Multi Baggers

Ashish Chugh

Investment Advisor

5.30 AM Jan 1st 1970

Balasore Alloys

BSE ID : 513142 NSE ID : ISPATALLOY

RECOMMENDED PRICE 6.00

PEAK FROM RECO 99.90 1,565.00%

CURRENT PRICE 6.02 Resource id #18

The cost of setting up a Greenfield project of similar capacity with integration of captive power plant and captive mines would cost many times more than the current enterprise value of Balasore Alloys.

Balasore Alloys Ltd. -CMP - Rs.6.00 (Face Value - Rs.5.00) - BSE Code -513142

Balasore Alloys Ltd. (Balasore Alloys) is a part of the Ispat Group headed by Mr. Pramod Mittal. The company has business operations in Orissa and manufactures Ferro Chrome and other ferro alloys. The company caters primarily to the stainless steel industry.

Corporate Debt Restructuring

The company which was referred to BIFR in 2003 got deregistered in 2005 pursuant to the financial and capital restructuring measures undertaken by the company.

The company has been able to negotiate a Corporate Debt Restructuring package with the Bankers with the cut off date being 31st March 2004. The package includes :-

Reduction in rate of interest on Rupee Loans,

Reschedulement of repayment of Term Loans,

Conversion of part of working capital limits into Term Loans,

Conversion of differentials/unapplied interest into Funded Interest Term Loan, and

Reduction in margin of working capital limits.

With the CDR package, the company will be able to substantially reduce its interest cost in future and this would lead to better financial performance of the company.

Equity Capital Reduction

The management also restructured the Equity Capital of the company and reduced it by 50% by reducing the Face Value of the share from Rs.10 to Rs.5. The balance equity was adjusted against the accumulated losses of the company.

The net worth of the company turned positive pursuant to its Equity and Debt Restructuring.

Fully Integrated Operations

The company has fully integrated operations - has captive mines, a captive power plant and ferro chrome plant. The company has a total capacity of 1,00,000 MT of various Ferro Alloys. The company has long term contract with the state government for supply of uninterrupted power alongwith a captive power plant of 21 MW capacity. Exports constitute a major chunk of revenues of the company. In the 18 month period ended September 05, the company exported 71,000 MT of Ferro Chrome worth Rs.253 crores, which is over 60% of the total Sales Revenues.

Captive Mines

The company has 100 Hectares of Chrome Ore mines in Sukinda Valley in the state of Orissa. Sukinda Valley has huge chromite ore deposits. Mining operations have resulted in company's self sufficiency in meeting entire chrome ore requirement to produce Ferro Chrome on sustained basis.

Financials

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

QUARTERLY - LATEST RESULTS - Balasore Alloys Ltd (Curr: Rs in Cr.)

Particulars	Quarter Ended (Jun 06)	Quarter Ended (Jun 05)	Quarter Ended (% Var)	Year Ended (Sep 05) (18)	Year Ended (Mar 04) (18)	Year Ended (%Var)
Sales	64.83	78.71	-17.6	412.97	253.14	63.1
Other Income	0.07	0.79	-91.1	38.05	3.52	981
PBIDT	10.31	12.12	-14.9	103.09	-13.91	LP
Interest	3.86	4.29	-10	14.92	29.53	-49.5
PBDT	6.45	7.83	-17.6	88.17	-43.44	LP
Depreciation	3.64	3.58	1.7	21.03	24.92	-15.6
PBT	2.81	4.25	-33.9	67.14	-68.36	LP
Tax	0.27	0.05	440	0.15	0	-
Deferred Tax	1.01	4.12	-75.5	10.7	-15.52	LP
PAT	1.53	0.08	1812.5	56.29	-52.84	LP

The company has an Equity Capital of Rs. 22.15 crores. The promoters currently hold 27.5% stake and their holding will go up to roughly 50% after the preferential allotment of shares (already approved by members in the EGM) is made to the promoters.

Preferential Allotment to Promoters

Pursuant to the terms and conditions of the Corporate Debt Restructuring package approved by the Bankers, the member of the company in the EGM held in August 06 have approved allotment of 200 Lakh shares to the promoters of the company at a price not less than Rs.12.75 per share. (Par Value of Rs.5 and premium of Rs.7.75 per share)

Major Concerns & Conclusion

The major concern in investment in the company is the past track record of the group. Investors who had invested in the group companies have lost money over the years inspite of the Sensex and other stock market Indices going up multifold and many peer group companies generating good returns.

However, in the changed business environment, companies are increasingly focusing towards the interest of the minority shareholders which has led to increased transparency levels and better corporate governance, even amongst small and mid sized companies. It is with this hope and premise that we are recommending a buy. The stock is however recommended for investors with an appetite for HIGH RISK.

The undervaluation of stock is evident from the fact that - The company has provided for a depreciation and PAT of Rs.3.64 crores and Rs.1.53 crores respectively for the quarter ended June 06. This makes the cash profit of the company as Rs.5.17 crores. The current market cap of Rs.27 crores is equivalent to just less than one and a half years of cash profits.

Also, the cost of setting up a Greenfield project of similar capacity with integration of captive power plant and captive mines would cost many times more than the current Enterprise value of Balasore Alloys. To give an illustration, Tisco is undertaking expansion of its ferro chrome plant in Orissa & increasing its capacity by 55,000 MT p.a (from 55,000 MT to 1.10 lakh MT p.a) which will cost around Rs.100 crores and setting up a Captive power plant which will cost around Rs.200-250 crores. As against this, a 1,00,000 MT p.a plant with 21 MW Captive power and over 100 Hectares of captive mines would command a much higher valuation. The business therefore is going at mouthwatering valuations at the current price.

Moreover, the corporate debt restructuring package has resulted in huge savings in interest cost for the company. The increase in promoters stake from 27.5% to 50% after the issue of shares to them on a preferential basis would be another positive.

In short, there is a great opportunity available to the management since the kind of assets they are sitting on, the potential for profits if Huge. We believe the current stock price discounts the negatives.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm, dependent family members and clients 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.