Vardhman Special Steels Ltd
(BSE Code: 534392) (CMP: Rs.100.15) (FV: Rs.10) By Laxmikant Bhole
Company Overview: Incorporated in 2010, Ludhiana-based Vardhman Special Steels Ltd (VSSL) is a leading steel bar producer for automotive applications. It caters to various sectors such as Engineering, Automotives, Tractors, Bearings and allied industries. Its primary products include steel bars and rods with a variety of bright bars of special and alloy steel. Its annual capacity for rolling bars stands at 1,80,000 TPA and for bright bars at 36,000 TPA. Its steel melting shop, which is an essential element for creating bars, has an annual capacity of 2,00,000 TPA. Its fully automated feeding system for DRI (Direct Reduction of Iron or sponge iron) and other raw materials provides high optimization and better cost control. It has well-equipped R&D facilities as well. It derives its revenue primarily from the two-wheeler and passenger vehicle segment. It marquee clients include Toyota, Hyundai, Maruti Suzuki, Nissan, Ford, Renault, Hero MotoCorp, Yamaha, TVS Motors, Honda Motors, Tata Motors, Volvo, Caterpillar, John Deere, Mahindra & Mahindra, Meritor, TAFE, JCB, etc. It serves over 200 clients across different sectors and countries. VSSL is on an expansion spree. It plans to enhance its steel melt shop capacity by 60,000 TPA to 2,40,000 TPA, its rolling mill capacity by 35,000 TPA to 2,20,000 TPA and its bright bar mill capacity by 15,000 TPA to 45,000 TPA.
Industry Overview: The auto industry accounts for 7.1% of India’s GDP with the two-wheeler segment as the market leader with 80% market share. With favorable policies initiated by the Government of India and major automobile players, India is positioned among the leading two-wheeler and four-wheeler markets of the world by 2020. India is a leading passenger vehicle (PV) manufacturer and was ranked No.5 in 2017 after China, USA, Japan and Germany. The Indian two-wheeler market is the largest in the world. Two-wheeler production rose 16% to 23 million units from the large base of 19.9 million units. Scooter production crossed 7 million units while motorcycles crossed 15 million units. Two-wheeler sales achieved a new milestone of 20.2 million units. Scooters and motorcycles recorded the highest-ever sales crossing 6.7 million units and 12.6 million units respectively. According to the Society of Indian Automobile Manufacturers (SIAM), domestic PV sales were up 8% at 32,87,965 units in 2017-18 v/s 30,47,582 units in 2016-17.
The demand for alloy steel is driven by specific sectors like automobiles, white goods, capital goods, etc. As infrastructure-led steel consumption gives way to consumer-driven steel consumption, alloy steel is expected to gain prominence going forward.
Financial Performance: VSSL exhibits a strong balance sheet with an equity capital of Rs.35.7 crore and a D/E ratio at 0.65x. It has reduced its debt significantly from Rs.350 crore in 2015 to Rs.228 crore in 2018. In FY18, it recorded the highest production and sales in terms of volume. It improved on all operational parameters and added key global clients too. It reduced its financial leverage and reported the highest-ever top-line and EBIDTA. For Q2FY19, it reported 43% higher income of Rs.295.49 crore with 6% higher EBITDA of Rs.15.32 crore and 21% higher PAT of Rs.7.07 crore. Its EPS stood at Rs.2. Sales volume rose 11% to 42,466 units from 31,142 units in Q2FY18. Exports accounted for 5% of total sales. In H1FY19, PAT zoomed 95% to Rs.16.15 crore while EPS jumped 59% to Rs.4.52 from Rs.2.85 in H1FY18.
As at FY18, RoE and RoCE improved to 7.38% and 11.07% respectively. Its D/E ratio has reduced from 1.98 in FY15 to 0.65 in FY18. Its current market cap stands at Rs.357.5 crore against its enterprise value (EV) of Rs.474 crore. EV/Sales ratio stands at 0.54, which is very attractive.
During FY18, VSSL raised around Rs.68 crore through a Rights issue and another Rs.50 crore through a QIP (subscribed by DSP Blackrock MF and Sundaram MF) priced at Rs.140/share. CRISIL has recently upgraded its credit ratings to ‘CRISIL AA’ from ‘CRISIL AA-’ for long-term borrowings and reaffirmed ‘CRISIL A1+’ for short-term borrowings. Total bank loan facilities that were rated amounted to Rs.546.82 crore. Capital Structure: The promoter and promoter group hold 66.39% stake in the company with not a single share pledged as at 30 September 2018. DSP Blackrock Fund and Sundaram Finance Fund each hold 5% stake in the company. Some marquee investors also hold over 5% stake in the company.
Strong R&D capabilities Strong clientele Strong promoter background and pedigree Sustainable growth seen over the last 5 years
1. Globally, the steel cycle is on an upswing on account of rising demand and a structural shift owing to China’s supplyside reforms in the steel sector. This resulted in a significant hike in key raw material and consumable prices like scrap, pig iron, sponge iron, graphite electrodes and refractories, which in turn affected VSSL’s operating margins. Therefore, even though it recorded a sizeable growth in its top-line and EBIDTA, its profitability margin remained subdued.
2. The demand for VSSL’s products was significantly higher than its production capability last year. As a result, its customer relations were compromised upon. Although the management is expanding facilities to meet the rising demand, the projects will take about 2-3 years to be completed. This is sentimentally negative for any business.
Common Sense Analysis: VSSL caters to the automotive segment, particularly the passenger car and two-wheeler markets. Both the segments are expected to witness robust growth in the current year driven by rising per capita income in Tier I and II cities and towns. Also, the management is expanding capacities to bridge the demand-supply gap for VSSL’s products. Based on these factors, VSSL’s future appears bright. Conclusion: VSSL has strong manufacturing capabilities and excellent business opportunities ahead. It has done exceedingly well over the past few years and the management is taking the right steps to boost its business footfalls. The stock’s 52-week high/low is Rs.184.15/ Rs.90.3. It is available near its 52-week low, which gives long-term investors an excellent opportunity to enter. The current volatility in the market may push the stock lower. Therefore, it may be prudent to accumulate the stock on dips between Rs.105 and Rs.95. With FY19E EPS of Rs.9-10 and P/E of around 1314x, the stock can easily touch Rs.128 fetching 25-28% returns in the next 12-18 months.