Sunflag Iron & Steel


Please point me to it. Does he build a case for the hypothesis across industries -asset-light & asset-heavy? I assume this is average historical RoE/RoCE he is talking about.

If by this Sunflag fair value is 2xBV and it is quoting at 1.2x BV then you are saying it is undervalued by far!


I think he mentioned it in some article, he was correlating P/B with ROA actually in a hypothetical example, to tweak it to use ROCE. Well i think we could discuss this on some other thread. The fact is there is no denying the stock is cheap, provided they maintain the kind of profitability of 2010 .The question is why is it cheap?? Is the market expecting a decline in future profits??

Hi Ayush,

You mentioned possible growth in 2-3 years.

I could not find any production increase plansor capacity expansion plans etc anywhere. Can youshare the source of growth related information?

Stock is definitely cheap at current prices. All they need to do is maintain the EPS of last quarter.

Page28 of annual report gives the consumption of Raw Material. Coal is small as compared to Coke in value terms. Coke is far costlier. Does this mean that they will replace Coke with Coal from their own mines? I am a bit confused.

Stock is tradingcloseto its 20 day moving averageand support near 31-32.Hope you guys dont start abusing me for writing some technical stuff :slight_smile:


Hi Yogendar,

Some of the regular expansion plans are here: mentioned in above threads)

Donā€™t have specific details apart from above. But with a very comfortable debt equity and strong cash flow now, the company will do some expansions for sure.

Stock has good support at these levels. The re-rating and momentum comes at higher levels :wink:



It does look like the coal linkages could be working.Look at the steep fall in Raw Material/Sales to ~61% in FY10 from ~67% in FY09.

Now, we need to see what contributed majorly to this. If raw material prices didn't soften majorly in FY10, then the coal linkages could be playing a big factor.

Hitesh/Ayush, any idea on this?

Sunflag Iron FY10 FY09 FY08 FY07 FY06
Common size P&L statement
Sales (%) 100.00% 100.00% 100.00% 100.00% 100.00%
Raw Material/Sales (%) 60.92% 66.78% 64.83% 58.06% 60.81%
Power & Fuel cost/Sales (%) 7.98% 6.03% 7.46% 10.39% 9.73%
Finance cost/Sales (%) 2.23% 2.77% 2.09% 1.44% 1.36%
Depreciation/Sales (%) 2.81% 2.81% 3.88% 4.84% 5.81%
Cost of Goods sold (%) 76.76% 78.54% 79.33% 77.83% 78.43%
R&D Expenses (%) 0.00% 0.00% 0.00% 0.00% 0.00%
Selling and Operating expenses (%) 13.31% 11.60% 11.22% 12.26% 10.74%
Operating Margin (%) 14.54% 10.84% 11.38% 12.18% 13.48%

Some more information

Iron ore prices touched peak in April 2010. Since then price has been falling. Prices have been coming down for last four months on the back of declining demand from China and migh stabilize at current level of 140.

Iron ore price at the beginning of 2007 were close to 80 USD per ton. After that there was a steep rise and by the end of October 2007 prices touched a peak of 180. Price remained nearabout 180 till middle of 2008. During second half of 2008 prices started declining sharplyand came down to 60. Tilllate 2009 prices remained below 100. From November 2009 onwards prices started increasing again and touched a peak of 180 in April 2010. Since then there has been a sharp correction and it has come to 140.

As you already know iron ore price has been highly volatile.

If we model the Raw Material as % of sales quarterly basis we will find that it is flucuating from as high as 69% to 59 %. Last Q it was approx 61 %. Assuming that iron ore inventory is bought three month in advance, Q2 iron ore prices should be higher than Q1 (unless they bought a lot of iron ore when it crashed last year).

(I dont even know whether they buy iron ore or have some mines). If they buy it there might be long term contracts (like 6 months - 9 months). But they are small company, so cant say for sure.

So before you buy this stock be aware of the fact the iron ore and coal prices can fluctuate wildly.

By the way chinese demand came down last year because they bought a lot of iron ore last year and are consuming the inventory. In addtion they are also focusing on domestic production. Chinese demand alone can change the price dynamic for iron ore across the world significantly.

At the moment spot prices are trading at discount to contract prices.

2-3 days back some Indian minister also commented on ban of iron ore export from India. So sentiment is for price coming down. But Q2 iron ore buying must have been already done before start of Q2. May be at peak Q1 prices or may be at low 2009 year prices. Most of the iron ore which is exported from India goes to China.

Also with recent changes in iron ore industry like BHP and Rio tinto thing, the iron ore production is a lot cocentrated than 5- 6 years back. Top 5-6 players control more than 50 % of the iron ore production. So dont expectprices to fall like they did during2009.Supply demand scenario is always touch and go and hence there is high volatility.

And that could be one reason why stock is trading at low PE :slight_smile:

And so i think Sales growth is very important as then even with high raw material prices company will be able to deliver EPS numnber.

Not too sure about coke and other ferrous alloys which are other important raw materials. But i think just like iron ore, they are also influenced by steel production in China.

Iron ore must be 20-30 % of total RM, same with coke. Ferrous alloyw would be some 15 -20 %.

Some of the above facts should be cross checked by one of you as i ve collected them from news sources :slight_smile:


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Thanks YSB.

