Panchmahal Steel - A hidden gem

Hi Reposting this as i had just given a link which the moderator asked me to copy paste.

Disclaimer: I had personally invested here at 36 rs.

This stock was first introduced to me by a friend who goes by the weird pseudonym of MunkthePunk on the money control board. As we collectively deep dived into this stock we unraveled a slew of triggers that has the potential to substantially rerate this stock. This note is a logical representation of our discussions on this stock in particular and on the steel industry in India in general. Since I have already disclosed who is the culprit in unearthing this stock a statutory disclaimer to begin with - If it transforms into a multibagger - as we think it would, the credit is mine and if things do not turn out as expected you know whom to blame.
On a serious note now let us start with the analysis:
Something about the Company:
First a cut copy paste about the company from their site for those who are too lazy to visit the Panchmahal site
With 40 years of special steel making experience, Panchmahal Steel is a leading producer of Stainless Steel long products in India. With a dedicated focus on Stainless Steel & fully integrated facilities from steel melting to cold finishing, we offer a comprehensive range of Stainless Steel grades, in hot rolled wire rod & bars and cold finished bars & wires.
Panchmahal’s state-of-the art steel melting facility includes an ultra-high powered 50 metric ton electric arc melting furnace, AOD convertor, ladle furnace for superior steel refining and continuous casting.
Facilities for cold finished bars & wires include coil-to-bar drawing & bar-to-bar peeling lines, heat treatment facilities, shot blasting & pickling lines and spooling, cutting & stamping lines for Stainless Steel welding products.
We offer Stainless Steel in Austenitic, Martensitic, Ferritic, Duplex and low nickel - high manganese (200 series) grades.
Panchmahal’s core strength lies in its ability to meet customer’s unique requirements. Our fully integrated facilities enable us to produce Stainless Steels with various modified chemistries for customer specific applications.
With ever changing market dynamics, Panchmahal is equipped to provide customized products and services for global markets, for volume as well as for specialty niche market requirement.

Here is their Corporate video presentation:

They make Stainless Steel in fully integrated facilities from steel melting to cold finishing and offer a comprehensive range of Stainless Steel grades, in hot rolled wire rod & bars and cold finished bars & wires.

They have three products:

  1. Stainless steel wire rods and bars.
  2. Stainless steel wires
  3. Stainless steel Welding Wires

The product specifications can be found in Panchmahal Brochure Link given below:

Applications of their products are in: -

Architecture, Building & construction Hot forgings Surgical Instruments
Automobile Components Machining Thread Rolling
Ball bearing Oil and Gas Industries Welding
Bar and Wire Drawing Pump and Valves White Goods and Consumer durables
Braiding Refractory Anchors Wall Ties
Cold heading and fasteners Screens and Filters Wire Mesh
Food Processing equipment Spokes Wire Ropes
Heat resisting applications Springs
Deciphering the sales potential - Volumes
• Total capacity is 72,000 TPA out of their plant at Panchmahal , Gujarat

• The above data is a clear enough indication of the abysmal state of the steel industry in India where the capacity utilization was just 27 %. Now the question that needs to be answered is what lies ahead. There are winds of change blowing in the steel industry (Similar to what happened a few years back for the cement industry) which clearly points to a rosier future. Here are some data and facts.

The Indian steel demand- supply is expected to tighten significantly:

The Supply constraint:
• No new steel capacity creation has come about in the last 3 years due to the deteriorating global steel industry environment and the abysmal financials of steel companies reeling under mountains of debts.

• Given the 3-4 year lead time to add steel capacities no new capacity should be available till at least FY 2022.

The demand outlook – Major triggers:
• Turnaround in the Investment cycle: The investment cycle in India is expected to pick up in the coming two years. The Steel demand growth which crashed to 3 percent over FY 2013-2017 is expected to climb up to 5-7 percent growth for FY 2017 - 2022.

• National Steel Policy: The Government is focusing on increasing domestic procurement in public sector projects going forward through its new National Steel Policy.


Indian steel companies set to get a boost from GAIL’s local sourcing policy 08 Jun 2017 Steel GAIL, Steel
Prime Minister Narendra Modi’s Make in India mission received a big boost when state-owned GAIL India issued a tender for a Rs. 3,000 crore pipeline project giving preference to domestic steel companies, which have been badly hit by cheap imports from China, said a report.

