The transcript of the presentation is as follows:
So, this presentation is mainly on the ferrochrome industry, and IMFA is the largest producer in India, for ferrochrome. Just as a disclosure, I have no investments in IMFA and the questions of whether there’s a case for investment or not doesn’t matter much. So let me just start more on how the industry is, what is the structure of the industry and where IMFA stands and so on.
Okay, so if you look at Ferro chrome chromite is the commercial name of iron chromite oxide and it’s a mineral that has chromium and iron oxide which is found in the earth. Chromite is crucial for the production of Ferro chrome and Ferro Chrome is used as an agent in manufacturing stainless steel. One of the key costs in extraction or you could say in the entire process is the requirement of electrical energy for every turn you require around 3000 to 3500 units or kilowatt hours of electricity. Over 80% of the Ferro-chrome in the world ends up going into stainless steel. If you look at the chromite market by geography (China is not considered), it is dominated by South Africa with 72% reserves followed by Zimbabwe. So if you look at it, India only has very little of the chromite reserves in the world. But India ends up producing 11% of ferrochrome in the world. South Africa is 72% and it ends up producing 49%. China is actually the highest ferrochrome producer today but China does not have chromite ore. So what it does is that, you know, it imports chrome or from other countries and then makes ferrochrome.
So what has happened is, over the years, if you look at specifically the South African and African countries, including South Africa and Zimbabwe, they used to export a lot of chromite ore but the governments wanted to actually convert that over into ferrochrome and export. So they started incentivizing the industry by giving subsidized power and there is another thing which they have done over the years, different countries in different ways, they have imposed export tax on chrome ore exports.
Now, if you look at key players in the world, the key player in India is IMFA, which does around 275 kilotons per annum and worldwide, if you look at the South Africa, there is Glencore-Mera fe, which has 2300 kilo tons per annum and then you have Samoncor core which is 1200. So, essentially the industry is extremely centralized in South Africa. And in some ways, you know, the entire pricing determination and how the industry behaves is a function of how the South African industry behaves.
So, what happens in pricing is a little weird here, the way pricing is set is the South African ferrochrome manufacturers sit with large steel producers, and every quarter they decide on a benchmark price, for example, like if I have to decide the benchmark price of Q3CY20, then a these guys sit sometime in mid of Q2CY20 and finalize the benchmark price. The benchmark price is is the guiding price for Long Term contractors and they generally take a 10%- 20% discount. Spot prices are clearly a function of demand supply scenario, almost like most companies, which I’ve seen have 70 80% long term contracts and around 15 20% short term spot price selling. Since ferrochrome is a function of demand of ferrochrome is a function of demand of steel, what I’ve done is I’ve kind of made a few charts here. And I’ve used HRB steel in general since all steel prices move together. So it could be any other steel as well.
One could actually see here that, you know, when the ferrochrome prices went up, you could see the steel prices also going up. So, probably there is a lag here, which.
Now, what is important here is that you know, what moves the needle in case of ferrochrome or first is a steel demand. The second is the South African production scenario and the third thing is exchange rate. When the South African currency depreciated significantly, that actually made it difficult for the Indian guys. The fourth thing is power rates and subsidies. So, in India, there used to be a company called a Facor based out of Vizag, that company was dependent on the government power subsidies, and they, and all of a sudden oneday, the Andhra government decided that they are not going to subsidize power any longer. And facor became a sick unit in due course of time, and then it went to NCLT.
If you look at the ferrochrome prices there was a spike where the ferrochrome prices moved from, somewhere around 100 to 160. The major reason, actually was that the Chinese stock had depleted but just three quarters before the price was 182, which was like the lowest in the decade. So, when the prices was at 82, all the ferrochrome manufacturers, which were not efficient, had to shut down mining. Incase of IMFA since it is vertically integrated, it has its own power plant. And IMFA is one of the most efficient ferrochrome manufacturers, it competes with South African companies, and it is far efficient and the Chinese companies, so, companies like IMFA in such a downturn, do post bad results, but you know, post such a downturn, when the situation improves, most of the competition or high cost manufacturers are actually out and stronger players life IMFA post stellar nos.
So this is pretty much on ferrochrome that I have.
Now, what I’ll do is that I’ll move to IMFA straightforward. I don’t want to go into financials and other details but purely like you know speak meta points, which could be important. The other Indian players like Balasore and Facor are doing very poorly because they don’t have captive power. IMFA exports 80% of its production materials. Most of the large Indian steel producers have their own captive access to ferro chrome. The promoters and the company has faced multiple issues from political, environmental. The environmental issues were probably an outcome of political issues. The company actually wanted to set up coal linkages, so it participated in coal block bids, and it got alloted a coal block and the Supreme Court took them all away. The saga went on for six seven years the company had actually put up around 300 crores the government came up with a law which said that the coal block linkage will only be happening to the core industries like steel and since you guys are not steel, we are not going to give you the coal block, and that block went to a PSU. The company had put some around 250-300 cr and as per court ruling they’ll be getting back the money but, having a linkage would have been beneficial. They actually wanted to acquire a coal mine in Indonesia as well, but then you know, that to again went into litigation. And the last thing is capacity constraints, the company has been doing somewhere around two lakh metric tons since the last 10 years, plus or minus 30,000. The things which it has done or the amount that has been generated has mainly gone into setting up the capital power plants, but,their capacity is not going up and they wanted to acquire Facor which did not happen.
