Top 5 Metal Shiners For Your Portfolio

They say gold is a shiny metal and it shines always--but then there are other metals which also do shine and these days they are shining brighter than before in the stock markets. We are talking about the steel, copper, iron, zinc and all of them-- Yogesh Supekar and Nikita Singh take a deep dip into this happening sector and armed with Neerja Agarwal, they come with these recommendations of five stocks also, which you must get in your portfolio now.

The global economy, after a sluggish period, seems to be finally getting its act together. The global economy picked up in Q4FY16 and was seen to continue its growth momentum in Q1FY17, owing to a broad-based recovery in manufacturing activity and a robust activity in the services sector. 

The global industrial production in February increased at an annualised rate of 4.3 per cent, indicating a significant improvement post-crisis period as seen in the figure below. 

The global manufacturing PMI in March 2017 was near six-year high, while the services PMI indicated robust growth in both advanced economies, emerging markets and developing economies. 

As far as the general price level goes, the global inflation firmed up in February. The inflation firming up was largely on account of rising energy prices in 2016. 

The global trade continued to grow at a decent pace in Q1FY17. The goods trade grew 11 per cent in  January-February, reflecting its strongest pace since August 2010. 

Indian Economy & Markets  :- 

 

Indian economy is in an extremely good shape in relative terms and is clearly the fastest growing economy in the world at the moment. The economy has strengthened in almost all the macro indicators, except the employment scenario, which has led several analysts to label India's growth story as a jobless one. Having said that, the healthy macro environment will sow seeds for a sustained momentum in economic growth going forward. 

Key reforms such as GST is now a reality with almost 81 per cent of the items to be taxed below 18 per cent. In a big boost to the industry, GST Council has set the rate for capital goods and industrial intermediate items at 18 per cent. Items such as coal will be taxed at 5 per cent, as against 11.69 per cent currently.

The run up in Indian equity markets recently has pushed the Indian markets to $2 trillion market cap (M-cap) club, thus making Indian stock markets the ninth largest equity market globally. India's M-cap to GDP ratio stands at 0.88, whereas this ratio stood at 1.4 during the peak of 2008 for Indian markets. The ratio above 1 may be considered as a signal of markets being expensive, which suggests further room for the markets to inch up from the current levels. 

Metal prices have shown sign of recovery and have indeed recovered in the last one year.

According to the World Bank report, the metal prices are projected to increase 16 per cent owing to strong demand in China. The metal prices are also expected to increase due to various supply constraints. Some instances of labour strikes and contractual disputes in case of copper and environmental and export policies for nickel are expected to create supply constraints for these metals, which may keep the metal prices firm in foreseeable future.

Individual metal trends:- 

Iron Ore:- 

Iron prices jumped 21 per cent in Q1FY17 (QoQ), also marking its fifth consecutive quarterly increase on the back of strong steel demand and restocking in China. 

The iron prices fell below $70/tonne in early April after peaking near $95/tonne. The prices fell on the expectation of weakening demand due to record high inventories at Chinese ports, rising supply and weakening steel demand in China. 

The latest quarter, i.e Q12017, saw exports from major iron ore producers, Australia and Brazil, increase to record levels. The new low-cost capacity from Brazil is expected to put downward pressure on prices and may push high-cost production to close down.

The key variable that will affect the iron ore prices this year will be the strength of steel demand and iron ore production in China and other countries. 

Copper :- Copper prices jumped owing to a 43-day strike at Escondida in Chile, which happens to be the world's largest copper mine. The strike ended in late March but without resolution. 

Similar disruption was seen in a three-week strike in Peru's largest mine, Cerro Verde, that ended in late March. Another disruptive factor in Peru were the floods that affected normal operations in world's second largest copper producer. 

The copper prices were seen easing in the April, following the end of disruptions even as the global mine output is expected to contract this year. 

Zinc :- Zinc prices zoomed 11 per cent in the latest quarter and has been steadily gaining in the last five quarters. The metal has gained almost 70 per cent in the last five quarters. The impressive gains recorded by the metal is due to strong demand for galvanizing steel and a tightening market owing to large mine closures in recent years.