• Anti- dumping policy: Anti-dumping duties are now being imposed by the Government to spur domestic production:

• GST – Low GST on raw material and transport costs: Steel industry is likely to benefit from the new GST rate for steel which is at 18%, with key inputs like coal, iron ore marked at 5%, which is the lowest slab under GST, could help to lower input costs. Together, with a substantial slash in transport costs due to unified and standard tax rate under GST, this is likely to help steel companies reeling under large debt and also keep steel prices stable.

• Affordable Housing, Construction, and Infrastructure: The Governments affordable housing program will spur demand.

The demand – Supply end result:
• The demand supply should tighten significantly going forward with increasing demand, restricted supply and tightening imports.

• What this means is that the capacity utilization which is presently a measly 27 percent in FY 2016 should go up substantially till FY 2019. In fact, the projection is of the steel industry reaching up to 90 percent plus capacity. This means that Panchmahal has the potential of reaching up to a capacity of 65,000 - 68,400 tonnes till FY 2019.

Deciphering the sales potential - Prices
• For 12 months ending March 2016, the company sold 19,737 ton (27% capacity utilization) for 314cr, average realization was approximately INR 1,65,000 per ton, which means using the average realization price, they had the potential in March 2016 to achieve a sales of Rs.1145 crores at full capacity utilization.

• The anti-dumping duties which we elaborated on above have put a floor on steel prices and margins. With the steel industry reeling under massive debts it is improbable that the Government will reduce the protection of steel anytime soon.

• Current average realization of the products is around Rs.2,65,000/- per ton (US$ 4112 per ton).
Deciphering the cost of production
• Let us have a look at the raw materials consumed by Panchmahal:

Scrap billets, Nickel and Ferro Chrome are the main raw materials:

• 70% of it is imported:

• The breakup of the raw material costs:

• Ferro chrome prices could rise signaling a risk, however there are no visible supply constraints. Nickel prices are slumping due to weak demand. Steel billet prices are in a downward trend. The raw material cost trends needs to be monitored closely as they are very volatile.
The promoters pedigree / Shareholding pattern
• The company has been in this game for the last 40 years.
• Promoters stake is a very healthy - 70.79% indicating strong promoter confidence.
• Promoters have been increasing their stake since December 2014 at a steady pace. Main promoter Ashok Malhotra further increased by 3.23% as per March 2016 SHP.
• There has been no equity dilution since 2013.
• However presently 36% of the promoter’s stake is pledged. With long term debt virtually repaid it is a matter of time before this pledge is removed.
• The Asset Reconstruction Fund (ARC) have reduced their holding from 21.14% in March 2012 and currently holds 4.14% of shares (equivalent to 8 lac shares), which they are keen to cash out of.
• The equity is size is 1.97cr shares only out of which promoters hold 1.39 crore shares.
• Only 21.15 lac free shares available as per March 2017 SHP.
The Financials:
• Let us do a comparative analysis of their financials to see where Panchmahal is placed.
Financials as on March, 2017
All Figures in Rs. Crores

• From the above it can be seen that Panchmahal is in a much better shape than its peers.

  • It is already in the green and showing some profits

  • Its debt / equity position is much lighter

  • Out of the total debt of Rs. 69.58 crores, Long term debts comprise of just 8.55 crores, while short term borrowings are 61.03 crores

  • Debt / EBIDTA levels and Interest cost / EBIDTA levels are very comfortable and way stronger than the peers.

  • The latest update is that Panchmahal has entirely paid off its long term loan and the promoters pledge can be released - it is only a matter of time.

  • The performance of Q4 has been exemplary and the operating margins are on the way up and was 6.36 % in Q4 of FY 2016.

  • Some of the factors that affect input costs such as iron ore, chrome, coal and power supply are down currently and government is ensuring that the supply of these remain smooth for steel industry. This will enable to have better margins with a positive impact on eps.

  • With long term loan paid, interest costs will come down to almost nil thereby giving positive impact on eps.

  • Specialized Steel products demand is expected to remain stable considering rising demand within the country owing to focus on various industry segments, such as affordable housing, warehouses, buildings, roads and infrastructure, automobiles, etc.

