Multi Baggers

Sarda Energy & Minerals Ltd.

Sarda Energy & Minerals Ltd., formed through the merger of Raipur Alloys & Steel Ltd. And Chhattisgarh Electricity Company Ltd. Is a fully ntergrated steel manufacturer. The company has a captive Iron Ore, Manganese Mines and Coal Sources. The company also has a captive power plant which provides it a clear competitive advantage enabling the company to produce at most competitive costs. The company is a manufacturer of Sponge Iron, Ferro Alloys and Rolled products. We expect to benefit from this edge in 2008-09 and beyond. The company’s has a 250-hectare plant located in Raipur  with a dedicated 8-km water pipeline from the Kharoon river to the plant for uninterrupted water supply.

Self Sufficiency in Critical Inputs:

The company is 100% self sufficient in its energy needs, which is the  most critical input in ferro alloys and steelmaking. The company has a 48MW power plant sufficient to meet ts own power requirements. The company’s operational Iron Ore mine has reserves of nearly 20 million MT.  In addition, the Company has got an in-principle approval from the Government of India for five more mines possessing sufficient reserves to meet its requirement for the next 25 years. The Company secured coal reserves of more than 100 million MT. The first mine with reserves of 67 million MT has been commissioned. As regard Manganese Ore, the company acquired mining rights from private parties in Goa. In addition, reconnaissance permits/ in-principle approvals were  granted  in favour of the Company for three mines in Madhya Pradesh.

Low Cost Producer:

The company is a low cost producer on account of its vertical integration, economies of scale and reduced dependence on the external market for  supply of critical inputs. The Company had foreseen the need to secure raw material resources more than a decade ago and had taken adequate steps in  that direction.  The company today is completely integrated from iron ore to finished steel for end users. The availability of captive resources within a radius of  250  km from its manufacturing facility significantly saves logistic costs.

Financials:-

The latest financials of the company are given as under :-

(Source: Capitaline)

In the quarter July-Sep 08, the company total income is up to over 150% to Rs 348 crores, PBT and PAT have roughly doubled to Rs 58.12 crores and Rs 46.64 crores respectively over the same period last year. The EPS on TTM basis comes to over Rs 55. The stock thus trades at a PE multiple of just over 1.

Conclusion:

Sarda Energy may be better placed than many other steel manufacturers to compete in a difficult environment on account of its raw material linkages. Even though steel prices are on a decline, we believe the drop in the stock price of Sarda Energy from a High of Rs 695 to the current price of Rs 60 is largely overdone. Investors may choose to buy the stock for a 50-100% gain over the next few months. However, a close watch needs to maintained on Steel Cycle and any indications of the prices stabilizing/ inching upwards after the fall witnessed recently may lead to upward rerating of the stock. The short term downside from the current levels looks negligible.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members donot have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.