With rising prices, it is expected that the law of supply will prevail and the supply will increase in global markets. On the demand side, the slowing property market in China and threats of substitution pose a concern for those betting on steady price rise for zinc. 

Aluminum :- 

Aluminum prices rose nearly 8 per cent owing to improvement in demand and restocking in China along with declining stocks in London Metal Exchange. The prices also reacted to the new Chinese law that has been effective since March 1. The new law in China requires aluminium smelters in four northern provinces to cut output by 30 per cent over the winter heating season, i.e mid-November to mid-March in order to reduce pollution. After several years of oversupply, the China market is now poised towards a balanced aluminium market and that augurs well for the metal prices. 

Lead :- 

Lead prices saw a rise of 7 per cent in the latest quarter due to supply constraint. Lead was in demand due to strong seasonal battery demand. 

The market squeezed, as lead mine output was affected by the closure of large zinc mines where lead is a byproduct. The intensifying environmental constraints on China's mine industry also played its role. 

The demand scenarios for the battery and industrial sector remains strong. The demand, especially for “stop/start” vehicles which use batteries containing 25 per cent more lead than conventional units, has seen an uptick and is expected to increase hereon. Maturing electric bike sector in China and alternate battery technology remains a dampener for lead demand and hence for the metal prices.

Conclusion :-

Markets going forward will be taking cues from the earnings growth and the metal firms are expected to post healthy earnings growth; possibly market beating one. If we look at India Inc's Q4 numbers, the metal firms overall have impressed and outperformed the broader markets reflecting superior growth YoY in terms of revenue.

The aggregate revenue growth stood at 13.54 per cent for India Inc's clutch of 651 entities that exclude banks and financials , YoY. Sans metal firms the revenue growth would have been a modest 6.01 per cent.

Tata Steel consolidated EBITDA soared 213 per cent YoY while for Vedanta it was 112 per cent even as JSW Steel impressed with 64 per cent YoY growth in EBITDA and Hindustan Zinc by 187 per cent YoY.

The earnings momentum will continue for the metal firms although the pace of growth may slow down.

While epxecting firm metal prices in coming quarters the metal firms look in good shape to deliver double digit returns in coming year.

Overall recovery in global economy and world beating Indian economy (GDP growth being highest in the world) augurs well for the metal firms in India.

A good probability exist that quality metal firms with less leveraged balance sheet have a good probability of shining in coming year as well.

Long term investors can add select metal stocks in their portfolio while maintaining a healthy sectoral diversification in the portfolio.

"Markets' upward trajectory supported by improvement in country’s fundamentals"

Prasanth Prabhakaran

Senior President and CEO, YES Securities (India) Ltd.

1) The equity market has hit an all-time high. How do you think the market will fare in the second part of the financial year?

The markets are on an upward trajectory supported by an improvement in the country’s fundamentals. This is clearly reflected in the earnings growth that has improved from the levels seen 3-4 quarters ago. Although recovery is yet to be broad-based, earnings are on the path of improvement. Fundamentals are expected to improve on the back of improving macroeconomic factors, with recovery led by consumption, followed by public sector capex and external demand improvement, benefits of reforms percolating to the ground level and conducive inflation/interest rate environment.

2) What do you think are the risks to invest in the equity market at current juncture?

While we do think that markets would continue to trend upwards over the long term, there could be some aberrations due to global events. But as seen earlier too, our markets are quick to recover during such times as the domestic growth story remains intact.

3) How do you think metal and mining companies will perform owing to price rise in Q4?

There has been an across-the-board price increase and higher volume growth in the metals and mining companies in FY 16-17. It is expected that the same growth trajectory would continue for these companies in FY17-18. Aluminum, steel, zinc, lead and copper prices have gone up by 20-65 per cent over the last year. With the government’s focus on increased infrastructure spends over the long term, along with sizeable subsidies made available for affordable housing and allied sectors, revenues of the top five metal and mining sector companies are expected to continue on the growth path.

4) Do you think there will be earnings upgrade for metal stocks? Is it the right time to invest in metal stocks?

There have been a lot of announcements made by the government in the infrastructure space and projects have already been awarded in the road and rail infra space. As and when execution of these projects pick up pace, there would definitely be an earnings upgrade for metal stocks. For the long term, metal stocks are a necessity in every investor’s portfolio.