Let us look at how IMFA stock price has moved along with the ferrochrome benchmark. If you see that although the ferrochrome benchmark has been somewhere between the 85-165, the stock price has moved up and down significantly because if ferrochrome hits when when ferrochrome went to 165, their operating profit went to 500 crores and when ferrochrome hit a low of, you know, 90 or 80 in that year, their operating profit went 220 crores. Personally for me, like the case for investment, if I have to make will purely be a function of , if I’m able to track the stuff, I don’t think steel demand is the stuff that I would want to track. But if the exchange rate, if INR depreciates significantly, or the South African Rand appreciated significantly, that would be one key thing for me. The other thing could also be that, you know, South Africa production nos.
So if somebody could time it or if somebody could take a valuation call when the stock is depressed significantly as compared to book value you can probably say that these are the only two cases for investment in my opinion.
Any comparable PR in the Indian listing space
Balasore. I mean in all aspects it’s a company that is far worse, no captive power plant… promoters ke sath humesha issues rahe hain around corporate governance
just to add to it, Balasore just went bankrupt.
Okay, so it may work 44 was the 52 week high of this talk 44 and it spent a lot of time about that level. And recently it has broken out so you should see some decent gains. the near future maybe 25 30% upside. And then depending upon the cycle, it can go. I will send the chart on our VP 2020 group.
we have flick case that it’s backward integrated to some sense. But it’s still so much dependent like a fixed cost, like a fixed cost a very, very high format. And like this is not at all a backward integrated company. It doesn’t have power sources, it doesn’t have a long term contract from any supplier of manganese source. But still, somehow they are the lowest cost producer of manganese alloys in India, with 11% market share, and I’m trying to understand why. So basic, very basic, they need three kinds of alloys get the masters and making magnesium. So they monopoly, or they are really good at making Ferro manganese and silicon manganese, and they also Ferro silicon. But that’s much smaller part of their revenues. Basic business model is, it’s a processor company. They take raw material power employees. And I’ve shown like the ranges over the last 15 years how it has moved, on average to make EBITDA margins of 12%. Industry, they have no slightly superior cost structure in terms of other costs, they have no other costs, as a result of which they make three to 4% superior margins compared to industry. So when do you need 12%, in general, the industry makes around 8%. And below 8%, the industry goes into red. So I show how this cycle generally plays out. So this is a chart like the black line is for a victim. And we see that whenever there is a boom, like Matthew makes matches up to 20%. In a bust, it makes much instead of 10%. So that this 10% cannot go on for a long time, because the whole industry is in black, and we can really see like, whenever it happened like it, it happened in 2008, nine and 10. it again happened like in 1415. This 1415 was also to do with the company specific issues. But anyway, we can see like in good times to make up to 20% of impact times below 10%. And also to protect from a balance sheet perspective, what actually happens is whenever the utilization goes about 75% like the EBIT up or metric, or Makaton moves about 1.1 71. And as a result, they actually start making money. So how it really looks like is this is the last good cycle. So in their face, after the 2016 mega China commodity market, they had a full cycle in 18 and 19. And they made good matches, as a result of which they accumulated a lot of cash, so to pay down all the debt, and now they have cash of around 660 girls. And a basic RFC is very high, has more to do with the fact that the source most of their raw materials from other sources, and they say that they are very, very good at getting good deals for this. Just some things about it. They don’t have power sourcing, so they buy it mostly from the power exchanges or the power distributor. They only so high grade manganese code from South Africa and Australia. These are the two nature they release. The only source about 10% of the material from India, which is basically from oil. They don’t source more because it’s a low grade manganese ore as opposed to pumping out in the case of central India doesn’t produce high, high grade manganese. And basically now because they have this huge cash pile of 700 crews like they are going for a big expansion which is a bit like a bunker project, which fill up if things go well, this can really like this can make the top line growth of 2.5 x if you just look from a city perspective. And yeah, and they always have maintained a healthy dividend and they are right now. A Net Cash Balance Sheet 650 grams That’s it and what I want to understand is what is their real operating niche Why do they actually why are they actually superior and in you know, case where we have companies like Infosys which are still I guess or decoratives upon, I guess pointy wise this guy who has 700 euros in cash and what is the real operating edge they operate is actually quite resilient. They have done well in the last 20 years. So, I would be happy to know more thoughts.