Jitendra Gupta Moneycontrol Research
For the ferrochrome industry, Africa is strategic location for two reasons. Firstly, the continent has a huge logistic advantage in terms of being near to western market. Secondly, it is very cheap to produce ferrochrome in Africa, which even China cannot match.
Balasore Alloys got a bargain in this market when it recently announced acquisition of 70% stake in Zimbabwe Alloys. Zimbabwe has the second largest reserves of ferrochrome in the world.
Why bargain?
On the business front, Balasore will gain access to vast mining reserves outside India, particularly in the competitive export market. It can leverage its expertise, export to clients and manufacture value-added products to create value.
Importantly, Zimbabwe Alloys had been under pressure because of the government’s directive to surrender its claims on reserves so that new investors can come and exploit reserves. On top of that, despite huge reserves of chrome ore and manufacturing facility for the ferrochrome, the company had been under financial stress.
Valuation comfort
For the 70% stake, Balasore will be paying about Rs 105 crore in cash along with infusion of another Rs 473 crore for the payment of the creditors and capex to revive the plant and meet working capital requirements.
Excluding debt, the company is valued at around Rs 825 crore, which is attractive considering that currently Balasore, which is having mining reserves of about 34 million tonne is valued at around Rs 20 crore per million tonne as against Rs 11.41 crore per million tonne in the case of Zimbabwe Alloys.
But that also explains the current state of operation of Zimbabwe Alloys, which in last three reported accounting years (2014-16) made an average sales turnover of only Rs 19 crore. Nevertheless, valuations should also be looked at from the perspective of time value of money as large part of these payments, such as capex and creditors, will be incurred in a staggered manner.
Balance sheet strength
While the structure of the funding is not clear as of now, Balasore should be in comfortable position to deal with the financing. It had Rs 155 crore debt on a net worth of Rs 535 crore or debt to equity of 0.3:1 and interest coverage ratio of 5 times at the end of FY17.
Even at one time debt to equity, the company can raise another Rs 380 crore. Moreover, because of improvement in ferrochrome prices and demand, in the first half of current financial year, the company made a cash profit of Rs 60 crore. This would be around Rs 120 crore without factoring in any growth in FY18. This essentially means that company may not have to rely too much on debt particularly in the light of internal cash flows and would not put too much pressure on balance sheet.
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