Improving pricing power for stainless steel and ferro-chrome producers, recovering Chinese demand for stainless steel, and an agreement with Posco to set up ferro-chrome capacity makes Indian Metals and Ferro-alloys (IMFA) an attractive, albeit, risky play in the steel space. The company's stock trades at Rs.565, which is around 9.2 times trailing 12 month earnings in-line with the rest of the steel space. Relatively better pricing power and capacity additions in the stainless steel space may place IMFA in a better position compared with peers.

Biz and products

IMFA produces charge chrome or Ferrochrome, a crucial input for the production of stainless steel. Stainless steel is a corrosion resistant variant of steel that finds application in variety of segments, including consumer durables, power, oil and gas. IMFA currently has the capacity to produce 2,35,000 tonnes of ferrochrome and an 108 MW captive power plant to meet the needs of the energy-guzzling arc furnace required to produce ferrochrome. In addition, the company also has the capacity to produce 61,000 tonnes of ferrosilicon, another input for steel production. One of the company's key competitive advantages is its 17 million tonnes of chromite mine reserves in Orissa. Exports in 2009-10 accounted for over 70 per cent of sales to clients such as Posco, Nippon, Nisshin, Glencore (to China) among others.

The company's prospects are tied to those of the volatile stainless steel cycle, which, over the last three years, has made for a rough ride. From around Rs 600 crore in FY07, sales peaked in FY09 at just over Rs 1,000 crore before crashing drown to around Rs 600 crore in FY10. Profits during the same period doubled, as the company exited low-margin products and improved its product mix. The first nine months of 2010-11 have seen sales rise by 76 per cent to Rs 760 crore as ferro-chrome realisations soared with rising stainless steel prices. Production expenses were up less sharply, resulting in significant margin expansion which saw net profits move from Rs 22 crore to Rs 141 crore. The company's debt equity ratio stands at 0.7 with EBIT covering interest seven times over the last twelve months.

Scope for growth

IMFA's capacity utilisation remained at around 60 per cent during the last fiscal and is expected to rise further with demand for stainless steel set to grow at double-digit levels globally. The company also has a tie-up with Posco to set up a furnace with capacity to process 35,000 tonnes of ferrochrome. In an effort to boost margins, IMFA, through a subsidiary, Utkal Coal, is expected to operationalise thermal coal mines in 2011. The company also plans to add an additional 30 MW of captive power. All these moves may help to better insulate the company's operating margins from rising coal and other input costs. The company's operating profit margins dipped to 24 per cent in FY10 from a peak of 47 per cent in FY09; they were at 33 per cent over the last twelve months.

OUTLOOK

Ferrochrome prices have been gaining 20 per cent over the last few months across the US, Europe and China after lagging iron ore, copper and other industrial metals. Ferrochrome contract prices still remain 50-60 per cent of their pre-crisis peaks despite very similar supply-side constraints prevalent in other industrial materials. Supply side constraints include power and logistical bottlenecks in major chromite mining regions such as South Africa.

Indian stainless steel production grew by 12 per cent to 2.9 million tonnes in 2010 and is expected to increase at a compounded rate of 8 per cent over the next three years. A whopping 70 per cent of India's stainless steel consumption is geared towards household goods, with the remaining 30 per cent consumed by infrastructure and automotive, among other segments.

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