5) What, in your opinion, are the key risks to invest in metal stocks at present?

The challenges faced by the companies in this space are manifold and hence, volatility in the space is also high. First and foremost remains a sustained order flow, which should help achieve higher productivity by better utilization of available capacity. Most companies are operating at approx 70-75% capacity. Second key issue remains raising capital. There was a sharp decline in loan finance to the sector, and most loans were used for refinancing existing facilities rather than going into new projects. Lastly, the global geo-political risks have a huge bearing on prices and demand.

"The metal sector will continue to perform in line with economic growth"

1)What is your outlook for metal stocks in 2017? Will metal stocks continue to outperform in 2017 in your view? 

Metal stocks are expected to perform well in 2017, however, returns will not be as what we have seen over the past 12-18 months. Further, only selective stocks like HZL, NALCO, MOIL & JSW steel are expected to outperform its peers.

2)What are your views on the valuation of the metal stocks? 

Valuations for some stocks continue to be supportive despite the sharp rally and are yet trading at-par and in some cases below global valuations. Stocks like HZL will continue enjoying premium valuation considering its strong balance sheet and earnings profile.

3)Historically, we have seen there has been economic cycle rotation in the market, how do you think metal industry perform in the coming years?

India is currently in a sweet spot and with thrust on infrastructure spending, the metal sector will continue to perform in line with economic growth and underlying pricing of the commodity.

4)What are the catalysts that are likely to affect the movements of the metal stocks?

For steel the government has taken various measures to ensure that imports are reduced thus aiding domestic steel companies. These are expected to continue which acts as a catalyst. As far as other non-ferrous metals are concerned, global pricing has been benign and commodities like zinc has benefitted immensely which is seen in the earnings growth of companies like HZL. The only spoilsport for metal prices could be appreciation of the INR against the greenback.

5)What are some of the geopolitical factors that will influence the metal market the most, in recent times? 

As far as Geopolitical factors are concerned, closure of any major mine worldwide could result in a sharp rise in non-ferrous metal prices. As far as ferrous is concerned, it is largely a domestic play barring input price increase like coking coal which is largely imported in India and could spur steel prices.

6)What impact do you think the recent reforms of the government bring to the metal markets?

The government has recently outlined a National steel policy which aims at 300mn tonnes of domestic production by 2030 from the current level of ~110mn tonnes. Also, per capita consumption is slated to increase from the current level of 60kgs to 160kgs over the same period. Further, imports from the current level of 8mn tonnes is expected to go down significantly and as per the policy India is expected to be a large exporter of steel. Besides this initiative, with thrust on infrastructure and increase in renewable energy steel consumption is expected to pick up significantly.

There are enough opportunities to ~build adequately diversified portfolio

Sachin Relekar, Fund Manager - Equity, LIC MF.

The equity market has hit an all-time high. How do you think the market will fare in the second part of the financial year?

At the outset, we have a positive outlook from 3-5 years perspective. Some of the important macro variables are very positive. First, real interest rates are positive, second, fiscal position and credibility is high; third. reform momentum (GST, DBT) is strong; and fourth, there is visible pick-up in public infrastructure projects. We believe this backdrop should lead to higher growth rates and earnings for corporates.However, the market has performed strongly post-demonetisation phase. The price appreciation is stronger in the mid and small-cap space. Therefore, market is discounting some of the benefits. Predicating broader market direction on a six-month basis is not something we attempt. On bottoms up basis, there are enough opportunities to build adequately diversified portfolio. It is important to have long term horizon.

What do you think are the risks to invest in the equity market at the current juncture?

As mentioned above, price appreciation post demonetisation phase, especially in mid and small-cap space has been strong. Some of the positives from macro factors are discounted in the price. If the earnings growth does not materialise, stocks trading at higher multiples will be re-rated. Also, Indian equity market has done well along with global equity markets. Global yields have also remained well behaved in 2017. Any negative surprises either on economic or political front is a risk. These types of risks are always present. Importantly for India, it is coming off from cyclical lows. The credit growth and investment phase is still at lower level and, therefore, the reasons for being positive outweigh the negatives.

