If you find a mining company, which is a low-cost producer, has got captive mines, low debt and adept promoters who have successfully run the business even in difficult times, there is no reason why that stock should not do well. Balasore Alloys is one such company,
If you find a mining company, which is a low-cost producer, has got captive mines, low debt and adept promoters who have successfully run the business even in difficult times, there is no reason why that stock should not do well.
Balasore Alloys is one such company, which is into ferrochrome used in stainless steel-making. The company has been able to withstand several down-cycles at a time when many of its peers are out of the business.
Stable earnings over a decade
We have analysed the 12-year history and only on four out of twelve occasions has the company reported a decline in year-on-year sales (average 16 percent decline). However, what is noteworthy is that in none of these years the company has reported operating loss or net loss.
Amongst the integrated players who have got their mines, Balasore Alloys is the second largest player after IMFA with the annual production of close to 160000 tonnes accounting for 14-15 percent of India's annual production. Having its captive ore mines, the company enjoys an operating margin of close to 20 percent.
Ferrochrome – upside in store
India's demand for the ferrochrome, which is used in stainless steel for strength and white silver look, is growing faster particularly with the improvement in the domestic steel demand. Industry is going through a phase of consolidation, with many of the leveraged players are in the ferrochrome space having shut down their business.
Impressive Q1 FY18
This is precisely the reason why during the quarter ended June 2017, Balasore Alloys reported 83 percent increase in sales to Rs 308 crore with 374 percent increase in the net profit to Rs 24 crore. This is a reflection of higher realisation and better demand.
During the Q1FY18, the Indian ferrochrome prices stayed at around Rs 85000 a tonne as against Rs 65000 a tonne in Q1FY17. Even if ferrochrome prices stay at around Rs 85000 per tonne, which is quite possible considering higher demand and tight supply, companies like Balasore Alloys will continue to benefit given its positioning and market share particularly in the light of the consolidation in the industry.
Growth strategy in place
The company's latest annual report reveals that it is making all the efforts to strategically drive its growth with more focus on the right resource allocation. It is implementing several of the globally acclaimed strategic planning techniques at every level of the value chain. It is quite possible that these endeavours would drive productivity gains and profitability growth in the future.
Comfort in valuation
The company has been conservative with debt financing. Over the last 12 years, the balance sheet (gross fixed assets) has expanded 5 times to about Rs 1000 crore. This is largely funded through Rs 1000 crore cash generated from the operations in this period. In fact, debt has come down in this period from Rs 224 crore in FY04 to Rs 155 crore in FY17.
This is the reason why interest coverage ratio has remained healthy even in the down cycle. Meanwhile, the company has a market capitalisation of close to Rs 441 crore and the stock at the prevailing price of Rs 55.9 a share is trading at 4.9 times its FY17 earnings. In the June quarter, the company reported net profit of close to Rs 100 crore. Even if one removes the other income of Rs 7 crore annualised net profit still works out close to Rs 370-380 crore. Even if we only consider 50 percent of Rs 370-380 crore achievable in FY18, price to earnings till comes to attractive 2.4 times.Moneycontrol Research Page.
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