Keynote capitals stock ideas

K E Y N O T E

Keynote Capitals Research January 16, 2012
Stock Ideas

Stocks Covered Page No.

Andhra Sugars Ltd. 1

Kirloskar Pneumatic Company Ltd 3

Petronet LNG Ltd. 5

Polaris Financial Technology Ltd. 7

Tata Sponge Iron Ltd. 9

Keynote Capitals Research
Keynote Capitals Institutional Research –awarded “India’s Best IPO Analyst 2009” by MCX‐ Zee Business

K E Y N O T E
Andhra Sugars Ltd.

Key St
tock Data Andhra SSugars Ltd. (A
ASL) was inco
orporated in A
August, 1947 engaged in m manufacture aand
sale of su
ugar, organic and inorganic chemicals being the ma ones at T
c ajor Tanuku, Kovv vur,
Sector Commod Chemicals
dity Taduvai, Saggonda and Bhimadole in Andhra P
e Pradesh. It is the largest manufacturer of
s r
CMP `116.15 caustic soda in south India. The c
company has three subsid diaries viz. Th Andhra Fa
he arm
52wk H
High/Low `130/ 84.55 Chemical Corporation Ltd. (AFCCL largest man
L) nufacture of h
hydrazine hyd drate (300 TPPA)
Market Cap
t `3.14bn at Kovvu JOCIL at Guntur is in the business of manufac
ur, s cturing fatty a
acids, glycerin
ne,
soaps, etc. and Hindusthan Allied Chemicals Ltd. ASL ha two assoc
d as ciate companies
($61.05mn)
known a Sree Akka
as amamba Tex xtiles and An
ndhra Petroc chemicals Ltd (APL) which
d.
6m Avg daily vol 8923
g. produces oxo-alcohols at Visakha
s apatnam, with technical c
h collaboration from M/s Da avy
BSE Se ensex 16154.62 Mckee of London, usi the latest LP Oxo process technolo
f ing t ogy, designed to produce 2-
e
ethyl hex
xanol or butan
nols.
Reco ‘Buy’
BSE Code 590062 Besides, ASL has in nterests in th power bu
he usiness with investments in the Andh
s hra
NSE C
Code ANDHRSUGA
AR Pradesh Gas Power Corporation Ltd. (APGP PCL), apart from its ow 16 MW c
wn co-
Face V
Value `10 generatio power plan and 11.60 MW of wind f
on nt farm. Power i one of the critical inputs to
is s
manufact ture Caustic S
Soda. Major power require ement for the production o Caustic So
e of oda
is met ou of this sour (APGPCL at an econo
ut rce L) omical rate. T supplemen and to ensu
To nt ure
adequate and continu
e uous availability of power f production purposes non-conventional
for n
Share tern (30th
eholding patt
wind pow is genera
wer ated at Rama agiri in Andhr Pradesh and at Veeran
ra nam in Tirunvveli
Sept, 2011)
district of Tamil Nadu.
f
Publi India is the second largest prod ducer of suga in the wor with 10 to 12% production
ar rld
c & of the world. Acc cording to the sources, till September, 2011 sugar
e , rcane has be een
Othr DIIs planted in 50.93 la hectare a
akh against 49.44 lakh hectares in same per
s riod last year up
45% 1% by 3% ASL has s
%. sugar manufa acturing capac of 5000 T
city TCD at Sugar Unit-I, Tanuku,
r
a 250 TCD capa
00 acity plant at S
Sugar Unit-II, Taduvai, and a 2000 TCD capacity pla
d D ant
Prom at Suugar Unit-III, Bhimadole. The compan produces 30 KL per d
ny day of industrial
oters alcoh from molasses, which is the raw mat
hol s terial for etha
anol (absolute alcohol), ace
e etic
54% acid, acetic anhyddride and ethy acetate.
yl
At present ASL pr roduces ethan on a limite scale. But in the comin years ethanol
nol ed t ng
produuction in the c
country will re
eceive impetu as the GoI proposes to come out with a
us h
policy to make m
y mandatory the blending of ethanol with petrol. This will provide an
e h
Price Performance (%)
) oppoortunity to the company to look into the possibility of expanding th production of
he n
ethannol.
1 Mth 3 Mths 6 Mths 1 Yr
Going forward ASL will also be benefited fro its strategic capacity ex
g e om xpansion plan of
n
4.64 18.46 19
9.68 2.65
Hi-Sttrength Hypo Plant propos to be set at Saggonda to produce Poly Aluminiu
sed a um
Stock Price Performance
k Chlorride extensiv
vely used in water treatm ment plants, aqua culture dairy, text
e, tile,
leather, paper and host of other industries.
d
120
ASL intends to d diversify in p
pharma segm ment and ha purchased a plot at t
as d the
110
Jawaaharlal Nehru Pharmacity, Vishakhapat ttanam. It is i the proces of finalizing a
in ss g
100 suitable product-line to be mannufactured fro this facilit With bette realisations in
om ty. er s
90 sugar, steady dem mand for chloor-alkali products, new pr roduct develo
opments back ked
80 by acctive R&D effo will help A post a de
orts ASL ecent performmance going fforward.
70 ASL’s expansion plan and with cane crush
s hing expected to be highe in the coming
d er
60 seaso expect w
on well for its gro
owth. Althoug production of caustic soda remain
gh n ned
unde pressure ow
er wing to highe imports. To help the do
er o omestic industry, governme
ent
Jan‐11
J 11
Mar‐11
May‐11

