Promoted Electrosteel Castings Limited (ECL), Electrosteel Steels Limited (ESL) plans to setup a 2.2 MTPA Integrated Steel and Ductile Iron Spun Pipes project in Jharkhand. ECL, the promoter company, manufactures Cast Iron pipes and Ductile Iron Spun Pipes with four manufacturing facilities across India.

Key investment Highlights
Production capacities getting operational within a year
ESL has already acquired ~1804.7 acres of land quite sufficient for the current plan. While one of its blast furnaces would get operational by October 2010, majority of its capacity would come on stream by June 2011. Speedy cash flow generation would help in reducing debt from the overleveraged
balance sheet of the company.

Low Cost of Production due to captive resources
The promoter company, ECL has agreed to supply iron ore and 30% of ESL’s coking coal requirement on a cost plus twenty percent for a period of 20 years from the date of commencement of commercial production. All sources are within a 230-km radius thus keeping freight charges low. In addition, captive power and railways sidings would further reduce cost of production thus enhancing profitability.

Low Cost of Production due to captive resources
The promoter company, ECL has agreed to supply iron ore and 30% of ESL’s coking coal requirement on a cost plus twenty percent for a period of 20 years from the date of commencement of commercial production. All sources are within a 230-km radius thus keeping freight charges low. In addition, captive power and railways sidings would further reduce cost of production thus enhancing profitability.

Value addition through pelletization plant and sinter plants
ESL is setting up sinter plant to use low cost iron ore fines in blast furnace. It is also setting up 1.2 mtpa pelletization plant that would also use fines, convert them into pellets and either use them internally or sell them in open market thus ensuring hefty savings or profits for the company.

The proposed plant will be based on Blast Furnace (BF) – Basic Oxygen Furnace (BOF) – Billet Caster and Hot Rolling Route. At its full capacity, the product profile would be as follows:

Product Capacity (MTPA)

Wire rods (5.5-12 mm Diameter) 0.5
Reinforcement bars (8-60 mm diameter) 0.7
DI pipe 0.33
Commercial billets 0.27
Pig Iron 0.4

Key Risks
High leverage ratio
Total capital expenditure for the proposed plant is Rs ~7,360 crore funded through debt of Rs 5,440 crore (of which Rs 2,700 crore has been raised so far) and equity of Rs 1,920 crore. Post-issue the debt/equity ratio would remain high at 2.8. Any weakness in realisations or expected volumes would
result into lower profits leading to prolonged debt trap.

Delay in operations at ECL’s iron ore mines
ESL’s low cost of production heavily depends upon the supply of iron ore and coking coal from its parent company ECL. Consequently, any delay in getting mines operational on account of regulatory approval would affect profitability of the company

Valuation & Recommendation
Considering green shoe option and total capacity expenditure, enterprise value of ESL at Rs11/share would be Rs 7720 crore. On EV/tonne basis, valuation comes to Rs35000 per tonne. Keeping integrated operations and valued added product profile in mind, the valuation seems to be at discount
compared to the steel majors. We expect ESL to start its full fledged operation in the second half of FY12. Higher proportion of value added products and purchase agreement with Stemcor assures higher capacity utilization as soon as the facilities become operational. This along with positive outlook on steel as well as DI pipe industry provides greater visibility in future earnings and hence we recommend investors to SUBSCRIBE to the issue for healthy long term returns.

Source: Ventura

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