Tata sponge iron - trading cheap...

Orissa – Based TATA Sponge Iron is a India’s Leading manufacture of sponge iron. TATA Sponge Iron is an associate company of TATA Steel.Orissa – Based TATA Sponge Iron is a India’s Leading manufacture of sponge iron. Tata Sponge sources iron ore fully from the mine of its parent and imports a good part of its coal needs, eliminating uncertainty of availability. It also generates its own power eliminating another source of availability uncertainty.

Why to buy?

1.  Tata Sponge operates its plant at near full capacity; and runs it well. For instance it tries to continuously minimize the coal and power needed to make a unit of sponge iron. Further the quality of sponge iron produced is consistent in its Iron content and weight – important consideration for customers. Operating a plant at full capacity allows its fixed costs to be spread over the largest possible quantity minimizing per unit costs of sponge iron – not to mention time and costs saved from rampant start-ups and shut-downs.

2. Tata Sponge uses waste heat from the sponge iron making process to generate power, 2/3rds of which at full capacity is sold to the local state electricity board. The marginal cost involved is about 30 – 40% of the price at which power is sold to the grid. These profits are independent of the sponge iron prices allowing the bottom-line to escape to an extent the cyclical nature of the sponge iron business.

3. Further Tata Sponge has turned a profit every year in the past since 1992. Tata Sponge features excellent business economics with high returns on tangible capital employed in excess of 50% and return on tangible equity over 20%. Impressively, Tata Sponge has grown revenue 15 out of the last 20 years.

4. Greater visibility on coal block statutory clearances  which will lead to margin expansion and  government focus on infrastructure growth should see a sustained demand for sponge iron. 



Cheap valuation, Tata group backed company, access to Tata Steel`s iron ore and excellent operational efficiency are reasons convincing enough to stock up on this script.

MINDA INDUSTRIES - STRONG OUTLOOK

Minda Industries (MIL), a flagship company of NK Minda Group (UNO Minda) is market leader in the domestic Switches and Horns, commanding a market share of 61% and 47% respectively. Switches/Lighting/Horns account for 45%/18%/22% of revenues with ~83% sales to OEMs Bajaj Auto/TVS Motor/ HMSI/Maruti Suzuki account for 27%/16%/9%/6% of standalone revenues.  MIL will benefit from the expected revival in automotive demand, given its strong and improving market share.

Key notes - 

 - During FY14, the exports contributed 19% to the consolidated top-line while the remaining 81% of the consolidated revenues came from domestic markets; 13% of the revenues were recorded from replacement markets while 87% of the revenues were from OEMs. The two-wheeler and four-wheeler percentage in the consolidated revenues stood at 63% and 37%, respectively. The domain-wise revenues break-up was as follows: Electricals & Electronics (46%), Body & Structure (14%), Chassis & Motor Systems (21%) and remaining others (19%).

- The Management stated that the FY14 performance lagged on the consolidated basis primarily due to lower utilization levels in the recently expanded capacities and non-recurring extra-ordinary expenses incurred on acquisition of Spanish Company, Clarton Horn. The acquired entity registered a top-line of above 2,000.0 mn but incurred a loss of approximately Rs.110 mn at the PBT levels which included a one-time Management Fees of roughly Rs.60 mn which was paid to the erstwhile stakeholders for the smooth transfer of operations. The EBITDA margin stood at 4.5% which is likely to go up over the period of next two years on account various cost-cutting measures and streamlining activities to synthesize the Indian and Spanish operations. The subsidiary received upgraded business orders from Renault and Nissan. Additionally, the leading horn manufacturer came out with new horn product for both OEM and Aftermarket.

- The Lighting division which contributed 14% of the top-line was substantially impacted by the slowdown in the four-wheeler category as majority of its revenues are being derived from four-wheelers. The profitability was also impacted in this segment on account of extended investments in Manesar, Pune and Chennai facilities. The Management stated that during last three years, the company has been investing substantially in capacity expansions in lighting division. The capacities are now ready and awaiting a ramp-up in improving the utilization levels. The old facilities have been running at 85-90% but the recently added capacities witnessed low utilization levels of 30-40% which is likely to improve during the current fiscal. The Pune plant is likely to break-even during Q1 FY15. The company has received new orders from Nissan and Mahindra & Mahindra in this division.  The EBITDA margin in the lighting division has come down from 14.96% to 13.72% during FY14.

- The Switches business also dragged the overall performance as the Hosur Plant which started production only in Q1 FY14 took almost three quarters to break-even. The Management expects the full benefits of this added facility only in the second half of FY15. The old capacities of this segment run at 85% utilization levels but the Hosur one ran at  55% in the recent quarter which is likely to move up to 80% within two quarters.

- Minda Distribution & Services Ltd. (MDSL) which is a distribution company for the aftermarket segment is primarily run as a cost-centre and all the profits are passed on to Minda Industries Ltd. and thus, despite a good top-line the profits are negligible. 

- The top-line of another subsidiary, Minda Kyurako doubled from Rs.210.7 mn in FY13 to Rs.467.0 mn in FY14, however, the losses at the PBT levels widened from Rs.15.7 mn in FY13 to Rs.44.3 mn in FY14 primarily due to addition of Bawal facility which started commercial production only during the last year and a paint shop which was added recently. Due to high investments, as reflected in higher interest and depreciation costs, led to widened losses. Nevertheless, the Management expects improved capacity utilization levels in FY15 which will positively impact the profitability levels.

- During the fiscal, the Company has started production of Fuel Caps for Maruti Suzuki India Ltd. The fuel cap business is currently running at 50% capacity utilization levels and is likely to go to 75-80% levels during H2 FY15. In addition, the revenues of Minda Auto Components jumped from Rs.550 mn to Rs.650 mn while the PBT levels improved moderately from Rs.35 mn in FY13 to Rs.40 mn in FY14.