Sep‐11
Nov‐11
Jan‐12
Jul‐11
J l 11

has imposed impo duty of bot caustic sod and soda a
ort th da ash.

Andh
hra Sugars
BSE_
_SENSEX

1 Keynote Cap
K pitals Resear
rch

K E Y N O T E
Key Financials (`Cr)
Particulars FY07 FY08 FY09 FY10 FY11
Net Revenues 576.12 463.99 571.91 551.59 468.83
EBITDA 146.63 116.09 133.95 156.44 108.47
Net Profit (Adj) 64.15 42.58 45.28 66.76 36.21
Earnings Per Share 22.64 14.96 15.81 23.94 12.58
Price Earnings 3.82 5.46 3.76 5.01 7.01
EBIDTA Margin (%) 25.45% 25.02% 23.42% 28.36% 23.14%
PAT Margin (%) 11.13% 9.18% 7.92% 12.10% 7.72%
RONW (%) 20.53% 10.29% 15.60% 19.80% 10.89%
ROCE (%) 25.37% 9.03% 14.48% 18.98% 9.36%
Sources: Keynote Capitals Ltd.

Quarterly Financials (`Cr)
Particulars Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12
Net Sales 132.1 143.61 126.59 103.48 107.22 116.69 142.64 180.32 195.51
Other Income 9.95 5.34 6.89 8.26 13.37 15.89 14.22 9.27 17.58
Total Income 142.05 148.95 133.48 111.74 120.59 132.58 156.86 190.04 217.5
Total Expenditure 104 96.99 101.17 90.87 100.31 111.34 108.63 147.82 161.17
PBIDT 38.05 51.96 32.31 20.87 20.28 21.24 48.23 42.22 56.33
Less: Interest 5.72 4.74 4.39 4.1 3.94 4.73 6.05 6.28 4.35
PBDT 32.33 47.22 27.92 16.77 16.34 16.51 42.18 35.94 51.98
Less: Depreciation 8.68 8.72 8.81 9.17 9.4 9.6 9.79 9.85 9.47
Tax 7.85 12.95 6.5 2.5 1.5 2.3 12.17 7.5 13.3
Profit After Tax 15.8 25.55 12.61 5.1 5.44 4.61 20.22 18.59 29.21
EPS (`) 5.83 9.43 4.65 1.88 2.01 1.7 7.46 6.86 10.78
PBIDTM (%) 28.8 36.18 25.52 20.17 18.91 18.2 33.81 23.41 28.81
PBDTM (%) 24.47 32.88 22.06 16.21 15.24 14.15 29.57 19.93 26.59
PATM (%) 11.96 17.79 9.96 4.93 5.07 3.95 14.18 10.31 14.94