The Valuation game
• Let us do a comparative analysis of their financials to see where Panchmahal is placed.
Financials as on March, 2017
Parameter Data Assumption set
Investment price Rs. 36 – 39 Current market price
Current Market Capital Rs. 72.50 crore Market capitalization as on 14/06/2017
Target holding FY 2020 Based on steel upswing cycle elaborated above
Target capacity utilization 90% Based on projected capacity utilization in steel by 2019
Average market price per ton * Rs. 265,000 Conservatively at Current market price even without assuming price upswing
Average sales Rs. 1,717 crores 64,800 tonnes at average realization of Rs. 265,000 per ton
EBIDTA margins 10% March 2007 they had achieved EBIDTA margin of 10.8%. With better sales realization, operating leverage and stable costs of raw materials a 10 percent EBIDTA margins possible
EBIDTA Rs. 172 crores Assuming a target sales of around 1700 crores and EBIDTA margin of 10 %
Profit after tax Rs. 100 crores Negligible debt
Plants mostly depreciated
EPS Rs. 50 – Rs. 52
PE 10 -15 Reflecting sectoral peak, negligible demand
Target price range at peak capacity utilization Rs. 500 – Rs. 750 Targeted price in FY 2020 at peak capacity utilization
Targeted upside at peak capacity utiliization 13x – 20x

Even if we assume a conservative capacity utilization of 60% to 70% there is a significant upside to this stock. At peak valuations in 2008 it had reached 325 plus. If the steel sector upswing actually goes per expectations we may expect an encore performance.
• The Net Current assets today are Rs. 8.77 crores. The Current assets (including cash) are more than enough to cover their Short term borrowings of around 61 crores.
Risks and concerns
• Delays in start of the Investment cycle in India.
• Variations / Increase in the cost of raw material prices.
• Promoter pledge of 36 % (expected to be released)
• Change in Government policies e.g. removal of Anti-dumping restrictions (not foreseeable for the next 2-3 years)
Panchmahal Steels is a safe bet to ride through the upcoming steel industry upturn. The steel industry is today at a similar cross roads where cement industry was 5 years back. With the whole industry weighed down by debt ridden companies, Panchmahal Steel with its comfortable debt status is a safe horse to ride through the cyclical upturn. Investors can consider putting up to 5 percent of their portfolio in here. However, it has to be played for its entirety of 3-4 years to secure maximum benefits.


Just some updates:

  1. The above calculations and targets were in an idealized world of 95 percent capacity utilization. But better to have a margin of safety and presume a peak capacity level utilization of just 60 to 70 percent by 2019.
  2. The promoter has since upped his stake by around 2 percent.
  3. ARC and ICICI bank have since exited this stock (Probably as all long term debt is repaid).
  4. Promoters pledge has come down but I was expecting (and in the future expect) full release of the pledge.

Thank you for detail rishi :slight_smile:

Hi, as I mentioned earlier =

The capacity of the company since 2003 has been 72,000 ton. I could only check annual reports up to 2003.
However, the company has never achieved a capacity utilisation of above 50%, and most of the time the utilisation was below 35%. Based on utilisation data since 2003.

Is the 72,000 capacity usable? If yes, why the management has never been able to utilize it properly since 2003. Even though since 2003, there has been two clear steel booms.

And why we think that now the company will be able to raise the utilisation which it has not been able to do since 2003

We are surely missing something




Yes this needs tracking. My logic is simple. At 20000 tons this has achieved break even point.
Their RM cost as a percentage of sales is 72 percent. So in general for every ton they sell beyond 20000 ton
they should earn 25 percent EBIDTA assuming all fixed costs are taken care of.

So for every 10000 ton of incremental capacity utilzation
Now with average realization of Rs. 165000 per ton (present market valuation is more than Rs. 200000 per ton) this
means an EBIDTA of Rs. 41,250 rs per ton or approximately Rs. 30000 per ton post tax assuming a tax rate of 20 percent.
This translates to around 33 crore profit per 10000 ton or 16.67 EPS per 10000 ton incremental sales.

If you assume a realization of Rs. 200000 per ton the incremental EPS for every 10000 ton is around Rs. 20.

So it is a factor of incremental capacity utilization from here on. If you take a max 50 percent capacity utilization
it comes to an EPS of 25 to 30 depending upon average realization rate per ton.
So with the slew of factors (on both demand and supply side) if you believe in the steel upturn story the undervaluation
is glaring. OFcourse other factors like zero long term debt, great and increasing promoter holding, short term debt covered
by receivables and inventory etc add to the story.

