Adhunik Metaliks Ltd. (AML) is the Flagship Company of "ADHUNIK GROUP" of industries and represents on integrated Steel Plant located at Rourkela, Orissa engaged in the production of value Added Steel, Alloy Steel and Stainless Steel products catering to the automobile, construction engineering and household industry.

Quarterly Results in line with our Expectations ?? Net Sales for Q1 FY10 went down by 32% at Rs. 231.39 crores as compared to Rs. 328.64 crores in Q1 FY09 and was almost flat at Rs. 229.90 crores in Q4 FY09. The major reason for fall in the net sales was due to the fall price realization.

EBITDA decreased by 17.7% to Rs. 46.56 crores in Q1 FY10 compared to Rs. 56.58 crores in Q1 FY09 and increased by 30.9% from Rs. 35.57 crores in Q4 FY09.

The Company reported EBITDA margin of 20.1% in Q1 FY10, up by 290 basis points as compared to 17.2% in the Q1 FY09 and up by 460 bps as compared to 15.5% in Q4 FY09. The significant improvement in the EBIDTA was because of the fall in the raw material costs as the company's Captive iron ore and coal mines which are the major raw? material for them became fully operational.

Net Profit for Q1 FY10 went down by 73.8% to Rs. 6.16 crores as compared to Rs. 23.50 crores in Q1 FY09 and increased by 488.9% from Rs. 1.05 crores in Q4 FY09.

There was a decrease in total expenditure by 30.8% to Rs. 189.72 crores in Q1 FY10 as compared to Rs. 274.12 crores in Q1 FY09. The other expenditures included the amount of Rs. 0.47 crores on account of hedging cost of foreign exchange in Q1 FY10.

Adhunik reported a PAT margin of 2.7% in Q1 FY10, as compared to 7.1% in Q1 FY09 and 0.5% in Q4 FY09.

The Company has reported an EPS of Rs. 0.58 in Q1 FY10 as compared to Rs. 0.11 in Q4 FY09.

The Orissa Manganese and Minerals Pvt. Ltd. (OMM), a 100% subsidiary of Adhunik Metaliks has commissioned its iron ore and manganese mines. OMM has 90MT of iron ores and 50MT of Manganese ores. Adhunik Metaliks enjoys the merchandising rights, which places its above rest of its peers. We feel that with OMM becoming fully functional in this quarter, which will improve the operating margins substantially going forward and thus, improving the overall profitability of the company. OMM reported Net Sales of Rs. 45.43 crores in Q1 FY10 as against Rs. 25.05 crores in Q1 FY09, of which sale from Manganese ore was Rs. 12.79 crores, sale from Iron ore was Rs. 32.1 crores and sale of Graphite ore was Rs. 0.2 crores in Q1 FY10. The company reported an EBIDTA of Rs. 24.15 crores in Q1 FY10 as against Rs. 17.45 in Q1 FY09, an increase of 38.4%. The Company reported an EBIDTA margin of 53.1% in Q1 FY10 as against 69.6% in Q1 FY09. The Company reported a PAT of Rs. 13.38 crores in Q1 FY10 as against Rs. 15.06 crores in Q1 FY09, a fall of 11.2%. The PAT margin was 29.4% in Q1 FY10 as against 60.1% in Q1 FY09, because of the huge jump in interest and depreciation cost.

The company's main growth will come from four sources, viz. improvement in operating margins due to fully backward integration, starting of its iron ore mining operations, increase in sales volume which the company is expecting to be in the range of 300000?330000 tons and from its newly set up power business.

Adhunik Metaliks has completed 17MW power capacity in September
08' which has increased the total capacity to 34MW. The company will further add 17 MW power capacity which will be commissioned by December 09'. Post expansion, the total capacity of power will be 51 MW, which we feel will reduce the cost of production and will have positive improvement in the operating margins of the company.

The company will see the full benefit of backward integration of iron ore and power in FY10. The company has started the functioning of iron - ore mine having a reserve of
90 MT. We feel that with the full commissioning of iron ore and power, the company will reduce the cost of raw? material substantially which will be added positively to the EBIDTA level and thus improving the operating margins of the company.

The OMM (Orissa Manganese and Minerals Limited) have become fully operational in this quarter. We feel that, with the OMM becoming operational, and the company having substantial reserves in iron - ore, manganese and graphite ore, OMM enjoying the merchandising rights of these mines, and the steel industry being stabilizing, we feel that the company will significant jump in the revenues, the operating margins will improve substantially going forward and thus, improving the overall profitability of the company.

The company is committed for the growth of the company and has decided to reduce its debt going forward. The management has decided to repay the debt of Rs. 100 crores in this fiscal year and going forward. The management has vowed to bring down the total debt position from the current level of Rs. 1250 crores to under Rs. 1000 crores.

Adhunik Metaliks is setting? up a total 540MW power capacity through its subsidiary Adhunik Power and Natural Resources (APNRL). The power generated from this plant will be available for commercial sale. The project will be completed in two phase: 270 MW in Ist phase and another 270 MW in IInd phase. The project of the Ist phase has started in April 09' which is expected to be commissioned by 2011?12. The cost of the project is Rs. 1270 crores which will be financed through Debt: Equity of 3:1. The IInd phase is expected to get commissioned by
2012?13. The total cost of the project is Rs. 2600 crores.

The company is in talks with Tata Power for the sale of 100 MW @ Rs.
2.75 - 3 per unit and the rest (170 MW) will be sold in the open market. The company has a tie ? up with Tata Steel for the mining of coal for the project. The total capacity of coal reserve is 140 Million ton out of which Tata Steel and Adhunik will be having a right to mine 69 million tons each. We feel that, with the power plant becoming operational, this will substantially improve the operating margins of the company from FY12.

The Company was about to set? up a Beneficiation and Pellet plant of 1.2 MT capacity which is expected to start functioning by FY12. All the formalities have been done, the setting ? up of plant will start by January
2010 and it will take around 27 months to complete the project. The cost of the project is Rs. 717 crores which will be financed through 65% Debt and 35% Equity. The company will use low grade iron ore fines which will be converted into pellets. The cost of low grade fines is Rs. 400?500 per ton and the conversion cost is Rs. 1200?1400 per ton.

The current realization price is Rs. 3500?4000 per ton, which we believe will substantially add to the profits of the company going forward. This will further improve the operating margins of the company.

We have not valued the power and beneficiation plant in our projection.

AML's increased capacity will be fully reflected from FY10 onwards. OMML has also started mining from the Q3 FY09 and has become fully operational in Q1 FY10. So, there will be a significant contribution (due to high margins) by OMML towards the consolidated net profit of AML, the full effect would be seen in the FY10E. At the current price of Rs
96.65, the stock is trading at a P/E of 9x FY10E & 6.1x FY11E.

The current price of Rs. 96.65 per share discounts our Target price of Rs.
128.6 per share by 33.1%. We Recommend a "HOLD" Rating on the Stock with a Revised price target of Rs. 128.6 per share (previous Target Rs.
98.90 per share).