During FY11, ASL posted 45.76% lower net profit (adj) of `36.21Cr on 15% lower net
sales of `468.83Cr. Its EPS was `12.58 and it paid dividend of 55%. For Q2FY12, its net
profit shot up 440% to `29.21Cr from `5.44Cr in Q2FY11 on 82% higher sales of
`195.51Cr and the Q2FY12 EPS stands at `10.78. For H1FY12, was `47.81Cr on 78%
higher net sales of `375.83Cr leading to a H1FY12 EPS of `17.6. Its equity capital stands
at `27.11Cr with reserves of `467Cr and sound debt:equity ratio of 0.7:1.
ASL a six decade old company represents a relatively safe investment option for the
investors. Although its sugar division continues to be a loss making units, the caustic
soda & industrial chemicals divisions are doing extremely well. ASL’s segment wise
revenue is sugar – 26%; caustic soda – 46%; chemicals 17% and others – 11%. At the
current market cap of `314.88Cr and considering ASL’s track record and management
capability indicates a scope for share price appreciation.

Keynote Capitals Research 2

K E Y N O T E
Kirloskar Pneumatic Ltd.

Key Stock Data We recommend buying in Kirloskar Pneumatic Company Ltd. (KPCL) as a value
buy.
Sector Capital Goods
Incorporated in 1958, KPCL provides high end integrated solutions using
CMP `451.75
Compression & Transmission Technologies. The company caters to the
52wk High/Low `600 / 375
industries like Petrochemicals, Power, Steel, Cement, Food & Beverage,
Market Cap `5.78bn Defense, Construction & Mining and many more.
($112mn)
6m Avg. daily vol 6,192 KPCL derives 89% of its total revenues out of compression systems products
BSE Sensex 16,154.62 while rest from transmission products. The company generates 60% of
revenues from projects business and balance from equipment supply. The
Reco ‘Buy’ company pioneered CNG Systems, Coal Gasification compression systems etc
in the country. It has supplied refrigeration system for all refineries in the
BSE Code 505283
country. The compressor division has just completed the coal gasification order
NSE Code NA
project. It is the market leader in CNG market with 40-45% share.
Face Value `10
In transmission products, KPCL caters to Gearboxes for Railways and Marine
th
Shareholding pattern (31 industries. The company does not supply to auto industry and therefore it is not
December, 2011) vulnerable to auto industry slowdown. The company has also diversified into
Public wind mill gear boxes, where the company manufacturers 1 MW gear boxes for
15% MW class WTGs. This is the only company apart from Suzlon, which has
Corpo
rate captive gear box production facility that is into manufacture of MW class gear
6% boxes.
Prom
nstitu oter
tions 56% KPCL has completed a revamp program of transmission business for which it
20% Forei made huge investment. The company has demolished its old plant totally to
gn
3% make it suitable for manufacturing large gear boxes. Replaced about 80% of
the old machines with machines with latest technology and is now brand new.

Price Performance % The company received permission from Indian Railways for operating Road
Railer trains in Delhi Chennai corridor. This is different from the roll on & rolls
1 Mth 3 Mths 6 Mths 1 Yr off service currently offered by CONCOR and other players. For example if a
-0.15% -7.27% -4.24% -5.78% car loaded specialised wagon at the Gurgaon Factory of Maruti Udyog will get
offloaded only in the premises of a Dealer in TN or AP without changing the
Stock Price Performance wagons. The specially made bogies/wagons will be decoupled and connected
to truck and taken to dealers. Manufacturing of road railers will start by
120%
115% Q3FY12.
110%
105% The company has over `500Cr order book while the average ticket size ranges
100%
from 006020-100Cr.
95%
90%
85% KPCL is fundamentally strong company with debt to equity of just 0.14x and
80% Return on Equity of 25.2%. The company’s stock price outperformed the
75%
Sensex over a one year period. Its share price dropped 19.3% for last one year
70%
compared to a negative return of 22.5% by the Sensex. Considering the
current inexpensive valuation, 7.7x for FY12 based on annualized EPS `58.76
KPCL BSE_SENSEX (5-year average forward P/e is 12.18x) and reasonable dividend yield of 2.9%,
we expect the downside is limited for the stock and can be considered as a
good value pick.