Do you think there will be earnings upgrade for metal stocks? And is it the right time to invest in metal stocks?

On a broader picture in metals and mining sector, the factors are: first, Chinese demand and supply; second, individual company’s cost competitiveness; third, government actions regarding export taxes and import tariffs; and fourth, individual company’s restructuring measures. Price appreciation in metal stocks since Dec 2015 is more driven by most of these factors showing improvement. However, we think the influence of the last two factors is very high in the case of Indian metal companies. We think earnings improvement in companies is sustainable if there is no large scale volatility in factors mentioned above. Metals and mining are by nature cyclical businesses, so timing the investment is not easy. Therefore, while considering investment in this sector, also take into account opportunities in border market, where timing plays lesser role.

What, in your opinion, are the key risks to invest in metal stocks at present?

Important difficulties in investing in metal stocks are: first,.understanding global demand supply equation; second, multi geography exposure of metal companies; third, leverage in the company. All of these factors are critical and can make significant difference to the investment outcome. Converse of this is that metal stocks at times are available at attractive valuations. Investor can benefit enormously from the turn of events. We think the risk currently, after strong price appreciation over last 15 months or so, is a lot of positives are factored into the metal stocks. However, one needs to be watchful of further efforts towards deleveraging of balance sheet and changes in the demand-supply situation.

“Valuations seem disconnected from ground realities”

Nilesh Shetty, Associate Fund Manager – (Equity) Quantum Mutual Fund

The equity market has hit an all-time high. How do you think the market will fare in the second part of the current financial year? 

The valuations seem disconnected with ground realities. There is hope of a strong recovery in earnings, but our interaction with company managements suggests it will be more gradual that what people assume. There is a strong possibility that markets may disappoint in the second half and give negative returns.

According to you, which indices should we look forward to?

Overall, the market looks expensive, but the rally in mid-caps and small-caps has been more pronounced. Investors need to be extremely cautious in that space as the management quality is not that great and the correction, whenever it happens, could be sharp.

How will the steel and metal industry perform, with significant global and domestic reformations happening?

A lot of the metal stocks have rallied in the hope of renewed capex cycle in the developed world and closing down of capacities in China. The bet on increased demand is right now based on sentiments and investors may be disappointed. Hence, most of these stocks may have downside risk.

In your opinion, what will be the nature of earnings upgradation in metal stocks in the near future?  

Commodity prices are showing signs of correction and there is a risk that the earnings may get revised downwards. Caution is advised.

National Steel Policy 

-Domestic crude steel capacity to be 300 million tonnes by 2030-31 (122 million tonnes in 2015-16) entailing an investment of Rs 10 lakh crore. 

-Steel demand is estimated to grow 3-fold to 212-247 million tonnes by 2030-31. 

-Per capita consumption of steel to go up to 160 kg by 2030-31 (from 61 kg now)

-India to emerge as net exporter of steel by 2025-26

-To domestically meet entire demand of high-grade automotive steel, electrical steel, special steels and alloys for strategic applications by 2030-31.

"For long term investors, India story remains intact"

Mr. PVK Mohan, Head – Equity, Principal Pnb Asset Management Company.

The equity market has hit an all-time high. How do you think the market will fare in the second part of the financial year? 

The market seems to be slightly overvalued on FY18 earnings estimates and we have not seen earnings upgrades as yet. Given the strong rally in CY17 so far, we expect a period of consolidation ahead, either some downward movement or a time correction in the next quarter or two.

What do you think are the risks to invest in the equity market at the current juncture?

Global risks emanate from geopolitics and fears of protectionism. Local risks come from rising commodity prices leading to higher inflation and hence possibility of interest rates rising and a slightly expensive market on FY18 earnings estimates. These could lead to some volatility in the near to medium term. For long term investors, however, we believe the India story remains intact.

How do you think metal and mining companies will perform owing to price rise in Q4? 

These stocks have already done very well. Given the slight cool off in metal prices of late, we expect this sector also to moderate or consolidate in the near term

Do you think, there will be earnings upgrade for metal stocks? Is it the right time to invest in metal stocks? 

