Buy Adhunik Metaliks - Motilal Oswal

Three-pronged strategy to drive earnings growth

Key takeaways from conference call with the management

Adhunik Metaliks' (AML) consolidated 1QFY11 PAT increased 3x YoY to Rs564.3m (Rs586m in 4QFY10) due to the doubling of iron ore and manganese ore prices and 17% higher steel prices. Volumes increased across products. Steel volumes increased 15% and manganese ore and iron ore volumes increased 171% and 7% respectively. We expect AML to deliver strong earnings growth over 3-4 years due to a three-pronged strategy.

- Standalone operations are focused on special and alloy steel business. Operating efficiencies are superior due to the incorporation of a blast furnace, sponge iron, sinter plant and coke ovens in the electric route of steel making. A Rs4.6b capex over two years to increase sponge iron ore capacity by 100ktpa and 45MW CPP, the expected start of captive iron mines, and 10-15% annual volume growth will fuel earnings growth.

- Orissa Manganese & Mineral (OMM) will increase production of iron and manganese ore. It invested in an equal joint venture to mine the Suleipat iron ore mines, which has reserves of 80mt, and is expected to start operations in nine months. Initial annual production will be 1mt a year, adding to iron-ore volumes. A Rs4.4b capex to set up a 1.2mtpa pellet plant by the end of FY12 will expand margins.

- Adhunik Power (ANPR) will set up a 540MW independent power project by end of FY12. Two private equity players have put in Rs3.75b for 39% stake in the project.

We expect consolidated EPS of 35% CAGR at Rs20.8 over FY10-12. Similar earnings growth is likely beyond FY12 as contributions from ANPR and Suleipat kick in. The stock trades at an attractive PE of 5.4x FY12E and EV/EBITDA of 4.9x FY12E. Reiterate Buy.

Source : Equity Bulls

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