Sunflag Iron & Steel

Recent write up at the following blog

Caution :

  • Please view these in the lite of your own research as certain people have their hidden agenda embedded in their research
  • metal stock are cyclic in nature and commodity type business .In commodity type business only company with large scale of operation with backward integration with superior products can create wealth
  • Some time waiting period if not purchased with margin of safety can prolonged even in best companies

Disc : Not invested This is not any stock recommendation to buy or sell Please investigate properly. I am not any Sebi approved analyst .

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@yourraj That blog is not written by Rajivji. It is an unknown author claiming to be the famous investor. I think that should be included in the your disclosure as well :slight_smile:


The company is available so cheap at 5 P/E which feels too good to be real. I am aware that it is a commodity company with high exposure to autos (~80%) but they are diversifying into various other sectors. Is it a value buy or value trap?


From AR

Sunflag Iron is venturing into manufacturing of Super Alloy, which is alloy for high performance application which involves high load [stress] at high temperature [above 540 degree]; resistance to operation at high temperature; and resistance toenvironment attack at high temperature. This is used in Aircraft Parts, Armaments, Submarine Parts, Space Vehicle and RocketEngines, Nuclear Reactor, Super-critical Power Plants, Industrial and Vehicle Gas Turbines, Petro-Chemical Plants and other HighTemp and Corrosive Applications.

Defence Minister said the government of India is planning to ban the imports of 101 items of military equipment in an effort to boost local production and improve self-reliance in weapons manufacturing.
The government is planning to progressively implement the embargo on select military imports between 2020 to 2024.

The military equipment includes some high technology weapon systems and range from assault rifles and artillery to transport aircraft and light combat helicopters. The aim is to apprise the Indian defence industry about the anticipated requirements of the Armed Forces so that they are better prepared to realise the goal of indigenisation. This is a big step towards self-reliance indefence.

Since as of date most of the raw material being imported and sooner or later, this facility will help us to sustain the changed market scenario,Sunflag is seeing the opportunities to meet:

  • the growing demand of our population and protect our border, growth NOF technology is inevitable.
  • the growth of technology in relevant sectors like defence, armament, aerospace, marine, nuclear, thermal, petrochemical & transport etc.
  • to attain high level of technical perfection in these sectors.

As per latest Annual Report

i) Installation of Super Alloy Steel making:
a) ESR-II (1.8 T Capacity) - Installed and under trail
ESR-I (22 T Capacity) - Installed and under trail production.
b) 6.5 T VIM is under commissioning.
c) 18T VAR order placed and expected at site by June, 2022.
ii) Other ongoing projects:
a) Downstream of Blooming Mill.
b) Installation of Ingot Annealing Mill
c) Installation of new Pickling Plant & IVD
d) Installation of Coil Spherodizing Furnace with new shed
e) Installation of LRF-3 and 4th Strand in CCM-1
f) Installation of Iron Ore Crusher Plant
g) Installation of Abrasive Saw Machine in BSM
h) Installation of Shot Blasting Machines for Rebar and Coils
i) Installation of Forging Plant
j) Installation of Quenching pipe for TMT rolling in BSM

Sunflag has commissioned its Super Alloy Steel manufacturing facility during the year under review and now shall be able to
cater to requirements related to Aircraft Parts, Armaments, Submarine Parts, Space Vehicle and Rocket Engines, Nuclear Reactor, Super-critical Power Plants, Industrial and Vehicle Gas Turbines, Petro-Chemical Plants and other High Temp and Corrosive Applications. This will enable the Company to reduce its dependency on automotive and auto ancillary industries and create opportunity for expansion and foray in new markets.

Besides this, the Government has recently announced Production Linked incentive scheme (PLI) for manufacturers of special alloy
steel which is an import substitute. This is expected to boost steel consumption.
Sunflag is already manufacturing certain grade of steel which are covered under the said scheme and would explore the
opportunity to avail benefit under PLI scheme.
Government has announced an investment of over 1 trillion in infrastructure over the next 5 years. This would be a key growth driver not only for steel industry but will also be a multiplier of growth across the sectors, boosting steel demand from sectors such as transportation, real estate and infrastructure.

