Sarda Energy & Minerals (SEML) is a manufacturer of steel products (sponge iron, billets, ingots, TMT bars), with focus on exports of ferro alloys. We visited company's Raipur plant to view existing operations and to understand its future expansion projects.

Existing operations: SEML has 360ktpa sponge iron, 200ktpa steel melting shop, 180ktpa wire rod mill, 600ktpa pellet plant, 82ktpa ferro alloys and 62MW captive power plant at their Raipur plant. Pellet plant is currently in the stabilisation phase, marked by high yield losses (~35%). Also because of shortage of iron ore fines (company's captive mine is not operational because of naxalite issues), the pellet plant is operating at below capacity. Expansion projects: SEML's 100% subsidiary Sarda Metal and Alloys is setting up a 125ktpa ferro alloys plant, with 80MW CPP in Vizag, AP. Financial closure for the capex of Rs5.5bn, in the debt: equity ratio of 75:25, has been achieved and is scheduled for completion by end-FY12. Power: SEML has 61.5MW of operational CPP and awaiting clearance for additional 18MW, which has already been commissioned. Further, the company is planning to set-up 350MW of pit-head power plant in two phases in Raigarh, Chhattisgarh near its coal mines. Additionally, the company is planning to set- up more than 200MW of hydro power capacity in Sikkim and Chhattisgarh through its various subsidiaries. Raw material integration: SEML is one of the few secondary- steel manufacturers to have operational iron ore and coal mines for captive consumption. While coal mine in Raigarh is operational since Q3FY10, iron ore mines in Rajnandgaon have been facing disruption due to naxal issues. In addition, the company has been allotted ML/PL for more iron ore, coal and manganese ore mines.
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Strategic stake sale: Recently, SEML announced preferential allotment of 1.8mn shares (5.03% of equity post-issue) to Hong Kong based Asia Minerals Ltd (AML) @ Rs510/ share, at 62% premium to its minimum issue price of Rs314. AML has been a strategic partner of SEML in supplying mn ore for ferro alloys and buying ferro alloys from SEML. SEML has an option to acquire 5% stake in a project company of AML, which is developing manganese ore mines in South Africa (Valuation yet to be decided).

Financial performance

H1FY11 performance: In H1FY11, net sales increased by 113% YoY to Rs4.2bn, due to increase in sales volume of steel and ferro alloys. OPM expanded to 18.2% Vs. 6.8% in H1FY10 on back of backward integration and rise in higher power sales. PAT rose to Rs289mn.

Financial leverage: As of H1FY11, SEML has standalone gross debt of Rs5.9bn and cash and investments of Rs1.2bn, with net D/E of 0.8x.

VALUATIONS At CMP of Rs 311, the stock is trading at 7.0x EV/EBITDA and 9.0x P/E on FY10 basis. On H1FY11 annualised basis (standalone), the stock is trading at 7.8x EV/EBITDA and 18.3x P/E. We don't have a rating on the stock.