Facor Alloys Ltd

I had first read about this company on Rohit Chauhan’s very useful blogUnderstanding and applying value investing principles. FY2010 was bad for the company on the back of a poor 1st half . Since then local and global demand has revived, the company has been progressively reporting better figures. Q2 results have been excellent, it still has 33Cr of cash on BS (or Rs. 1.6 off the stock price of ~Rs. 7 CMP Nov 9), very little debt, growing cash flows. Markets have not yet factored this in, prompted Ayush. Worth looking closely!

APRIL 1, 2010

Analysis - Facor alloys

Facor alloys is in the business of chrome alloys, which is used in the production of steel. The company has a capacity of 70,000 MT (industry capacity - 7 lac MT) and is located in Andhra Pradesh. The company emerged from a demerger of the FACOR group in 2004

**The company was created by the demerger of the FACOR group into three companies, one of which was Facor alloys. The company had accumulated losses and underwent a restructuring exercise during the initial years. The current promoters for the company injected funds into the company and the debt was also restructured in the initial years
The company has since then turned around its performance. The debt has been wiped off and the preference capital has also been paid off. In addition the company, now has cash balance in excess of 30 crs which is around 25% of its market cap. The company has more than doubled its topline in the last 6 years and net profits have gone up considerably too. In addition the asset turns have reduced and Working capital turns have remained steady. All in all the asset efficiency has improved in the last 6 years.

**There are several positives for the company. The company has a strong balance sheet. In addition the steel market which is the consumer industry for the companyas product is growing in excess of 7-8% and hence the company should see adequate demand for its product.
Chrome ore and power are the key raw material for the company. The company has ample cash on the books which it is planning to utilize to invest in a group company to access captive power. In addition the company is also in the process of acquiring chrome mines to gain access to reasonable priced ore. These two developments should provide some hedge to fluctuations in the price of the end product.
The management has also been sensible in allocating capital and has turned around the financials of the company. The company also has accumulated losses which should help in reducing the tax outflow and improve the cash flow for the company.

**The company faces a lot of risk. The industry in which the company operates is a price competitive commodity industry. This industry has low to non-existent pricing power and minor competitive advantage from scale of operations. Due to the nature of the industry, most companies in this industry are unlikely to make high returns over a business cycle.
The company is a much smaller player with exports to various markets across the world. However the Chinese market has considerable impact on the steel demand and hence any slowdown in china could hurt the company, both directly and in-directly.
The company was re-structured in the past and has worked to turn the business around. Although small, there is always a chance that the performance could turn south again

**Competitive analysis
**The industry is a competitive, commodity type cyclical industry. There are a lot of small companies in this industry in india. Finally the Indian companies are at a cost disadvantage with respect to their south African competitors who have access to low cost power and better ore quality.
The pricing in the industry is determined by the demand supply situation and is also based on the mid to long term contracts with the steel manufacturers.

**Management quality checklist
)- Management compensation : fairly reasonable at less than 1% of sales
)- Capital allocation record : fairly good for the last 6 years
)- Shareholder communication a average
)- Accounting practice : appears conservative
)- Conflict of interest: none that I could see. The company has access to low cost ore from sister company
)- Performance track record : appears good for the last 6 years. However industry economics are bad

**The net margins and the topline growth of the company maybe at a cyclical high. The fair value of the company is between 7-10 if one assumes that the normalized margins are in the region of 6-8% and the growth will average 8-10%. The reason for having a range is that it is difficult to pinpoint a single number as athea margin or topline growth and peg a fair value to it.
In terms of comparison to other companies in the sector, the company is selling at a 30-40% discount to other companies in the sector.

**If you search the internet on this company, you are likely to find this stock being touted the next microcap to make you rich. I have seen price targets ranging from 12-15 rs in the next 6 month. The geniuses giving these price target donat know what they are going to eat tomorrow, but know what the stock price would be. It is still debatable who is the bigger idiot a the one giving the price target or the one acting on it.
I have personally created a small starter position in the company as I am now focused on learning and analyzing small cap and commodity type companies. These companies involve a different approach and mindset. The stock price is very volatile due to the nature of the industry and the size of the company involved. As a result, my estimate of fair value is not more than 9-10 in the best of the circumstances.
The stock can provide decent returns if the demand supply situation remains stable in the next 1-2 years and the company executes well. However, as I said before, if you want to build castles in the air and daydream then there are a lot of geniuses in the market ready to sell you a nice price target.