3 Keynote Capitals Research

K E Y N O T E

Particulars FY07 FY08 FY09 FY10 FY11
Net Revenues 353.56 398.75 514.57 453.28 491.73
-
Growth (%) - 12.78% 29.05% 11.91% 8.48%
EBITDA 37.07 37.99 66.67 70.96 72.77
Growth (%) - 2.48% 75.49% 6.43% 2.55%
Net Profit 26.52 29.82 40.74 44.59 42.78
Growth (%) - 12.44% 36.62% 9.45% -4.06%
EPS (`) 33.4 22.05 30.12 35.01 31.93
P/E (x) 22.8 6.2 14.1 14.8 14.1
EBIDTA Margin (%) 10.5% 9.5% 13.0% 15.7% 14.8%
PAT Margin (%) 7.5% 7.5% 7.9% 9.8% 8.7%
RONW (%) 41.1% 36.1% 46.8% 41.2% 36.1%
ROCE (%) 41.8% 32.0% 35.1% 32.9% 25.2%
Source : Company


K E Y N O T E
Petronet LNG Ltd.

Key Stock Data Petronet LNG was incorporated in 1998 as a JV by the Govt. of India to import LNG
and set up LNG terminals in the country. Its promoters are GAIL (India), ONGC, IOCL
Sector Gas Distrib. and BPCL, each having 12.5% stake in Petronet LNG. In addition, GDFI (part of GDF
CMP `156.65 Suez, a French national gas company) holds a 10% stake and is a strategic partner.
52wk High/Low GDF Suez has been the largest LNG importer in Europe for the past 30 years. Asian
`185.85/105.1 Development Bank also has a stake of 5.2% in Petronet LNG.
Market Cap `12198Cr The Dahej LNG terminal was started in 2004 with a capacity of 5 mmtpa. The terminal
($2.36bn) is strategically situated in the biggest gas consuming state in India and is in close
6m Avg. daily vol 23,06,889 proximity to Qatar, the company’s main supplier. In 2009, capacity of Dahej terminal
BSE Sensex 16,154 was increased to 10 mmtpa. Currently, the company has a 25 yr LNG supply contract
for 7.5 mmtpa with Rasgas of Qatar. LNG is transported via three tankers—Disha,
Raahi and Aseem to the Dahej terminal. The company has back-to back off-take
Stock Codes agreements with GAIL, IOCL and BPCL in the ratio of 60:30:10, respectively. The
terminal is well connected with GAIL’s HVJ & DUPL pipelines and GSPL’s network in
Bloomberg Code PLNG IN Gujarat. The company has recently contracted 1.5 mmtpa for 2 yrs and has entered
Reuters Code PLNG.BO into offtake agreements for the same. The company also provides regasification
BSE Code 532522 services wherein companies can use Petronet LNG’s facilities for regasifying their LNG
NSE Code PETRONET cargoes.
Face Value `10
Capacity Expansion: Petronet LNG is expanding its capacity in Dahej by 5 mmtpa
by constructing another jetty and expanding its regas plant facilities to handle
Shareholding Pattern (31st Dec, higher volume of LNG. This expansion is being done at a very competitive capital
2011) cost of `20bn. The company is also constructing a greenfield LNG terminal of 5
mmtpa at Kochi at an investment of `42 bn. The higher capex/ton reflects current
Public & costs of setting up LNG terminals and is in line with other projects scheduled to
Others
27.53% come up in the future. Kochi terminal is expected to be operational by the end of
FY13, thus, contribution to topline and bottomline is expected from FY14. There is
sufficient pent-up demand for natural gas in the Southern region, mainly from the
industrial sector in Mangalore and Kochi. The management is confident of
DII supplying LNG from its Kochi terminal to BPCL’s 9.5 mmt Kochi refinery and MRPL
7.92%
(Capacity: 11.8 mmt). Both these refineries are undergoing capacity expansion to
Promoter 15 mmt, which would require additional volumes of gas.
FII
50%
14.55%