I took a quick look on Screener … my takeaways in no particular order

  • Sales growth is negative. There might be market factors for this, but their OPM has also reduced.
  • They specialize in custom steels (i.e. alloys which are custom mixed) which larger producers might not be willing to manufacture in small quantities. A specialization like that would imply bigger profit margins, not smaller like we have here.
  • Debt is growing but not correlated to capex or production. What is it being used for?
  • SSGR is reducing. It is currently at -13%
  • Cash flow is very variable
  • Power and fuel expense (biggest expense after raw material cost) as a percentage of sales fluctuates between 7.3% to 13.7%. I don’t know their source of power, but it looks like they are not able to pass on this cost to the customer.
  • Interest coverage is currently -0.3.


  • Not invested. Not tracking.
  • This is a personal opinion as much as an analysis of financials

I took a quick look on Screener … my takeaways in no particular order
Sales growth is negative. There might be market factors for this, but their OPM has also reduced.
Ofcourse. The steel sector was in the doldrums in the last 5 years. What matters is what it will be in the next 5 years.

They specialize in custom steels (i.e. alloys which are custom mixed) which larger producers might not be willing to manufacture in small quantities. A specialization like that would imply bigger profit margins, not smaller like we have here.
Anti dumping duties extended for 5 years yesterday on stainless steel. Right now they are at break even. Beyond 20000 ton utilization operating leverage
comes into effect.

Debt is growing but not correlated to capex or production. What is it being used for?
Long term debt completely repaid. Short term debt covered by inventories and receivables. Co working towards reducing the debt.

SSGR is reducing. It is currently at -13%
Refer point no 1.

Cash flow is very variable
This is a sectoral play. We invest in a downturn subject to hopes of an upturn.

Power and fuel expense (biggest expense after raw material cost) as a percentage of sales fluctuates between 7.3% to 13.7%. I don’t know their source of power, but it looks like they are not able to pass on this cost to the customer.
As I said function of capacity utilization. Generally they have 25 percent EBIDTA margins over 20000 tons. Rest are fixed costs

Interest coverage is currently -0.3.
Refer point no 1.

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My answers inline.



Comment: Huge demand of specialised steel can be evidently seen over the next couple of years. That is why such a large venture is being set up. Panchmahal Steel has an edge as they are already established and operational with huge scope of spare Capacity utilisation while these companies take 2-3 years atleast to establish their plant :nerd_face:!

SAIL, ArcelorMittal steel unit’s site to be sealed in 3 months"It (SAIL, ArcelorMittal JV) is in the final stage now. Absolutely in the final stage," Steel Secretary Aruna Sharma told PTI in an interview.

But the question highlighted above is quite valid. Agree that it takes 3 to 4 years to exploit the plant in full. But why they have not been able to expand their utilization beyond 50% since 2003, the industry saw considerable infrastructure led upcycle. What made them to operate at low capacity and why will they jack up their utilization. It is so simple to say that they are 27% utilization and hence going forward the scope of increasing utilization and adding to bottom line is substantial. But has any figured out why they were not able to increase it in past upcycle and what will make them to increase it now.

Disclosure: Not invested, not finding it interesting.


Capacity utilisation is driven from the demand and supply largely speaking. In this case, the steel sector showed similar trend and is not reflective of just Panchmahal. The phenomenon was across the sector and the related sectors that were not growing, be it infrastructure (still struggling with huge NPAs), construction, defence, roads, housing etc. The current government is putting a lot of effort in driving growth in these sectors, through various policies and measures such as anti-dumping. What you think as considerable infrastructure led upcycle is an eyewash as only NPAs increased and nothing else.

Do we know any details about promoters? I was not able to locate any interviews/meets/concall etc.explaining challenges or vision for the future.

I haven’t seen any meets or concalls organised by promoters. That said while it doesn’t really help investors but it can’t be taken as negative either. As far as future is concerned, there are clear signs of steel industry turnaround looking at some results that have been declared so far. There are many industry updates that are getting published that indicate clear vision of what lies ahead. Panchmahal stands tall in the specialised steel segment it deals, steel story is only beginning and will take shape in the coming years. Be long term in this sector.

:nerd_face:Read the top three paragraphs :innocent:

08 Aug 2017 Steel Tata Steel’s outlook pinned on China’s appetite for steel
The villain is now playing the hero’s role. A few years ago, global steel majors railed against China’s steel industry for its excess production, which flooded their markets. A wave of protectionist measures followed to keep Chinese steel out, including in India. Since then, steel prices have risen but they weakened in the past few quarters.

