Monnet Ispat & Energy Ltd (MIEL) is the flagship company of the well diversified Monnet Group. It is the second largest sponge iron based steel manufacturer in India after Jindal Steel & Power limited. The Group currently manages manufacturing units for Sponge Iron, Steel Melting & Rolling Mill, Ferro- Alloys Plant, Power Generation units, Mining & Mineral Beneficiation of Coal, Iron Ore and other minerals. The Group also has a highly skilled set of professionals who aid the industry by providing Coal Consulting Services.

Future Outlook

At the current price of Rs 385, the stock is available at 8.55x of its FY09 earnings, 6.83x of its FY10E earnings and 6.27x of its FY11E earnings.

Investment Rationale:

For the quarter ended 31st Dec, 2009, the company has doubled its net profit to Rs 68.01cr as against Rs 33.5cr during the same quarter last year.

1050MW power plant of MPCL is expected to be commercialized by FY11. The power will be available for commercial sale.

Monnet Ispat & energy has huge capital expenditure plans to become a fully integrated steel manufacturer, to earn its slice of cake in growing Indian steel industry.

QUARTERLY ANALYSIS:

During the quarter ended 31 Dec, 2009 net sales of the company fell by 7% on y y basis to Rs 372.19cr as against Rs 400.08cr during the corresponding quarter last year.

Operating profit of the company grew by a massive 50.4% to Rs 117.66cr as against Rs 78.22cr. Operating profit margin of the company has improved to 31.61% as against 19.55%, since raw material cost cost a percentage of sales by 580 580 to 54.79% from 60.59% in the same quarter last year. Power & fuel cost also fell by to Rs 7.72cr as against against Rs 10.21cr.

During the quarter ended 31 Dec, 2009, the company doubled its net profit to Rs 68.01cr as against Rs 33.5cr during the same quarter last year. Interest cost of the company fell by 10.5% to Rs 16.03cr a against Rs 17.91cr. Tax payment during the quarter rose by 80.42% to Rs 15.48cr as against Rs 8.58cr, however the incidence of tax fell by 185 bps to 18.54% y-o-y as against 20.39%.

Revenue Mix for the Quarter:

During the quarter ended 31 Dec, 2009 the iron & steel segment. 31% of the total contributed pany as of the total net revenue of the company as against 71.05% last year. However the power segment witnessed a marginal rise in the total contribution to 36.69% at Rs 136.5 Rs115.82cr during the same period last year.

PAST FIVE YEARS PERFORMANCE:

During the Financial year 2008-09, net sales of the company reported an impressive 33.62% increment to Rs 1548.73cr as against Rs 1159.07cr last year. Operating profit during the year rose by 44.40% to Rs 406.62cr as against Rs 281.6cr during the corresponding period last year, largely on account of fall in raw material prices. Net profit for the year stood at Rs 216cr as compared to Rs 166.07cr an increment of 30% on account of larger base and the lower incidence of tax at 20.21% as against 24.77% last year. However both interest and depreciation cost reported an increase of 331.80% and 46.77% respectively, having their toll on the bottom line of the company.

ANALYSIS & REPORT

Why invest in shares of Monnet Ispat & Energy Limited?

SECTOR:

While global steel industry is still struggling, Indian steel industry has gained strength from strong Indian economy, and strong sectors like Infrastructure, construction and automobile. India is the only country across the world to post a positive growth in crude steel production for the January-March period of 2009.

Per capita steel consumption is at 46 kg as against the global average of 198 kg. Thus, potential is there to raise its steel consumption high.

60% of steel output is consumed by construction industry, which has performed well in past. With increased focus of government on infrastructure development in the Eleventh Five year plans, demand for steel product is expected to grow over the years.

Automotive industry may consume a relatively small proportion of steel output, but it is growing at a faster pace. With India becoming the hub of small cars and auto parts industry demand for steel is expected to increase further. The sector is witnessing a rise in demand with increasing orders from automobile industry.

COMPANY:

Diversification

The revenue mix of the company is well diversified. It has diversified into power generation through its subsidiary Monnet power company Ltd; it will help to de risk the cyclical trend of the steel industry.

Capacity Expansion:

The company is setting up Blast Furnace & EAF, Rebar Mil & Plate Mill, as a part of its forward integration process to increase its steel manufacturing capacity to 1.5MMTPA.. It is expected to be complete by the end of FY11.

It is also adding up 70-80MW of power plant to its Raigarh plant, which will increase its captive power capacity up to 230MW.

Monnet is setting up a coal washery plant at Talcher in Orissa, with an investment of above Rs 40cr.

FUNDAMENTALS:

Backward Integration:

Raw Material:

The company sources its entire coal requirement from its captive coal blocks at Raigarh, Talcher and Mandakini in Orissa. This will result in saving of Rs 500-600 per ton. Through its overseas subsidiary Monnet Global Ltd., it has acquired two coal blocks to the tune of 1.5MTPA. in Indonesia

With the acquisition of Rameshwaram Steel, the company has also acquired control over a captive iron ore mine to the tune of 30MTPA. MIEL meets its iron ore requirement through purchases in the domestic spot market.

Captive Power:

The company has 100% captive coal blocks catering to the need of the company, which is expected to result in saving of Rs 500-600 per ton & also captive power plants of 60MW & 90MW the surplus power will be sold after meeting the firm’s captive requirements.

Cost Advantage:

Monnet Ispat is one of the cheapest producers of sponge iron based steel manufacturers in India. Further the plants of the company are located near its captive mines which will reduce the transportation cost and thus improve the margins of the company.

Monnet Power Company Limited:

The company is implementing a 1050MW power plant in Angul, Orissa, which is expected to be commercialized by 2012. For the project, the company has already been allotted a coal mine in Orissa along with two other players. The total capacity of the mine is 300 million tons out of which the company’s share is 100 million tons.