Kalyani Steel - Steel Sector

Gaurav_Agarwal · May 28, 2016, 10:50am

Kalyani Steel established in 1973 in the group company of Kalyani Group (Bharat Forge).

Product

The company produces forging and engineering quality carbon & alloy steel using blast furnace route.

Carbon Steel
Carbon - Manganese
Chrome Steel
Chrome - Manganese
Chrome - Nickel
Chrome- Moly
Chorme - Nickel - Moly ( Low Carbon)
Chrome - Nickel - Moly ( Medium Carbon)
Bearing Steel

Customer

OEM in the space of Automotive, Engineering, Energy, Aluminum Smelting, Defense etc.
Application of products is in automotive forgings, construction equipment, bearings, seamless tubes & aluminum smelting.

Cummins, Kirloskar, Delphi, ZF steering gear, Oerlikon, Eaton, Dana, Meritor, AAC, UST, BHEL.

Raw Material

Iron Ore
Coking Coal & Coke

Capacity
Could not find out

Financials
Profit and loss from 2005 to 2016

Balance sheet from 2005 to 2015

Point to ponder

I. FY16 Long term debt of 110cr and short term debt of 152cr therefore total debt of 262cr at the same time company has non-current investment of 146cr in group company. This from the annual report 2015

II. Revenue degrowth from 1266cr in fy15 to 1179cr in fy16. Reduction in cost of raw material which is iron ore is the reason for this.

III. Sharp increase in OPM from 13.6% in FY15 to 20% in FY16.

IV. Company is trading at low PE of 6.68 and market capitalization of 758cr.

Trigger
Introduction of Minimum Import price by GoI effective Feb-16, could result in expansion of top and better profits.

Disclosure
Not invested.

chitreshlunawat · July 26, 2016, 2:13pm

Super Results by Kalyani steel OPM at 25.25% vs 19.08% YOY with Net profit 47 Crores this quarter.
Hopefully it should be able to cross 200 Crores profit this year. The company is available at the MCAP of 900 Crores

Gaurav_Agarwal · July 26, 2016, 7:27pm

True, results for the quarter are very good on all fronts and the stock in undervalued on all counts.

The question in my mind is - Is this growth sustainable?

Do we have secondary source to confirm that the sector is turning around? We can of-course look at the numbers of competitors.

rajivmansotra · July 29, 2016, 6:11pm

Are the margins sustainable…management is very confident of business they r getting under Modi government…superb results and definately undervalued

rajivmansotra · July 29, 2016, 6:57pm

kalyani steel.pdf (1015.3 KB)

rajivmansotra · July 29, 2016, 6:58pm

Can somebody please post Annual report …want to know the segment wise performance

Pavas · July 31, 2016, 6:39pm

Stock looks cheap if one annualized last quarter…however three concern areas for Steel sector in general…1. Artificial prices: Current prices are now totally de-linked to international prices . The day safeguards (duties, MIP) are removed, sector margins will shrink considerably. Post imposition of MIP prices have increased by ~10-15% which led to better performance of steel players this quarter. However global prices are still much lower then the Indian market. 2. Lack of demand: Global steel consumption is expected to decline this year while India seems to grow at low single digit growth. Based on demand their is hardly any case for higher prices. 3. Recent correction in prices: Steel prices have corrected recently by 5-7% so it will not be right to annualized 1Q profits. 2Q margins will be lower for the industry…

Disclosure: Not invested but looks interesting…

yogansh · August 5, 2016, 11:25am

Kalyani Steel’s FY16-17 Q1 results were great enough to attract anyone’s interest and therefore, calls for further digging in as to what could have been the reason for it.

A 14.28% rise in Quarterly revenue (344 cr) and an OPM of 25% all looks great but the concern here is what is the driving force behind it?
From the data that I plotted (see table below) it can be seen that Raw Materiel cost is possibly the difference maker.

However the real question that is still bothering me is- How sustainable is this cost efficiency?
Has the firm identified a cheaper raw material or a cheaper source?
Getting a clear answer to this would lead to a better visibility into the future prospects of the firm.
Building up on the same thought I noticed, Kalyani steel has increased its stake in “Lord Ganesha Minerals Private Limited” to 77.50%.

The questions that now arise are;
Is the firm able to source cheaper raw material via Lord Ganesha Minerals Private Limited?
(If yes, then the related party information doesn’t reflect any such transaction between the two entities.)
What is the company’s plan on the back of this acquisition?
Is this growth in revenue and rise in margin sustainable over a period of time?

Disclosure: Not Invested

Gaurav_Agarwal · August 5, 2016, 11:55am

Prices of both Iron Ore and Coal are falling from 2010. That could justify the reduction in raw material cost.

But a big surprise is increase in opm of the company. Opm has increased from 8.2% in 2010 to 19.9% in 2016 whereas the revenue is almost constant at 1180cr in fy16 compared to 1236cr in fy11.

This points to amazing pricing power of the company. We need to find out about the competition of the company and also what percentage of products are sold to group companies?

ayushmit · August 6, 2016, 4:24am

Hi Gaurav,

Being a highly competitive industry, I don’t think companies can have high sustained margins for long. But in the case of Kalyani, they have been having much better margins than the industry since last several quarters and hence there may be some other reasons behind the same. Few thoughts that come to mind:

Like you mentioned - they do supply to group companies and that may be yielding them better margins. But I don’t think the related party sales have increased materially from before.
In the 2016 annual report, the company has mentioned that they are continuing to focus on “niche segments such as critical components in Automotive and engineering”. If they are directly making forged products then they could be benefiting of lower raw material prices.
May be MIP has helped in short term.
May be the investment in Lord Ganesha Mineral is helping them get raw materials at a cheaper rate (as mentioned by @yogansh.