Sunflag is committed to maintain its quality and has received appreciations and awards from various sources. With the
continuous efforts on making clean steel, now Company is focusing on expanding its market share in other segments viz. railways and
defence etc. This will protect the Company from dependency on Automobile sector.
exploring better opportunities in the years to come due to continuous developments of new grades of high alloy steel
as well as wire rod. Further, venturing into the self-dependency of raw materials will help in reduction in the cost of production and
enhancing the profitability. This has even proved advantageous during the recessionary period which is a very good sign for the
During the year under review, could see some material change in the top line and in profitability. Indian Steel industry has been driven by availability of raw material viz. iron ore, coal etc. and cost of labour. Consequently, the Financial Year under review
remained volatile during the year. Further, your Company with continuous development of new grades of steel and upgradation of plant and equipment, could maintain its presence in the market particularly in automobile industry. As a result, there was an increase in the sales and profit before tax. EBIDTAas a percentage to total income for the year was 13.53% as against 10.27% for the previous year.
In order to achieve effective cost reduction and improvement in productivity, activity of Total Productive Maintenance (TPM) continued to be implemented by the Company during the Financial Year 2020-21 under review.

List up to 3 of your products or services whose design has incorporated social or environmental concerns, risks and/or

a) Stainless Steels : Stainless Steels are 100% recyclable, environment friendly and with long life. Stainless Steel Rebars
were developed to achieve long life.
b) Steel for Turbine Blades : Turbine Blade steel is used in manufacture of steam turbines for Power Plants.
c) Steel for Defence : Sunflag is one of the major manufacturers of Steel for Bombshells for Defence

Management discussion is poor in the Annual report,
However from the accounting perspective I had found the Balance sheet very much informative as you can get details of all schedules.

Disclosure : Invested recently at levels of 80


With the arbitration award in favor of Sunflag, the stock valuation has become very much attractive.

Extracts from AR of LLoyds Metal
"An Arbitration Award was passed by the Sole Arbitrator Mr. Justice A.R. Joshi (Retd.) Former Judge, Bombay High Court, under the Arbitration and Conciliation Act, 1996 on 22nd April, 2022 in the matter of arbitration between Sunflag Iron & Steel Company Limited (“Sunflag”) and Lloyds Metals and Energy Limited (“Company”). The matter in nutshell is that the Company and Sunflag from the year 2004 have been entering into various understandings
and contracts to have joint and equal control on the iron ore mine of the Company and sharing of the iron ore extracted in the ratio of 60% and 40% respectively in return Sunflag
assisting the Company with the required funding for capital and operational expenditure.
However, for reasons not attributable to both the parties the said arrangements could not take place and the mining operations could not be commenced. During this period Sunflag had advanced funds to the Company towards the operation and commencement of the mine. In the year 2016, the Company started mining operations with minimal production; however, the Company could not share the iron ore extracted with Sunflag for various reasons. The Company and Sunflag were engaged in discussions to resolve the issue amicably but the same could not be resolved. Sunflag then invoked the arbitration clause and initiated the
arbitration proceedings. The claim(s) made by Sunflag were as follows:

  1. Repayment of the amount paid by Sunflag along with the interest @4% + SBI PLR compounded annually amounting to Rs 312 crores;
  2. A demand of Rs 1,433 crores towards Sunflag’s right of 40% mineral extracted at cost over the life of entire mining lease period i.e., 40% of 75 million tonnes, i.e., 30 million tonnes with a margin of Rs 2000, per tonne amounting to Rs 6,000, crores and when discounted to the present value the same worked out to Rs 1,433 crores; and 3. 32% of the equity share of the Company considering the net worth attributable to the mine being 80% of net worth of the Company, and Sunflag having the right of 40 % of the mine. All the above claims of Sunflag were refuted by the Company and various counter claims were also made. After hearing
    the arguments of both the parties, the learned Arbitrator has passed an Arbitration Award dated 22nd April, 2022 and an Additional Arbitration Award dated 28th April, 2022. The gist of
    the Award is as follows:

