Adding lustre to chrome

Mudar Patherya

We've heard of steel companies integrating backwards into ore, alloys and power; this one's about a ferro alloy company (Rohit Ferro-Tech) intending to move backwards into chrome ore and power on the one hand and forward into stainless steel on the other.

What has transpired in the space of three quarters is telling. Total income climbed from Rs 100 crore in April-June 2007 to Rs 139.91 crore in October-December 2007; earnings before interest, taxes, depreciation and amortisation (EBITDA) jumped from Rs 15.70 crore in the first quarter to Rs 31.98 crore in the third quarter; profit after tax strengthened from Rs 9.49 crore in April-June 2007 to Rs 20.09 crore in October-December 2007.

How? Ferro chrome is riding an unprecedented stainless steel rebound; stainless steel demand is responding positively to a rising standard of living; improved standard of living is largely coming out of a liberalising India and China.

Result: ferro chrome realisations strengthened from an average Rs 33 per kg in 2005-6 to Rs 40 per kg in 2006-7 to Rs 46 per kg in the first quarter of 2007-8 to Rs 52 per kg in the second quarter of 2007-8 to around Rs 70 per kg in the third quarter. Since then transactions have also been effected at Rs 90 per kg.

Rohit Ferro is in the right place at the right time. Its consolidated ferro alloys (high carbon ferro chrome, ferro manganese and silico manganese) capacity of 1,80,000 tonne per annum went on stream in November 2007; production is expected to climb from 1,10,000 metric tonne in 2007-8 to 1,80,000 metric tonne in 2008-9; revenue is expected to strengthen from Rs 550 crore to Rs 800 crore during the period-at higher margins should the higher realisations sustain.

These factors make the company an interesting stock: power tariff of under Rs 2 per unit in Bengal, profits from the Bishnupur plant 100% exempt for five years, the company enjoys a chrome ore advantage by virtue of being located in a chrome ore rich region (along the richest and largest in the world) and the export of chrome ore has been restricted by the government resulting in input cost control.

What makes the Rohit story compelling is how it is using its profits to strengthen its business model:

• It intends to commission a 110 MW power plant by 2009-10, keeping power cost to below Rs 2 a unit (as against Rs 3 a unit in Orissa today)

•  It intends to acquire chrome ore properties globally (where they would be cheaper compared to India)

• It intends to manufacture stainless steel

On the one hand, this is a cyclical business; on the other, the company could well report a post-tax bottom line of Rs 65 crore in 2007-8 and Rs 90 crore in 2008-9 on a fully diluted equity (conversations to start from April 2009) of Rs 42.4 crore. A market capitalisation of Rs 340 crore gives it a post-tax discounting of less than 4 for 2008-9.

Bargain.

Disclosure: The writer holds stocks in Rohit Ferro-Tech 

Patherya heads Trisys, an annual reports consultancy. His column will identify stocks that are not in the limelight He can be reached at mudar@trisyscom.com