No Visa To Growth

Nothing seems to be going right for Visa Steel which manufactures products such as pig iron, Lam coke, ferro chrome and recently added sponge iron to its products portfolio. Although the company has come out with stunning H1FY09 results, many challenges are awaiting the company in the second half. The scenario is really not good for the company with sharp fall in the product prices resulting in lower realisations, lower demand expected to take toll on volumes and falling margins making the business unviable in some of its segments. Vishal Agarwal, MD, Visa Steel, says “Product prices have corrected sharply and the next two quarters are expected to be tough for us as it is difficult to maintain the margins.” The situation is worse for its ferro chrome unit, which the company has temporarily closed down as ferro chrome prices have declined almost 50 per cent and the raw material prices have not corrected proportionately. The closure of the plant has also put a question mark on its forward integration of the stainless steel plant. With this, the company is not only expected to suffer in its topline, even its bottomline is expected to get hampered. Even the management has stated that in the second half, the company may post profit at EBITDA levels but it may make losses at the after tax level. So, although the company has made profits in the first half, losses in the second half will make sure that there will be no bottomline growth for the company in FY09. That apart, the scrip does not seem to be well-placed on the valuation front also. While its P/E of 5.50x on FY08 basis is higher than that of Tata Steel and other steel players which got battered down in the recent turmoil, its EV/EBITDA of 11.40x seems to be much overvalued. Hence, it will be a prudent strategy for the investors to exit at the current level

The Company
Visa Steel is into the manufacturing of products such as pig iron, Lam coke, ferro chrome and sponge iron, with ferro chrome capacity of 50,000 tonnes per annum (TPA) and pig iron capacity of 225,000 TPA. The company has recently added 150,000 TPA of sponge iron capacity and another 150,000 TPA capacity is expected in Q4 FY09, taking its total to 300,000 TPA. The company also two power plants of 25 MWs each, with one 25 MW plant being captive power plant at its ferro chrome plant and the other 25 MW plant being a waste heat recovery plant at its recently commissioned sponge iron plant. In addition to this, the company is also adding 25 MW waste heat recovery plant along with the second kiln of 150,000 TPA of sponge iron. Regarding backward integration, although the management has stated that it is an integrated player and it has chrome ore mines at Ghotaringa, most of the demand is met through imported chrome. Even the coking coal is imported as it has not yet been allotted a mine on lease for iron ores.

Ferro Chrome – Temporary shut down
As stated earlier, the company has temporarily closed its ferro chrome facility due to poor market conditions. Actually, ferro chrome prices have corrected sharply from around Rs 96,000 per tonne to just Rs 46,000-48,000 per tonne. But the prices of chrome ore, a major raw material, have not declined proportionately. “We have shut[PAGE BREAK]

the plant temporarily to put pressure on our raw material providers so that they can reduce the prices making it viable for us to market the finished product,” says Vishal. Asked when they expect the unit to start production again, he stated that “Raw material pricing is done on a quarterly basis and hence we will get clarity in January 2009 only”. But there is no confirmation from the management on whether, even after decline in raw material prices, they will start the unit because if the ferro chrome prices decline further, it will not be viable for them to market the product. As the FC plant is closed and VSL has a captive power plant, it is selling the power to grid at Rs 2.30 per unit. The management is looking to enter into power purchase agreement with state, but talks are still in the initial phases.

Other segments also impacted
While the ferro chrome business has become unviable, its other two segments are also getting impacted as the demand and prices have both declined. “Due to global financial crisis, most of the customers are cutting back on the raw material purchases and this has impacted the demand for our products also,” says Vishal. With lower demand, the pig iron prices have also corrected from the level of Rs 28,000 per tonne in last quarter to around Rs 22,000-23,000 per tonne. In this regard, the management has categorically stated, “Already the downfall in the prices has been there and next six months we may see further correction. The demand is softening and we need to sell at the right price”. The company’s sponge iron unit has just got commissioned, but the sponge iron prices have corrected by more than 10-12 per cent, making it difficult for the company to sustain its margins. The company has a waste heat recovery plant of 25MW and is planning to set up another 25 MW plant. The company will utilize the power for captive consumption and plans to sell excess power. But, again, the PLF will depend upon the capacity utilisation of sponge iron plant, so the amount of power generated is still not known.

Other concerns
The management states that it is an integrated player, but still the company imports chrome ores and has not yet got the lease for iron ore mines. When asked about iron ore mines, management informs that it is still in the process and will take some time ahead of elections. If that is not enough, company has already suffered forex losses amounting to Rs 38.7 crore in Q2FY09 (Rs 60.49 crore for H1FY09) and management is expecting Rs 15 crore loss in Q3FY09 pulling the profitability further down. In addition, the company was planning for stainless steel capacity of 500,000 TPA (FY2010) as a strategy of forward integration, but with FC production becoming unviable, this plan may get delayed.

Financial
If we take a look at H1FY09 results, the growth may look very good but one should note that the figures are not comparable as most of its manufacturing facility has gone on stream in the Q3FY08. Till Q2FY08, the company had most of the sales through trading activity, and hence with lower margins the bottomline was also on the lower side. Therefore, due to lower base, the growth was on the higher side. As regards FY09 performance, although the company has posted good bottomline in H1FY09, the growth for whole year is expected to be negligible on account of expected losses in H2FY09. On the valuation front, at CMP of Rs 20.50, the scrip discounts its FY09E earnings by 5.50x (EPS of Rs 4). But with other steel majors like Tata Steel trading at P/E of sub-3x, we feel the scrip is overvalued and hence we recommend the investors to exit the counter.