Key Financials
(`Cr)
Price Performance Particulars FY07 FY08 FY09 FY10 FY11
(%)
1 Mth 3 Mths 6 Mths 1 Yr Net Sales 5508.96 6555.31 8428.70 10649.09 13197.29
-0.8% 0.3% 8.5% 26.5% Y-o-Y Growth % 43.6% 19.0% 28.6% 26.3% 23.9%
Total Expenditure 4860.90 5689.18 7527.43 9802.63 11981.02
Stock Price Performance EBITDA 648.06 866.13 901.27 846.46 1216.27
Y-o-Y Growth % 32.8% 33.6% 4.1% -6.1% 43.7%
160

140
Margin 11.8% 13.2% 10.7% 7.9% 9.2%
120
Interest 107.04 102.36 101.21 183.93 193.13
100 Depreciation 102.03 102.18 102.52 160.86 184.67
80 Tax 162.33 240.52 255.60 195.00 286.80
60 PAT 313.25 474.65 518.44 404.50 619.62
Jan-11

Mar-11

May-11
Jun-11

Dec-11
Jan-12
Feb-11

Jul-11

Sep-11
Oct-11
Apr-11

Aug-11

Nov-11

Y-o-Y Growth % 60.7% 51.5% 9.2% -22.0% 53.2%
Margin 5.7% 7.2% 6.2% 3.8% 4.7%
Petronet LNG BSE Sensex
EPS (`) 4.18 6.33 6.91 5.39 8.26
(Source - Keynote Capitals ltd.)


K E Y N O T E
Demand-supply gap of natural gas in India: The Indian market for natural gas has
always suffered from a chronic shortage of supplies. This is due to limited domestic
gas supplies, gas pricing & customer allocation being the prerogative of the Govt.
and inadequate transmission infrastructure in the country. A study by Mercados
shows that natural gas demand is expected to grow at CAGR of 21% from 179
mmscmd in FY11 to 381 mmscmd in FY15. On the other hand, the Directorate
General of Hydrocarbons (DGH) estimates that supply will grow at CAGR of 8.6%
only from 146 mmscmd in FY11 to 203 mmscmd in FY15. Thus, the demand-supply
gap is expected to increase by more than 5 times from 33 mmscmd in FY11 to 178
mmscmd in FY15.

No regulatory threat to regas tariffs: Petronet LNG is perhaps the only player in the
oil & gas industry whose margins / pricing / returns are not subject to any regulations.
The company has reported ROEs in the range of 25-30% historically. This has
created a concern that the regulator may bring LNG terminals and regas tariffs into
its ambit. However, since the regasification tariff accounts for a small portion of the
delivered price, controlling the tariff may not result in any meaningful relief to
regasified liquefied natural gas (RLNG) customers.

First mover advantage at Dahej Terminal: The Dahej terminal is located in Gujarat,
which accounts for 1/3rd of the total gas consumption of India. Gujarat is home to
various refineries, petrochemical, fertilizer & power plants which account for the lion’s
share of R-LNG consumption. The 10 mmtpa LNG terminal at Dahej will continue to
be the base of Petronet LNG’s operations going forward due to its optimal location,
low capital cost translating into competitive regas tariffs and tying up of 75% of its
capacity at favorable long term contracts.

Valuation and Outlook
Demand for natural gas is expected to remain robust in India and domestic supply of
natural gas fails to meet the shortfall, which will boost business prospects for Petronet
LNG. With growing volumes and increasing revenue visibility through capacity
expansions at Dahej and new capacities coming up at Kochi makes Petronet LNG as an
attractive long term investment opportunity. As per the consensus estimates, Petronet
LNG is trading at 12.05x FY12E EPS of `13.0 and `11.85x FY13E EPS of `13.23.


