Buy ISMT with target Rs 140: HDFC Sec

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Buy ISMT with target Rs 140: HDFC Sec

HDFC Securities has come out with report on ISMT and has maintained buy rating on the stock with a target price of Rs 140.

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HDFC Securities has come out with report on ISMT and has maintained buy rating on the stock with a target price of Rs 140.

HDFC Securities report on ISMT

Positives

• The company is in the process of expanding its seamless business at its Ahmednagar facility from 65,000 tons to 75000 tons and at Baramati from 90,000 tons to 4,00,000 tons between FY07-08E. These will come on stream by Q4FY08.
• The overall capacity by FY08E will go up to 4,75,000 tons from 1,55,000 tons in FY07.
• The company will incur an overall capex of Rs 2.5 billion between FY07-08E to fund its expansion plans of which Rs 800 million will be raised through debt and the rest from internal accruals (annual cash flow around Rs 1.7 billion).
• After the expansion, ISMT will become the second largest seamless tube manufacturer in India after Maharashtra Seamless (5,00,000 tons).
• The company is expected to grow at the rate of 30% between FY08E-11E following the expansions.

Key Developments

• ISMT recently acquired 100% stake in Structo Hydraulics AB ("Structo"), in Sweden. It is one of the largest and best-known manufacturers of tubular components for the hydraulic cylinder industry. The company has an annual turnover of SEK 450 million (Rs 3 billion) and is an established supplier to many multinationals, particularly those in the construction and agricultural equipment industry.
• The company was acquired at an EV of Rs 900 million (Rs 600 million debt and Rs 300 million equity) by its 60% subsidiary IEL Ltd. Structo has an annual capacity of 40,000 tons. In the near term, ISMT expects this acquisition to create a captive market of roughly 1,00,000 tons per annum of high value seamless tubes.

Outlook & Valuation

We believe, the company is well poised in terms of scale and customers within the Bearing, Automotive and Oil & Gas segments, making it a niche specialty steel producer, offering value added products and not merely a commodity player. The company's focus on continuous improvement in quality and delivery, its large range of product offerings and widespread geographical spread, not only insulates it against competitor aggression, but also makes it possible to improve its penetration on a sustained basis.

The revenues and profits of ISMT are expected to grow at a CAGR of 18.8% and 23.2% between FY07-10E. The stock currently trades at a P/E multiple of 6.5x FY09E and 5.1 x FY10E. Based on its growth, the valuations look reasonable. We expect it to re-rate positively and when coupled with the underlying earnings growth, it should deliver significant out performance to investors in the long term. We maintain the buy rating on the stock, with a target price of Rs. 140 (upside of 75%), and we are not concerned about the stock's underperformance in recent months.