As explained earlier, prices of commodities have moderated of late, so we would evaluate buying these stocks as and when they correct from current levels

What, in your opinion, are the key risks to invest in metal stocks at present? 

Slowdown in Chinese economy and the expected big push in the US on building infrastructure not living up to expectations.

Kalyani Steel   Rs.405

BSE Code: 500235 FV: 5 Market Cap (F.F.): Rs.690 Cr. 52 Week H/L : Rs.435/156

HERE IS WHY

Improving demand scenario Product portfolio

Cheaper valuation

Kalyani Steel Ltd (KSL) belongs to the Kalyani Group and is a leading manufacturer of forging and engineering quality carbon and alloy steel.

Its products have applications across several critical sectors such as automotive, oil & gas, power, locomotive, marine, aerospace, construction, and mining etc. The company has grown at a CAGR of 4 per cent over the last five years.

The strong performance of the company can be attributed to rising demand from strong client portfolio, strong R&D, pan-India foothold and strong parentage of the Kalyani Group.

 We believe, going forward, change in MIP norms for steel products and revival in industry demand will play a crucial role for KSL at macro level. We expect strong client portfolio of KSL to fuel the growth at CAGR of 6 per cent over FY16-18E. Kalyani Steel has delivered an earnings CAGR of 68 per cent over three year period.

KSL strengths

Countrywide foothold due to strategic location: KSL is a Pune-based company having steel mill at the strategic location of Hospet, Karnataka with hot metal capacity of 2,90,000 TPA.

KSL enjoys a locational advantage as the southern region is a burgeoning automotive hub and Karnataka is rich in iron ore.

KSL also benefits from adjacent Mangalore port for imports of other raw materials. End of MIP on steel products will lower operating costs:

With minimum import price (MIP) a history now, KSL will benefit from cheaper imports in terms of iron ore which is its raw material. This will lead to improvement in profit margins for the company.

An improvement of at least 500 bps in EBITDA margin is possible due to cheaper imports. However, one has to factor in the rising coking coal prices, which may offset the benefits accruing from lower iron ore prices.

Strong Clientele

KSL benefits from its parentage in terms of access to steady clientele. Kalyani Group has joint ventures with Bharat Forge, Automotive Axles, Kalyani Hayes Lemmerz and Kalyani Carpenter Special Steels. KSL caters to all business requirement of these JVs through backward integration.

KSL's client list includes players from automotive, energy and aluminium smelting segments such as Eicher Motors, Hyundai, Force Motors, Tata Motors, Maruti Suzuki, Renault, Nissan,Mahindra, Volvo, Eaton, AMW, 7F India, BHEL, Jindal Saw, MSL, UST etc. KSL is also a supplier to the Indian defence segment and can benefit from the expansion in defence budget. A well-diversified client list from different sectors augurs well for KSL. There is no concentration risk.

Revival in industry demand After a slowdown for several years, there are signs of revival in the industry. KSL is a tier-1 quality vendor to several automobile giants. Post-demonetisation, the recovery in automobile sales is visible. KSL should benefit from a double-digit growth in Q4FY17 and FY18 for the automobile industry. We believe the stock can be looked at for long term investment. we recommend a BUY in this counter.

Maithan Alloys   Rs.385

BSE Code: 590078 FV: 10 Market Cap (F.F.): Rs.374.54 Cr. 52 Week H/L : Rs.544/201

HERE IS WHY

Strong Financials

Geographical spread

Manufacturing niche low carbon and low phosphorus grades

Maithan Alloys manufactures ferro manganese, silicon manganese and ferro silicon with a consolidated production capacity of over 172 MVA. The metal manufacturing giant is one of the leading exporters of customised manganese alloys to large and growing steel companies across the globe. The company has three manufacturing units in India, located at Kalyaneswari (West Bengal), Visakhapatnam (Andhra Pradesh) and Ri-Bhoi (Meghalaya), and every unit is equipped to provide customised metal products. The company caters to the manganese alloy demand of large integrated steel companies such as SAIL, JSW, JSPL and JSL, among others, in India. The company also has a strong customer base of traders and manufacturers in other Asian countries, which adds to the company's profits. Maithan Alloys supplies in over 35 countries in the world, including Japan, Germany, Europe, Argentina, Greece, Indonesia, Iran, UAE, Jordan, Korea, Libya, Malaysia, the US, Poland, Romania, Republic of Korea, Peru, Pakistan, Nigeria, the Netherlands, Singapore, Spain, Russia, Egypt, Belgium, Jordan, Slovenia, among others.

