Stock Pick From Iron & Steel/Interm.Products Sector

This column gives you script chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

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Tata Metaliks, a subsidiary of Tata Steel, is one of the leading manufacturers of foundry grade pig iron in India with an annual production capacity of 345,000 tonnes. Positioned as the fourth largest producer of crude steel, the Indian steel industry is expected to become the second largest producer of crude steel by 2020. The industry demand is likely to get strengthened exponentially, especially on the spate of growth in the Indian economy, government’s increasing focus on infrastructure development and its protectionist stance towards Indian industry. 

Increase in domestic consumption, recovery in exports, renewed private investments, improving rural consumption and spending, new tax legislation and promoting inclusive growth will spur the demand for DI pipes, creating growth opportunities for Tata Metaliks. 

While the merger of pig iron and DI pipes business into one entity will enable the company to significantly gain cost efficiency, it will be further aided by the availability of 10 MW captive power from its newly commissioned power plant, encashing competitive advantage in the face of expensive grid power in West Bengal. 

The company recorded a sizeable increase in its turnover in FY17 to Rs1410 crore from Rs1390 crore in FY16, despite 91 days of shutdown of one of the blast furnaces of the company. The company’s operational and financial performance hasbeen on the rise over the last three years. 

On the financial front, Tata Metaliks posted a 22.03 per cent rise in its revenue from Rs334.35 crore in Q1FY17 to Rs408.01 crore in Q1FY18. However, the company’s profit before interest, depreciation and tax (PBIDT) stood at Rs49.51 crore in Q1FY18, down by 18.26 per cent on a year-on-year basis. The profit after tax of the company stood at Rs30.62 crore, a decrease of 11.09 per cent in the first quarter of FY18 on a yearly basis. 

On an annual basis, the company’s revenue increased by 1.95 per cent to Rs1,398.51 crore in FY17 from Rs1,371.75 crore in FY16. The company’s PBIDT stood at Rs224.12 crore in FY17, up by 3.98 per cent, as against the PBIDT in the FY16. The company’s profit after tax stood at Rs116.05 crore, up by 3.37 per cent in FY17 from Rs112.27 crore in FY16. 

As an impact of improved working capital and sales proceeds from its Redi plant, TML’s debt has reduced from Rs581 crore in FY12 to Rs351 crore in FY16, with a substantial decrease in its debt-to-equity ratio as well, from 7x in FY12 to 1.8x in FY16. With the fulfilment of all its major capital expenditures, the company is likely to further reduce its debt and move towards a debt-free balance sheet. 

On the valuation front, the share price of Tata Metaliks is trading at a PE of 16.15x as against its peers such as Tata Sponge Iron (16.01x) and Kirloskar Ferrous Industries (21.61x), whereas the industry PE stood at 47.84x.