Like try to explore more.

Regards,
Ayush

Gaurav_Agarwal · August 6, 2016, 1:29pm

Hi Ayush,

I. In an interview dated 15-Feb-16, RK Goyal, MD of Kalyani Steel said that MIP is not available on products produced by Kalyani steel.

II. I do not think company is into forged components. See the following from 2016 (page 7) annual report

Cast blooms

III. I could find these two listed companies in alloy steel space

Both the companies are running losses. What is so special about Kalyani Steel?

harshitgoel · October 19, 2016, 4:15pm

yogansh · October 22, 2016, 9:55am

Kalyani Steel’s Q2FY17 results look good. Firm has been able to achieve 22% OPM and has also reduced debt substantially. RM cost continues to be in line with previous year’s numbers (see below table). In fact, this cost maintenance comes as a pleasing surprise to me, in times when we are seeing a sharp increase in coke & iron ore prices (40-50%).

As mentioned in my previous post, sustainability of this trend is a concern. It is still unclear the reason behind this cost efficiency. Is it due to amazing inventory management or cheaper source or a cheaper raw material?

Would Like to explore more on the following aspects (which have made this stock interesting):
1 Reason behind the RM cost efficiency.
2 Sustainability of OPM.
3 Since, its products are not available under MIP, how are they able to maintain good numbers, what are they doing differently (as per the link shared by @Gaurav_Agarwal)?

Disclosure: Not Invested.

ayushmit · February 9, 2017, 8:30am

Pretty decent set of results once again considering the bearish stance of the management in last few interviews citing the sharp increase in raw material prices.

It may get interesting in coming quarters as the company might be able to pass on the cost increase and may be report better margins.

Ayush
Disc: Invested

mparadkar · February 9, 2017, 12:46pm

Tough to maintain margin; no plan to pay dividend: Kalyani Steel

ayushmit · February 10, 2017, 4:20am

As per the above interview:

It seems the margins are higher than they look due to - 1. Trading turnover of 60-65 Cr which hardly had margins 2. Forex loss
The company mentioned about good volume growth in this quarter.
The co couldn’t pass through the cost increase in this quarter.

Its interesting that the company has been doing close to 18-20% operating margins and has been reporting very good cash flows, unlike other players in the industry.

Regards,
Ayush

yogansh · February 10, 2017, 5:14am

One more good take away from the interview is falling Finance cost, it has come down to 1.9 Cr from 3 Cr.
Currently they have 125 Cr debt and intend to bring it down further, as and when it falls due.

Regards,
Yogansh Jeswani

sanjay09 · February 10, 2017, 7:07pm

please take a look and guide me if something is wrong and what else should i found or look foe the same…

kalyani steel research report.docx.pdf (271.8 KB)
Quantitative analysis.1.pdf (261.8 KB)

lohiyaakshay08 · February 20, 2017, 10:38am

There is rise in manufacturing of automobiles in JAN. And as we know, there is a direct correlation in Automobile sector & Steel Sector, It looks like for Q4 too, the growth of 20% in Revenue will continue.

Also see - http://www.moneycontrol.com/news/results-boardroom/tough-to-maintain-margin-no-plan-to-pay-dividend-kalyani-steel_8460101.html

rupeshtatiya · February 26, 2017, 2:25pm

This stock showed up on my Screener.in screen & I did some digging over the weekend. Following are some of the notes -

Current MD of the company, R. K. Goyal was appointed on the March 17, 2011. He was previously Director of Strategy & Corporate Affairs at JSL. He seemed to have brought in a lot of operational efficiency.

Some of those initiatives are listed below (mostly derived from Annual Reports) -

Rolling Mill

Pasted image956×156 25.8 KB

The rolling mill became operational on 28 March 2013.
Hot Rolling Mill Video -

Sinter Plant, Coal Injection Systems & Stoves on Blast Furnace

Pasted image901×159 28.1 KB

Sinter Plant -

Sinter plant came online on 4 March 2013. Coal injection systems & stoves also came online in FY13.

Coke Oven Battery
Coke Oven Battery is basically group of ovens in which coal is heated to extremely high temperatures in the absence of air. This process concentrates the carbon in coal to produce coke.

Reference -
https://www.reference.com/business-finance/coke-oven-battery-e12ffe555cafa35d

Further following cost reduction initiatives were taken in FY13 -
They include reduction in coke & iron ore input, replacement of costly furnace oil with furnace gas

Further in FY14, “Iron In, Iron Out” policy was introduced which is as following -

Now putting the data -

Some conclusions I could derive are as follows -

In FY09, company experienced triple whammy almost causing it to report operational loss - Imported RM of three months at high cost, Reduction in demand & reduction in steel prices.
The company recovered a little in FY10 & FY11, only to be hit by Coal Mining ban by Supreme Court. These caused severe shortage of iron ore & coke. The only option of procuring these were via e-auctions & due to scarce availability, the domestic prices had almost doubled. This caused RM cost to escalate to ~56%.
FY13 & FY14 represents two interesting year in the journey of the company. The cost of RM remained high at ~53%, but OPM margin almost doubled that of FY12 & ~8 times that of FY09. It seems that cost reduction initiatives along with better capacity utilization have started bringing fruits.
In FY15 & FY16, three factors have come together to have multiplier effect on OPM - Reduction in cost, Reduction in RM costs & higher capacity utilization.

I have had cursory look at other things like subsidiary companies, related party sales, consistent levels of debt, lack of dividend despite high cash on books etc. I would try to go deeper in these next weekend.

Disc - No investments at this point