Not heavily traded and lesser tracked, this stock has some untapped potential

Adhunik Metaliks Ltd (AML) is a long steel manufacturer with a plant in Sundergarh, Orissa. It has a steelmaking capacity of 0.45 million tonnes of billets, forward integration for manufacturing 0.22 million tonnes of rolled products, and stainless steel capacity of 0.12 million tonnes. It is also into steel product trading, but the share of this in its revenue has been declining over the last few years and is currently only around 10%-15%. About 10% of its revenues come from pig iron.

Billets and rolled products are the main revenue generators currently - both these products contributed 71% of revenues in FY09 versus 23% in FY06.A large part of its value is in its subsidiaries, especially its merchant mining subsidiary, Orissa Manganese & Minerals (OMM). A lot of value also comes from its 98.6% stake in Adhunik Power & Natural Resources and a 50% JV (with Tata Steel) in United Minerals. A few details:
 

OMM has iron ore reserves of 97 million tonnes in Ghatkuri, Jharkhand with ferrous content of around 60%, and 53 million tonnes of manganese ore reserves in Patmunda, Orissa. It sold 1.15 million tonnes of iron ore and 0.15 million tonnes of manganese in FY10. AML is setting up a pellet plant with a capacity of 1.2 million tonnes (expected to start production between October 2011 and March 2012). For this, it will use surplus fines (from its mines) and thus expects better profitability.In addition to OMM, AML has been allocated iron ore mines in Keonjhar, Orissa, which are estimated to have reserves of 25 million tonnes and may begin production between February and March 2011.
 

Through a 17.5% stake in a JV, AML has been allocated thermal coal mines in Talcher, Orissa, bringing its share to 31 million tonnes. Its own coal requirement is just around 0.42 million tonnes. AML could start realising benefits from these mines only in FY13.Currently, Adhunik Power & Natural Resources (APNR) is setting up two 270MW thermal power plants - one each in Padmapur and Srirampur in Jharkhand, expected to be completed in January 2012 and March 2012 respectively. In long-term projects, it has signed MoUs with the government of Jharkhand for setting up a power plant of 1,080MW and with the governments of Chhattisgarh and Bihar for setting up power plants of 1,000MW each.
 

Through a 50:50 joint venture (with Tata Steel) it has been allocated coal mines in Ganeshpur, which are expected to begin production only by March 2013. AML's share in these mines is 69 million tonnes.AML is expected to be a great performer over the next 3-4 years based on the following:
 

1. Improving efficiencies: With production from its captive mines in Keonjhar starting, its dependency on externally sourced iron ore is expected to come down from the current 70% to almost zero by FY13.

2. AML has already signed power purchase agreements for almost half of its generation capacity with Tata Power and the Jharkhand government. Benefits from this will flow in FY13.

3. OMM is set to increase its iron ore production by as much as 22%-43% to 1.4-2 million tonnes in FY11-12 and its manganese production by as much as 14%-52% to 0.22-0.25 million tonnes in the same period.

4. Its thermal coal linkages should start kicking in from FY13.
 

In its Q1FY11, OMM was the star performer with its net profit zooming 264% y-o-y to Rs487 million due to higher realisations of manganese and iron ore and higher volumes of manganese ore. Standalone PAT also increased 3x y-o-y to Rs183 million.

Systematix has split the valuation of AML into two parts - it values the steel and merchant mining business on EV/EBIDTA of 5x on FY12E estimates and arrives at a value of Rs18.36 billion (to capture the high debt in the standalone steel business). It values the power business on 1x P/BV of equity investments in APNRL and arrives a fair value per share of Rs157 (current market price is at Rs112). Equirus values the standalone business and OMM at 8x FY11 EPS and uses IDFC's project equity's investment for the power business to arrive at a fair value of Rs161 (IDFC Project Equity Company invested Rs 2.5 billion in the power subsidiary). ICICI Securities has a price target of Rs171 while Motilal has reiterated a 'buy' on the stock. Prabhudas Lilladher has a price target of Rs147.

The stock has been trading in a range of Rs100 and Rs125 since June. Currently it is at the lower end of that range at Rs112 and is showing a bearish trend on technical charts. It is not very heavily traded and the two-week average traded quantity is around 88,000 shares. It is not available in the F&O segment.
 

(With inputs from the company's presentation and research reports of Motilal Oswal, Systematix Shares & Stock Brokers, and Equirus). — Munira Dongre