Gallantt Ispat - Steel producer DRI route

Stock Opportunities
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Product

Sponge Iron
Steel melting Shop
Rolling Mill
Captive Power
Wheat products - Atta, Suji, bran sold in UP, Bihar & West Bengal

Capacity

Sponge Iron - 2.97 Lac Ton per annum
Steel Melting Shop - 3.3L Ton per annum
Rolling Mill - 3.3L Ton per annum
Captive power - 53 MW
Floor Mill - 1 Lac Ton per annum

The above capacities are recently expanded at the cost of 235 crores. Commercial production of expanded capacities started on 01-Dec-17.

Please find companies letter dated 15-Jan-18 in this regard here. (256.8 KB)

Expansion

As per the company disclosure dated 24-Jan-18 company wants to expand capacities further as follows

Sponge Iron - 4.45 Lac ton per annum
Steel Melting Shop - 4.95 Lac ton per annum
Rolling Mill - 4.95 Lac ton per annum
Captive power - 73.5 MW
Pellets - 6 Lac ton per annum

The cost of this expansion is pegged at 510 crore.

Other details like

When will the expansion start? When it will be completed etc. are not know at this point?

Location

Company’s registered office is in Kolkatta and plant is located in Gorakpur Industrial Development Authority (GIDC), Gorakpur U.P

Raw Material

Iron Ore
Coal

Process

Company uses Direct Reduced Iron method for steel production. It is similar to how Tata Sponge produced Steel.

Holding Company

Gallantt Metal is holding company with plants located in Gujarat in similar line of business.

Financials

As always Screener.in is our destination for financial of the company.

  1. Consolidated Cash flow from operation is more than Consolidated Net Profit.
  2. Debt to equity is less than one.

Controvery

  1. Land takeover for Gorakhpur Metro - There was some news that company land will be takeover by Government for Gorakpur Metro. Management clarified that they have some land bank in Gorkhpur city a portion of which will be taken over for Metro Rail
  1. Company designated as Shell Company by SEBI - According to this disclosure, shell company status has been removed.

Risks

  1. Excessive leverage - Having completed a recent expansion, company has planned for another expansion at the cost of 510 crore. Such rapid expansions are marred with multiple risks.

  2. Increase in price and non-availability of raw material - Company does not have captive mine of iron ore or coal. Rapid increase in price of any raw material can derail the company.

Triggers

Iron & steel companies are coming out with wonderful results. Tata Sponge has done very well. Multiple source say India is having very good demand for Steel. Expansion of capacity will lead to increase in topline & bottomline of company.

Invested. Views may be biased.

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Company relies heavily on subsidies from UP and accounts for it in P&L even if it has actually received only a fraction of the payment. It shows this subsidy as ‘short term’ advances to - Pradeshiya Industrial & Investment Corporation of U.P. Ltd (PICUP) even if those payments are pending for years. No provision has been made against these.

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Source: Company Annual Report 2017.

This short term advance is now 50% of networth. Look at Note 39 to 42. It talks about this subsidy. Company has even filed petition in court against state govt.

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In spite of not receiving the subsidy for last so many years, company is still going ahead with capex which is based on further subsidy from the state govt.

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Source: http://www.bseindia.com/xml-data/corpfiling/AttachHis/97d74778-2e75-465f-8ad2-bd1e7f776af7.pdf

I also could not understand why steel segment is losing money while bulk of the profits come from power even though it is for captive consumption.

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Source: Company Annual Report 2017.

segment reporting does not add up. Assets - Liabilities = Capital Employed.

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Source: Company Annual Report 2017.

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  1. Company rely on subsidiary of UP Govt. - True. Also UP Govt does not wish to pay the subsidiaries. Now this is big in comparison to the size of company and is a investment risk. But Hon’ble Supreme Court has dismissed the petition of UP Govt. which comforts me that company has put a right demand and sooner or later it will be realized. This is surly a investment risk, a investor is taking, if she chooses to invest.

But management has been quite open, transparent and public about it.

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  1. Management is planning an expansion based on unrealized subsidiary for Govt. - I think this a very tentative plan given the company has completed an expansion as close as December 2017. I think we need to monitor this plan and it will surely evolve. Over leverage is the risk we need to keep an eye on.

  2. Steel segment is loosing money wheres power is profitable - Below find segmental results for q3fy18. Now the case has reversed Steel is profitable and power is losing money. I could imagine since steel was loosing money for last few year the company may not be running the plant at full capacity and may be selling power. You would appreciate the management kept the company profitable throughout the bad period of steel cycle.

