Sathavahana Ispat - Rs.52.00

Sathavahana Ispat Ltd (SIL), promoted by Mr A S Rao in 1989 is one of the leading manufacturers of foundry grade pig iron using Mini blast Furnace technology, with its plants located in Ananthapur District in Andhra Pradesh. Pig Iron is the basic raw material for most of the engineering products, foundry, construction industry & also used in automobiles manufacturing. Recently company upgraded its technology by replacing TATA - KORF technology with CHINA - SHOUGANG technology, the full impact of which will be seen in current year. The pig-iron industry is witnessing a dream run on account of both better price realizations and a volume outbreak. The run has been fueled by a strong demand flowing from the castings and forgings industry, infrastructure companies, and mini steel plants that are running full stream on account of the domestic demand and the demand flowing from China.

SIL is currently operating at more than 100% capacity utilization with improved profitability despite sharp rise in iron ore and coke prices.Currently, the company has an installed capacity of 120,000 TPA and predominantly caters to the foundries, textile and agriculture machinery manufacturers and the construction industry in the South apart from its presence in the West and the North. Importantly, to mitigate the impact of the sharp rise in coke prices and a step towards backward integration, it has recently set-up a non-recovery type Coke Oven facility with conventional technology with a capacity of 150,000 TPA, which commenced operations from 1st March 2004. It has also installed a 8.4 MW power plant for captive consumption to meet its growing power requirement Moreover, its modernisation and expansion plan is near completion, which will take the installed capacity to 210,000 TPA. This will boost the bottom-line for second half of FY05. For future growth and to become an integrated player, the company is planning to set up a greenfield project for the manufacture of metallurgical coke with a capacity of 300,000 TPA coupled with a captive 30 MW co-generation power plant at an estimated cost of Rs 170 cr. in Karnataka. This plant is estimated to start operation by the last quarter of FY06.

The impact of the high pig iron prices and benefit of the coke plant is clearly visible in the last two consecutive quarters with operating profit margins improving from 20 per cent in FY03 to 53 per cent in Q4FY04 and 50 per cent in Q1FY05. Although sales was down 17 per cent to Rs 29 cr., the NP increased by 140 per cent to Rs. 9 cr. With the thrust given by the government to infrastructure, the growing demand from the forging industry, the construction sector and with the company's initiative in modernising, expansion and backward integration, the company is expected to earn a Net Profit of around Rs 45 cr. on a turnover of Rs.180 cr. in FY05. This would mean an EPS of Rs. 17 on its equity of Rs. 26.30 cr. It is also likely to declare 25 per cent dividend for FY05. Hence, at the current price, it's trading quite cheap at a PE of less than 3 with an expected dividend yield of 5 per cent. Its share price can easily double in 12 months time and long term investors can expect much higher returns in the next 2~3 years.