Q417 performance

Maithan Alloys posted a net profit of Rs.197.69 crore for the quarter ending March 31, 2017, as against net profit of Rs.79.03 crore in the corresponding quarter in the previous year. The PAT of the company witnessed a substantial increase as a result of rebounding of the metal industry since Q3, stable raw material prices and various state governments announcing power subsidies in Q4. 

The power subsidies provided by Andhra Pradesh government as also other state governments through their respective state electricity boards (SEBs) brought down the power tariffs, aiding the companies to cut down power cost and boost PAT and EBITDA margins The consolidated revenues from operations increased impressively by 126.24 per cent from Rs.131.25 crore last year to Rs.293.43 crore in the FY2017. The impressive growth was aided by improvement in metal and oil prices and better capacity utlilisation. During the year, the company achieved a growth of 4 per cent in volume terms and 17 per cent in value terms, which was due to the superior product range along with other favourable factors including technology upgradation. The ROCE (return on capital employed) of the company stood at 45.32 per cent, which was higher than that of its peer companies including Balasore Alloys, Facor Alloys, Ferro Alloys Corp, Indian Metal & Ferro whose ROCE stood at 12.49 per cent, 12.89 per cent, 17.04 per cent and 27.21 per cent, respectively.

Future Plans

The company is constantly investing in power generation facilities that provide unhindered, better quality and low-cost power for captive use with plans to extend capacity. Unlike most companies, Maithan has created a competence in manufacturing niche low carbon and low phosphorus grades that usually moves the slowest. While Maithan also exclusively focuses on its global conversion efficiency than the entire system, unlike the other players of the sector, driving its rapid growth. 

Further, the National Steel Policy 2017 is also likely to significantly enhance domestic steel manufacturing capacity to 300 million tonnes by 2030, thereby stimulating the demand for Maithan Alloys’ products substantially.

Rama Steel Tubes  Rs.135

BSE Code: 539309 FV: 5 Market Cap (F.F.): Rs.77.87 Cr. 52 Week H/L : Rs.163/86

HERE IS WHY

Improving demand

Diversified product portfolio

Large client base

Rama Steel Tubes is one of the leading manufacturer of a wide variety of steel pipes and tubes, and, rigid OVC and GI pipes in India, with a growing global presence in countries such as the UK, the USA, UAE and Germany among others. The company has a strong distribution network of over 200 direct dealers across India and worldwide.

 The company has large client base of top companies such as SAIL, L&T, GAAR, DLF, Reliance, NTPC, Airtel, Bajaj, Ashok Leyland, HP, Reliance Petroleum, NDPL, Tata Motors, BSNL, Gujarat Gas, GAIL, and LANCO.

The company has two manufacturing units in Sahibabad and Khopoli with a total installed capacity of 72,000 mt. While the company has further proposed an expansion of the total capacity by 60,000 mt to 1,32,000 mt in FY18. With a spur in the infrastructure sector coupled with a steel output cut by China is likely to revive the industry demand and enable Rama Steel Tubes to penetrate further in both the domestic and international market. The company has a strong presence in over 75 countries across the globe, while over 15 per cent of its total revenue is credited to exports.

Financial Performance

Rama Steel Tubes posted a hike of 40.4 per cent to Rs.668 million in its net sales for the third quarter of fiscal year 2017. Whereas the EBITDA of the company also grew by 44.1 per cent to 60 million with an EBITDA margin of 9 per cent for Q3FY17. The company also posted a 30 per cent increase in its profit after tax at Rs.1.43 crore in the third quarter of the fiscal year 2017, against PAT of Rs. 1.10 crore in the same quarter in the previous year. The net sales also grew substantially by 49.11 per cent to Rs. 58.43 crore in Q3FY17 compared to the same period in the last year. Driven by the company’s operating efficiency and favorable raw material conditions, while the company’s hold on its working capital requirements also contributed to the steady growth in its operating profit.

