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Sunflag Iron – Update & Ideas

We had discussed about Sunflag Iron and provided an update earlier. At that time the company had been posting substantial improvement in operating margins and hence much better net profits and it seemed that the improved was because of the backward integration the company had been doing over last 2-3 years. But since last 2 quarterly results, the margins have taken a hit and so have net profits.

As the whole midcap space has undergone a strong correction in last 3 months, there are several other interesting ideas available at good valuations. One may consider switching out from Sunflag Iron into new ideas.

Some new ideas on which we are researching are:

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Sunflag Iron – Update

We had mentioned about Sunflag Iron . Since then then the stock price has appreciated by just 10% while the fundamentals and the outlook seems to be getting stronger.

We had mentioned that the company has been acquiring coal blocks since last few years and getting backward integrated. The latest annual report gives a strong confirmation on the same:

Excerpt from the FY 2010 annual report:

“During the year under review, the total coal production at Belgaon Coal Block is 140,147 MT as against of 51,234.41 MT in the previous year, which is about 174% higher than the previous year.”

If one analyses the Fixed Asset schedule and the investment section, the company has been stepping up the investments for captive coal blocks after the success from the Belgaon coal mine. For eg: The co has invested 10 Cr+ in subsidiary – Khappa Coal Mine which is JV between Sunflag Iron (63.27%) & Dalmia Cement (36.73%).

Future expansions as per the annual report:

Compelling Valuations at CMP of 34:

FY 2011 Expected turnover is 1650 Cr+, with expected NP of 110 Cr+
Stock is trading at less than 5 PE on expected FY 2011 earnings
Stock is trading at 1.25 times BV of 25.50
Debt Equity ratio has improved to 0.80 : 1

Promoters have been regularly buying from open market and have increased their stake from about 40% in September 2008 to about 51% as of now.

Company Website

Updates and Follow-ups

Shilpa Medicare: The company has got funding from Barring Equity PE Fund. The co will be allotting 5 Lac warrants to promoters and 20 Lac shares to the PE Fund @ Rs 350/share. This is a major positive for the co in the long run and fundamentals will improve majorly.

Harrison Malayalam: We had discussed about the company a few days back. The company has come out with poor nos and the stock is down to 118 levels. We feel the intrinsic value of this company is much higher than the current M Cap of the company. Few reasons to substantiate our view:

1. The company has 57,800 acres of plantations. The value today would be multiple times higher than the Current MCap of just 210 Cr. Have a look at the 10 yr financial data of the company. in 2005, the co had sold 674 Hectares of one of its Rubber Estate and had got 33 Cr as other income. Similarly in 2006. the co had sold about 916 Hectares of another rubber estate and got 63 Cr as other income.

2. The asset value of the estates must have almost doubled since 2005. As of 2009, the company has about 25,000 Hectares of plantations. So if one extrapolates the above valuation, the real value of their assets would be huge.

3. Over the years the company has been able to reduce the labour and mechanize it’s plantations.

4. As Rubber & Tea prices are rising, logically the co should be making money.

5. The record date for the demerger should be announced in next few days.

Manjushree Technopack: We had earlier recommended MT at about Rs 32 here. The company has posted excellent Q1 numbers. MT is a proxy play to the domestic consumption story and the co should continue doing well. We expect the company co close FY 2011 with 195-200 Cr turnover and close to 15 Cr of NP. The stock should continue to do well.

Gujarat Reclaim Rubber: The co has posted a very good Q1. We expect the company to come out with better nos going ahead and the stock should do very well. The company had been featured in the latest “Tyre Asia” magazine and the article is a must read.

Balkrishna Industries: BKT continues to do well. The company has posted a good Q1 when other tyres cos suffered heavily on the margins side. The reason for good performance is the niche area the company is operating in. As per Q1 con-call of the co, the updates are:

1. The outlook is very positive. The co is already operating at 100% capacity and needs more capacity to fulfill additional demand.

2. Co is witnessing very strong growth in US markets. Share of EU has come down to about 55% from 70% earlier.

3. Co is adding about 20% capacity in next 1 year. At a cost of about 150 Cr

4. Co is undertaking a major expansion of about 900 Cr over the next 2 years. Post this the capacity of the company will get more than doubled.

5. Co wants to be a $ 1 Bln turnover company by 2015.

We feel that BKT is an excellent long term opportunity.

Sunflag Iron: As expected, the co continues to do very well. The promoters have been buying every other day from the open market. The stock is available at less than 5 PE and 1.2 times BV.

Sunflag Iron & Steel – CMP 31

Dear Friends,

Steel Sector has been witnessing a lot of price hardening due to both input price rise and demand. Stocks of this sector are finding interest.

One company which has good fundamentals and looks interesting is – Sunflag Iron & Steel. Sunflag is part of the Bhardwaj group having presence across 6 Countries in 3 Continents. The company manufactures high quality alloy steel which finds usage in Automobile Industry and Infrastructure sector.

The company has grown steadily over the years and should be able to post a turnover of close to 1300 Cr this year- FY10. Over the last few years, company has tried to go for backward integrations – for eg: expanding of captive power plants, acquiring coal blocks etc.

Attractive Valuations:

1. Stock is available at 7 times expected FY10 earnings.

2. Stock is trading at just 3 – 3.5 times FY10(E) EBITA margins.

3. If one analyses last few quarters, it seems the effect of backward integrations are fructifying and if the company can continue the same, the company may be on its way for yearly net profits of more than 100 Cr.

Another positive is – increasing shareholding of promoters (from 42.39% to 49.03% within one year).

Financial snapshot:

Interview of ER Shekhar, Director. | Company Website