Buy Adhunik Metaliks; target of Rs 130: Unicon Investment

“Adhunik Metaliks Ltd (AML) Q4FY11 consolidated net income came above the Unicon estimates; however, PAT was below estimates on account of higher interest and depreciation. Quarterly consolidated net income increased 24.5% on a YoY basis to INR 5513 mn, while it was up 23.7% on an annual basis. This was on account of a strong performance shown by the subsidiary, Orissa Manganese & Minerals Ltd. (OMML), resulting in a 72.7% increase in mining revenue in FY11. On the volume front, sales volume for the iron & Steel increased marginally by 1.2% YoY to 372,884MT, while the mining volume contracted 9.5% YoY to 1,173,603MT. Despite no increase in volume, increase in net sales indicate higher price realisation in the mining segment.”

“During FY11 price realizations for iron ore and manganese ore increased 70.2% and 83.9% respectively as compared to last year. EBITDA in FY11 increased 43.2% YoY while it was up 21.2% YoY during the quarter. EBITDA margin during FY11 increased 460bps to 31.7% while it declined 80bps during the quarter compared to the corresponding periods last year. This was primarily due to cost pressures in the steel segment offset to some extent by significantly improved price realizations in the mining segment. PAT for FY11 increased 34% YoY with a margin expansion of 84bps. On a sequential basis however, net profit declined 36% YoY with a margin contraction of 621bps YoY. Annual improvement in PAT was driven by an increase in EBITDA, offset to some extent by higher interest & depreciation expenses. FY11 interest expense & depreciation increased 44.6% & 63% YoY respectively. Quarterly decrease in PAT was due to the higher interest cost and higher deferred tax expenses due to the commissioning of the beneficiation plant in March 2011. AML is focussing on backward integration with major thrust towards the mining business, where it would be able to fetch better margins.”

“The company has successfully commissioned the 1.2 million MT iron ore beneficiation plant in March 2011 and expects to commence trial production of the pellet plant in September 2011. Moreover AML, expects the captive Iron Ore Mines, Kulum (Orissa) to start operations by Q2FY12. At the Suleipat Iron Ore Joint Venture, AML expects to start operations by H2FY12. All these initiatives would contribute significantly to the iron ore volume growth. The implementation of the 540 MW power plants is as per schedule and is expected to be commissioned in two phases of 270 MW each by March 2012 and June 2012.”

“Demand for steel is expected to increase domestically by 10-12% in FY12 on the back of strong growth of consuming sectors. Going forward, AML expects strong growth in its mining business as well as the iron and steel business, due to its backward integration initiative and improving product mix. Captive power generation would help the company to reduce its power cost. We expect AML to deliver 40% sales growth in FY12. The stock is currently trading at FY12e EV/EBITDA of 5.5x and FY13e EV/EBITDA of 4x respectively. We remain positive on the company and recommend investors to buy the stock with a price target of INR 130,” says Unicon Investment research report. 

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