Indian Metals & Ferro Alloys (IMFA) is a fully integrated largest ferrochrome producer in India. It has capacity of 275,000 tpa in Odisha with a captive chrome ore mine and coal-based power plant with capacity of 258MW.
Business activity of the firm is primarily functioned through Ferro Alloys and Power segments. The Ferro Alloys segment focuses on Ferrochrome, which imparts the non-corrosive property to stainless steel. The Power segment engages in the generation of electricity and operates on a mixture of coal and furnace off-gas.
The demand for ferrochrome largely depends on the global demand for stainless steel. The Indian ferrochrome industry is oligopolistic, with Balasore Alloy and IMFA controlling over one-third of this market. IMFA is the largest integrated ferrochrome manufacturer in India.
Drivers for growth
a) Ferrochrome demand – Propelled by healthy growth in stainless steel industry
The Indian ferrochrome industry bases its growth on the Indian and global (especially Chinese) stainless steel industry. As a primary raw material in stainless steel with no substitute, worldwide ferrochrome demand in the next 5 years is expected to rise at a 5% CAGR.
b) Integrated play provides global competitive advantage
IMFA is the only Indian player with captive chrome ore mines and captive power. As it depends on the export market for around 80% of its production material, IMFA has to compete with South African and Chinese ferrochrome producers in terms of cost effectiveness. With backward integration, IMFA’s production cost matches that of most of the efficient players in South Africa and it is lower from Chinese firms by vast margin as China lacks chrome ore mines.
c) Opportunity for expansion
IMFA bidding for ongoing auctioning of ferrochrome assets of bankrupt competitors in India (Rohit Ferro & Ferro Alloy)*
• Reasonable debt to equity despite considering investments of INR 1200cr in power assets
• FY18-19 RoCE will be >20% due to high margins and lower organic capex requirements
• Global stainless industry is cyclical in nature but IMFA would have sustainable demand as the company enters into long term volume contracts for upto 70% of its production
• The company has a strong balance sheet and domain experience.
• Long term borrowing approximately equal to working capital; Quick Ration of 1:1.16
Even during such a bad quarter, the company earned an EBIDTA per tonne of close to Rs 11,000 with total cost per tonne at Rs 61,800, which indicates that the company has enough room for improvement due to a significant move in chrome prices. Moreover, the upside is equally important. Anything above its cost means a jump in profits and cash flows. It is for this reason that it would be rather prudent to look at yearly realizations and profits numbers, which tend to relatively stable and provide fair assessment
Fearing a price correction, the stock has fallen from a high of Rs 795 a share to Rs 366 at present. Today its market capitalization at about Rs 988 crore is less than its net worth of Rs 1,246 crore. Even in its worst quarter, it has generated a cash profit of Rs 31 crore, which works out to Rs 124 crore on an annualized basis.
The Price to book ratio is less than 0.75
Currently IMFA is running at 85% utilization leaving lesser scope for volume growth. Upside will be driven by steady high EBITDA margins
Volatility of chrome prices (recent correction of chrome prices led to worst quarter in 2018)
Disappointing Quarter – 97 % drop in net profit
- Volume grew but fall in realization impacted revenue
- Correction in Chrome Prices (Historically volatile, from lows of Feb 2016 jumped till 300% last year)
- Inventory cost and forex loss put strain on profitability. Raw Material cost increased in Q4FY18 by ~INR 5,000/tonne. Increase in cost is mainly attributable to increasing coking coal prices and higher electricity duties.
• IMFA founder Bansidhar Panda passed away in May 2018
• Jay Panda (Founders son) has resigned from BJD after significant tussle with CM
• Agitation in Therubali Plant (Rayagada district, Odisa) in april 18 led to nearly 3
weeks closing down of operations**
**Recent agitation and subsequent plant closure caused shell puncture of one of the
furnace while restarting the plant. The management revised its budgeted production
for Q1FY19 as well as for the FY19. Company originally budgeted 59,000 tonnes and
239,000 tonnes for the Q1FY19 and FY19 respectively which is now revised down to
49,000 tonnes and 223,000 tonnes respectively.
Quality of Management?
Degree of cyclical risks and vulnerability of input cost volatility?
Whether IMFA will be able to grow inorganically by bidding for FACOR ALLOY?*
Implication of such expansion on long term debts?
- IMFA Ltd was one of the companies which had submitted its bid for ferrochrome assets of FACOR. However, in the NCLT case hearing, FACOR’s creditors rejected all the submitted bids which led to company going for liquidation. IMFA ltd. had objected the rejection of bids and for the same, next date of hearing for the FACOR case in on June 06, 2018.
Disclaimer: Not invested
PS: Came across edelweiss analysis of the stock and not finding an existing thread initiated one here to seek feedback from learned and experienced friends here
Ferro Alloy outlook: