Sathavahana Ispat: The next multi-bagger?

There is a newly-discovered respect for all those ductile iron pipe makers that one had earlier dismissed because they were steel related, infrastructure driven, technology intensive (hence, unpredictable) and capital intensive. The Srikalahasthi Pipes turnaround sent out a signal saying: 'Hey, here I am and don't take me lightly.' The last quarter results of Tata Metaliks confirmed the direction. The obvious question: where is the next ductile multi-bagger?

At the risk of sounding speculative, it could well be Sathavahana Ispat. These are some reasons why it wouldn't make sense touching the stock.

One, the company reported a profit before depreciation and tax (Pbdt) of Rs 14 crore in 2015-16 on an equity of Rs 50 crore. Two, the company is sitting on a debt of Rs 466 crore with an annual interest drain of around Rs 90 crore. Three, the company struggled with capacity utilisation of 45 per cent on the ductile side during the last financial year (pig iron 95 per cent, met coke 70 per cent). Four, the company's competitors are probably already enhancing their production capacities, strengthening their bidding competence (corresponding to a lower capital cost per tonne).

Now, come to some reasons why this stock may still be an interesting medium-term (or even long-term) proposition. The high operating leverage is precisely the reason why one should buy. The moment capacity utilisation increases (the company expects to produce 15,000 tonnes per month against a rated capacity of 210,000 tonnes per annum by the second quarter of the current financial year), a turnaround could happen faster than one anticipates.

The company is an integrated producer - the pig iron transferred as hot metal to the manufacture of ductile iron pipes, coupled with precious supports (sinter plant, waste heat recovery plant and independent power plant) promise competitiveness.

The company's order book of Rs 1,250 crore, which translates to 280,000 metric tonnes, should keep it busy for the next 18 months.

The company does not have any capex lined for the next three years (unless it makes so much money that it doesn't know what to do with it and, hence, expands capacity); it would prefer to repay debt and become debt-free in about three years, which should give a smart stock picker an idea of the kind of money the company expects to generate based on its order book and resource costs.

The gearing (level of company's debt related to its equity capital) of three, which no sane stock picker will back today, could decline to less than one during this period, making it attractive to buy into the transition before than after. The company is sitting in the heartland, where much of national growth is likely to come; Telangana accounted for 80 per cent of its orders; Andhra Pradesh has announced a range of projects related to piped water access and irrigation projects entailing the use of ductile pipes. The fundamentals appear to be in place for an attractive story, except for that one critical number: capacity utilisation. That holds the key to what could emerge as the next Tata Metaliks in the country's ductile iron sector.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed