Vardhman Spe­cial Steels Ltd

(BSE Code: 534392) (CMP: Rs.100.15) (FV: Rs.10) By Laxmikant Bhole

Money Times - - Stock Buzz Stock Scan -

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.

Key Pos­i­tives:

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.


Newspapers in English

Newspapers from India

© PressReader. All rights reserved.