K E Y N O T E
Polaris Financial Technology Ltd.
Polaris FT was founded in 1993. It provides software services and solutions to
Key Stock Data
multinational clients. The Company provides its services to companies in the banking and
Sector IT financial industry, which specialize in retail banking, credit cards, insurance, risk
CMP `137.80 management, investment banking and a variety of telecom related activities. It is chosen
52wk High/Low 214/113 outsourcing partner for 9 of the top 10 global banks and 7 of the 10 top global insurance
Market Cap `1369Cr companies. It is world's first CMMi (Capability Maturity Model Integrated) level 5 certified
($268mn) Company.
6m Avg. daily vol 64829
Revised guidance upward:- Polaris’s management has increased its revenues
BSE Sensex 16154.62
guidance for FY12E at `2014Cr –`2060Cr from `1968Cr – `2014Cr backed by robust
volume growth and strong performance of Intellect. The EPS guidance is revised to
Reco. ‘Buy’ `22.65 – `23.47 from `21.95 – `22.35.
Excellent numbers for the Q2FY12:- The Company has registered strong numbers
BSE Code 532254
for the quarter ending September 2011. The company has crossed `500Cr as
NSE Code POLARIS
revenues in the September quarter ended. A sharp rise of 35% in the consolidated
Face Value `5
revenues to `523.12Cr in Q2FY12 as compared with `387.95Cr in the same quarter
last year. Operating profit moved up to `75.54Cr as compared to `60.24Cr Y-o-Y
basis. Similarly revenues contribution from Top 5 clients increased to 43.03% against
Shareholding pattern (30th
Sep, 2011) 40.81% in the same quarter last year.
Geography-wise revenues contribution:- The company received more than 67%
revenues from US and Europe. The highest revenues come from US (45.43%) as
Prom compared to Europe (22.40%). Revenues contribution from Offshore stood at 59.15%
Other oters
s 29% in Q2FY12 as compared to 56.68% Y-o-Y. It will have positive impact on companies
36%
bottom-line.


DII FII
11% 24% Particulars FY07 FY08 FY09 FY10 FY11
Total Sales 1032.4 1099.3 1377.9 1353.8 1586.3
Y-o-Y Growth % 25.1% 6.5% 25.3% -1.8% 17.2%
Price Performance (%) Total Expenditure 871.8 981.1 1144.4 1131.7 1372.4
1 Mth 3 Mths 6 Mths 1 Yr EBITDA 160.6 118.2 233.5 222.0 213.9
9.9% 7.8% -24.6% -15.8% Y-o-Y Growth % 110.4% -26.4% 97.6% -4.9% -3.7%
Depreciation 48.1 46.0 50.5 35.0 33.7
EBIT 112.5 72.2 183.0 187.0 180.2
Close Price Sensex Other income 9.3 18.1 -31.6 -7.3 59.1
Bse IT Interest paid 0.8 0.8 0.7 0.9 1.1
115
PBT 121.0 89.5 150.7 178.8 238.2
105
Tax 19.9 16.1 20.9 25.5 35.9
95 PAT 101.1 73.4 129.8 153.3 202.3
85 Y-o-Y Growth % 374.3% -27.4% 76.9% 18.1% 32.0%
75 NPAT & Minority 101.2 73.2 130.7 152.8 202.5
EPS(`) 10.2 7.4 13.2 15.4 20.4
65
EBITDA Margin 15.6% 10.8% 16.9% 16.4% 13.5%
55
PAT Margin 9.8% 6.7% 9.4% 11.3% 12.8%
PE 14.7 11.0 8.1 11.2 6.8
Source: Keynote Capitals Research


K E Y N O T E
12 Intellect wins across banking and insurance verticals: - Intellect (The flagship
product of company) suite is a set of most comprehensive pack of solutions designed for
the Corporate, Retail and Investment Banking segments. Intellect is a service-enabled,
component-based core banking system. Polaris is assessed at CMMI Level 5
certification offering highly repeatable, continuous-improvement processes. Intellect
revenues contributed `139.28Cr in the Q2FY12, representing 27.32% of its revenues;
witnessing a jump of 68% y-o-y. Services revenues contributed 72.68% at `370.46Cr to
the revenues; representing a growth of 21% on y-o-y basis. Polaris has recorded 12
intellect wins across banking and insurance verticals during the quarter.