The 6 month performance is impressive!

Facor Alloys Ltd

Quarter ended Year to
Year ended
% Var 201009
%Var 201003
% Var
Sales 110.66 68.41 61.76 196.18 113.54 72.78 261.94 255.95 2.34
Other Income 0.44 0.34 29.41 0.70 0.59 18.64 0.91 2.96 -69.26
PBIDT 18.49 9.46 95.45 30.02 7.60 295.00 24.15 44.43 -45.64
Interest NA NA NA NA NA NA NA 1.43 -100.00
PBDT 18.49 9.46 95.45 30.02 7.60 295.00 24.15 43.00 -43.84
Depreciation 0.55 0.62 -11.29 1.06 1.11 -4.50 2.28 1.76 29.55
PBT 17.94 8.84 102.94 28.96 6.49 346.22 21.87 41.24 -46.97
TAX 6.11 0.21 2809.52 10.13 0.21 4723.81 5.37 2.50 114.80
PAT 11.86 8.60 37.91 19.23 6.28 206.21 14.03 38.15 -63.22
Equity 19.55 19.55 0.00 19.55 19.55 0.00 19.55 19.55 0.00


1). Demand cycle has reversed. Excellent 1HFY2011

2). Competitive situation with South Africa has improved due to power problems faced there. India is turning out as a hub for ferro alloys now,as per the company.

3). Cash on BS is ~21% of Mcap

4). Zero Debt, Strong Balance Sheet,Strong Cashflows even with a poor

5). Available at 5.3 TTM PE (CMP 7.7) Considering all above, more upsides left despite the recent upmove of 15%


1). Commodity Cycles need watching carefully

Views invited from those tracking/invested in the stock.

Indian ferrochrome Industry competitiveness may improve as the South African currencyRand has appreciated 18% since last Mayagainst the Us dollar.

The Ferrochrome prices have been on an upswing, and running away. Forecasts predict a42% rise in ferrochrome priceson the back of rising stainless-steel demand, as reported by Bloomberg.

Hi donald

per our discussion, thought of adding a few points here.

i have a position in the stock and think the stock is undervalued. However, and its a big but, i have had doubts about the management. On looking at 2010 AR, i found that the management has passed several special resolutions to invest upto 300+ crs in various other sister companies/ ventures.

So the management is using the company as a personal piggybank. I personally hate such situations and i am not sure how things will turn out.

also free cash flow is not good in recent quarters, due to increases in inventory and AR (dont recall the exact numbers)

All of the above does not mean that the stock will not jump …these days anything can go up. my comments are more from a long term point of view - for someone wanting to hold for 2-3 yrs



From 6.6 to 8.37, the stock has jumped over 25% in the past 2 days! There should be some instituitional buying to see such jumps??

Thanks Rohit.

What you raise is important to consider for anyone taking a long-term view on the counter. A good Corporate Governance record is must have while assessing a small company. Its a pity, we were beginning to think -maybe another good company.I will also look in some detail to assess any immediate impact.

Most investors I have talked to though, are looking at Facor Alloys for a short term ride. Enjoy while it lasts!

Going by the action across small & midcaps past few days, retail frenzy is not too far. Coal India’s spectacular listing has added to the froth.

Time to be careful, very selective and pick gains off the table rapidly??


Hi Rohit,

You have raised a valid point and I saw that yesterday only. After that I talked to a couple of friends who are aware about the group and promoter structure…they said that the above may not be wrong caus they have planned some major investment in unlisted co - Facor Power and they are funding the same through listed cos. Now in return the listed cos will get the Power at pre-determined cheaper price to get return on their investment.

I was also told that the reason why Facor Alloys has better margins is that the group co has captive mines and they sell the ores to Facor at pre-determines prices (hence better margins).

There was a major advertisement by Facor group on 10th Nov in Financial Express (front page) wherein they had mentioned about the growth in listed cos - Ferro Alloys and Facor Alloys and major upcoming investments.

So if the promoters are fair and honest, then the above may not be negative.

I’m trying to get moreunderstandingon the same.

Views Invited

Hi ayush

yes, you are right that the company gets ore at cheaper rates from sister concerns. I checked the margins of the company with rohit ferro and found the RM cost was lower.

