sun flag iron

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STOCKPANDIT EQUITY RE SEARCH VALUE DRIVEN INCISIVE RESEARCH

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15th August,2010

SCRIPT :- SUNFLAG IRON & STEEL (CMP = Rs. 31.85 )

BSE CODE :- 500404

TARGET PRICE :- Rs. 62

CATEGORY :- BLOOMER

SNAPSHOT :-

Equity Capital Rs. 162.2 crs. Book Value Rs. 20.23

Face Value Rs.10 P.E ratio 11.8

Market Cap Rs. 516.6 crs P/BV 1.45

52 Week H/L 36.1/20.1 N.O.I/share Rs 67.97

EPS Rs. 2.69 Debt/Equity 0.95

CEPS Rs. 4.6 NPM 7.03%

OPM 14.16% Sales/Current

Assets

2.54

SHARE HOLDING PATTERN

General Public

Promoters

Foreign Holdings

Others






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SUNFLAG IRON AND STEEL COMPANY LTD. - SPRING PROFITS

A BRIEF OVERVIEW:-

SUNFLAG IRON & STEEL COMPANY was established in the year 1984 is a Nagpur based

niche steel manufacturing company specializing in automotive spring steel. Sunflag Iron & Steel

is one of the flagship companies of the SUNFLAG GROUP founded by Mr. Satyadev Bharadwaj

in the year 1937.The group has it's roots in Kenya and today the group has active operations in 6

countries across 3 continents. In other countries the group has major interests in textiles.

The company has a state of the plant in Bhandara district near Nagpur, Maharastra. The entire

plant was built in collaboration with global industry majors like Hamburg Consulting & Steel

Engineering GmBH, Krupp Industrietechnik GmBH, Mannesmann Demag e.t.c. The companyhas a mini blast furnace which can produce 2,30,000 tonnes per annum of basic grade hot

metal.Very recently the company has established a sinter plant capable of producing 4,70,000

tonnes annually. The company also has a relatively cost free 30 MW captive power plant which

operates on the waste flue gases.

The Belgaon Coal Block allocated to the company at Warora, Maharastra has gone operational.

The joint venture at Madanpur(North) Coal Block , Chattisgarh is also underway. The recently

installed state of the art Continuous Casting Machine (CCM) has also gone operational this year,

which would boost it's product profile in a major way.

We have pages & pages of information & field research on Sunflag but what does all theseinformation really means to us ? Why are we interested in this particular steel making company

in a sector where there are so many big names like TISCO,JINDAL, MUKUND, MUSCO e.t.c.

Well the whole market is going gaga on TISCO. Let us examine further.






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INVESTMENT RATIONALE

1) THE MOST NICHE AND EFFICENT STEEL PRODUCING COMPANY IN THE

COUNTRY.

Sunflag Iron & Steel specializes in automotive spring steel.This special kind of steel is

used in leaf springs used in automobiles, railway suspension systems. It is the most

preferred supplier of spring steels for our domestic automobile companies and abroad.

Sunflag is one of the prime suppliers to General Motors. It manufactures speciality steels

of virtually of all known national & international standards. Apart from IS specifications,

in manufactures as per DIN/SAE/JIS/EN standards as well. Apart from the automotive

industry another major client of Sunflag is the defence sector ( Heavy Vehicles

Factory in Avadh).

Apart from spring steel, Sunflag has an impressive product portfolio in the form of carbon

steels, ball bearing steels & alloy steels of various applications. The ball bearing steel

segment another revenue driver for Sunflag.

We think by this time you must have had a fair idea the niche sector the company is in and

the kind wide potential of its products. So next time if you are thinking about your car

suspension or railway suspension system there is probably Sunflag steel in it.