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  1. Segment reporting does not add-up - That seems to be typing error. Do look at latest segment report q3fy18 below

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Hon. High Court of UP ordered State Govt. to pay subsidy to Gallant Ispat.

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What do you think about this income tax search.What do you think about the increased production capacity in recent years

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Out of additional tax liability of 56,75,667. Amount of 56,03,358 is already available with Income Tax Dept. I don’t think the additional liability will have any bearing on the company.

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What do you think about the remuneration of the management?Their remuneration is very low wrt profits and they get no dividends.Still the MD chandra prakash agarwal has bought one percent of the company.He has put in atleast 10 crores on 13/1/2017 to buy almost one percent of the company.(Source:Page 50 annual report 2017).His remuneration is 15.6 lakh(page 54 annual report 2017) and his remuneration from gallant metal is 19.2 lakh.

What do you think the lifestyle of the managers is like if they earn 19 lakh per year.

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I mean if he receives salary of 19.2 from ispat and 15.6 from gallant metal.How is able to afford to buy shares worth 10 crores?

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Hi,

Salary is like profit and loss account. Your question concern the balance sheet of person. You need to the consider the accumulated wealth of person over the lifetime to know what s/he capable of buying.

There are many-many possibilities - He could have inherited vast track of land, which he could have sold in personal capacity to buy the shares. I do think we could have sufficient data on personal net-worth to argue the case.

Disclosure-

Invested. Views may be biased. This is no recommendation just an expression.

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Holding companies trade at deep discount in India. Expansion will directly effect Gallantt Ispat.

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Provided steel demand remains good.

FY18

Capacity - 99k
Price iron/ton = 35k
Rev = 350cr (company doing more due to floor & real estate)

FY19

Capacity = 3L ton (mngt interview dt 16/jan/18 on cnbctv18)
Price iron/ton = 35k (assuming)
Rev = 1050cr
Npm = 12% (13% in q23fy18)
Np = 126cr

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What do you think will be the debt level?Environmental clearance?Management seems to be pretty nice

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Company has 200cr debt as on q2fy18 (including working capital). Since expansion is behind us. I don’t it rising much. Company has declared further expansion, we need to see how do they proceed with.

What changed your opinion so quickly?

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For 9mfy18 interest outgo is 3.17cr. I imagine they will pay bigger amount this quarter.
For earlier years the interest outgo seems reasonable to me.

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You can check Q2FY18 balance sheet yourself on BSE website. I think 200cr debt in not for the full year. Let us wait of fourth quarter numbers.

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Excellent results for Tata Sponge. Gallantt is also a sponge iron manufacturer.

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Hello Whats your take on steel sector prospects in India in near n mid term in general n Gallantt Ispat in particular?

Will Prakash industries crashing inspite of posting good results have some adverse impact on gallnt ispat as well?is the stel sector being derated?

Any update on long overdue subsidy payment to Gallantt Ispat from UP Govt and expansion?

Co shud post good results due to captive mkt in Eastern UP

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Steel prices are holding. You can look at yesterday’s interview of MD of Godawari power and ispat on Cnbc.
I don’t think they have received the subsidy as of now.

Disclaimer- Invested. Views may be biased. This is no buy/sell recommendation.

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@Vivek, If you have not seen this , have a look. CARE has come up with their analysis on steel cycle.

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There are certain & obvious red flags which i want to raise:

Check the shareholding pattern of the company, almost 97% is controlled by the promoters.
64% is the direct shareholding and the rest ~33% is being held by a complex web of shell companies
with multiple cross holdings.Individual share holders comprise just 3%.

Last time i checked almost a year back and noticed that all the shareholder companies (Holding almost 33%) are based in Kolkata with similar addresses, AAR COMMERCIAL COMPANY LIMITED, CAMELLIA TRADELINK PRIVATE LIMITED etc etc. They all seem Paper shell companies.

Also if you notice the share price since its debut on NSE, you will notice that whatever be the market conditions this script is un affected, the free float being negligible the promoter seems to easily fix the share price at any value they seem OK with. May be capital gain/loss management?The script remains at same price for months alltogether.

Aug 2014 to Feb 2016 the script was at fixed price of 380 Rupees in a straight horizontal line, whether the results were good or bad.Suddenly the script rose to 600 in 2 weeks for no apparent reason and then was made to fall to 200 very swiftly.

The reason given for fall from 600 to 200 was that UP govt was contemplating acquiring company’s land for a metro Project in Gorakhpur. At That stage even the DPR study for Mtero was not initiated,moreover the company is situated in outskirts of Gorakhpur city where the metro will never go.Obviously the company just used it as an excuse.

Individual shareholder is on its own in this company, the script price will always be dictated by the promoters and not by the markets or steel cycle!!

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