I am not thrilled about this too. Why should any business subsidize another ? each business should stand on its feet, other wise the risk is that the good business will subsidize the bad and we will have a collection of average businesses.

now i can understand that from the promoters point of view …if one company run by my son and one by my son-in-law, i want to keep peace at home and hence one biz subsidizes another.

The company is not hiding the fact . so they are not cheating.

My concern with facor is that one will never know when the line is crossed where facor alloys inspite of being a good (or bad business) subsidizes or gets subsidized.

I am definitely in a minority for holding these views. Most indian promoters work this way and as a long as they can show an illusion of growth, the markets may not care.

So maybe the stock will do well and one can make money, but i personally avoid such muddy situations where a metal company invests in power company which invests in a mining company and so on.

Maybe i expect too much :slight_smile:

Hi Rohit,

Yup, you are right - one will never know when the line is crossed.

On other hand - many often the above structures are created in good intentions also. For eg - in case of Facor Group, they are coming out with a 100 MW power project in unlisted group co. They couldn’t had funded such a big project in any one listed co, so they have tied up the funding through several group cos. Ofcourse, the risk is - they can screw the minority when they want to :wink:

I completely agree that it is not a great long term bet or something but given the market levels…other ideas etc, this looks cheap to me. Till now the promoters haven’t cheated the minority shareholders and the co has consistently done well in a bad sector. At 6-7 Rs, the downside looks very limited to me (till there is huge crash in metals etc)

Hi ayush

One more point - this company was in BIFR in early 2000s and de-merged in 2004. the management was the same before and after.

now early 2000 was a down cycle for steel …so maybe the loss is explainable …but clearly shows that the management may not be able to fight a headwind if the cycle turns south. on top of that if the management invests in sister companies in excess of its market cap, then the risk is even higher.

you must be wondering if i am long or short on the stock :wink: …i am still long and exiting. now that you have written about it on your blog …the stock will go up and i can exit out of it :slight_smile:

Hi Rohit,

Not at all, I’m happy to see you sharing the concerns.

Infact, I have always stayed away from alloy cos and the first time I looked into Facor seriously was after reading it on your blog. At that time I was not convinced…I got interested after the very good Sept nos…and the price of the stock was still the same :slight_smile:

My aveg might be same as yours and I look at it for afavorablerisk-reward ratio. Given the cash on B/S, dividend, BV etc, at 6.5-7, the downside looks limited while if the fortunes of alloy ind continue to be better, I won’t be surprised to see the stock double out.

My blog is just for sharing ideas - it can’t move stocks. They move on their fundamentals only.


I had a look at facor after the recent fall. market cap around 135 crores, First half sales at around 196 crores and net profits at around 19.22 crores which gives a pe of below 4 if we assume a full year net profit of 40 crores. Loan of 13 crores and cash on hand of 33 crores as on sep 2010 which gives net cash at around 20 crores.

This one looks very much like pondy did at around 30-32, waiting for re rating triggers.

Investing theme here also looks very much like Pondy — hit and run kind of stock where if you make quick bucks, you cash out without too much greed.

I dont know why another good stock navbharat ferro alloys is getting battered day by day inspite of a lot of power revenues in its sales.

Of late, the company has started production after close down for almost 10 quarters. the stock is buzzing and had run up too fast. If the co. can sustain the net profit of around 3.9 cr for next 3 quarters with the increase in ferrochrome prices, it is available at an attractive PE of less than 1.

A very high risk - high return bet, If somebody is interested.

Disclosure: Invested 10% of my portfolio with highly cautious tracking.

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Hi, any one tracking this company, can you please update earnings and future growth for next 1-2 years?

Facor Alloys have reported fantastic results. Even if it continues the same EBITA for next 3 quarters, the PE will be less than 0.5. Ferro Chrome as a business is doing well. The company has entered into an agreement with TATA Steel. the company is not yet running with full capacity.


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A research report on the indian ferro chrome sector https://www.macquarieresearch.com/ideas/api/static/file/publications/7310466/IndianFerrochromeSector030117xe262178.pdf

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Any reason you could guys think of recent fall in most of Alloy companies in spite of fantastic results ?

Indian Metal and Ferro ALloys
Maithan Alloy

Not sure of maithan. Though balasore n imfa are cracking due to couple of reasons. Common reason is drop in fecr prices. Have dropped by almost 30-35% from tops made in January. Another reason for imfa crack is mines closure due to political/environmental reasons. For balasore, it’s because of some misdoings of promoter mittal.