Electrosteel Castings - Gaining Size, But Clearances Remain Key - Nirmal Bang

We had a meeting with the managements of Electrosteel Castings (ECL) and Electrosteel Steels (ESL), an associate of ECL with a 39.6% stake. We paid a visit to the plants of both these companies. ESL is setting up a 2.51mt integrated greenfield steel plant. Its management gave guidance of commissioning the integrated steel plant by the end of FY13. However, we believe a very significant portion of ESL's profitability will depend on commencement of operations at its iron ore mine and ramp-up of coking coal production. ECL has commenced production at its coking coal mine through the open-cast route, while work on underground mine is progressing, which the company expects to complete by the end of 1QFY14. The company has obtained forest stage-1 clearance for iron ore mine and it is expecting stage-2 clearance by the end of 1QFY14, but we believe it can take a longer time. Currently, we do not have any rating on ECL and ESL.

Steel plant to be commissioned before the end of FY13: ESL has witnessed significant delay in commissioning its 2.51mt steel plant, which was originally scheduled in FY11. Total project costs stood at Rs95,620mn and ECL's equity contribution was at Rs8,876mn as of end-October 2012. The management stated that there was an exodus of almost 95% Chinese workers in September 2010 due to Arunachal Pradesh state's border issue with China. This impacted project work severely and led to a long delay. The company has resolved these issue and it is likely to commission the plant by the end of FY13.

Iron ore mine status - key to profitability: ECL has been allocated 91mt iron ore mine at Kodolibad, Jharkhand. This is an open-cast mine and the company has obtained stage-1 forest clearance. The management has indicated that it should be able to get stage-2 forest clearance in the next six months, but we believe it may take a longer time. The mine is around 230km away from the plant, but there is a connecting 200-km rail line of Indian Railways, which will result in moderate freight costs. ECL is looking at peak production of 4mt iron ore and after meeting its own requirement, rest of the iron ore would be sold to ESL at cost plus 20% basis.

Coking coal mine status: ECL has also been allocated coking coal mine in Parbatpur, Jharkhand, which has mining reserves of 231mt. A significant part of this mine is underground and the company is working on it to start operations. The company has started open-cast mine, but the volume is still insignificant at around 10,000tn/month. ECL is looking at peak production 1.5mt of coking coal from the mine and after fulfilling its own requirement, rest of the coking coal would be sold to ESL at cost plus 20% basis. This mine is around 6km away from the plant site and ECL has also set up a 2mt coal beneficiation unit at the mine.

Source : Equity Bulls

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