Whereas, the strategic location of the company’s Khopoli plant in Maharashtra, with its full capacity utilisation and proximity to ports has aided the company to cut down on logistics cost by 20 per cent for exporting and catering to the high demand from the southern and western states. Higher logistics cost shadows the profit of most of the industry majors. The company’s revenue for 9MFY17 stood at Rs.. 191.17 crore, increased by 18 per cent from the revenue in the corresponding previous period. Its EBITDA also grew by 51 per cent in 9MFY17 to Rs.. 15.60 crore on a year-onyear basis. While the PAT of the company rose by a substantial 111 per cent to Rs. 7.85 crore for the same period. The ROCE (Return on capital employed) stands at 17.51 per cent above most of its peers including Nelcast at 14.26 per cent, Hi Tech Pipes at 14.79 and Aanchal Ispat at 9.87 per cent. The ROCE of Rama Steel Tubes is expected to grow further on assumption of a continued growth momentum in the current fiscal.

Future strategies

The company plans to raise its production capacity significantly to 340,000 MT per annum by FY19-20 from the company’s present capacity of 99,000 MT per annum, targeting the value-added segment, to command a higher profit margin thereof. Further, the company’s wholly owned subsidiary Lepakshi Tubes is set to launch a manufacturing unit at Lepakshi in Andhra Pradesh in a bid to enhance its geographic presence and tap the demand rife southern market. Leading manufacturer of ERW pipes, Rama Steel Tubes also bagged several prestigious export orders worth Rs. 30 crore in the month of April in 2017, thereby ensuring a hike in profits in the coming quarters. The company is also planning to foray into value added products such pregalvanised tubes to improve the profit margin of the company. The end of minimum import price on steel products is further likely to benefit the company, by reducing import cost iron ore and thereof lowering the operating cost and improving the profit margins. However, the rising coking coal prices may neutralise this benefit.

Sarda Energy & Minerals    Rs.246

BSE Code: 504614 FV: 10 Market Cap (F.F.): Rs.256.99 Cr. 52 Week H/L : Rs.297/98

HERE IS WHY

Fiscal discipline and prudence

Higher production flexibility

Less than 35 per cent dependency on any single model

SEML is one of the lowest cost producers of steel (sponge iron, billets, ingots, TMT bars) and one of the largest manufacturers and exporters of ferro alloys in India. Headquartered in Raipur in the state of Chhattisgarh, the company merged Chhattisgarh Electricity Company Limited (CECL) with itself in 2007 with a vision to become a leading energy and minerals company.

Benefiting from the recovery in steel prices during previous one year, Sarda Energy and Minerals limited (SEML) has outperformed broader markets when it comes to returns provided on the bourses. There have been triggers for the stock price to go up. The similar triggers are expected to support the stock prices in future.

At SEML, the company has built an integrated model ranging from mining iron ore to manufacturing Pellets, Sponge Iron (DRI), Billets, Wire Rods, Ferro Alloys and Eco-Bricks producing Power (Coal-based). This has resulted into higher production flexibility for the company.

 This is one of the key strengths of the company. SEML has consciously built its facilities at Raipur and Visakhapatnam. Raipur has proximity to the mineral base and Visakhapatnam gives SEML easy access to the seaport. Both these facilities enable SEML to be closure to its customers in India and abroad. With these facilities at strategic locations, SEML has improved reach across India and considerable savings in logistics.

As far as macro environment goes for the steel sector, the situation has improved drastically over the past one year. Indian government undertook necessary corrective trade remedial measures to maintain a level playing field by enhancing custom duty and introducing the minimum import price (MIP) mechanism to curb imports at prices below marginal cost of exporting nations.

 The government also introduced BIS Standards for steel to check sales of inferior quality steel in India. These initiatives give a breathing space and positive hope to the Indian steel manufacturers including SEML. The company has during sluggish environment diversified its focus on strengthening its internal efficiencies through process improvements to remain competitive in the challenging environment.

Various steps taken during tough times have led the company to reduce wastage, cut overall costs and maintain quality. The initiatives have resulted in improving the production levels without altering the raw material mix or allocating any additional resources. SEML'S financial prudence and cost rationalisation has further allowed the company to maintain low leverage, thus providing a cushion in adverse market scenario.

