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Indian Metals & Ferro Alloys: Rise in chrome prices make it an attractive play

The stock is trading at 8 times its annualised cash profit in one of the worst quarter, which is quite attractive, particularly since chrome prices have moved up.

May 23, 2018 / 04:13 PM IST
Representational Image. A worker cuts metal inside a workshop manufacturing metal pipes in Mumbai.

Representational Image. A worker cuts metal inside a workshop manufacturing metal pipes in Mumbai.

 
 
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Investors’ biggest fear came true in Indian Metals & Ferro Alloys (IMFA), which reported a 97 percent drop in net profits to Rs 4.9 crore in March quarter as against Rs 174 crore in the same quarter last year. The company suffered a huge blow, led by correction in chrome prices, which has a history of excessive volatility. Despite a 14 percent year-on-year increase in volumes, the company took a 25 percent YoY hit in sales because of realisation falling to Rs 69,000 a tonne in Q4 FY18 as against Rs 105,000 per tonne in the corresponding quarter last year.

While chrome prices have marginally recovered since the last quarter, they are certainly not at a level to report hefty profits. On top of that, the company has guided for marginally lower volumes for Q1 and FY19. In Q1 FY19, it is expecting volumes to be around 49,000 tonne as against 52,000 tonne YoY.

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The flip side of the story is that realisations often fluctuate on a quarterly basis. For FY18, realisations came in at Rs 74,000 a tonne as against Rs 72,600 a tonne in FY17. While the company may not report hefty margins, a quarter erosion in earnings does not warrant excessive worry. It is a key player in the chrome industry with integrated facilities operating at relatively low cost.

Cost advantage

Even during such a bad quarter, the company earned an EBIDTA per tonne of close to Rs 11,000 with total cost per tonne at Rs 61,800, which indicates that the company has enough room for improvement due to a significant move in chrome prices. Moreover, the upside is equally important. Anything above its cost means a jump in profits and cash flows. It is for this reason that it would be rather prudent to look at yearly realisations and profits numbers, which tend to relatively stable and provide fair assessment.

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Valuation

Fearing a price correction, the stock has fallen from a high of Rs 795 a share to Rs 366 at present. Today its market capitalisation at about Rs 988 crore is less than its networth of Rs 1,246 crore. Even in its worst quarter, it has generated a cash profit of Rs 31 crore, which works out to Rs 124 crore on an annualised basis. The stock is trading at 8 times its annualised cash profit in one of the worst quarter, which is quite attractive, particularly since chrome prices have moved up.

For more research articles, visit our Moneycontrol Research page
Jitendra Kumar Gupta Principal Research Analyst
first published: May 23, 2018 04:13 pm

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