Our research team has studied the production process and we concur that Sunflag has the

most advanced steel making machinery & and cost effective processes in the country. This

is probably the secret of generating good profits quarter after quarter even when the

steel prices are going soft and the entire steel sector is in a bad shape. Sunflag is the only

exception here. The best part is the management is extremely progressive. Every year

they make sure that Sunflag has the latest technology and processes in place. It would not

be an exaggeration to state that SUNFLAG IS THE MOST EFFICIENT STEEL MAKER

IN THE COUNTRY.




It's also worthwhile to mention Sunflag runs a 30 MW captive power plant from its flue

waste gases which supplies cheap power to the plant and keeps the operating cost to agreat extent.Take any plant efficiency ratio Sunflag is the leader.

2) SEVERAL NEW PROJECTS IN THE PIPELINE

Sunflag's present core business is looking solid with a large portfolio of clients with

assured future business for the next few years owing to its strong position. The

company's management have expanded its horizon into new business areas. A new

subsidiary company known as Sunflag Speciality Steels have been set up to explore even

'nicher' verticals within the steel industry. Also the company has ventured into Hydro

Power generation in Uttarakhand at the Hanol Tuini Hydro Electric Power Project.

These new projects will be the future growth drivers for the company. These are fairlyrecent developments and benefits from these projects will be accrued in the coming

quarters.

3) SOLID FINANCIAL PERFORMANCE – YEAR AFTER YEAR

Sunflag is probably the most consistent performer in the steel industry in the view of

financial performance. Top line is at 1349.63 crores a jump of 22.42 % YOY. Bottom

line is 94.91 crores a jump of 120.06 % !!! YOY. Wait..there is more. The icing on the cake

is the jump in Net Profit Margin (NPM)- to 7.03 % from 3.91 %. The OPM is around

14.16% which is the highest in the industry. The P/BV ratio under 2 clearly tells us

this script is grossly undervalued. If you consider the cash EPS this company is tradingmuch much lower than its industry peers. If you consider the last few years data...the

graph only goes one way...thats up.

We are pretty convinced that this script is a solid performer in the long run and a must

add for every long term portfolio. Let us now go through the numbers.




CRUNCHING THE NUMBERS

BALANCE SHEET

Period and months 2009/3 2008/3 2007/3

SOURCES OF FUNDS

Owned funds

Equity Share Capital 162.2 162.2 162.2

Reserves and Surplus 165.9 131.88 97.75

Loan Funds

Secured Loans 195.16 183.85 123.59

Unsecured Loans 117.23 110.23 101.58

TOTAL 640.58 588.15 485.12

USE OF FUNDS

Fixed Assets

Gross Block 795.36 720.88 715.99

Accumulated Dep. 474.53 443.53 405.35

Net Block 320.83 277.34 310.65

Capital Work in Progress 83.61 64.86 14.7Investments 1.22 0.1 0.1

Net Current Assets

Loans & Advances 433.7 458.95 404.12

Less:- Prov. & Curr. Lia. 198.78 213.1 244.45

Total Net Current Assets 234.92 245.85 159.67

TOTAL 640.58 588.15 485.12

(in crores)




PROJECTIONS

(in crores)

Years 2008/3 2009/3 20010/3 2011/3(E) 2012(E)

Operating

Income

994.06 1102.47 1349.63 1670 2230

PAT 43.62 43.13 94.91 135 215

Sales Growth % 9.93% 18.31% 23.80% 33.50%

PAT Growth % -1.01% 120.00

%

42.20% 59.25%

(as per industry estimates )

COMMENTS

SUNFLAG IRON & STEEL is trading at a substancial discount considering its forward P.E

and growth projections.It is the most efficient steel producing company in the country and we

feel it is a future steel MNC like Tata- Corus. As per our GADM price model we have arrived at

a target price of 62 for this script in the next 10-12 months.Price target as per DCF comes to

around 56.We would strongly recommend our esteemed subscribers to accumulate this script for

excellent returns in the coming one year.

AnalystsRahul Balpande

Sujoy Sikder

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report accurately reflects their personal views about the subject stock.

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