Although the coking industry outlook is good, it may be a long time before the benefits start flowing in for Austral Coke.

Austral Coke & Projects (ACPL), which was primarily into leasing of equipment and trading of textiles, has swiftly entered into the coke manufacturing business.

To invest further and grow its business, the company has done a pre-IPO placement of Rs 53.7 crore and is raising another Rs 119-142 crore through the initial public offer at a price band of Rs 164-196 per share.

Right moves
The company had low-ash metallurgical (LAM) coke manufacturing capacities of 175,000 tonne during FY06, which it raised to 375,000 tonne in December 2007.

The company is now planning to increase this capacity further to 525,000 tonne by March 2009. Also, as its coking coal (raw material for LAM coke) requirements are currently fulfilled by way of imports from markets such as China and Australia, the company is now investing to ensure future availability of coking coal.

In this direction, the company has acquired the licenses to mine over one lakh hectares of area in Mozambique, which the management estimates has reserves of over three billion tonne of coal. It is considered to be a significant step, which will help the company secure its raw material requirements and expand capacities in future.

While the move will take time as the company is hoping to complete the entire process by December 2009, it will however help improve volumes was well as result in higher margins. Currently, the company pays $300-310 per tonne for coking coal. But, with its own mining, its landed cost is estimated to be about $180-200 per tonne (including production, transport and royalty).

Meanwhile, the benefits of increased domestic capacity of LAM coke will reflect in its revenue growth. The new capacity (200,000 tonne), which was added in December 2007, will fully reflect in FY09. Also, the increased capacity utilisation at 75 per cent as against the 65 per cent should improve its volumes.

As far as the demand is concerned, according to the industry estimates there is strong demand from user industries such as steel, cement, ferro alloys, etc.

The strong demand in user industries coupled with the limited coke supply in the domestic and international markets have resulted in rising prices. In the international market, LAM coke prices have risen from $400 per tonne to $680 per tonne.
 

Power benefits
The new capacities will also generate lot of steam and heat, which will be further used to generate power through its waste heat recovery plant.

The company is putting an 8 mw power plant, out of which around 6 per cent of the power produced would be used for the captive purposes, while the remaining will be sold to the grid.

Analysts estimate that the sale of power will generate additional revenues of Rs 14.9 crore per annum and help in improving margins.

Revenue mix
As indicated by the management, the company in the long run will focus on the energy sector. Its other businesses like textile and equipment will be gradually hived off or sold.

While these segments contributed about 44.9 per cent to total revenues in FY08, its impact is likely to be marginal as the company expects a strong growth in the coke business.

Valuations
The company is operating in a growing industry where the demand and pricing is favourable. This trend expected to continue for some time. In this scenario, the company's efforts to increase capacities and aggressively look to acquire new mines should translate into higher growth.

However, rating agency CARE has assigned a grade of 2 on a scale of 5 indicating below average fundamentals, primarily on account of competition, cyclicality of the user industry and moderate corporate governance.

Besides, investors should also consider the risks associated with timely project execution and also the fact that coke prices are estimated to be around their peak levels, thus, leaving little room for further appreciation.
 

What though also does not provide confidence is the fact that the share price of another listed group company, Gremach Infrastructure Equipments & Projects, has fallen substantially in the recent past-it made a high of Rs 504 per share in January 2008 and is now down to Rs 86.9 currently. While the state of the market explains this to some extent, some of the large institutional investors have also sold in large quantities.

Regards valuations of ACPL, at upper price band of Rs 196, the issue is priced at 14 times its FY08 annualised earnings on post-issue capital.

While this is relatively lower compared to Gujarat NRE Coke, which is trading at 21 times its FY08 earnings, it is also because ACPL derives a good chunk of its revenues from trading and leasing activities, which attract lower valuations.

Also, given that revenues from the textile and leasing businesses will decline over the next two years, it will tend to subdue the overall growth rate even as revenues from the coking business increase.

Additionally, given the scale of the coking project, there is a high possibility of further equity dilution to finance the rapid growth plans. The growth in earnings thus, may be lower. Investors with a high appetite for risk and patience may want to consider this one.

Issue opened: August 7
Issue closes: August 13

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