Indian Metals & Ferro Alloys Ltd - Nirmal Bang

IMFA witnessed subdued ferro chrome demand but revival of price realization in Q1FY13 boosted the top-line growth YoY basis. The EBITDA margin at 31.5% in Q1FY13 was up by 400bps YoY and by 1040bps QoQ due to the significant jump in price realization which went up by 14% YoY to Rs. 69190 per ton and by 18.3% QoQ.

- Standalone Net Sales for Q1FY13 was up by 10.5% at Rs. 287.88 crores as compared to Rs. 260.41 crores in Q1FY12 and down by 5.5% QoQ.

- IMFA reported EBITDA of Rs. 90.69 crores in Q1FY13, up by 26.8% YoY and by 41.1% QoQ. EBITDA/ton was Rs. 21795 in Q1FY13 as compared to Rs. 16694 in Q1FY12 and Rs. 12344 in Q4FY12.

- The Net Profit margin is 9.9% in Q1FY13 as compared to 14.4% in Q1FY12 and 7.2% in Q4FY12. The margin fell on YoY basis due to jump in interest cost by 230.1% to Rs. 32.02 crores as the company has accounted for MTM loss of Rs. 19 crores in Q1FY13 and jump in tax rate.

- Closure of Nuasahi mine: Pursuant to a communication from the district collector, the company had to close one of its chrome mines, Nuasahi, in Jajpur district in Mid February 2012. The company was expecting the mine to start as early as end of 1QFY13, however, considering the slow progress, it has become less hopeful to start the mine any time in near future. The company is also contemplating legal action against the order. The mine was producing at the rate of 70-80,000tn annually, contributing to the company's total production of chrome ore at 450,000tn.

- Utkal coal mine commissioning delayed after directive from Orissa government: IMFA was targeting commissioning of Utkal coal mine in 3QFY13, however, Orissa government has stopped all mining leases approval due to the Supreme Court directive that all natural resources should be auctioned. We would refrain from taking a call on the time-line for the resolution of this issue. The commissioning of mine is likely to delay further from our already conservative target of 1QFY14. We have not taken any benefit of Utkal coal mine in our projection for FY13E and FY14E.

Valuation & Recommendation

The company would be in a much different shape once the above projects get commissioned. However, the company has also been a victim of policy paralysis and the benefit from expansion projects, undertaken during last two years, are getting consistently delayed. We believe that clarity on Utkal coal block would be necessary for the stock to show any kind of positive up-move. We were estimating the benefits from these projects would come by 2HFY14; however, this is likely to be delayed further. The company has further cut its ferro chrome production guidance from 180KT-200KT to 160KT-170KT due to closure of Nuasahi mine which raises looming concern over the profitability of the company. At CMP of Rs. 269, the stock is trading at an EV/EBITDA of 4.9x FY13E and 4.2x FY14E. We have incorporated all the negatives in our projections and revised our target price to Rs 295 (5x EV/EBITDA FY14E), from the earlier Rs. 331 per share and maintain our HOLD rating.

Source : Equity Bulls

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