CMp: 27 | tp: 53| duration: 6-12 months November 29, 2010
company
Sunflag Iron and Steel company (SunFlag) belongs to the Sunflag group. It was founded by Satyadev Bharadwaj in Kenya. Sunflag’s products are used mainly in automobiles but also cater to industries like railways, defense, engineering and other infrastructure industries.
COMPANY DATA
Share Data
| Market Cap (Rs) | 438 |
| Issued Shares (mn) | 162,197,503 |
| 52 wk High/Low | 36.1/21.75 |
Valuation Ratios
| To 31 Mar | FY09 | FY10 | FY11E |
| Revenues (Rs in million) | 1102 | 1349 | 1618 |
| EPS (Rs) | 2.69 | 5.85 | 6.72 |
| P/E (x) | 4.37 | 4.31 | 4 |
Shareholding Pattern (%) (Quarter ending Marh,2010)
| Promoters | 50.51 |
| FIIs | 0.09 |
| MFs | 0.05 |
| Public | 35.94 |
| Others | 4.47 |
positives
1. Sunflag has been consistently clocking good profits for the past 5 quarters before the quarter of September 2010 which was not good.
2. Sunflag has been slowly but steadily doing backward integration and takes care of operations from mining to finished products. It has also been investing in coal mines in collaboration with Dalmia cement company, giving access to vital coal resources. It is also in the process of manganese mining in Navegaon in Maharashtra. This is currently in the planning stage.
3. Sunflag’s promoter’s holding has consistently gone up to more tan 50% from about 40% two years back. This gives good confidence to the share holders.
4. Sunflag’s debt-equity ratio is 0.8 which is pretty low.
5. Sunflag’s peer comparison can be done with companies like Pennar, ISMT etc. The industry average has been traditionally between 10 and 12.
6. Sunflag’s OPM has been pretty impressive at around 14% and is expected to go up further because of advantages from backward integration.
7. Sunflag’s has forged a technical collaboration with Daido Inc, Japan to export steel to Japan. This could turn out to be a future game changer if Daido decides to hold stake in Sunflag, which seems to be a good possibility now.
concerns
1. Sunflag somehow has not been a favorite with the FIIs and MFs who are the movers and shakers in Indian stock market.
2. The new GOI proposal of sharing 26% of mining profits may prove to be a dampener for all companies with mining rights and Sunflag is not alone.
3. Sunflag’s recent trade union strike issues are not positive. A good worker-management relationship could help the investor plan for a long term investment in the company.
4. The recession fears are always lingering and even a small drop in automobile output could become a challenge for Sunflag. The probability of this occurring are pretty low anyways.
valuations
Sunflag is a value pick. It has been consistently clocking good profits and revenues and is expected to continue its trends in the future. With the planned expansions slowly and steadily contributing to the revenues and with some improvements in input raw materials through mines integration, we can expect Sunflag to improve the revenues and EPS steadily over the next few quarters. It is trading currently at 4 PE FY11E and with an industry average PE of around 10, even if we consider a conservative PE Of 8 we get a target price of 53, which gives a significant increase over the current price. With the Indian equity markets correcting recently, it is a good time to BUY Sunflag for some happy wallet days in the future.
disclaimer
This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.
Peer Comparison
