Prabhudas Lilladher is bullish on Sujana Metal Product and has maintained buy rating on the stock and expects target price of Rs 80.

Prabhudas Lilladher research report on Sujana Metals Products

Located in South India, the 290,000-tpa Sujana Metal Products manufactures long products, mainly TMT bars and structurals. It recently spun off its tower-manufacturing division and has robust expansion plans for the steel division.

Highlights

Riding on real estate and the infrastructure boom: Huge investments are being made in construction: about Rs 26,473 billion in the next five years (Rs 14,043 billion in the past five). The Indian economy is growing at about 9% p.a. To sustain this growth, huge investments are expected to be made in infrastructure. Construction is expected to grow at a CAGR of 13.5% in the next five years. Housing and Real Estate demand are also on the rise.

Robust expansion plans: SMPL has planned capital expenditure of Rs 3.3 billion for various greenfield and brownfield expansions in various projects such as heavy structurals, billet manufacturing, a TMT bar-processing plant, a sponge iron plant and a new rolling mill, all of which would make it an integrated player.

Economies of scale:

Integration and capacity enhancement will facilitate a rise in the operating margin--from 9.4% to around 15% in the next two years, thereby significantly improving the bottom line.

Decentralised locations: Steel products are extremely freight sensitive. As per expansion plans, production will be located close to the markets, resulting in lower cost and increased competitiveness.   Financial Valuation and Overview Prospects for Sujana are directly linked to growth in real estate construction and infrastructure development. Besides, the steel-to-cement consumption ratio in construction is about 1.1 in developed countries, compared to only 0.3 for India. As the economy transits from a developing to a developed phase and because of the awareness of safety, steel consumption in construction would rise.

Besides, freight and logistics costs make it uneconomical to import TMT bars. So we believe that Sujana Metal Products should be valued at higher than steel companies, and the valuation should be in line with cement and construction companies. The present major expansion mode of the company would bring about dilution. Assuming a debt-equity ratio of 0.8, post-dilution, we have a price target of Rs 80.