Management Guidance - 

Management expects net sales CAGR to move up to a higher trajectory over FY2014-16E driven by the demand recovery and ramp-up at new facilities/ customers. EBITDA margin is expected to improve from ~5% in FY14 to near double digits over the next two years, on the back of higher utilization levels. Management’s guidance of strong revenue growth, near double-digit EBITDA margin and benefits of deleveraging implies a possible EPS of ~Rs 39 in FY15 and ~Rs 55 in FY16. At the CMP, the stock would be trading at an implied P/E of 12x FY16E earnings respectively. On management’s view of growth/profitability/capex, the company could see a RoCE of ~15% in FY16 and Net Debt:Equity is likely to come down from 0.9x in FY14 to 0.3x in FY16E.

JBF INDUSTRIES - CRUDE BENEFICIARY PLAY?

JBF Industries, stands on a gleaming pinnacle of success as an industry leader in Polyester Chips & as one of the top 5 players in the polyester Partially Oriented Yarns (POY) in India. The company conceived as a private limited company in 1982, attained the corporate status by becoming public limited company in the year 1986. The company's growth can be imagined by the fact that company's turnover has increased by about 250 times since it became public  limited. It was not only the corporate status and turnover, which changed but also the company's product profile engorged with the vibrant polyester industry in India. Starting its operations as a consumer of POY for texturising yarns to become a leading supplier of POY in India and thereby further backward integrated projects in manufacturing of Polyester Chips, made JBF a dominant force in India. Despite company's focus on Indian market, it never lost the opportunity to cater to the growing polyester markets globally and made its due presence in global polyester markets . These efforts were duly recognized by the govt of India by awarding company with export house status.

Raw material costs accounted for 72.9% of FY14 net sales. The costs of most of the raw materials like pure terephthalic acid or PTA (69.8% of raw material consumption) and mono ethylene glycol or MEG (25.6%l) are linked to crude oil prices. The costs of these raw materials accounted for ~72.0% of net sales and, therefore, the fall in Indian crude oil basket price will boost gross margin. On a consolidated basis, raw materials costs accounted for 78.0% of net sales and its composition is fairly similar to the standalone entity. As the company has inventory (high-cost) of 78 days, it will suffer inventory loss in 3QFY15 and after three months the positive benefit of lower crude oil prices will be visible. The company has Rs80bn of debt, with a 4x D/E ratio in 1HFY15 and working capital requirement of Rs22.7bn. With the fall in crude oil prices, its working capital requirement will reduce significantly, which will ease the high D/E ratio and also reduce interest costs to that extent.

Since it's an opportunity who believes in high leveraged high risk portfolio position, we advise small risk takers to stay away. However, for medium to long risk takers this could be opportunity to dive in. 

JBM AUTO - best auto in making?

Company Profile - 

JBM AUTO, a public limited company, was incorporated in 1990 mainly to manufacture tools, dies and moulds for the automobile industry, from its Faridabad facility. Subsequently in 1993, the company entered the sheet metal components manufacturing business for OEMs(original equipment manufacturers)other than Maruti Suzuki India Limited to benefit from the growing demand from the automotive sector. Further in 2006, JBM Auto started its Special Purpose Vehicle division engaged in the fabrication and assembly of bodies of heavy vehicles. JBM Auto is part of the JBM Group of companies, and the other major auto component manufacturing companies of the group are Jay Bharat Maruti Limited and Neel Metals Products Limited.

JBM AUTO operates in three segments: Sheet Metal Division (for manufacturing sheet metal components, assemblies, sub-assemblies), Tool Room Division (for manufacturing tools, dies and moulds) and Special Purpose Vehicle (SPV) division (for development and assembly of SPV).

JBM has also kicked off partial production of complete cabs for the new trucks from VE Commercial Vehicles(Volvo-Eicher motor JV). JBM Auto’s in-house R&D, based in Delhi-NCR, works in sync with its global R&D centres in Italy and Germany-owned by JBM subsidiaries.

JBM is involved in the design of all vehicle types right from concept stage including packaging and engineering and is working on projects with Volvo, Fiat, Mahindra & Mahindra, Volkswagen AG, Ashok Leyland, Tata Motors and other OEMs. It also provides engineering services to Mercedes-Benz/Daimler, Lamborghini and McLaren.

Why to buy?

1. JBM  Auto products are widely used in two-wheelers, cars, tractors and trucks, white goods industries and other sectors in India and overseas. The company’s manufacturing facilities and tool rooms are strategically located in close proximity of leading automobile hubs of India at Faridabad, Greater Noida, Nashik, Chennai, Sanand and Pune for catering to diversified clients.

2.JBM has also installed new facilities for manufacturing of passenger buses and other allied products at its manufacturing units situated at Ballabgarh (Faridabad) and Kosi Kalan (Mathura). These expansions shall give JBM a big leap forward to generate the revenue for the future growth.

3.The reduction in rate of interest expected going forward, more certainty in economy, more liberal policies of Government relating to foreign investment in India and reduction in excise duty will lead to better growth of Automobile Industry in India as well as opening global destinations also.

4. Past financial performance is always remain consistent and with the economical revival we can expect company to post decent numbers in coming quarters.

5.The Government of India allows 100 per cent FDI in the automotive industry through automatic route. With a special focus on exports of small cars, multi-utility vehicles (MUVs), two and three wheelers and auto components, the automotive sector’s contribution to the GDP is expected to double in 2016-2017.

With all this positive indication we recommend our buyers to make an entry point at CMP of 180.