Indian Metals & Ferro Alloys : HOLD

Q4FY11: Dismal set of numbers

IMFA posted a disappointing Q4FY11 results which were way below our expectations due to increase in Raw material cost mainly the increase in procurement of coal from e-auction/imports. IMFA posted a sales of Rs 289 Cr (Up by 68% (YoY)), an EBIDTA of Rs 60 Cr (YoY growth by 31%) and PAT of Rs 24 Cr (growth of 28% (YoY)). The EBIDTA margins corrected by 588 bps on annual basis.  

Charge Chrome Segment:  In this quarter, IMFA produced ~51500 tn (38435 tn for Q4FY10) of Charge chrome and sold ~51000 tn (35744 tn for Q4FY10). Realizations for the Charge chrome corrected by ~5% on sequential basis. Going forward, the realizations are expected to firm up as the S African Ferro Chrome producers (who are price setters in the Fe Cr industry) are expected to raise the price to pass on the incremental cost. It must be remembered that ESKOM- the public utility company in SA has a mandate to raise the power prices by 25% (approx.) every year starting CY2010 till CY2012. The Chinese spot prices are seen strengthening to 110 USc/lb against 95 USc/lb last year.

Power:  IMFA generated 20.5 Cr power units and consumed them captively. IMFA is adding up 30 MW of dual fired power plant which will be using captive flue gases and coal for generating power. The new power plant (30 MW) was expected to be commissioned by Q3FY11, but has been delayed further and is expected to be operational by Q1FY12. In addition, the company is erecting a 120 MW coal fired merchant power plant at a capex of Rs 595 Cr which is expectedto be commissioned by FY13.

Valuations & Outlook

Robust demand and expected rise in price of S African Fe Cr is expected to keep the European benchmark prices at current levels and upward bias in the Chinese spot prices. IMFA, which supplies to international players like POSCO and Glencore has its sales pegged to the benchmark prices but also linked to spot. Although, the realizations are expected to strengthen, the sharp rise in the cost of production (CoP) due to rise in coke and domestic coal prices is expected to affect the margins. We had already priced  in  rise  in  coke price but the further rise in domestic coal cost (due to drop in availability of linkage coal) has led to increase in power cost which for the last quarter has inflated to Rs 4.19/unit as against the  historical cost of generation of Rs 2.3/unit. IMFA is struggling to get supply of linkage coal as MCL has discontinued the coal supply citing the tapering linkage policy while the coal block alloted is yet to be operationalised and as per management, is expected to yield coal not before Q4FY12E.Despite the robust Fe Cr prices expected in the coming quarters, IMFA would not be in position to defend its margins due to inflating power bill. We have hence further toned down our topline and bottomline estimates by 4% and 37% respectively for FY12. 

Taking into account these developments, we recommend a Hold with reduced price target of Rs 589 (which is drop of 28% from our earlier target of Rs 822).