This one is a clear case of mistaken identity. Sathavahana Ispat is a Hyderabad based company which is engaged in the production of coke. However, that is not how the analysts seem to be covering it. Here is one report by Sunidhi securites. (Report). Am sure if you search on the internet you will find some more reports.
However, I have my apprehensions. Not on the findings of the report but the perception of which industry Sathavahana belongs to. Before I dwell further on my thoughts let me give you some background about what Sathavahana is all about.
This company was incorporated in 1989 and manufactures pig iron through the mini blast furnace (MBF) route. In terms of cost of production the MBF route is not as effective as a proper blast furnace. However, its advantage is the low capital cost required. Subsequently this company also set up a coke plant to cater to its coke requirement. As an offshoot of the coke plant and to make efficient use of the Coke Oven gas (COG) the company also set up power plant. As of June 30th 2010 the capacities are as follows.
a) Pig Iron - 0.21 Million tonnes
b) Coke - 0.30 Million tonnes
c) Power - 30 MW
Stemcor the world's largest steel traders is an investor in this company.(Website)is one of the investors in this company and has just less than 15% stake in this company. Do you know the price at which it invested in the company. Stemcor has invested in this company at the rate of Rs 60 per share along with the promoters. (BSE notice).
Typically a MBF uses about 600 Kg of coke for every 1 ton of pig iron production. Thus this company already has an excess of coke. It is adding a further 0.15 million tonnes of coke making capacity and about 20MW of power generation capacity. (Source: Annual report 2010 - Directors report). All this expansion is going to be completed in the quarter ended 30th September 2010. Please note that there has been no increase in the pig iron capacity. Thus, it technically becomes a coke making company which also makes pig iron rather than a pig iron manufacturer which also manufactures coke. Need more evidence of this being a coke making company. Have a look at what Stemcor has invested in the company for. Not for the pig iron. Its coke. (Stemcor announcement)
Further evidence can be had if you you look closely at the Q1 FY11 results. All you have to do is to have a look at the segment information. Coke making + power generation has capital employed of 129 crores which is about thrice that of the capital employed in pig iron making. Need more evidence. Stemcor
Now for some more interesting observations. About 75% of the gross revenues come from coke making and power and about 78% of the profits come from coke + power. Even last year this part of the business was making profits even though pig iron was making losses. If the Q1 FY11 results are any indication the company should close FY11 with EBITDA of about 75 crores of profit which is double that of last year. And mind you this does not include the additional profits that the additional coke making and power generation capacity is going to bring. The additional coke made would all be sold. According to Gujarat NRE coke MD (Link)coke is likely to be in short supply during FY11 and its prices are likely to firm upto above $500 per tonne. At 10% profit margins the addition EBITDA could be in excess of 30 crores from coke itself. (=$500X10%X150000X46). Not to mention the additional income that power is likely to bring.
Ennore coke with about the same capacity and with about 9 crores PAT trades at a MCap of about 166 crores which is the same as this company which could post a net profit in excess of 50 crores. Also it trades at a PE of about 18 whilst Sathavahana is at a PE of less than 7 times on the basis of FY10 financials.
This makes this company a classic case where there is going to be profit expansion as well as a chance of PE rerating. Let me know if you liked it.
Till then happy investing
PS: A lot of you have written to me about the last 2 posts about Ganesh polytex and Southern ispat and your concerns surrounding them. Will cover them to the best of my understanding in the next couple of posts.