The Company was liable to pay Rs 900 crores to Sunflag (i.e., Rs 312 crores on account of refund of advance along with accrued interest and the balance Rs 588 crores as full settlement of all other claims). Given the amount being large, the Company proposed
to settle the said liability, subject to the approval of the Shareholders and in accordance with applicable laws, by issuing six crores (6,00,00,000) 0% interest Optionally Fully
Convertible Debentures (“OFCD”) which will settle entire liability of the Company on the basis of proposed issue price of Rs 150/- (Rupees One Hundred and Fifty only). The OFCD would be converted not before 9 months but, not later than 18 months at a conversion ratio of 1:1. This proposal has also been agreed by Sunflag and they will be termed as the Non-Promoter of the Company. Further, the Company is liable to pay an interest at the rate of 9% p.a. on the face value of the OFCD’s if the Company fails to convert the OFCD’s and in the event the proposed allottee does not exercise the conversion right within the 18 months conversion period, then the OFCD’s will be redeemed by the Company within 48 months from the date of allotment and interest will accrue at 9% p.a. on the face value of OFCD’s from the expiry of the conversion period of 18 months until redemption of the OFCD’s.
The Company shall commence the process of the proposed issuance of OFCD’s and obtain necessary approvals and compliances with respect to the same."

Disclosure from levels of 80 since last more then 1 year and added more recently at around levels of 85.

The current Share Price of Llyod Metals is around Rs 229 and hence the investment value will be 1374 Cr as against present market cap of Rs 1900 Cr of Sunflag Iron.


The total value of compensation is 1194 crores. Shares are issued at Rs 199 each for 6 crores shares. Roughly around 15% of Lloyd metals mcap.

where did you got the figure of Rs 199 each for 6 Crore shares??

Exceptional income of sunflag for Q1FY23 and exceptional loss of Q1FY23. No of shares on conversion is 6 crores share. so price comes to Rs 199 per share.

Its 150 and not 199 as per notification submitted by the Company

The reason i said 199rs is because as per lloyds metals they issued 6 crores shares and booked exceptional loss of 1194 crores and sunflag booked 1194 crores exceptional income. So the math comes to Rs 199

Sunflag has converted their OCD to shares. They cant sell the same for another 3 months. Holds 12% post dilution of Lloyds metal

Very interesting . Mar-23 SHP is out.
Sunflag as expected have 11.69% of Lloyds metal share and it reflects in SHP.
But now Lloyds metals holds 1.69% stake in Sunflag as per sunflag’s SHP

Spoke to the IR dept at Sunflag. LM has acquired 1.69% from the open market. The IR has no idea why LM is doing this and they say that it is as per LM descretion.

Nice. Thats bad for LLoyd metals business considering they would do 4500 crores capex in 3 years.
Why would they acquire such a small stake from open market.?
Also would love to intereact with IR of sunflag. If you could share the details in dm for email id of IR

Lot of interesting points to study Sun flag:

  1. Won auction for Surajgad iron ore block
  2. Any positive direction from current mines where lease has lapsed and matter is sub-judice
  3. More approvals from various leading companies from defence, aerospace for super alloys
  4. More utilization of super alloys division will help to increase realisation per ton.
  5. Daido steel which holds 10% will help to expand reach of Sunflag to global market and increase focus on Super alloys
  6. Current value of the co’s stake in Llyod metals is nearly 3500 cr which is current mkt cap of the company
  7. Technically the stock consolidating in 190-200 range and sector also looks positive

I think company is at inflection point from 5-10 years perspective, however I would like to know analysis of other members whether to factor in some risks which could derail the growth.

Disc : Invested. This is not any stock recommendation to buy or sell. Please do you due diligence. I am not any Sebi approved analyst.


Interesting reading!

Disc: Invested

Some questions which I have for the management

  1. As the arbitration awards value (now shares of lloyds metals) has grown more than 3x, what does the management plans to do with this corpus?
  2. The Daido corporation (sunflag’s partner) uses Electric arc furnace to make steel, does Sunflag plans to expand or switch to electric arc furnace?
  3. How much % of portfolio is going to be Special alloy steel ?