A few days back, I had talked about Facor Alloys, and here I am again with my views on a company which operates in the same segment, and has rather same set of products on offer i.e. ferro alloys. Rohit Ferro is a perfect example of one of those commodity stocks, which can bring you a lot of wealth during the peak of cycle and then suddenly take away almost all of it during doom. It also tells us that people start noticing debt in the balance sheets of the company, only when sentiments are down, otherwise they ignore it completely.
I have mentioned it time and again, that commodity stocks are cyclical and huge amount of wealth can be made in them, provided you invest in them at a time when the markets are ignoring them and also exit them completely at a first sign of distress. The waiting period for gains to be realized may extend up to 3-4 years, but then to enjoy the fruits, one needs to have patience.
Excessive debt
Rohit ferro is an aggressive player and has enhanced its capacity tremendously. When it started its operations back in October'2003, then it just had a capacity of 24000 TPA (Tonnes Per Annum), and now it has enhanced it up to 1,80,000 TPA. The capacity increase reflects in its revenue which has increased from Rs 126 Cr in FY2005-06 to about Rs 874 Cr in FY2008-09.
For expansion of such a large scale, the company has to either plough back into its reserves, go for equity dilution, or take up loans. Rohit ferro took on excessive debt to funds its plans and that's what proved to be a spoiler for the company. Till last year it had Rs 211 Cr as debt on its books, but this year interest payments of Rs 44 Cr tells me that debt portion has more than doubled to somewhere around Rs 450 Cr.
Investors on a whole don't like a debt/equity ratio for a company not into a growth sector. We all know what happened to real estate companies or Aban offshore, where the Market cap was eroded by almost 95%, and similar is the case with Rohit ferro. At one point of time, it had touched a high of Rs 190 and soon after that it came down to Rs 12, so a 93% wash-off.
Advantages
I believe that Rohit Ferro has seen worst of all, and with its huge expansion and capacity enhancement, it can certainly be at an advantage than others, although it may take some time. The ferro alloys prices have almost halved from their peaks in 2008, and going forward there should not be much drop, as demand has again strenghthened. So with a capacity of 1,80,000 TPA, it can really boost its revenues and run its plants at full capacity once the price of ferro alloys resume their upward trend.
While expanding its capacity, it also did a sensible thing of going for backward integration by acquiring some 60% interests in coal mines in Indonesia through its subsidiary in Singapore. Coal being an important raw material, determines the overall margins of the company, so with acquisition of interests in coal mines, it will be able to protect itself from the escalation in the prices.
Also the company invested heavily in its captive power plants, and that reflects in its cost of power and fuel. Companies producing ferro alloys need regular supply of power to run their huge furnaces. Expenditure on power runs into almost 25% of their total expenditure for such companies, so it makes sense for them to invest in captive power generation. Facor Alloys Ltd. had almost spent 58 Cr to secure total revenues of Rs 258 Cr, whereas Rohit Ferro spent just Rs 128 Cr on a total revenues of Rs 874 Cr. That in itself, speaks of the cost advantage the company has over others.
Valuations
I shall not value Rohit Ferro in terms of just P/E because that won't be a correct method of valuing it. Its profits were badly hit both on account of large interest payments and also on account of decrease in prices of ferro alloys across the board. Now the market cap of Facor alloys stands at 85 Cr, whereas that of Rohit ferro is just about 99 Cr. As I said earlier that Rohit has a total capacity of 1,80,000 TPA whereas Facor has just 72,000 TPA. Similarly Rohit Ferro has a captive power generation capacity of 110MW and also 60% right in coal mines in Indonesia.
Its just that the performance of Rohit Ferro has been bad due to above mentioned reasons, and hence it is being valued so cheaply. This company can prove to be a multibagger, but one will have to keep patience for the cycle to attain its peak.
I have mentioned it time and again, that commodity stocks are cyclical and huge amount of wealth can be made in them, provided you invest in them at a time when the markets are ignoring them and also exit them completely at a first sign of distress. The waiting period for gains to be realized may extend up to 3-4 years, but then to enjoy the fruits, one needs to have patience.
Excessive debt
Rohit ferro is an aggressive player and has enhanced its capacity tremendously. When it started its operations back in October'2003, then it just had a capacity of 24000 TPA (Tonnes Per Annum), and now it has enhanced it up to 1,80,000 TPA. The capacity increase reflects in its revenue which has increased from Rs 126 Cr in FY2005-06 to about Rs 874 Cr in FY2008-09.
For expansion of such a large scale, the company has to either plough back into its reserves, go for equity dilution, or take up loans. Rohit ferro took on excessive debt to funds its plans and that's what proved to be a spoiler for the company. Till last year it had Rs 211 Cr as debt on its books, but this year interest payments of Rs 44 Cr tells me that debt portion has more than doubled to somewhere around Rs 450 Cr.
Investors on a whole don't like a debt/equity ratio for a company not into a growth sector. We all know what happened to real estate companies or Aban offshore, where the Market cap was eroded by almost 95%, and similar is the case with Rohit ferro. At one point of time, it had touched a high of Rs 190 and soon after that it came down to Rs 12, so a 93% wash-off.
Advantages
I believe that Rohit Ferro has seen worst of all, and with its huge expansion and capacity enhancement, it can certainly be at an advantage than others, although it may take some time. The ferro alloys prices have almost halved from their peaks in 2008, and going forward there should not be much drop, as demand has again strenghthened. So with a capacity of 1,80,000 TPA, it can really boost its revenues and run its plants at full capacity once the price of ferro alloys resume their upward trend.
While expanding its capacity, it also did a sensible thing of going for backward integration by acquiring some 60% interests in coal mines in Indonesia through its subsidiary in Singapore. Coal being an important raw material, determines the overall margins of the company, so with acquisition of interests in coal mines, it will be able to protect itself from the escalation in the prices.
Also the company invested heavily in its captive power plants, and that reflects in its cost of power and fuel. Companies producing ferro alloys need regular supply of power to run their huge furnaces. Expenditure on power runs into almost 25% of their total expenditure for such companies, so it makes sense for them to invest in captive power generation. Facor Alloys Ltd. had almost spent 58 Cr to secure total revenues of Rs 258 Cr, whereas Rohit Ferro spent just Rs 128 Cr on a total revenues of Rs 874 Cr. That in itself, speaks of the cost advantage the company has over others.
Valuations
I shall not value Rohit Ferro in terms of just P/E because that won't be a correct method of valuing it. Its profits were badly hit both on account of large interest payments and also on account of decrease in prices of ferro alloys across the board. Now the market cap of Facor alloys stands at 85 Cr, whereas that of Rohit ferro is just about 99 Cr. As I said earlier that Rohit has a total capacity of 1,80,000 TPA whereas Facor has just 72,000 TPA. Similarly Rohit Ferro has a captive power generation capacity of 110MW and also 60% right in coal mines in Indonesia.
Its just that the performance of Rohit Ferro has been bad due to above mentioned reasons, and hence it is being valued so cheaply. This company can prove to be a multibagger, but one will have to keep patience for the cycle to attain its peak.
Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.
To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com
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