit with a capacity of 22,500 kilo liter per annum of alcohol at its Barkatpur facility. Out of the post-expansion co-generation capacity of 81 MW, the company is expected to have a surplus of more than 35 MW and is currently completing arrangements to sell excess power to the Uttar Pradesh State Electricity Board.

The total cost of the two new units is approximately Rs 270 crore and the working capital requirement is Rs 16.70 crore.

Strengths

• Uttam Sugar Mills is one of the few players in the industry to employ the Defeco Remelt Phospho Floatation (DRP) process in its Libberheri unit that results in manufacture of sulphurless sugar. This sugar is preferred by industrial buyers and generally commands a premium over plantation white sugar. The proposed units, too, will employ the same process of manufacturing sugar.

• The Libberheri unit (6250 TCD) is eligible for deduction from income tax under section 80 IC and is also entitled to exemption from payment of excise duties for 10 years with effect from December 2004. This is due to the fact that it is located in the industrially backward region in Uttaranchal.

• Uttam Sugar Mills is also eligible to obtain certain incentives in the form of capital subsidy and reimbursement of the transportation cost of sugar from the UP government. This incentive is available to private entrepreneurs that incur expenditure to set up new production facility or expand the existing facility from FY 2005 to FY 2007. These plants need to commence production by March 2007. It has also set a minimum expenditure of Rs 350 crore to avail this facility. Combining the cost of the Barkatpur plant expansion and the proposed new capacities, Uttam Sugar Mills will also be eligible for the incentives. This is expected to save approximately Rs 1 per kg of sugar sold.

Weaknesses

• Uttam Sugar Mills operates in the western and northern parts of UP and in Uttaranchal where the sugar mills are known to pay more to farmers, either in cash or kind, in excess of the state advised price (SAP) paid. SAP is higher than the statutory minimum price (SMP) fixed by the Central government. This is evident from the fact that for the 2005 sugar season, SMP stood at Rs 74.5 per quintal of sugarcane and SAP was Rs 112 per quintal. However, the actual cost for the company was more than Rs 128 per quintal. Going forward, this is likely to result in higher raw material cost.

• There is a mad rush for setting up and expanding sugar mills in and around UP to avail of the state government’s incentives. This is bound to create excessive capacities and could lead to severe shortage of sugarcane especially when the sugarcane crop in the region falls.

• The promoters have many companies engaged in diverse activities. Plant and machinery for major portion of the proposed units will be obtained from group companies.

Valuation

In the year ended September 2005, Uttam Sugar Mills posted net sales of Rs 187.94 crore and its net profit stood at Rs 26.71 crore. The resultant earning per share based on the post-issue equity capital of Rs 25.77 crore comes to Rs 10.4. The lower price band of Rs 290 discounts the same by 28 times and at the higher band PE ratio stands at just under 33. Compared to the average PE ratio for the sugar industry of around 20 times, the issue is richly priced.