ICICIDirect - Adhunik Metaliks

Adhunik Metaliks (ADHMET)

Price: Rs 37 Target: Rs 52.50 OUTPERFORMER

Adhunik Metaliks Ltd (AML), a value-added steel manufacturer, is expected to
more than double its top line and quadruple its bottom line during FY06-09E
on the back of capacity expansion into high-margin products along with
backward integration into critical raw materials such as iron ore and coal.
We believe these initiatives would result in a significant de-risking of its
business model and lend stability to earnings. The stock appears attractive
on various valuation parameters and we rate it an Outperformer.

INVESTMENT RATIONALE

Capex to transform business model: AML is implementing a capex programme
that would transform its business profile from a secondary steel
manufacturer to an integrated steel player with linkages across the entire
value chain from critical raw materials such as iron ore and coal to
value-added steel products. Post expansion, we expect the company to emerge
as one of the lowest cost integrated special steel manufacturer in the
country by 2008.

Capacity to double: The company is executing a expansion programme which
would double its capacity from 250,000 tonnes per annum (tpa) to 440,000 tpa
by 2008. Apart from making the company more competitive, we expect the
expansion would result in improved realizations from value-added products,
as prices in this segment are higher and more stable than those for base
grades products.

Backward integration to drive profitability: AML is integrating backwards
with captive ownership of critical raw materials, viz. iron ore and coal
mines, which would enable it achieve a 36% reduction in iron ore costs and
more than 40% savings on coal even on an expanded capacity base, resulting
in annual combined savings of about Rs 50 crore annually.

Valuation: We believe the current stock prices do not reflect the forward
and backward integration benefits over a two-year investment horizon. We
expect RoCE to expand from 14.58% in FY07E to 25.65% in FY09E. RoNW is
expected to jump from 24.69% in FY07E to 27.54% in FY09E. Net profit margins
are expected to expand by 186 basis points to 11.61% in FY09E. At the
current price of Rs 37, the stock discounts its FY08E EPS of Rs 13.13 by
2.82x and FY09E EPS of Rs 15.02 by 2.46x. We believe the stock is a
re-rating candidate and even without at a lower P/E band of 4x FY08E
earnings, it offers an upside of 42% to Rs 52.50 levels.

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