PINC Research has given a 1-year target price for Visa Steel : Rs. 85.00.
Here's what the news article in the Economic Times says (here) : At the market price of Rs 48, the stock trades at a P/E of 2.8x and EV/EBITDA of 3x 2009-10 estimated earnings of Rs 16.90.
Given the fact that Visa Steel's 52-week high is Rs.65 ... a Rs. 85 target means the company is doing something outstanding which the markets (and hundreds of analysts) have not eyed thus far. Additionally, the research house is expecting a 75% appreciation in the stock from current levels.
I got curious :-) ... however, a cursory glance of the company's financials seems to offer a very different picture. An independent analysis is enclosed :
Equity capital : Rs. 110 crs
Face Value : Rs. 10 per share
LY profits : Rs. 20.5 crs
CY Profits : Rs. 22.5 crs (last 4 qtrs)
Debt : Rs. 498 crs
EV : Rs. 1041 crs
EBITDA : Rs. 64.68 crs (last 4 qtrs)
CMP : Rs. 49 per share
EPS : Rs. 2.04 per share
PE ratio : 23.9
EV/EBITDA : 16.06
The PE ratio and EV/EBITDA ratio for FY08 are 23.90 and 16.06 respectively. If PINC's earning estimate of Rs. 16.9 per share is correct, VISA Steel has to earn about 8.3 times of what it earned this year. This amounts to Rs. 186 crores of net profits for FY 2009-10.
Visa Steel operates at a net profit margin of 3.7%. Assuming this increases to as high as 5% (given some forwarding looking statements by the VISA Steel management), we are looking at sales of Rs. 3,720 crores for FY09-10 (which is 6.6 times of FY08 numbers). Now, this is the steel industry we're talking about ... sales increases need to be supported by capex increases ... which means more debt, more interest payments, more depreciation etc.
It would be interesting to read their report though. I have a thumbs-down on a Rs. 85 price target. From a value investor's view-point - there seems to be no margin of safety, power franchise or pricing anamoly that can be exploited.
Friday, April 25, 2008
Visa Steel
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9 comments:
Hi Shankar,
In the steel space, i recently picked up ROhit ferro tech.
The company earned Rs.20 crore PAT in 3rd qtr 08. That is equal to the PAT it earned in entire 06-07...
am looking forward to its 4th qtr. nos.
the only -ve point is that company buys its entire ore requirement..
regards
venkat
Hi Venkat,
Hopefully you bought Rohit Ferro about a month back, when it was priced at 55 rupees. The company has shown impressive numbers over the last 5 quarters in sales and profits.
Venkat - do make sure you read the annual report of Rohit Ferro. A couple of pts -
1. I think the debt in FY2008 is much higher than FY2007 owing to higher working capital and sales. The interest charges have been increasing each qtr too.
2. Depreciation charge is very low (just 5 crs over a gross block of 121 crs)
It's important that Rohit Ferro keeps a strong Q4.
Hi Shankar,
Nope, i picked it at Rs.80/share almost 4 months back. added a few more at 70/share 2-3 weeks back.
I agree the debt is definitely high.
in my calculations,
for the last qtr. i assumed that the company would repeat its 3rd qtr performance.
With rising ore prices, i also assumed that the company would atleast show 5% growth in free cash per annum.
I discounted it at 12% keeping in mind it is a small co. Post 5th year, i assumed 3% growth to perpetuity.
also reduced the entire debt. the value arrives to around 130-140 per share.
Sustaining the high growth rate of 07-08 would be impossible. better to reduce the costs - mainly RM.
i also assumed that with the steel consumption would continue its growth.
there are lots of ifs which come with the commodity industry..
would definitely await your views.
regards
venkat
While i've not seen the PINC report. A couple of points which i think u've missed out.
a).More than 60% of Visa Steel's current sales are on account of trading, i.e. trading of coal & coke.
b).the other half comes from pig iron, which again is an intermediate product in manufacture of steel.
c).Visa Steel is putting up a special & stainless steel mfg capacity of about 0.5 million tonnes, which explains the high amounts of debt on its books.
