Sarda Energy & Minerals Ltd (SEML) is one of the lowest cost producer of steel and one of the largest manufacturer and exporter of manganese-based ferro alloys in the country. With the objective to be a leading energy and minerals company, the company generates sufficient captive power from waste heat and coal and has interests in hydro power projects through Special Purpose Vehicle. For Q2FY2020, the company reported 79% higher profit after tax of Rs 71.4 crore on sales of Rs 543.5 crore with an EPS of Rs 19.1. SEML has paid a 50% dividend for FY2020. On an equity capital of Rs 36.05 crore and reserves of Rs1741.97 crore, SEML’s share book value works out to Rs 494. The value of its net block including work-in-progress of Rs 1,199 crore was Rs.6120 crore with its net DER (debt:equity ratio) standing at 0.8:1. The developing economies are driving global demand for steel in the recent past with the country witnessing a sharp rise in the demand for energy and steel. The current rate of investment in the country’s infrastructure sector indicates that India is poised to become a major player in the global steel business. On the completion of the hydro power project in Sikkim, SEML will have a bouquet of sustainable cash generating hydropower assets with a total capacity of 126 MW. The commissioning of the Sikkim project will also help it unlock capital for future value creation. Coal-based sponge iron technology is an economical method to manufacture steel in the country as environmental clearances and costs needed to set up an integrated steel plant are substantially high. Therefore, the sponge iron industry which uses non-coking coal has flourished in India. However, the industry faces issues such as low availability of non-coking coal, rising iron ore prices, etc. Power is one of the most critical components of infrastructure crucial for the economic growth of any nation. The sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar and agricultural and domestic waste. The government has undertaken multiple initiatives for improving infrastructure and with the focus on increasing renewable energy, SEML’s prospects appear bright. India now has a robust macroeconomic policy framework, flexible exchange rate and manageable exposures to foreign currency-denominated debt. SEML is one of the very few companies to be fully self-sufficient of its energy requirements and is on its way to achieve self-sufficiency in other mineral resources as well. It has acquired iron ore, coal and manganese mines in India and is aggressively looking for mineral resources across the globe. On the hydropower front, SEML’s strategic foray into hydropower is a conscious attempt to generate green energy and add a perennial stream of cash flow to sustain the downturn and de-risk itself from the cyclical effect of the steel industry. There has been very low capacity addition in this segment as against a sequential rise in demand over the past few years, but this will allow SEML to fetch higher realisations per unit going ahead. The company is likely to notch an EPS of around Rs 55 for FY2020 and at the current market price of Rs 210 the stock trades at a forward P/E of Rs 3.3x. On a conservative P/E of 5x, the share price can appreciate to Rs 275 in the medium term horizon.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.