Monnet Ispat Posts Good Results For March Quarter 2012

Monnet Ispat, a producer of sponge iron, steel, ferro alloys and power has reported good results for the March 2012 quarter. The topline of company has jumped by 20.1 per cent on a YoY basis to Rs 537 crore. The jump in the sales was mainly on account of the increase in the realisation of sponge iron, which grew by 23.2 per cent to Rs 24,159 per tonne. Moreover, the sales volume of structural steel jumped by 25.7 per cent YoY to 21,065 tonnes. However, the sales volume of power declined by 23.5 per cent on a YoY basis to 180 million units while the net realisation of power sales grew by 14.3 per cent YoY and 2.7 per cent QoQ to Rs 3.6 per unit during the quarter.

The company has performed well on the operating front too. The operating profit of the company has grown by 7.5 per cent on a YoY basis to Rs 138 crore while the net profit has grown by 8.5 per cent on a YoY basis to Rs 83 crore. However, the EBITDA margin due to increase in the raw material cost declined by 300 basis points YoY to 25.73 per cent. The raw material cost as a percentage of sales increased to 64 per cent in 4QFY2012 compared to 59 per cent in 4QFY2011. The higher interest cost - up by 34 per cent on a YoY basis to Rs 24.27 crore - impacted the net profit margin of the company which declined by 180 bps to 15.11 per cent.

Segment-wise, the steel business has done better than the power business and the topline growth of the company is mainly on account of the steel division which grew by 27 per cent YoY to Rs 469 crore. Meanwhile, the power division reported a decline in the revenue which was lower by 15.51 per cent YoY to Rs 73 crore. The decline in the power segment revenue is mainly due to lower sales volume - down by 23.5 per cent YoY - during the quarter.

In conclusion we believe that overall the company has done well during the quarter on the back of an improved demand scenario and increase in the prices. However, the higher raw material price remains a concern for the company in the coming quarter. In a statement released by the company, it is stated that there has been an increase in the raw material prices globally and locally which has had a resultant impact on increasing the prices of sponge iron and steel. However, with the increase in the steel prices the margins of the industry have remained almost unchanged.

As for the outlook for the fiscal year, the company has stated that the industry is set to go through challenging times on account of a gradual decline in the investment cycle of the country.  We believe that the weakening economic situation and slowdown in the investment cycle in the coming quarter will lead to lower consumption of steel and will remain a challenging task to achieve accelerated growth in steel consumption in FY13.

Expansion Plan

The company is in the process of implementing a 1.5 million tonnes integrated steel plant with a project cost of Rs 3,562 crore that is expected to get commissioned by mid-FY2013.  However, the benefits of the expansion will be accrued from FY14 onwards. Further, it is also setting up a merchant power plant of 1,050 MW with a project cost of Rs 5,092 crore at Angul in Odisha backed by captive coal mines. The project which was expected to get commissioned by the end of the fiscal year 2014 has been delayed now by six months and may get operational by the second half of the fiscal year 2014.

The company has carried out a financial closure of Rs 3,800 crore (76 per cent of the total project cost) for the power plant with the consortium of lenders led by Infrastructure Development Financial Corporation (IDFC). It has raised Rs 275 crore through equity dilution of 12. 5 per cent in favour of the Blackstone Group. For the sale of power it has signed a PPA agreement with Power Trading Corporation (PTC) for the sale of 850 MW and with Grid Corporation of Orissa Limited (GRIDCO) for its 1,050 MW power plant. The rest of the power will be sold in the open market.

A major issue in power projects is the availability of coal, especially in the current situation when there has been a shortage of thermal coal. And to mitigate the risk of easy availability at a fair price the company has purchased and has been allocated five coal blocks. Out of the five coal blocks only the Chhattisgarh mine is currently operational with 1 MTPA of output while the second mine in Utkal, Odisha will get operational by the end of FY2012. Both the mines will be good enough for the power projects. The rest of the coal blocks are expected to become operational by 2014.  

As per the FY2011 consolidated balance-sheet, the cash balance of the company stood at Rs 688 crore. Further, with its total debt of Rs 3,195 crore and the equity capital of Rs 2,140 crore, the debt equity ratio of the company stood at 1.49. This remains a cause of concern in a tight liquidity situation. With the current expansion plan the debt of the company will increase to Rs 6,995 crore which will lead to higher interest outgo and lower profits, thus affecting the EPS of the company.

We believe that on the back of captive coal and iron mines, the company will see improvement in its profitability in the coming years. However, higher interest will play a dampener in the company’s profitability. Also, with all the expansion plans getting operational from the next financial year onwards, the benefits of the projects will be accrued from FY13. More importantly, the steel sector is going through a tough phase due to slowdown in demand which may impact the company’s sales volume in the coming quarters. Therefore our advice to investors is to stay away from the stock.