Uttam Galva

Investors holding shares in steel company Uttam Galva can consider not tendering their shares in ArcelorMittal’s open offer.

While the Rs 120 per share offer in the midst of a commodity slump is very generous, the potential upside with a brand such as ArcelorMittal taking a stake and the scope for an exponentially increased scale and product line make for a good investment.

The company has been valued at 15.7 times trailing diluted earnings with a market cap of close to Rs 1,370 crore.

Peers such as Bhushan Steel are valued at 12 times earnings. Shree Precoated Steel, with slightly higher capacities and a similar product line, is being acquired by Essar Steel for Rs 700 crore.
WHO THEY ARE

Uttam Galva has a single production unit at Khopoli, Maharashtra. It purchases and processes hot rolled steel into cold rolled steel (1 million MTPA) and other value added processes include galvanising (7,50,000 MTPA), annealing and colour coating (90,000 MTPA).

Consumers for its products include automobiles, consumer durables, industrial machinery majors such as Bajaj, Force motors, BHEL, Whirpool, LG, Tata Steel among others.

In 2008-09 exports accounted for 52 per cent of sales, with Europe and the US being its major markets. While the high percentage of exports would normally be a worrying factor considering the global scenario, in Uttam Galva’s case, the company’s low production volumes can easily be absorbed given the robust domestic demand.

Proximity to the Nava Khera port is an advantage, given the high percentage of exports.

This also allows import of steel if the domestic market prices are higher than international prices. The stake acquisition by ArcelorMittal may guarantee timely supply of steel for Uttam Galva’s operations.
THE NUMBERS

Over the last five financial years the company’s sales have grown at an average of 23 per cent for the last five years, with FY09 registering a higher 38 per cent growth.

The operating margins have averaged at 9.8 per cent over the past five years, but fell to 8.2 per cent for FY09, with higher interest expenses and firmer steel prices for the first nine months of the year.

Being a ‘processor’ of steel, the largest cost component for the company is hot rolled steel. However, the ability to pass on input changes to customers has helped the company weather raw material price swings over several years quite well.
WHERE THEY FIT IN

ArcelorMittal currently has plans to set up steel plants in Jharkhand and Orissa which are expected to start production in 2014 with a expected capacity of 14 million TPA. These will be fully integrated plants with access to iron ore and coal.

Uttam Galva’s facility would neatly complement ArcelorMittal’s India plans, by using the supply of hot rolled steel from the latter’s plants to fill in a lucrative niche of the vertical. This gives Uttam Galva a full four-five years to ramp up capacities.

The company could also draw from ArcelorMittal’s vast product line in coated steel including alloy coatings and organic coatings.

Speciality coatings such as zinc-aluminium (Galfan), speciality surface treatments, aluminium silicon alloy coatings are a few of the products which are likely to find application in energy, automobiles and the consumer durables sector.

Such competence, which would have taken years for Uttam Galva to attain as a standalone company, can now potentially be tapped quite easily from the co-promoter.

This would confer a first-mover advantage on Uttam Galva to enter emerging niche segments.
SECTOR PROSPECTS

While global steel production dropped 21 per cent for the first six months of 2009, Indian production grew by 1.3 per cent. Demand for washing machines, air-conditioners, cars, etc, have grown 10-26 per cent for the five years ending 2007-08.

As demand for consumer durables, automobiles and industrial machinery grows, the steel pie follows suit. In this scenario, the share of speciality cold rolled steel products for niche industries is likely to grow at a faster clip than long products and generic flat products.

While major steel companies such as Tata Steel, JSW Steel, SAIL, Essar Steel produce cold rolled galvanised and colour coated steel, very few players other than Uttam Galva have cold rolled and derived products as their sole focus.

Backed by ArcelorMittal financially and for product development, Uttam Galva can potentially double or triple its sales in five years, albeit with additional borrowing which might take a bite out of the slim margins in the near term. The current interest cover ratio stands at 1.54 times, which may turn into a worry if sales stagnate.

OFFER DETAILS

Arcelor Mittal’s open offer is for 29.39 per cent of the non-promoter holding of the company. The current promoter group holds 39.7 per cent.

ArcelorMittal will hold roughly equal stakes of about 35 per cent in the company if the open offer succeeds.

via BL