The hydro power project at Gullu is expected to add to the bottomline of the company besides providing a natural hedge to the company's carbon footprints. The company's focus on completing existing projects, strengthening domestic market share and leveraging locational advantage in minimising logistics cost as well as reaching out to different parts of the country augurs well for the company. Maintaining cost effectiveness and exploring opportunities in the customised product requirements globally are some of the top priorities at SEML.

SEML is reflecting a price to book value of 0.81, lower compared to peers such as Bhushan Steel and Kalyani Steel which are available at 1 and 2.61 multiples respectively. Available at current P/E multiple of 7.73 we believe the stock can be looked at for long term investment. we recommend a BUY in this counter.

Vedanta Resources   Rs.231

BSE Code: 500295 FV:1 Market Cap (F.F.): Rs.31736.48 Cr. 52 Week H/L : Rs.278/94

HERE IS WHY

Fiscal prudence

Rising metal prices

Diversified product

Vedanta Resources is a London Stock Exchange listed, globally diversified natural resources company with interests in zinc, lead, silver, copper, iron ore, aluminium, power and oil & gas.

Geographically, Vedanta Resources operations are centreed in India, Zambia, Namibia, South Africa, Liberia, Ireland and Australia with an employee strength of over 25,200 regular employees. Vedanta Ltd is owned by Vedanta Resources. Vedanta Ltd owns two listed entities viz., Cairn India (59.9 per cent) and Hindustan Zinc (64.9 per cent) and several other unlisted subsidiaries including BALCO. The company's operations are focused on mining metals, extracting oil & gas and generating power.

Vedanta Ltd operates its mines in India and has three operating blocks in India producing oil & gas. Vedanta is the world largest diversified natural resources company.

Q417 performance

Vedanta posted a profit of Rs. 2,988 crore for the quarter ending March 31, as against a loss of Rs. 21,104 crore in the corresponding quarter last year that it had reported due to a non-cash impairment charge of Rs. 12,304 crore. The revenues from operations increased impressively by 41 per cent from Rs. 16,865 crore last year to Rs. 23,691 crore this year.

The impressive growth was aided by higher volumes of Zinc India and ramp-up in the aluminium and power business. The improvement in metal and oil prices aided the revenue growth along with higher iron ore volumes.

The consolidated total revenue of the natural resources giant surged by 35.43 per cent to Rs. 24,612.15 crore during the quarter under review. It had recorded revenues to the tune of Rs. 18,172.61 crore for the corresponding quarter of the last fiscal.

Its total expenses surged to Rs.19,448.47 crore in the fourth quarter of the last fiscal as against Rs.16,992.70 crore in the corresponding period a year-ago

Investment Trigger

Buoyed by the stellar performance in Q4, signalling a turnaround in the commodities sector, Vedanta Ltd remains an attractive play on the India growth story.

The company has been able to reduce the gross debt by Rs.4,000 crore during the year. The net debt to EBITDA (earnings before interest,tax, depreciation and amortisation) at 0.4 times is the lowest and strongest among Indian and global peers. The ROCE (return on capital employed) stands at 14 per cent and is expected to reach 20 per cent, assuming the growth  momentum is maintained this fiscal as well. In the current fiscal, Vedanta plans to invest $1 billion focusing mainly on Hindustan Zinc and the zinc facility in South Africa. Nearly about $250 million is earmarked for investments in Cairn India. The good amount of free cash flow generated this fiscal gives Vendanta elbow room to allocate capital strategically. The excess cash will be used to deleverage high-cost debt where the interest rate is above 9-10 per cent.

Some portion of the capital will be allocated for growth in certain businesses with higher ROIs, as per the management and a portion of the cash will be returned to shareholders by adopting an investor friendly dividend policy. Such policy decisions are aimed at bringing Vedanta in line with other global companies and making Vedanta an Indian multinational mining company. The strategic priority of growth in production and asset optimisation, while adopting disciplined approach towards ramping up production may ensure healthy growth ahead for Vedanta even as the company continues to deleverage its balance sheet.