Recommendations From Iron & Steel/Interm Products Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Tata Sponge Iron Limited 

STEELING THE GROWTH OUTLOOK

HERE IS WHY High capacity utilisation Improving financials Favourable outlook for steel sector   

The company commands leadership position in the industry and has an advantage both in terms of procuring raw materials at competitive prices and relatively low logistics costs. In today’s market, the main advantage of the company is its high capacity utilisation, which means that it is able to use its resources in an optimum manner. The company’s plants are now operating at 107 per cent of their capacities.

The significant recovery of the global steel industry in 2017 after almost a decade of limping growth points to a favourable outlook for the Indian steel industry. The demand for steel is expected to be strong on account of improving macros and increased investment in infrastructure by the government. The steel industry's recovery has proven to be hugely beneficial for small but efficient players like TSIL.

The company’s management has hinted at the possibility of applying for environment clearance for further production of about 30 to 40 KTPA from its existing kilns. The management of the company also approved the set-up of a steel plant of up to 1.5 million tonnes in stages, which would be a brownfield expansion with a competitive capex cost.

On the financial front, the company posted a 31.59 per cent hike in its net sales toRs 243.50 crore in the fourth quarter of FY18 as against Rs 185.04 crore in the same quarter of the previous fiscal. The PBIDT of the company increased by 138.80 per cent to Rs 61.61 crore in the fourth quarter of FY18 as against Rs 25.80 crore in the same quarter of FY17. The net profit of the company also increased by over 120 per cent to Rs 46.70 crore in the fourth quarter of FY18 as compared to Rs 21.20 crore in the same quarter of the previous fiscal.

On the annual front, the net sales of the company increased by 32.75 per cent to Rs 816.65 crore in FY18 as against Rs 615.16 crore in FY17. The PBIDT of the company increased by 196.35 per cent to Rs 182.73 crore in FY18 as against Rs61.66 crore in the previous fiscal. The net profit of the company increased by over 139 per cent to Rs 140.86 crore in FY18 as compared to Rs 58.74 crore in the previous year.
  
On the valuation front, the company has a PE ratio of 11.97x as against an industry PE of 30.12x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 6.95 per cent and 13.40 per cent, respectively. The company is virtually debt-free. TSIL has been maintaining a healthy dividend payout of 26.16 per cent.

Considering the company’s strong parentage and forward integration into steel-making, we recommend our reader-investors to BUY the stock.