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MSP Steel & Power - Capex growth to bear fruit

By Shashikant Singh | 8/1/2011 4:32 PM Monday

MSP Steel & Power (MSPSPL), formerly Adhunik Rollers, came out with its FY11 results a few days ago. It witnessed a sharp jump of 57% in profit on a yearly basis, against a 29% jump in sales during the same period. The company is on an expansion spree – it has completed its first phase of expansion and is in the middle of the second phase. To know more about the company, its expansion plans and how this will impact its future financials, our analyst visited the manufacturing site of MSPSPL and got first hand information on the same.

Expansion Plans

MSPSPL is a Kolkata-based company which has its manufacturing unit at Raigarh, Chhattisgarh. It is engaged in manufacturing of pellets, sponge iron, long products and also has captive power generation capabilities. In the longs segment, it offers products like billets, TMT, structural, angles, channel, plates and beams.

Currently, the total installed capacity is 300000 tonnes per annum (TPA) for pellets, 307500 tonnes for sponge iron, 144109 tonnes for billets and 80000 tonnes for TMT Bars. Its Structural Rolling Mill has a capacity of 128000 tonnes. In addition to this, the company has a captive power plant with a capacity of 42 MW.

These capacities are after the completion of its first round of expansion, in which the company increased its capacity of sponge iron by 115500 tonnes and that of the power plant by 18 MW. Currently, the company is in its second phase of capacity expansion, wherein its pellet capacity will be expanded by two times to 900000 tonnes, sponge iron to 423000 TPA and that of its power plant from 42 MW to 76 MW.

The reason that MSPSPL has taken this huge capacity expansion is to capture the rising demand for steel in India. At its current capacity, its ability to service the demand is falling short. As per the company’s management, at the end of June 2011, its various plants (TMT, structurals, pellets) are operating at anywhere between 68-90% of their capacity.

The total cost of expansion will come to around Rs 815 cr, and the financial closure for this has already been achieved. Of this, banks will fund Rs 545 cr, internal accruals will be to the tune of Rs 135 cr and the rest will be funded by the promoters in form of six% redeemable non-cumulative preference shares of Rs 10, at a premium of Rs 90 per share. The company has already used Rs 335 cr from the bank. The average interest rate that the company is paying on its debt is around 12.5%.

Understanding the vagaries in the prices of key raw materials, iron ore and coal, MSPSPL has chalked out a long-term strategy to protect itself from such price volatility. Integrating backwards, MSPSPL has even got coal mines allocated in Madanpur (Chhattisgarh), which have an area of 714 hectares and reserves of 175 MT, in which MSP’s share is 26 MT. This is likely to serve the expanded capacity of MSPSPL for 26 years.

It has been allotted an iron ore block of 150 hectares with reserves of 35 MT, at Kankan (Chhattishgarh). However, the immediate benefit of these mines will not be available to the company as “it will take 15 months for the iron ore and three years for the coal to start producing ore and coal from captive mines respectively”, explained KK Jain, CFO of MSPSPL. This means that the financial impact of this back-ward integration will not be reflected in the current financial year, and will have a partial impact only in FY13.

 

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