Now, all these put together, u have a story in hand -
1).Visa Steel is still in process of setting up its integrated steel plant.
2).in the interim is undertaking trading activities and selling its pig iron produce in the local mkt.
3).as and when the project is complete, both coal and pig iron will be used in house.
4).Stainless steel companies earn margins in the north of 10%, so to that extent, the company will report significantly higher profit numbers, as compared to what it does now.
Trust this explains, the optimism reflected in the PINC report. Do correct me, if I am wrong.
Big time wrong analysis dude …. First .. U have no idea abt their operations .. they commissioned a 50000 ton ferro chrome plant in nov 07 …. Their 400,000 coke plant is fully commissioned now …
Given the current realizations of ferro at Rs. 1 lakh and coke at Rs. 25000, it can get them a topline in fy09 of: Ferro: 500 crore (50000 * lakh); Coke: Rs. 1000 crore (400000 * 25000) .. however their will need some coke for their pig iron (.6 times) and ferro operations (.6 times). Hence we can assume that they will sell half of wat they make … so Rs. 500 crore for this unit.
Further, they have a 225,000 pig iron facility running along with a 300,000 ton sponge unit expected to be commissioned by June 08. pig is going at Rs. 27000 and sponge at Rs. 20000. Do the math now.
They should be able to do more than Rs. 1700 crore in FY09 itself. …
Second: incorrect statement on PAT margins. If you look closely (which u shld if u giving gyaan on the net :)), they are currently doing about 22% PBIT margins in the manufacturing business. They will do more than 30% margin given the current prices … as well as cause a 50 MW power plant which will be commissioned next month. The PAT margin that u r talking about is for the overall biz which includes trading where margins are as low as 2%
They will atleast do a PAT margin in manufacturing of 10%. Rs. 1700 topline pe 10% is Rs. 170 as PAT for FY09. !!!
The report by pinc says 16.9 EPS for FY10 … Given the above explanation they will be able to d same in FY09 itself …so they are 2.8 times FY09 earnings and not FY10 earnings … so 17 at the end of FY09 shld fetch them a multiple of 10 as then they will be in the process of commissioning their 0.5 million ton special and stainless steel plant which will double all these numbers.
So bottomline .. 17 EPS * 10 multiple = Rs. 170 per share … wont comment on whether u shld buy or not ..
If u need any further clarification do let me know ..
Just another thing.. u mentioned their EPS at 2.04 trailing for 9Ms … just watch out for their Q4 FY08 results .. and be blown away … :) ur “trailing” multiple will come down substantially ..
Dude .. sincere advise .. u shld clarify when u r talking abt PE multiples whether u r referring to trailing or forward ..(hope u know the difference) ;)
Hi Nick,
Quite a brilliant analysis (and badgering of my ignorance of Visa Steel's business :-)).
The conceptual difference is of a value buy and a growth buy. Over time, I have tried to develop a discipline of examining the current price of a share with it's current value. In the process I have either excluded or marginalised future plans & forward looking statements. Investment is normally on the basis of a price-value mismatch (and an appreciable margin of safety). This practice has helped me over the years and there is no reason why I will move away from it.
Now PINC's report on Visa Steel maybe right. The stock might reach Rs. 85 in an year or Rs. 850 in the next 5 years. However for people like me, who analyse a stock on it's face value, the PINC report might not be a strong piece of paper. As I said - everyone has his own metrics of analysing a stock.
Appreciate your analysis of Visa Steel. It does make for a good reading. Would love to get my hands on the report though. I'm amazed why mutual funds have not latched onto this excellent (growth) buy.
Warm Regards
Shankar
Hi Shankar, with regards to your last comment - Kindly check out moneycontrol. DSP and UTI have brought into VISA. :)
Thought i should let you know
if you still dont have the pinc report, do let me know.
Cheers!
Hi Nick,
The PINC guys must be celebrating along with UTI and DSP :-) .. best of luck to all three.
Nah! .. still dont have the report. It'll be great if you can email it to me. My email id is shankarnath@gmail.com
Thanks!
Warm Regards
Shankar
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