Revenues split by Products and Services `Cr
Particulars Q2FY11 Q1FY12 Q2FY12
Product Revenues 83.0 105.2 139.3
Services Revenues 305.3 344.9 370.5
Source: Company
Quarterly performance `Cr
Particulars Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12
Total Sales 388.0 411.4 443.0 455.8 523.1
Q-o-Q Growth % 5.0% 6.1% 7.7% 2.9% 14.8%
EBITDA 60.2 63.9 58.2 63.5 75.5
Q-o-Q Growth % 5.7% 6.1% -9.0% 9.2% 19.0%
Depreciation 8.4 8.7 8.7 9.6 11.2
EBIT 51.8 55.2 49.5 53.9 64.4
Other income 5.4 5.3 17.5 8.0 8.9
Interest paid 0.3 0.3 0.4 0.5 0.6
PBT 56.9 60.2 66.6 61.5 72.7
Tax 9.0 10.1 9.0 16.9 18.9
PAT 47.9 50.2 57.7 44.5 53.8
Q-o-Q Growth % 3.0% 4.7% 15.0% -22.8% 20.9%
Source: Company

Valuation
At current market price of `137.80 stock is trading at 6.8x FY11 and 6.3x Q2FY12 (TTM)
earnings. Which is low as compared its industry PE of 14.3x (From Bloomberg). The
management of Polaris has revised the revenue guidance upward and increasing deal
sizes will lead to outperform going forward. Similarly Rupee depreciated against the
Dollar, which will have positive impact on the company’s EBITDA margin.


K E Y N O T E
Tata Sponge Iron Ltd.
Tata Sponge, which has its manufacturing facility at Bilaipada (in Joda Block of
Key Stock Data
Keonjhar District in Orissa), was initially set up as a joint venture company between
Sector Metals Tata Steel and the Industrial Promotion and Investment Corporation of Orissa Limited
CMP `254.7 (IPICOL). It has a production capacity of 390000tpa of sponge iron. The company has
52wk High/Low 379.0/232.6 also set up 26MW of captive power plants to gain from the waste hot gases released
Market Cap `389.77Cr from its kilns in phases.
($74.9mn)
High Dividend yield: Over the last several years company has consistently paid
6m Avg. daily vol 5235
dividend more than 40% of face value. Last year company paid dividend of Rs8 per
BSE Sensex 16154.6
share translation dividend yield of 2.33%. Average dividend yield for the last 5 years is
Reco ‘Buy’ 2.8% which is reasonably good.

BSE Code 513010 Debt free: The Company is totally debt free and therefore higher cost of capital will not
NSE Code TATASPONGE affect the company’s performance.
Face Value `10
Lower production and sales volume muted by higher realization: Despite
Shareholding pattern (30 th significantly lower production and sales volumes, strong sponge iron realizations are
Sept, 2011) supporting both revenue and margins. Sponge Iron production was significantly lower
in H1FY12 to 143K tons from 193K tons on account of disruption in iron ore supply due
to mining ban in Karnataka and regulatory rigor in the Barbil region has affected supply
of iron ore to the industry. Current sponge iron prices are at a 3-year high in the
Othe Prom domestic market and are expected to be elevated till the ban is not taken back.
rs oters Currently, price of the sponge iron is `24000 per ton as compared to `17200 per ton
42.3 43.7
% during same period previous year.
%

DIIs FIIs
7.3% 6.8% Particulars FY07 FY08 FY09 FY10 FY11
Price Performance (%) Total Income 296.83 480.04 628.28 541.94 694.87
1 Mth 3 Mths 6 Mths 1 Yr Growth (%) 45.2% 61.7% 30.9% -13.7% 28.2%
4.6% 18.5% 19.7% 2.6% Total Expenditure 245.04 311.92 424.16 396.09 526.07
PBIDT 51.79 168.12 204.12 145.85 168.8
Growth (%) 23.5% 224.6% 21.4% -28.5% 15.7%
110%
Interest 5.36 12.03 4.64 0.25 0
100%
PBDT 46.43 156.09 199.48 145.6 168.8
90%
Depreciation 13.49 19.65 18.31 19.38 18.52
80% Tax 2.91 19.48 60.5 46.08 55.6
70% Fringe Benefit Tax 0.2 0.31 0 0.02 0
60% Deferred Tax 8.6 21.12 0 -4.4 -6.66
50% Reported PAT 21.23 95.53 120.67 84.52 101.34
Jan‐11
Mar‐11
May‐11