Its always a good idea to take a little more trouble and link to news sources, when possible, for substantiation and cross-verification.

If your data is correct, then it substantiates that increased coal production may be responsible for the good show in FY10. FY09 prices had corrected sharply to 60$,prices remained sub 100 till Nov and progressively went up to $180 in April 2010. So FY10 actually saw far higher raw material prices than FY09. yet RM/Sales came down from 66% in FY09 to 60% of Sales in FY10.

Another way to cross-check the effect of hardening of raw material prices, would be to compare RM/Sales figures for other steel manufacturers without ore/coal linkagesā€¦like Mukand, Kalyani and Adhunik with ore & coal linkages against Sunflags figures.

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In my opinion for the purpose of buying FY10 prices were lower. From beginning of calendar year 2009 to November 2009 prices remained very low. I would expect companies to do a lot of buying during this period effectively covering almost complete FY10 ending in March 2010. Even for Q1 ending June 2010 i thinkg buying must have been done at relatively lower prices (as compared to peak prices of April to July 2010).

But still these are just speculations. We should try to estimate the unit iro ore price for this company.


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Iā€™m not too much concerned by these fluctuationsā€¦reason - this is a perfect commodity business where the steel prices re-adjust themselves in accordance with fluctuations in raw materials.

Because of these fluctuations, when the prices are increasing cos get inventory benefits and report better margins and vice versa. So when steel prices are falling sharply one should avoid steel stocks as the cos will be reporting very less profits (due to inventory losses) for next few qtrs.

One can take the help of above graph to make an estimate of the trend.

It seems the steel prices have been stable off-late.

Views Invited


Inventory Days (FY10-Fy06)907010510476

Inventory days for FY10 is ~ 90 days of Sales at for Sunflag. High figures in past 5 years has been 105 days sales. Its unlikely that a whole years RM is carried in Inventory - storage requirements will be huge (bulk iron-ore)??

Hi Donald,

There are lots of ifs and buts here. From a common sense point of view companies would definitley buy more when prices crash and then consume it as the year progresses so that by year end their inventory again comes down to normal levels. Or may be when the prices come down they get in mid term contracts with the iron ore suppliers to freeze the prices for some more quantity or for few more months.

Again as Ayush said, they also have the option to increase steel prices. In this argument there are more questions like which price is more sticky iron ore or Steel. Which price will be the first one to change as per market prices. Then there are issue like spot buying/selling or contract buying/selling of iron oreandsteel.

All these things make it very difficult to understand the actual scenario.

My purpose of studying and writing about steel prices was only to make myself and others aware of the **near/mid term investment risk **which is the raw material prices. Some companies might handle it well others may not.

After considering this risk and near term price momentum as well as arguments given by you and Ayushi think it is undervalued at current prices. I only hope that we have studied the complete picture and have not missed out on any other investment risk.


The data provided by you was certainly useful for folks like us (first-timers) fishing in the dark and trying to make sense:) of the steel sector:)

I would have taken this forward by comparing RM/Sales of Mukand, Kalyani, and Adhunik for the last 3 years or so; I am travellingā€¦and may not be able to address this before weekend.

That may throw up surprising conclusionsā€¦and pointers to who is doing a better job at this. if convinced and you have the time, please have a go.


** near/mid which Ayushi**

Just restarting an old thread

This stock has come into my radar since there seems to be a turnaround in the fortunes of the Steel Industry and commodity experts have predicted good rebound in steel prices in 2017

The stock was first analyzed by Shri Ayush Mittal way back in 2010 when the price was about Rs. 32/-

Today on 11-01-2017 it has made a life time high of 41+ and volumes are also supporting the price

They are mostly into flat products which have a price advantage; The company is a turnaround case and it has reduced its debt (Debt to equity of 0.41 from 1.05)

DAIDO Steel of Japan has picked up a 10% stake in 2014 in SUNFLAG

Others can share their analysis

I am also bullish on this stockā€¦ Debt has been reducedā€¦ steel sector is also in good shape as compared to 2010. The company is survivor.
Can others please provide their viewsā€¦

Disclosure - planning to initiate position ā€¦

Technically also it looks strong; good volumes; It should sustain above 40/- for a sustained upmove

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stock is in all time high made a high in 2008 and yesterday closed @ 52.50 will read about itā€¦intrasting

Anyone tracking this stock?

Dec 2016 Qtr Profit 32.84 Cr. & Dec 2017 Qtr. Profit 75.56 Cr OPM also improving. Though stock is not chaep, it is neither expensive. With improving performance looks like stock may do better going forward.

Disclosure: Not invested. Planing to invest tomorrow .

Trade receivables( Rs 248 to Rs 306 Cr) and Trade payable (140 to 237 Cr) as on 30/09/2017 are at very high levels and have increased substantially . Inventory holding although declined but still at very high level of Rs 343 Cr. The net cash flow from operation as on 31/03/2017 was negative due to changes in working capital. Capex during last 5 year is very low however the company is doing some capex in this current quarter. Tracking for investment if falls below 70

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Figures in isolation doesnā€™t matter. Receivables days have remained same around 52 and payable days have increased from 60 to 77, if we consider 6 months of fy18 vis a vis first 6 months of fy17. Increase in later is good for business overall.

Status: not invested.