Kalyani Steels: more gains in the cards

The company wants to ramp up its production capacity to 100% over a period of time

 

Mid size steel manufacturer, Kalyani Steels rose 15.3% to Rs 42.2 per share on Thursday after supreme court lifted the iron ore mining ban in Karnataka.

The development for Kalyani Steels is considered to be positive since earlier because of low availability of iron ore the company was not able to utilise its steel manufacturing capacity fully. It is currently operating at about 60% of capacity utilisation.

The company has said that it wants to ramp up its production capacity to 100% over a period of time as exploration from the banned iron ore mines start and thus lead to increase in availability.

On an annualised basis the company in current financial year should do a sales turnover of about Rs 1000 crore, this is around 30% lower compared to its sales turnover of Rs 1,445 crore in financial year 2011 mainly on account of lower production lesser utilisation of its existing manufacturing capacities.

Kalyani Steel has annual installed annual capacity of 6,70,000 tonne for pig iron and 2,50,000 tonne for rolled products.

Even if one assumes that its pig iron capacity is underutilized and there is scope for 40% higher utilisation, at current pig iron price of around Rs 24,000 per tonne this could lead to additional about Rs 650 crore to its sales turnover and gains in terms of profitability will also be similar leading to higher profits.

Apparently, the profitability could be higher given economies of scale (advantage of depreciation and interest cost) and possible correction in iron ore prices due to increase in availability of the same.

Analysts believe that benefits will be visible over next 6-8 months as exploration of iron ore mines could take some time due to issues including expiry of licenses and compliance of new norms and conditions that companies need to fulfill to start exploration of the said mines.   

Meanwhile, the company's share prices have fallen by almost 30% in last one year. Currently the stock is trading at 7 times its trailing four quarter's earnings and 0.5 times its book value.

"I think there is potential in the stock, which could be unlocked as company’s capacity utilisation improves from the current levels. Also valuations at current prices are supportive," said SP Tulsian of sptulsian.com.