Sep‐11
Nov‐11
Jan‐12
Jul‐11

Extra-ordinary Items 5.37 3.17 0 0 0
Adj PAT Extra-ordinary item 15.86 92.36 120.67 84.52 101.34
Tata Sponge Metals Growth (%) -28.4% 482.3% 30.7% -30.0% 19.9%
Sensex Source: Company & Keynote Capitals Research


K E Y N O T E
Quarterly performance(`Cr)
Net sales grew 19% Q-o-Q (down 1% Y-o-Y) to `174Cr while realizations increased
23% Q-o-Q to `22397 per ton.
EBITDA decreased 10% Q-o-Q (13% Y-o-Y) to `29.9Cr while EBITDA/ton declined
8% Q-o-Q to `4206.
Radhikapur (East) coal block is on track. Coal production is likely to start in 2013.
`Cr
Particulars Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12
Net Sales 175.3 168.38 191.64 138.09 168.02
Other Income 3.8 2.89 4.14 4.48 6.22
Other Operating Income 0.09 2.01 3.8 7.6 5.7
Total Income 179.19 173.28 199.58 150.17 179.94
PBIDT 19.45 37.75 68.07 37.57 36.08
Interest 0 0 0 0 0.06
PBDT 19.45 37.75 68.07 37.57 36.02
Depreciation 4.64 4.64 4.52 4.56 4.62
PBT 14.81 33.11 63.55 33.01 31.4
Tax 4.4 10.91 20.72 10.49 9.67
Reported Profit After Tax 10.41 22.2 42.83 22.52 21.73
EPS (`) 6.76 14.42 27.81 14.62 14.11
PBIDT Margins (%) 11.1% 22.4% 35.5% 27.2% 21.5%
PBDT Margins (%) 11.1% 22.4% 35.5% 27.2% 21.4%
PAT Margins (%) 5.9% 13.2% 22.3% 16.3% 12.9%
TTM Profit & Loss A/C `Cr
Particulars TTM Q208 TTM Q209 TTM Q210 TTM Q211
Net Sales 603.54 492.84 606.09 666.13
Other Income 10.27 9.98 7.96 17.73
Other Operating Income 6.26 9.93 10.84 19.11
Total Income 620.07 512.75 624.89 702.97
Total Expenditure 364.7 415.84 472.23 523.5
PBIDT 255.37 96.91 152.66 179.47
Interest 8.43 1.5 0.25 0.06
PBDT 246.94 95.41 152.41 179.41
Depreciation 17.89 19.2 19.02 18.34
PBT 229.05 76.21 133.39 161.07
Tax 65.75 26.83 43.4 51.79
Reported Profit After Tax 163.3 49.38 89.99 109.28
EPS (`) 106.04 32.06 58.44 70.96
PBIDT Margins (%) 41.2% 18.9% 24.4% 25.5%
PBDT Margins (%) 39.8% 18.6% 24.4% 25.5%
PAT Margins (%) 26.3% 9.6% 14.4% 15.5%
Source: Company & Keynote Capitals Research

Valuations: We expect sponge iron production to be significantly lower due to iron supply
issues. However, this has been factored and the stock is available at the attractive
valuations. At CMP of `254.7, company trades at the TTM PE multiple of 3.59x and P/BV
multiple of 0.71x which are very low as compare to the industry peers of 10.9x and 1.68x
respectively.


K E Y N O T E

KEYNOTE CAPITALS LTD.
Member
Stock Exchange, Mumbai (INB 010930556)
National Stock Exchange of India Ltd. (INB 230930539)
Over the Counter Exchange of India Ltd. (INB 200930535)
Central Depository Services Ltd. (IN-DP-CDSL-152-2001)
4th Floor, Balmer Lawrie Building, 5, J. N. Heredia Marg, Ballard Estate, Mumbai 400 001. INDIA
Tel. : 9122-2269 4322 / 24 / 25 • www.keynotecapitals.com

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