Tata Steel Ltd’s management pointed out that steel prices have increased again, chiefly due to China. In the June quarter, domestic demand was dull and realizations declined sequentially. But an increase in global steel prices can change that. China has cut steel output and even better, its steel consumption is increasing. That’s a situation that will drive prices higher. On Monday, Chinese rebar steel futures rose by 7% to their highest level in four years, according to Reuters, sparking a similar jump in iron ore prices.

Tata Steel’s management said that international steel prices had risen by $80-100 per tonne in the past 4-5 weeks. India’s steel production has risen sharply because of capacity expansion. Tata Steel’s production was up by 32% in the June quarter, over a year ago, according to government data. The country’s steel output rose by 6.7% but consumption rose by only 4.6%. The rest has to be exported but becomes less profitable as prices have fallen.

That’s why Tata Steel’s consolidated revenue declined by 15.7%, with average realizations per tonne declining by 1.6%. The drop was mainly due to steel deliveries declining with a slight fall in realizations. But Ebitda declined by 32.4%, much more than sales did, because material costs declined by only 11.1%. Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.

In Tata Steel’s case, in India, higher iron ore prices don’t matter because it has captive sources, but it imports about 70% of its coking coal requirement.

A spike in coking coal prices was the main reason for the jump in costs. The net result was a 21% decline in Ebitda per tonne in India. In Europe, the company benefited from higher realizations but even here, Ebitda declined due to higher input costs.

The increase in steel prices has to sustain so that Tata Steel (and other steel companies too) find it viable to export steel, which will reduce the domestic surplus and support prices. Its European operations too will benefit from better realisations. Conversely, if steel prices reverse then it could mean tougher times ahead. A lot depends on whether China continues to support global steel prices by producing less steel and consuming more of it.

Tata Steel said it’s close to reaching an agreement on its UK pension plan. If that happens and it also helps in the long-pending restructuring of its European business, that could be a swing factor for valuations. The goods and services tax rollout too has affected its India performance and a post-GST recovery can also help performance.

Its shares are up by more than a third since early-May. The 29% sequential decline in its Ebitda and the 47% decline in its profit before tax and exceptional items suggest caution although its year ago growth numbers looks good. If steel prices sustain the uptrend, the coming quarters should see much better numbers both in India and in its overseas operations.

Panchmahal Steel results are out. Q to Q losses have reduced from 3.24 crores to 1.48 crores. Sales have increased from 79 crores to 111 crores (40%)
Sequentially for the quarter the sales increased from 103.33 crores in Q4 to 110.97 crores in Q1 (7.39%). In Q1 the losses were 1.48 crores compared to 2.08 crores profits in Q4.
Points for consideration:

  1. The sales are increasing both Q to Q and sequentially so green shoots of revival are visible.
  2. In Q1 the other expenses have shot up from 4.44 crores to 9.49 crores (5 crores) sequentially over the last quarter. This was primarily due to ISO18001 exercise. Panchmahal has recently obtained ISO18001 which is mandatory for exports to Europe.
  3. There has been an adverse impact in Q1 due to GST.
  4. The Fixed costs for Panchmahal (Including interest) is around 75 crores. Their contribution margin is around 18%. So at around 422 crores we have the breakeven point or around 105 crores quarterly sales. So we are on the border line to the breakeven point.
  5. Beyond this incremental sales should contribute 18% to the PBT figures going forward.
  6. With steel revival, anti-dumping duties for stainless steel in place and the current pathetic capacity utilization (around 30%), gradual increase in per ton realization and capacity utilization the story should gradually build up for the next 2-3 years.
  7. The debt position is comfortable with all long term debts paid off and short term debt covered by receivables and inventories.
  8. Current market capitalization is hardly 94 crores. So it is available cheap for a specialty steel manufacturer with 72000 ton capacity with a good balance sheet

This seems interesting - especially that the promoters have increased their stake considerably.
I am trying to get a sense of the competition here. Who are the direct contributors in this specialised steel market and their market shares?

Since the company uses Electric Arc furnace for steel making, how much does graphite electrode price increase impact it’s operations?

I read somewhere that the graphite electrode cost is less than 2% of the overall costs…however, availability of the same for small cos like panchamahal might be an issue, unless they have long term contracts…

Again, augurs well for graphite electrode cos as it is less than 2% of overall costs… a small pinch for steel cos… but big for electrode cos.

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Got interested due to low valuations but some information is not complete.

for example: The thread mentions 72000 tons capacity but the 45 AR say 1.5 lakh tons for Steel Billets and Bar/Rods/Coil/Wires each.

Attaching company snapshot